From the US housing bubble to the (proposed) bailout of US financial system

The bursting of the US housing bubble and the high default rates on "subprime" and adjustable rate mortgages, marked the beginning of the subprime mortgage crisis (2005-2006).

In the end of 2006, foreclosures accelerated in the US, causing a global financial crisis through 2007 and 2008. On August 9 2007, the so-called “credit crisis” became obvious, when a liquidity crisis emerged caused by investors’ loss of confidence in the value of securitized mortgages. This motivated the massive capital injection into financial markets by the Fed and the ECB. On 17 July 2008, major banks and financial institutions around the world have reported losses of about US$435 billion.

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In the initial phase of the crisis, the companies affected were those directly involved in home construction and mortgage lending, such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages, such as Bear Stearns, were badly damaged. In late summer of this year, the crisis aggravated with the Federal takeover of Fannie Mae and Freddie Mac. It was the start of repercussions in the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending.

Recently, there was a new aggravation of the crisis, with the bankruptcy of Lehman Brothers and the sale of Merrill Lynch to Bank of America on September 14, and the bailout of American International Group by the Fed on September 16.

On September 20, the U.S. Treasury Secretary Henry Paulson proposed the Troubled Asset Relief Program (the proposed bailout of U.S. financial system). As originally proposed, the plan would give absolute and un-reviewable authority to purchase up to US$700 billion of mortgage backed securities from financial institutions for the purpose of stabilizing the market.

On September 23, the three pages plan was presented by Paulson and Bernanke to the Senate Banking Committee who rejected it as not acceptable. As of September 26 2008, consultations over amendments to the plan are on-going.

On Saturday, 27 September 2008, the US Congressional leaders said they hope to reach agreement on a massive rescue plan to aid the financial markets before they open on Monday.

On Monday, 29 September 2008, the lower house of the US Congress has voted down a US$700 bn plan aimed at bailing out Wall Street.

“Creative destruction” vs bailout of US financial system

It is important to refer the possibility of an economic crisis at global level this year, like the following indicators hint at: - high oil prices, which drive to both high food prices and global inflation; the previously described credit crisis, which leads to the bankruptcy of several large and well established investment banks; increased unemployment.

It’s often adopted one simple rule considering that “a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters”. However, this simplistic rule fails to register several official (or NBER defined) US recessions. The National Bureau of Economic Research defines a recession more broadly as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Concerning US, and because of the recent financial “disasters”, there is a great probability of economic recession and the probability of a severe economic recession has come up.

There are various strategies for moving an economy out of a recession: ”Keynesians” defend government deficit spending to trigger economic growth; ”Supply-side” supporters recommend tax cuts to promote business capital investment.; ”Laissez-faire” economists advise the government to remain "hands off" and not interfere with natural market forces.

Past week, according to Democrats, Speaker Nancy Pelosi will not bring the plan to rescue the financial sector to votes in Congress, unless it gets substantial Republican support.

Other sources of the U.S. press indicate that, according to one GOP lawmaker, some House Republicans are saying privately that they prefer " let the markets crash" than approve the massive bailout.

“For the sake of the altar of the Free Market system, do you accept a Great Depression?", the member questioned.

House Republicans consider that the president is “trying to tear up the Constitution” by committing the federal government to such a massive intervention in the US financial system.

As we can observe there is a confrontation between an option of a massive state intervention in the financial market system, and the “free-market” view (“"hands off" and not interfere with natural market forces”).

Both tactics will probably have serious costs for the economy. The first could induce to a not so intense recession, but very extended in time - a probable economical stagnation for many many years with more government oversight.

The second could be more intense, but perhaps it allows a more rapid capitalist recovery. However, before that, it could led to a severe recession or depression – the “neoliberal” recovery preceded by the so-called “creative destruction”.

Is known that, besides a rapid increase of transnational mobility of capital, a wave of deregulation of financial markets swept over the world, since the last decades. Corporate pressure has intensified on governments to adopt neoliberal “reforms” that regularly produced state spending.

This process has been a form of “creative destruction”, weakening and breaking institutions, social welfare, health care, education and culture. And history shows that governments have been generally powerless to fight the unavoidable and damaging capitalist ‘business cycles’.

Although unstable and unfair, the capitalist system has evidenced a capacity to reform itself to survive economic business cycles. However, these ‘business cycles’ stimulated by corporate greed and maintained by deception of the people, cause huge human and environmental costs.

Having as background the worst global financial crisis in decades, we can also attend to a media spectacle, stage of confrontation between complementing capitalist factions, questioning what really happened and what can be done to maintain alive this economic and social model:

“A good functioning financial system has its rules!”; “We have deregulated the system. Now we must regulate.” “We should learn from mistakes!”; “Financial institutions should be managed by serious people|, not adventurers”; “Central banks should protect major banks and financial institutions - investors need to be protected”; “It´s important to avoid panic selling and allow the markets to stabilise.”

Or:

“This is not real capitalism.”; “We don’t need protectionism”; “The banking system is very regulated. More competition is needed”; “Why the state allowed this housing bubble burst?”; “We need only a modernisation of regulation, not more regulation”

In fact, one of the institutions of the capitalist system, the private property, whose integrity is crucial for its survival, shows signs of imploding, particularly in the financial sector. The social power of the private property of finance industry is being dissolved and, for survive as a system, it needs urgently to be replaced by new market forces and new administrators in the financial institutions. For the more well positioned “classes”, this is a opportunity to achieve capitalist power. The social classes that are being pushed down, may not have the required organization and the will to confront and challenge the ruling class in the labour market.

There are also signs showing that some sectors of the capitalist class are not very worried with the spectre of an economic recession. It may be, because that would be an opportune scenario for creating the conditions for the workers to accept, by submission, the continuation of the current unsustainable economic model, based on exploitation of the material and human resources of our planet – more of the same: more oil, more war, more unemployment, more social injustice, more environmental disasters.

In the middle of one alarming economic crisis it will be more easy to use of the “strategy of fear”, exploiting the population feelings of social and economical insecurity, creating problems and then appearing as the protective solution. To overcome this, people need to take conscience of social and economical reality, and, against the logic of competition and exclusion, get the collective liberation from political fear, which should be an individual liberation, at the same time.

References:
Wikipedia article, Economic crisis of 2008
"Creative Destruction' – The Madness of the global economy", medialens.org

Images:
The Panic - Scenes in Wall Street Wednesday Morning, May 14 / drawn by Schell and Hogan, 1884 (LOC) / By pingnews.com , Some rights reserved

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