Editor’s note: This two-part series, which was initially published as a pamphlet in 2012 titled “The Myth of Democracy and the Rule of the Banks,” lays out, in accessible language, the causes and consequences of the 2007-2008 economic crash. What is known as the “Great Recession” threw millions of people out of work and out of their homes. Instead of bailing out the people, the U.S. government came to the rescue of the very institutions that caused the crisis.
Liberation School is publishing the pamphlet, with a new 2020 preface, to provide historical and political context for the current economic crisis, and to help demystify the workings of the capitalist economic system. While the particulars of each capitalist crisis differ, they all share underlying dynamics in common. Moreover, as in the Great Recession, we today see the capitalist government rushing to cushion the fall for their class while leaving workers to fend for themselves.
In part one of the series, Richard Becker articulates the specifics of the most recent economic crisis, explaining how they are the outgrowth of the very logic of capitalism and imperialism. Part two details additional crimes of the banks–from targeting the elderly to laundering cartel drug money–analyzes the “too big to fail” argument for bank bailouts, shows why legislative reforms aren’t enough, and makes a case for seizing the banks.
In the wake of the Great Recession, the Occupy Wall Street movement erupted. Millions of people took to–and stayed in–the streets to protest the capitalist system and its attendant forms of oppression. Learning from the successes and failures of Occupy, we need to build a new movement to fight for the interests of our class, to make sure that the people, and not the 1 percent, get bailed out. Reading and studying this series can help us do just that.
Preface to the 2020 online edition:
This pamphlet was published following the deepest economic crisis since the Great Depression of the 1930s.
In the “Great Recession” that began in 2007, tens of millions in the United States lost their jobs, homes, healthcare, and pensions. The crisis was so deep and the government response was so inadequate that, when the COVID-19 pandemic struck this year, many hadn’t yet recovered from it.
The social costs accompanying mass unemployment, evictions, and foreclosures are hard to quantify, but they’re immense: families torn apart, soaring drug and alcohol abuse, rising suicide rates, and more.
As these words are written, we are still in the very early stages of the medical, economic, and societal crisis of 2020.
Periodic crises, as this pamphlet points out, are a built-in feature of capitalism. They have been since capitalism became the dominant world system more than two centuries ago. Most often, economic recessions and depressions have been caused by capitalist overproduction, or the production of too many commodities that can be sold at an adequate profit, a glut on the market that leads to cutbacks and layoffs.
Inevitably in the boom (late) phase of the capitalist economic cycle, wild speculation breaks out, egged on by the system’s propagandists proclaiming, “this time it’s different.” But the boom always ends in a bust, and the only thing that is actually “different” is the event or events that trigger the crash.
In the 2008 crash, it was capitalist overproduction, particularly of houses, combined with the most extraordinary forms of fraudulent wheeling-and-dealing that brought the entire financial system to near-collapse.
As “The Myth of Democracy” documents, despite the most egregious criminal activities, including massive drug money laundering, serial preying on the elderly, massive and pervasive fraud in the mortgage business and more, not one of the top bankers spent a day in jail. Instead, they were declared “too big to fail” and were bailed out to the tune of $800 billion, with trillions of dollars more made available to them if needed. The paltry fines for their crimes were invariably paid by the institutions, not the criminals in three-piece suits.
In 2020, it was the capitalist world’s unpreparedness for a pandemic that brought much of the global economy to a screeching halt. The COVID-19 epidemic struck at a time when the economic system was again extremely over-leveraged, as the gamblers in the big Wall Street casino were playing with immense piles of borrowed money.
The rapid shutdown of much of the economy, necessary to limit the spread of the deadly virus, caused the layoff of tens of millions of workers virtually overnight. In just three weeks following the crash, 17 million workers filed first time unemployment claims.
Never in the country’s history have so many workers lost their jobs so quickly. In addition, millions of small businesses and shops were shuttered.
Once again, as in 2008-09, the Federal Reserve Bank, Treasury Department, Congress, and the White House have come riding to the rescue of the banks, hedge funds, and other investors. While out of fear of mass anger, the initial bailout package provides limited support for “qualified” fired workers and small businesses, it offers a mind-boggling $4.5 trillion–$4.500,000,000,000–in support to the capitalist bankers and investors, with more to come if needed.
What the crises of 2008-09 and 2020 have conclusively proven is that the capitalist class is a parasitic class. While capitalist ideology glorifies the “bold entrepreneur,” the reality is that capitalism cannot live without massive state support.
In the midst of the current crisis, millions of health, food production, delivery, sanitation, utility, and other vital workers are literally risking their lives to keep society going. Meanwhile, the capitalist class lives hidden away in luxury, contributing nothing of value to society.
It’s time for this to end.
What is the crime of robbing a bank compared to the crime of founding one? – Bertolt Brecht
In October 2008, the U.S. government rescued the big banks at a cost of $700 billion in taxpayers’ money. It was the biggest bailout in history. The government provided trillions of dollars more in loan guarantees and other benefits to the major banks, insurance companies and other corporations.
A couple of months later, a reporter called around to ask the bankers what they had done with the money. Their responses were nearly all the same:
Thomas Kelly, JPMorgan Chase (recipient of $25 billion): “We have not disclosed that to the public. We’re declining to.”
Kevin Heine, Bank of New York Mellon ($3 billion): We’re choosing not to disclose that.”
Carissa Ramirez, Morgan Stanley ($10 billion): “We’re going to decline to comment on your story.”
So it went, right down the line. Not one of the bailed-out banks would disclose any information on what they had actually done with the biggest bailout in history, a bailout that saved the financial system from collapse. (Matt Apuzzo, AP, Dec. 23, 2008)
The Dec. 23, 2008, article highlights the incredible arrogance of the bankers. They got $700 billion of the people’s money—plus trillions more in loan guarantees and other forms of government backing—and would not even say what they did with it!
Remarkably, they did not have to. When Congress appropriated the funds for the bailout, they did not bother including a requirement that the banks had to report what they did with the money. Compare this to standard practice where even the smallest grants from the federal government to social service agencies require considerable documentation of how every last dollar is spent. Failing to comply results in having to return the funds.
Nor were any other significant concessions or reforms demanded from the banks despite the fact that most of them would likely have gone belly-up without the bailouts. So, they used much of the money to pay dividends to shareholders and huge bonuses to thousands of executives, traders and analysts—despite having all-time record losses.
That Wall Street bankers tend toward arrogance is hardly news. What is much more significant about this episode is what it reveals about the capitalist system we live under: While the government and its apparatus of repression rule over the people, the big banks and Wall Street rule over the government.
Imperialism, war, and the banks
The domination of the banks in later-stage capitalism was explained by the Russian revolutionary leader V.I. Lenin nearly a century ago in his famous pamphlet, “Imperialism: The Highest Stage of Capitalism:”
As banking develops and becomes concentrated in a small number of establishments, the banks grow from modest middlemen into powerful monopolies having at their command almost the whole of the money capital of all the capitalists and small businessmen and also the larger part of the means of production and sources of raw materials in any one country and in a number of countries. This transformation of numerous modest middlemen into a handful of monopolists is one of the fundamental processes in the growth of capitalism into capitalist imperialism ….
The economic essence of imperialism is monopoly capitalism. A financial oligarchy (literally means “rule of the few”—ed.), which throws a close net of relations of dependence over all the economic and political institutions of contemporary bourgeois society without exception—such is the most striking manifestation of this monopoly.
Today, the economic and political power of the biggest banks has soared to much greater heights than in Lenin’s time. In just the past 30 years, the 10 largest banks in the United States have increased their share of total bank assets from 22 percent to more than 60 percent. Ninety-five percent of all trade in derivatives is controlled by five banks: JPMorgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo. Derivatives are financial instruments that enable big speculators such as hedge funds to “bet” on changes in value, either up or down, of the underlying asset—such as a stock, a bond or a currency.
Just four—JPMorgan Chase, Bank of America, Citibank and Wells Fargo—issue half of all home mortgages and two-thirds of all credit cards. Each of the five biggest banks holds assets of more than a trillion (a million million) dollars.
This financial oligarchy, as Lenin pointed out, dominates politics as well as the economy—though powerful as it is, it cannot put an end to the periodic crises of the capitalist economy. Wall Street pours billions of dollars into campaign contributions and lobbying, funding Democrats and Republicans alike. The result is that instead of any kind of real democracy, we live under a system that is of, by and for the super-rich.
War—the inevitable outcome of capitalist competition and the resulting drive to control markets and sources of energy and other raw materials—is built in to the imperialist system. War has long been a source of immense profits for the military-industrial corporations, the monopoly oil companies and the big banks, which are all interconnected through their boards of directors and business dealings.
In 1935, Marine General Smedley Butler, one of the most highly decorated soldiers in U.S. history, said after his retirement:
I spent thirty-three years and four months in active service in the country’s most agile military force, the Marine Corps. … And during that period I spent most of my time being a high-class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism.
I helped make Mexico, and especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenue in. I helped in the raping of half-a-dozen Central American republics for the benefit of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers and Co. in 1909-1912. I brought light to the Dominican Republic for the sugar interests in 1916. I helped make Honduras ‘right’ for American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went its way unmolested.
Today there are more than 900 U.S. military bases in over 100 countries making the world “safe” for Bank of America, Goldman-Sachs and other big banks, as well as Exxon Mobil, Boeing and dozens of other transnational corporations.
The banks finance the government’s wars by buying interest-bearing Treasury bonds. More than $250 billion in interest paid out by the federal government in 2011 was due to past wars.
Banks, directly and on behalf of their clients, invest in and share in the tens of billions in annual profits of the military-industrial, oil, high-tech and other multinational corporations. Thomas Friedman, pundit and propagandist for war and globalization, triumphantly expressed the relationship between militarism and capitalism in a 1999 New York Times column:
The hidden hand of the market will never work without a hidden fist—McDonald’s cannot flourish without McDonnell Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley’s technologies is called the United States Army, Air Force, Navy and Marine Corps.
From “too big to fail” to bigger and richer
The unprecedented bailout of the banking system in 2008 and 2009 was a bipartisan project bridging the Republican Bush and Democratic Obama administrations. When the Troubled Assets Recovery Program was passed and signed into law on October 3, 2008, it had the support of both of the big capitalist parties.
“Troubled Assets” are more of the weasel words for which Washington is renowned. Assets are things, not people; they can’t be “troubled.” What these words were meant to disguise was the fact that many of the “assets” that the banks had been betting on were no longer worth anything—that is, they were not assets at all, or were at best, actually worth far less than their face value.
And “betting” is the word that best describes the kind of wild speculation and schemes that the banks had been engaging in during the boom phase of the capitalist economic cycle that came to a temporary halt in 2007 when the “housing bubble” burst. But as the May 2012 disclosures of the $3 billion or more loss for JPMorgan Chase’s London “hedging” operations reveal, the wild speculation continues.
The Bush and Obama administrations’ rationale for the bailout was that the largest banks were “too big to fail,” meaning that their collapse would threaten to bring down the entire economy.
Today, due both to the built-in dynamics of capitalism and the way in which they were rescued, the same “too big to fail” banks that survived the crash are much bigger. As has been happening since crises of generalized capitalist overproduction first began, the latest economic crisis saw the strong devour their weaker competitors. Among the swallowed-up were some of the most famous names in the finance world, like Bear Stearns, Merrill-Lynch, Countrywide Finance, Wachovia, Washington Mutual and more. Others, like Lehman Brothers, whose collapse on September 15, 2008, triggered a worldwide financial panic, simply went bankrupt and disappeared.
At the end of 2008, the bailed-out survivors who had suffered big losses and would likely have collapsed without the huge gifts they received from the government, paid out executive bonuses. To the average person, the idea that executives should be paid bonuses when their bank loses money does not make a lot of sense. But for the big banks it is a game called “heads we win, tails you lose.”
In 2008, JPMorgan Chase gave bonuses of more than $1 million to each of 1,626 employees. Goldman Sachs handed out 953 bonuses of over $1 million, of which 212 were more than $3 million. Altogether, the same banks that “chose not to disclose” what they had done with their bailout money distributed more than 5,000 bonuses of at least $1 million.
One thing that the rescued banks did not do with the money was lend it out. In response to widespread outrage at the TARP program when it was announced, politicians justified it on the grounds that it would enable the bailed-out banks to continue lending to small businesses and individuals and thus keep the economy growing. But as the economy plunged deeper and deeper into crisis, the last thing the bankers were going to do was engage in risky lending. Credit became almost impossible to obtain.
Aided by massive government intervention, the biggest banks grew much bigger in the midst of the “Great Recession.” Between 2007 and 2009, Bank of America’s assets grew from $1.7 trillion to $2.3 trillion, as it absorbed Merrill Lynch, Countrywide Finance and more. JPMorgan Chase went from $1.6 trillion to $2.0 trillion, and Wells Fargo doubled in size, from $600 billion to $1.2 trillion.
From the big banks’ perspective, the “too big to fail” doctrine is an open invitation to take even wilder risks in the future. Profits belong to the banks; losses will be covered by the public. To put it another way, profits are privatized, losses are socialized.
The increased concentration of wealth in banks, which federal officials already regarded as “too big to fail” before the 2008 crisis, means that even more costly disasters loom in the future. With even greater assets with which to gamble, the losses in a future crisis—and there will continue to be bubbles, booms and busts as long as capitalism exists—may well mean even bigger bailouts to come.
Under capitalism, it is great to be a banker.
What caused “the great recession?”
What caused the severe economic crisis that began in 2007 and continues?
Periodic economic crises have been part of the capitalist system for nearly 200 years, ever since the industrial revolution and subsequent technological advances enabled capitalist production to grow faster than the market. The “boom-and-bust” cycle is built into the system. Over-production crises generally take place every 7 to 11 years, with varying degrees of severity. The current crisis is the worst in 80 years.
Frederick Engels, Karl Marx’s closest collaborator, described the boom-bust cycle in 1877:
As a matter of fact, since 1825, when the first general crisis broke out, the whole industrial and commercial world, production and exchange … are thrown out of joint about once every 10 years. Commerce is at a stand-still, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence. …
The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. Little by little, the pace quickens. It becomes a trot. The industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit, and speculation, which finally, after breakneck leaps, ends where it began—in the ditch of a crisis.
A unique feature of capitalism is, as Engels put it, “the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence.” In all earlier phases of human existence, economic crises were the result of scarcity—caused by crop failures, floods, drought or other natural disasters. The idea that a surplus of necessities would be the cause of crises would have seemed an unimaginable absurdity to our ancestors. It should seem just as absurd to us today.
Only under the capitalist system is the production of “too much” the cause of crises. Capitalist over production has a very particular meaning. It does not mean that too much has been produced in relation to human need. It means too much has been produced to be sold in the market at an adequate profit for the capitalist.
How this plays out is illustrated by the coal miner’s riddle from the time of the Great Depression:
Daughter: Daddy, why is it so cold in our house this winter?
Father: Because we don’t have any money to buy coal.
Daughter: Why don’t we have any money?
Father: Because I was laid off from my job at the coal mine.
Daughter: Why did the coal mine lay you off?
Father: Because we produced too much coal.
Today, for the word coal we could substitute houses. Why are so many people being foreclosed and thrown out of their homes? Because there are too many houses—too many to be sold at a sufficient profit, that is. Capitalist over production in housing—made possible by a huge expansion of mortgage debt—led to the loss of millions of jobs in construction and related industries. Employers in other sectors of the economy—from agriculture to automobile production to computers and more—also laid off workers. The resulting sharp decline in wage and salary income accelerated the economic contraction in virtually every sector.
The crisis also had a disastrous impact on federal, state and municipal budgets, causing sharp declines in revenues leading to the slashing of social programs now needed more than ever. Millions of public sector jobs were eliminated either through layoffs or not filling job vacancies, thus exacerbating the crisis.
The criminal absurdity of the capitalist system is nowhere more clearly demonstrated than in the housing crisis in the United States today. The 2010 census counted more than 18.7 million vacant housing units in the country. In that year alone, the banks filed foreclosures on 3.8 million homes. Since then, more foreclosed homes have come on the market daily.
Yet, as the number of available houses and apartments grows, more and more people are becoming homeless. Why? Mainly because of high and persistent unemployment. More than 25 million people are unemployed or severely underemployed. Of them, millions have been out of work so long that even those who once had savings now have nothing left.
How the banks made it worse–much worse
The process of obtaining a traditional, fixed-rate mortgage is bad enough. The borrower will typically end up paying the bank twice the face value of the mortgage due to interest on the loan. For the first several years, the borrower is mostly paying interest, meaning that he or she has very little if any equity in the house. Along with the mortgage comes an array of fees and closing costs.
In the boom phase of the capitalist economic cycle that ended in 2007, millions of people bought homes. Many were sold “subprime” adjustable-rate mortgages by the bankers. These are loans that initially have lower interest rates and thus lower monthly mortgage payments than fixed-rate mortgages—for the first few years. Then the mortgage payment resets or balloons, with monthly payments increasing by 50 percent or more. Unscrupulous bankers selling subprime mortgages disproportionately targeted African American and Latino communities.
Many mortgage bankers paid bonuses to sellers of subprime loans because in the long run they are much more profitable for the lenders and, of course, much more expensive for the borrower. Widespread fraud surrounded the selling of both subprime and standard fixed-rate mortgages, and hardly anyone has been significantly punished.
Mortgage originators—the banks and other financial institutions that sold the mortgages, the largest of which was Countrywide Financial—routinely engaged in falsifying loan applications.
The bankers’ selling point was this: “Housing prices are going up and they will keep going up. When it comes time for your mortgage payment to go up, you will be able to refinance [take a new loan based on the hoped-for higher value of your house]—you’ll be able to make the new payments and have money to spare.”
The mortgage originators made most of their short-term profit from the fees tied to the mortgage loans. Mortgage sellers were paid bonuses for each mortgage issued, with larger bonuses for the riskier and thus more profitable mortgages.
The originator companies then generally sold the mortgages to a bank or an investment firm. The banks and investment firms bundled the mortgages as mortgage-backed securities and sold most of them as bonds to clients, including pension funds, other banks and various foreign and domestic investors. The income stream to pay the interest on the bonds was based on the monthly mortgage payments by individual homeowners.
Banks and insurance companies, such as AIG, also sold derivatives, known as credit default swaps. These were a form of insurance on this debt and supposedly protected investors against loss. The sellers of the mortgage-backed securities then persuaded ratings agencies to issue top credit ratings on the bonds, convincing pension funds and other conservative investors that the bonds were almost as risk-free as U.S. Treasury bonds.
This system was an incentive for extreme fraud and corruption. The company that sold the mortgages pocketed fees, typically 1 to 3 percent of the price of the mortgage. Because the mortgages were then sold to another financial institution, the originator had no material interest in whether the loans would ever be paid back. This made the incentive to falsify information on loan applications irresistible for many mortgage sellers.
So, too, was the incentive to inflate the value of houses, and thus the size of loans and the fees. Some of the banks, Wells Fargo being an especially prominent example given its domination of the mortgage market, set up their own appraisal companies, creating a clear conflict of interest.
By late 2006, the prices of houses had stopped rising and began to fall. Millions of people who had subprime loans as well as traditional mortgages began losing their jobs. At the same time, the market value of their houses fell below what was owed on their mortgages, so there was no possibility of refinancing. This situation is known as being “underwater.” As the market value of houses shrank, so too did the number of homebuyers who could refinance. At the same time, millions of subprime loans ballooned—after 2 to 3 years of 6 percent interest up to 10 or 11 percent. The foreclosure crisis exploded.
A safety net for the super rich
The combination of declining house prices, ballooning mortgage payments and job losses was cataclysmic. The rising supply of empty homes further drove down housing prices, leading to still more foreclosures, a cycle that continues in 2012.
As millions of people stopped making mortgage payments, the massive decline in the value of mortgage-backed securities nearly brought down the banking system. For instance, Merrill Lynch was holding $30 billion in these securities, which it ended up selling—just before it went under—for $7.5 billion, or 25 percent of its former supposed market value.
These severely devalued bonds, some of which were completely unsalable—that is, no one wanted to buy them at any price—became known by another oxymoronic term: “toxic assets.” Another way of saying that is: “Assets that are no longer assets.” And in yet another act of “generosity” to the banks, the Federal Reserve and government accepted “toxic assets” as collateral for near interest-free loans.
The executives of these banks were the same ones who for many years had posed as rugged individualists, reciting the mantra, “get government off our back.” But when they got in trouble, they ran to the same government crying, “Save us.” And their government did.
The capitalist equation: More vacant homes = more homelessness
The number of home foreclosures is now projected to exceed 10 million. More than 4 million families have already been foreclosed on and evicted from their homes. Some 16 million homeowners are underwater.
The equation more available housing equals more people without housing is, from any objective or human point of view, a criminal absurdity. It only makes sense if you are part of the richest of the 1 percent—the owners of the big banks, the finance capitalists.
How can it be that their right to reap more billions in profits takes priority over the right of people to have a place to live, especially when the needed housing is sitting there empty?
The answer is that the capitalists are the ruling class, protected by police, sheriffs, judges and the world’s biggest prison system. Behind them—if and when needed—is the Pentagon. Under capitalism, the right of the dominant class to its property and profits takes precedence over the most basic needs of the people, including a place to live.
The results of the normal functioning of this system are massive parallel increases in wealth at the top and suffering at the bottom, as Karl Marx noted more than 150 years ago. The number of people officially living in poverty in the world’s richest country has grown to more than 47 million, gauged by the insultingly low standard of $22,400 annual income for a family of four. By counting in what the government calls “low-income” (many of whom are also truly living in poverty), the number rises to more than 145 million people, or more than 48 percent of the population, again, in the richest country in history.
The government and a number of private agencies estimate the number of people who were completely homeless during part of 2011 at about 3.5 million, or 1 percent of the population. That number itself is an outrage, and it only begins to explain the depth and human cost of the housing crisis. Millions more have moved in with family or friends, or are living in very overcrowded circumstances.
The human toll
Tens of millions of people in the United States have lost homes, jobs, health care coverage, pensions and more over the past five years. More workers have been laid off for longer periods than any time since such records have been kept. Millions have given up looking for work after years of searching. As of March 2012, there are, on average, more than three workers for every job opening.
The loss of a job or home has devastating impacts on individuals and families; to lose both in a short time is nothing short of catastrophic. Families break up; depression is common, drug and alcohol abuse increase, as does domestic violence. The impact on children is especially severe. An August 2011 American Journal of Public Health article reported on a 10-year survey, “U.S. Housing Insecurity and the Health of Very Young Children.” In the course of the study, which ended before the current economic crisis, researchers surveyed more than 22,000 low-income households with children under the age of three in seven major U.S. cities.
They found that 46 percent of all of the households surveyed suffered “housing insecurity,” 41 percent from overcrowding and 5 percent from multiple moves, which would include loss of housing altogether. Nearly 20 percent of these households were also “food insecure,” meaning that at times they ran out of food. Children under the age of three whose families were “housing insecure” were subject to poorer health, lower weight and developmental risk.
All this devastation and more as nearly 19 million housing units sit empty and the bankers responsible for creating so much destruction continue to live in obscene luxury.
Continue with part two here.