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Bubble
Troubles
The
intoxicating US housing boom has come to an end. Now the economic
hangover has arrived.
With the collapse of the housing boom in the US what is likely, at the
very least, is a prolonged crisis of the credit system. And as credit
greases the wheels of capitalism this is no laughing matter for the
capitalist class.
The Federal Reserve has been doing its best to ease the pain—the pain
for the investment banks, that is. Barkeeper Ben Bernanke announced on
March 11 that the Fed intends to generously fund the banks “rehab,”
loaning them the incredible sum of $200 billion in return for the
tainted “mortgage-backed securities” as collateral. This is very much
like a doctor who prescribes a little hair of the dog to an alcoholic
as a “cure” for a hangover. At best, such bailouts will probably only
buy a bit of time.
And not very much time at that—judging from the recent string of
collapses in recent weeks. On March 7, the investment fund Carlyle
Group Corp. announced that it was unable to meet $37 million in margin
calls from its lenders and a few days later it was reported that the
85-year-old investment bank Bear Stearns, which suffered huge hedge
fund and mortgage-related losses, is being bought out by JPMorgan Chase
in a fire sale, with money loaned by the Fed.
Far from calming the financial waters, the actions of the Fed have
drawn attention to the severity of the crisis and also accelerated the
decline of the dollar. Somehow, the system as a whole—the once
inebriated economic body and its battered financial organs—will have to
expel the vast quantities of toxic loans that are clogging it up. When
other countries face this dilemma, the US has always the first to
prescribe a bit of shock therapy, making use of capitalism’s natural
function of regurgitation. For some reason or another, though, the US
policy makers are sentimental when it comes to their own venerable
financial institutions.
The US government that hasn’t lifted a finger to assist the massive
number of workers who face foreclosure, but has acted quickly to pump
money into the accounts of those who have made a good living picking
the pockets of those workers. The direct impact of the crisis involving
“subprime loans” (once more accurately referred to as “predatory
loans”) has already led to hundreds of thousands of foreclosures, with
the overall number of foreclosures up 79 percent in 2007 alone.
Clearly, the US policy makers have every intention of shifting as much
of the pain from the crisis onto the working class as is economically
and politically possible.
Empty wealth
Some cold comfort to workers from the crisis,
however, is that it rips great holes in some of the smug arguments that
economists and politicians have tried to pass off as “common sense”
(and which seemed plausible enough during the long speculative boom in
the US that basically stretches all the way from the mid-1990s until
recent months). For instance, it is becoming increasingly self-evident
that the prices of many “commodities” lack any real basis and are thus
“fictitious” prices to a large extent.
There is an important distinction, in other words, between the products
of labour, which are the basis of any society and happen to take the
form of commodities in a capitalist society, and the wide variety of
things that have a price and thus take the commodity-form but are not
the product of labour and thus lack intrinsic value. When capitalism is
humming along, no one is very concerned with whether what is being
bought and sold has intrinsic value or not, so long as it can be sold
on the market. Thus, “mortgage-backed securities”—to take one
example—were as good as gold for many years.
Now that the housing bubble has collapsed, however, such securities are
being shunned, as it is clear that a great number of borrowers will be
unable to meet their mortgage payments. The “value” (=price) of this
commodity has plummeted, wiping out a vast amount of wealth that
existed on paper, while leaving a hard lump of debt behind.
It is hardly surprising that people flock to gold during a crisis. That
behaviour is not motivated by a human love of shiny metal objects.
Rather, gold has served as the “general equivalent” or money
historically precisely because gold has intrinsic value as a product of
labour and that that value exists in a form that is inherently more
durable and divisible than most other products of labour.
In short, a crisis reveals the crucial distinction between commodities
in the fundamental sense (as the capitalistic form of products of
labour) and commodities in the purely formal sense (as anything with a
price). Call it the revenge of the labour theory of value.
There is some irony in the collapse of the housing bubble revealing the
distinction between intrinsic value and mere price. Because one of the
initial attractions of the housing market to investors, after their
dizzying experience with stock-market gambling, was that it appeared to
be terra firma. After a vast amount of paper wealth was wiped out of
401k (retirement) plans and mutual funds circa 2000, it seemed that
real-estate was a secure investment in a tangible asset.
But to describe a house as having intrinsic value turns out to only be
a half-truth. Sure, the house itself has intrinsic value, like any
other commodity in the fundamental sense just described, according to
the socially necessary labour expended to produce it. In other words,
the house’s value (as a structure) stems from the value of the building
materials used and the amount of labour expended to assemble them.
However, in addition to the house itself, the price of the land upon
which it is built represents a large part of the overall price—and the
bulk of the price in the case of large urban areas. And that land has
no intrinsic economic value (apart from whatever labour was necessary
to clear trees or previous buildings out of the way so that
construction could commence), only a price determined, since its supply
is fixed, by the paying demand for it. In this sense, real-estate
prices are a reflection—more than anything else—of the purchasing
ability of the prospective buyers. So it is no surprise that those
prices rose rapidly along with the increasing abundance of cheap
credit.
Buyers in each particular housing market tried to convince themselves
why the price of their own house would never fall (whether because of
the desirability of their neighbourhood, the solid construction of the
house itself, the strong local economy, or some other reason), but in
fact there is no intrinsic value around which the price must gravitate,
meaning that there is much room for the price to rise, or indeed, fall.
Profit-creation
Another central (but often ignored) fact which a
crisis helps shed some light on is the origin of profit. During a
speculative bubble, when mutual funds or housing prices are steadily
rising, profit seems to arise magically from the very act of
investment. No one is too bothered to ponder how this feat of alchemy
is achieved. When the bubble eventually bursts, it may dawn on some
that the actual creation of profit—rather than the mere transfer of
money from one wallet to another—involves more than simply letting go
of funds and then waiting for an even bigger sum to return in
boomerang-like fashion.
And if the person bothers to investigate the matter further, it would
become clear that profit is generated in the production process. It is
there that surplus-value is generated as the difference between the
value of the labour-power the workers sell to capitalists in return for
their wages and the value those workers add to the commodities produced
through their actual labour. In contrast, much of the profit that
appeared to be created during the boom was in fact an expression of the
expansion of debt.
The housing boom, like the stock market boom that preceded it, was
praised as a way for workers to move up the social ladder, and it
seemed that there was enough profit to go around to swell the ranks of
the capitalist class. From today’s perspective, however, we see that
workers are left in a worse situation than ever following the
speculative boom, facing foreclosures and wiped out retirement funds.
The only upward mobility in the end was for the money itself, which was
coaxed out of the pockets of workers to pad the salaries of the much
heralded “financial wizards.”
Granted, in any speculative bubble the expansion of consumption goes
hand-in-hand with an increase in productive activity, but it is
certainly not the case that the enormous gains made through speculation
in certain activities reflect or correspond to an expansion in
surplus-value created via production. Rather, the increase in the
“value” (=price) of real-estate, stocks, or whatever the mania is
centred on is fed by the speculation itself. Prices go up as more money
is thrown at the object of speculation, and with those rising prices
even more money is invested. But there is nothing to sustain the high
prices once the speculative demand dries up. This is quite different
from an increase of investment in productive activity that results in
products containing surplus-value that are sold to realize a profit.
A comparison to eating, rather than the earlier hangover analogy, may
highlight the distinction between mere speculation and investment in
production. Simply put, speculation is not all that different from a
person who consumes a large amount of food without performing any
physical activity whatsoever. The result, unless the person enjoys a
remarkable metabolism, is weight gain.
During the housing boom, the economy swallowed a tremendous amount of
credit that for the most part was not directed towards productive
activity, and this inevitably led to a flabby result. The speculative
feast was good fun for those who partook of it, but now the heavy debt
burden is making it hard for the capitalist economy to function, with
the credit crisis also hindering investment in productive activities.
But it is not as if a “muscle-bound” capitalism is a lovely state of
affairs either. As mentioned earlier, the surplus-value that arises
from productive activity is nothing more than unpaid labour extracted
from the working class. So there is no profit without exploitation.
A “fundamentally strong” capitalism (as it is called by those critical
of finance capital but enamoured by capitalism itself) may conjure up
an image of a healthy organism, but really it is more appropriate to
picture a young Arnold Schwarzenegger prancing around the stage of a
Mr. Universe contest clad only in his over-inflated muscles and surreal
suntan. It is not true health or strength, but just the appearance of
it. And just as Arnie worked out incessantly in the pursuit of muscles
for their own sake, without any concern for their actual use, the
productive activity under capitalism is only a means of building bigger
and bigger profits, rather than being primarily a way to produce
material wealth to meet the needs of society’s members in accordance
with their collective and democratic will. There are all sorts of
side-effects from the mad pursuit of profit, both in the short- and
long-term, similar to how Mr. Schwarzenegger’s steroid-fuelled
body-building in his younger years resulted in open-heart surgery by
the time his muscles had sagged with age.
Workers cannot be indifferent to a crisis, no matter how much we are
disgusted by the predictable pendulum swing between “boom” and “bust”
(and the sudden mood swings it causes among our capitalist rulers),
because our lives can be directly influenced by today’s financial
turbulence. But at the same time, we have no interest whatsoever in
thinking up ways to put capitalism “back on track” or make it “healthy”
again. Even when the system is in tip-top shape it works directly
counter to the interests of workers.
The crisis will not miraculously or mechanically turn every worker into
a socialist, as some pseudo-Marxists fervently hope, but it does at
least create a situation where socialists may find workers more willing
to consider an alternative to capitalism. It is up to us, as
socialists, to present that alternative in a convincing way based on
our understanding of the essential nature and limitations of the
capitalist system.
MICHAEL SCHAERTE
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