Tuesday, August 05, 2008

Workers, Banks and the Credit Crisis

Workers, banks and the credit crisis

By Fred Goldstein
Published Aug 1, 2008 12:29 AM

Underneath the credit crisis that threatens the entire financial structure of U.S. capitalism is an overwhelming fact: large sections of the working class and the middle class are sinking under the burden of unsustainable debt. To make matters worse, 485,000 jobs have been lost in the last six months.

Most headlines are about the problems of Freddie Mac and Fannie Mae—two sweetly named financial bloodsuckers—and other financial institutions threatened with collapse. The crisis of the workers and oppressed who have been ensnared in the web of debt woven by the financial wizards of Wall Street is kept way in the background.

Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke, in consultation with the banks, have got Congress to pass a $300-billion bailout plan for Freddie and Fannie, which are privately owned banks. Congress threw $4 billion into the legislation to help homeowners refinance, but left it to the banks’ discretion as to whether they’ll agree to the refinancing.

The great disparity in assistance—$300 billion for the banks, $4 billion for homeowners—speaks volumes about the priorities in Washington.

In fact, Fannie Mae and Freddie Mac played a key role in fostering the present crisis by buying up and packaging mortgages and selling them to speculators. The two banks together hold or guarantee almost half of the $10.5 trillion in outstanding mortgage debt in the United States.

The intervention of the capitalist government as a guarantor of risky bank debt of unknown magnitude is a measure of the crisis. Washington has crossed a line and put the U.S. Treasury in the banking business.

Outstanding loans amount to trillions of dollars. With workers losing their jobs, suffering wage cuts and hikes in interest on adjustable rate mortgages, and the general economic condition of the masses deteriorating, neither of the banks really has the money to cover even a fraction of the potential defaults. For example, Fannie Mae has only $38 billion to back up $2.8 trillion in mortgage loans.

Behind the crisis: raid on workers’ wages

Bourgeois analysts and experts of all types offer up a wide variety of explanations for how this debt crisis arose. They debate who is to blame—the lender or the borrower, the swindler or the victim. But few if any go to the heart of the matter.

The present credit crisis arose because in recent decades finance capital has moved more and more aggressively to plunder the consumption fund of the working class. The working class is an exploited class under capitalism. The workers create wealth through their labor, getting wages to live on. The bosses keep the profits—which is the surplus value created by the workers. That has been the essence of capitalist exploitation since the origins of the system. That is the basis of class inequality and class antagonism.

Now, in addition to the profits taken directly from the workers by employers in the process of production, distribution and services, the financiers have waged a systematic campaign to get hold of larger and larger portions of the workers’ wages outside the workplace, in the form of interest and fees. Workers’ debt has become a huge source of profit for layers of bankers, brokers, fund managers and other sharks. The working class has become more and more a debtor class during the same three decades in which the capitalists have been lowering wages, taking back benefits, busting unions and creating a low-wage society.

In a New York Times special report on July 20, Gretchen Morgenson said that consumer debt “stands at $2.56 trillion, up 22 percent since 2000 according to the Federal Reserve Board.” In addition, there was $10.5 trillion in mortgage debt at the end of last year, more than double the $4.8 trillion of just seven years ago.

The average household’s credit card debt is $8,565, up almost 15 percent since 2000. “College debt has more than doubled since 1995,” wrote Morgenson. “The average student emerges from college carrying $20,000 in educational debt.”

Household debt overall, including mortgages and credit cards, represents 19 percent of household assets, according to the Federal Reserve Board. In other words, one fifth of everything people own is based on loans that still have to be paid off with interest to the banks.

But the most dramatic statistic concerning the extraordinary level of indebtedness of the masses is the Federal Reserve finding that “average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984.” (New York Times, July 19)

Workers owe more than they can ever earn. When bosses offer easy loans, workers beware!

During the 19th and early 20th century in the United States, the capitalist class was not interested in lending money to even the neediest workers. If the workers needed money they had to rely on the pawnbroker or the loan shark. The pawnbroker took the worker’s valuables in return for a pittance. Loan sharks charged very high rates and failure to pay was often met by violence.

It was only with the development of mass production and “big ticket” items that the bosses were eventually compelled to lend the workers money. One of the earliest to do so, in the middle of the 19th century, was Singer Sewing Machine. A sewing machine cost $100—more than any worker could afford at that time. Singer began to sell on the installment plan, with interest included in the payments. Once mass production really took hold in the 20th century, General Motors began the GM Acceptance Corporation in 1919 to facilitate the sale of its autos. Sears Roebuck, the pioneer mass retailer, was famous for selling on credit in order to bring customers to its chain. Soon all manner of items were sold on the installment plan.

The interest charged was another source of profit for the boss, but it was secondary. The primary purpose of extending credit to the workers was to get customers to buy a specific commodity or spend their money in a particular establishment. Repossession was common when workers lost their jobs or fell behind for whatever reason.

It was not until the 1970s that exotic mortgages were devised. The 1980s saw the rise of universal credit cards, first with Bank of America and Chase Manhattan. This changed the fundamental aim of lending to the workers. It was no longer a stimulus to buy a particular product or patronize a particular establishment but a way of making profit for the bankers through charging interest.

The universal credit card could be used for anything. It was a device to get workers in debt. The more needy they were, the more certain they were to miss a payment and be subject to sharp hikes in interest rates, fees and penalties of all kinds.

A similar process took place with the development of mortgage-backed securities and other complex debt instruments. The purpose of a mortgage was no longer to make a loan and collect the principal and interest from the borrower. The loan was sold and packaged the moment after it was made. The original lender had no interest in the credit-worthiness of the borrower. The loan passed through the hands of other bankers, money managers, perhaps hedge funds or other Wall Street sharks, and could go around the world.

The fees charged by all the intermediaries in the financial processes stimulated a voracious appetite and high demand for more loans. About four years ago an intensified assault was made on the working class and particularly on Black and Latin@ borrowers. Lying and swindling reached new heights and subprime mortgages were targeted at the oppressed and working class communities.

Credit bubble depends on workers’ future wages

The underlying assets beneath all this speculation, the source of future funds that give the bonds their market value, is the expectation of collecting a portion of the future wages of the workers. Trillions of dollars of fictitious paper value are leveraged upon the diminishing wages of the working class.

Credit card companies and the mortgage industry make loans not to create wealth or make things available to workers that they could not otherwise have. They do it to convert the workers’ wages into bankers’ profits, through the collection of usurious interest—up to 28 percent—and fees.

Karl Marx discussed interest-bearing capital as a factor that both advanced production through the extension of credit and also led to speculation and crises. In Marx’s time, the banks collected interest mainly from the capitalists and it came out of their profits. Interest payments from workers, on the other hand, come out of wages. Both have the same form—interest—but an opposing class character.

In recent years, particularly since 2000, the capitalist economy has grown very slowly in terms of production and services. After the collapse of the dot-com bubble in 2000, the Federal Reserve System under Alan Greenspan pumped credit into the economy. He did it by lowering interest rates from 6.5 percent in late 2000 to 1.0 percent by June 2003.

Greenspan was trying to counteract a “jobless recovery.” However, more than 590,000 jobs were lost during the sluggish recovery from 2001 to 2003. Pumping cheap money to the banks did not create many jobs. Instead the credit stoked a housing boom that has now come crashing down. From 1985 to 2002, houses sold at 14 times the annual cost of rent. In early 2006 houses sold at 25 times rent.

This boom caused such overproduction that enough houses are now on the market to satisfy demand for the next two-and-a-half years without building a single new one. (New York Times, July 19)

It all boils down to capitalist profit system

Why do workers buy homes that will make them debt servants for decades? Because this profit-making capitalist society, the richest in the world, won’t build decent, affordable housing for the mass of the people. That is the starting point of the housing foreclosure crisis. There should be another alternative: affordable housing as a right.

Students end up in debt because education is tied to profit. It should be free. Workers go into debt to make ends meet because wages are low or they lose their jobs. Medical debt arises because there’s no universal health care and because the health-care system is structured to make profits for insurance companies, hospitals, drug companies and the medical-industrial complex.

The system of production for profit and not human need is the origin of the debt crisis of the workers and the financial crisis of the system.

Why should workers have to resort to credit cards to keep afloat when they get a layoff or a wage cut? Jobs should be a right.

The task of the moment is to fight for a moratorium on foreclosures and evictions, for the right to a job, to universal health care, to affordable education and a bailout of the workers, not the bankers.

To fund this basic program one could start with turning the military budget into a fund for human needs.
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