What the Economic Crisis Means for Us and How to Defend Ourselves

Workers Action

A Statement by Workers Action

Gloom and Doom

The pillars of the U.S. capitalist economy are crumbling and falling all around us while the federal government frantically races from one crisis to another, throwing money at them as if throwing water on a fire. It could well turn out that the money represents only a few drops of water thrown on threatening flames that will soon billow into an out-of-control wildfire so that nothing President-elect Barak Obama has proposed will succeed in averting the disaster.

Thus far, a breathtaking $700 billion has been rushed to the banks. The mortgage companies, Fannie Mae and Freddie Mac, along with American International Group (AIG), an insurance company, and Bear Stearns were bailed out. But Lehman Brothers was denied a lifeline and went under. Washington Mutual went down, thereby earning it the title of the largest bank failure in US history. The US automobile industries are in a perilous state and might face bankruptcy. Financial institutions in general are in dire straights. Meanwhile, the debt the US government has incurred has reached an astronomical $10 trillion, which means that it has doubled as a percentage of the Gross Domestic Product (GDP) over the past 30 years. And those of us in the working class have accumulated historically high debts. Meanwhile, the stock market has suffered whiplash as it has plunged from historic highs to historic lows, then back up again, and then down.

Expert economists, who are usually overly upbeat about economic prospects since the economy requires people’s confidence in order to function smoothly, sound decidedly morbid. Former Federal Reserve Chairman Alan Greenspan said the economic crisis is “outstripping anything I’ve seen and it still is not resolved,” Warren Buffet, a multibillionaire, referred to it as an “economic Pearl Harbor,” and Nassim Taleb, whose opinion ranks high in the eyes of the rich, offered the most dire prognosis: it could be worse than anything since the Revolutionary War, meaning it will be worse than the Great Depression. And he added that he has started waking up in the middle of the night worried about the prospects.

The Crisis

Starting on the most superficial level, one could say that the sub-prime loan debacle kicked off the nose-dive. These loans were made by banks and mortgage companies like Freddie Mac and Fannie Mae to people who simply could not afford to repay them. Often, people were lured in with low-interest loans that were programmed to reset at much higher rates after a few years, making repayment virtually impossible. In many cases, the institutions that made the loans would then bundle them together into a package and resell them to other investors — not only in the U.S. but all over the world — where the investors had no idea of the toxicity of their purchase. So those who made the loans scored a quick profit and left others holding the bag. As long as housing prices kept rising, all was well. The loans accelerated until the ceiling was hit, foreclosures began to pile up, and then everything began to collapse.

A second tendency has also been at work that has contributed to this economic meltdown. Debt has been incurred on an increasingly higher level on all fronts here in the US, including by governments, businesses, and consumers. And this has been happening virtually all over the world, placing the global economy on a precarious precipice. In other words, almost every country on some level has been living beyond its means. But as a result, banks are refusing to provide loans because, as the economy has taken a sour turn, they fear that loans might not be repaid.

A third tendency has proliferated that has been particularly lethal. All kinds of investments have been made, particularly by the rich, which take the form of sophisticated gambling. Here one needs advice from mathematicians who know how to calculate the probabilities. For example, some invest in hedge funds that bet that a particular currency will increase in value, or a particular commodity will lose value. If correct, these funds can pay fabulous profits, allowing some brokers to go home with over $1 billion in a single year. But the unpleasant reality for these risky investments is that the future does not always resemble the past. Even the best calculations can be foiled by the unexpected. But until now, a wealthy elite has made huge sums of money by shrewd investments simply by placing their bets.

One might think that the crisis that is slowly unfolding is simply a financial institution crisis. Unfortunately, our lives are entangled with theirs, meaning they will take us down with them.

For example, many businesses, especially the bigger ones, require credit to operate. They get loans, sometimes on a daily basis, to pay their operating expenses and then repay the loans as the profits arrive. This is normal procedure. Without these loans, the businesses will fold, and workers will be without jobs. As for the hedge funds, many of them involve our pensions. If they go down, the pensions go with them, thereby endangering the income of present retirees, not to mention future prospects.

The 40 percent drop in the stock market has wiped out, or nearly wiped out, many 401k’s, which workers have been forced to purchase because companies can then eliminate funding workers’ traditional pensions. Moreover, when the 401k is invested in the company’s own stocks, the added demand raises the price of the stocks, thereby delivering a windfall to the owners.

Finally, in a worse case scenario, we could find ourselves in the same position as the Argentine working class: we try to withdraw our money from the banks and they no longer have it.

All this is to say that the economy is currently in a state of free fall. No one knows how far away the ground is.

Capitalism is the Root Problem

Capitalists, having a large stake in maintaining the system, have assured us that by making a few adjustments, these cataclysmic breakdowns can be avoided in the future. For example, hedge funds, which were created in the 1980’s, have been notoriously unregulated and thus provide an easy target for reforms. Leaving aside the fact that they made the same promises after the Great Depression, a closer look at the internal mechanisms of capitalism leads to the inescapable conclusion that these tumultuous convulsions are unavoidable as long as capitalism survives.

Capitalism is a system based on competition. Business owners compete against one another for profits, and workers compete against one another for jobs. If one business scores higher profits than its competitors, it can use the additional money to lower the cost of its product, deprive the competitors of their customers, and drive them out of business. Consequently, simply in order to survive, capitalists must maximize their profits. And this drive becomes the underlying culture of society. The rich strive for ever-greater profits, and everyone judges one another by how much money they have.

However, every business operator knows that in order to maximize profits, production costs must be minimized, and production costs include labor costs. Management is therefore trained in all the tricks to keep workers’ wages low, benefits to a minimum, and, if possible, replace workers by machines or computers altogether. So under normal operating conditions, capitalism aims at keeping workers’ compensation as low as possible and profits as high as possible. Hence, unless workers organize themselves into unions and attempt to reverse these trends, the inequality in wealth, which currently stands at historic highs, continues to grow.

With the buying power of the working class increasingly squeezed, eventually a limit is reached. Capitalists overproduce and their products go unsold. Few in the working class can now afford to buy the recently built houses that stand empty. U.S. automobile sales are down between 30 and 40 percent in comparison to last year, and cars sit in the lots of dealerships. Supply is abundant, demand has shriveled, and the economy is caught in a vice of overproduction with a recession as the outcome. Because of these underlying tendencies, capitalism has been plagued by crises of overproduction since its inception.

Because labor is the source of all value, and because capitalists try to operate with fewer and fewer workers, preferring to replace them with machines, there is a tendency for the amount of value produced to decline in the manufacturing sector, which in turn means a lower rate of profit. Consequently, the rich look for other avenues of investment such as the stock market or hedge funds. Here one does not have to be concerned with all the complexities of hiring workers and securing raw materials and machines in order to produce a commodity. The stock market and hedge funds are only about money. One can place a bet by pushing a button, and presto, make millions of dollars, sometimes in just a few seconds.

In capitalism, people do not get rich by working. They get rich by having other people do the work for them, or they simply place their bets. And as capitalists, they have far more inside information that allows them to make educated bets than those of us in the working class. In the 1990’s, the rich doubled their wealth on the stock market while our wages dropped.

But eventually even educated bets can fail on an enormous scale, as capitalists have recently discovered. In the final analysis, all the money in the stock market, hedge funds, etc., only has value in so far as it is based on the value created by labor. When this connection is severed, a bubble appears and, when stretched too far, bursts. However, in their compulsive greed for profits, the rich are always seeking new get-rich-quick schemes that eventually produce bubbles.

What to Do

First, we need to organize workers in every arena: at work, in communities, at schools, etc. Organizing the unemployed should be a high priority because their ranks will be growing. We will all be hit hard, and people will want to fight back.

Second, we must link up different working class organizations into larger coalitions. For example, the Central Labor Councils in New York City and San Francisco have already organized demonstrations of working people and passed resolutions condemning the bailout for the banks. Recently, the faculty union at the California State University system reached out to other teachers’ unions in the state so that together they could demand more federal funding to help our money-starved schools and universities. The faculty union pointed out that if the federal government has $700 billion to bailout the banks, surely it has a few billion for our public schools. One should note, by the way, that schools have pleaded for more money for years, only to be told by the government that there was none. When the banks needed a bailout, $700 billion appeared immediately.

Third, we must begin to consolidate these coalitions in the direction of a political bloc of working people and our allies, including the oppressed in general: immigrants, Blacks, Latinos, women, etc. The business owners go to their Democratic or Republican representatives in government for help. We need our own political party that can represent our interests. But in order to reflect our interests accurately, it must be democratically run so that the entire constituency can define its guiding principles and select its leading representatives. We cannot continue to elect Democrats to office and expect a different outcome; they all are on the corporate payroll. We need a party that recognizes our interests are counterposed to those of the employers, corporations, bankers, speculators, etc. — a party that understands that we must not be asked to sacrifice our standard of living and whole well-being in order to subsidize their life of luxury. We did not cause this financial crisis, and we refuse to allow it to be resolved at our expense while the rich emerge unscathed. A party of working people could begin by demanding a stop to the Wall Street bailout but help for those who face foreclosures in houses they live in and help for those who have lost their jobs.

Finally, throughout this struggle, we must clearly and relentlessly explain why capitalism does not operate in the interests of working people but serves the interests of a fabulously rich minority at the expense of the vast majority, even in the best of times. The rich employers raise profits by lowering labor costs, throwing us out of work, polluting the environment, conducting wars for oil and profit, and reducing humanity to a constant struggle for survival. With their own self-interests and greed at the helm, the rich have just steered us into an iceberg. It is time for a reversal. We working people make the country run; we should run the country.

This means we will need to build a society that defends and promotes ALL our interests — our COLLECTIVE interests — as its highest priority. And since we need one another to thrive, the well-being of each individual will be considered a necessary condition for the well-being of everyone. Health care, quality education, housing, convenient transportation, and a clean environment will be everyone’s birthright. All will be guaranteed a job, and by providing the unemployed with work, we can reduce the workweek with no loss in the amount of wealth created. People will be rewarded on the basis of their work, not on the bets they place or on how hard they make others work for them. We will lift everyone’s standard of living, not allow a minority to get rich by making everyone else poorer.

But society can only operate in everyone’s interests if we all have a voice in creating public policy. This means that all major decisions must be discussed, debated, and voted on by all so that policies will be determined by the most persuasive arguments, not by the largest campaign contributions to politicians. Accordingly, we can run our economy on clear, rational principles as opposed to the dark dealings of capitalism. In the final analysis, it will be a society based on rationality, cooperation, and morality, not on greed, competition, and gambling.

Now is the time to begin.

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