Vol. 72/No. 40      October 13, 2008

BY JACK BARNES  
Driven inexorably by the necessity to compete or die, capitalists, without exception, act pragmatically—on the basis that what has been happening will continue to happen. They seek to maximize profits by moving in directions that currently bring the highest returns. The more they inflate credit to shorten the turnaround time of capital in order to reap massive gains, the more successful any individual capitalist seems to be—the more they guarantee disaster when the inverted pyramid becomes shakier and shakier and the trends begin to play themselves out, and then to reverse. That’s when all the talk about “new economies,” the “end of cycles,” even “the end of history” turns to ashes in their mouths. It’s always “different this time.” Indeed. And always the same.

Today the propertied families of finance capital, and their hired circles of managers, politicians, technicians, academics, and professionals—the “cognitive elite”—are incapable of believing what’s happening to the mountains of paper values they’ve piled up over the past two decades. What worked so wonderfully well over those years for the well-heeled, what seemed like free money, has today inflated bubbles of debt that—as they overlap and reinforce one another, and before the contraction in stock prices has come anywhere close to running its long, full course—will bring down major banks, brokerage firms, insurance companies, pension and health trusts, and industrial and commercial corporations.

For the first time since the opening of the depression-ridden, war-ridden 1930s, all the evidence in the advanced capitalist countries points to the onset of something more than a deep, international recession such as those in 1974-75, 1980-81, or 1990-91. We’re seeing the symptoms of a debt-deflation deadness that only sluggishly responds to the monetary or fiscal prodding that accelerates an upturn in a normal trade cycle. In short, we’re in the opening stages of what will come to be recognized as a world depression.

Whenever overall profit rates are under pressure in these ways, each capitalist intensifies competition to corner the greatest possible share of the wealth, the surplus value, produced by the labor of workers and farmers. And it’s the biggest banks—Citibank, J.P. Morgan Chase, Bank of America, and a few others—that make the biggest loans. On bank ledgers these giant loans are listed as assets, since they guarantee a steady stream of interest payments, so long as the debtors are able to pay. But when bankruptcies and loan defaults begin piling up, then it’s also the biggest banks, insurance companies, and brokerages that will take the biggest hit. And when these institutions begin to crack—the ones rated by Wall Street agencies as the most “solid” and “reliable”—that’s when a financial catastrophe starts looming.

Let’s say, for example, that you or some other worker were allowed by a big company to lease a car for less than 1 percent interest. Not only that, the company also let you sell the car and use the money—so long as you agreed to return a car of comparable value when the lender calls in the loan. What’s more, if the price of cars started going up—and the lender became worried you couldn’t afford to buy one back to return—the leasing outfit would actually step in behind the scenes to hold down car prices on the market! So you could buy a car back for less than you sold a comparable one, return it to the leasing company, and walk off with a handsome profit. And the leasing company would get their car back, undriven, plus the 1 percent interest.

Quite a deal, isn’t it? But workers don’t have that option, of course. We’re members of the wrong class.

Giant banks do have such an option, however. And that’s how it has worked over the past decade, until it started not working so well a year or so ago. How is it done?

Central banks, which hold large quantities of gold, lend it to a handful of the largest commercial and investment banks and insurance companies for a nominal interest rate—usually around 1 percent. These financial institutions then turn around and either sell that gold and invest the cash in bonds, or lend it to someone else for a small fee. The world’s biggest banks then create a market in what are called gold derivatives—a highfalutin term for bets on the future direction of gold prices (their bet always is that prices will stagnate at worst)—and manipulate that market to help keep the price down. So, when it comes time to give back the gold to the lender, the borrowing institution buys it back at a lower price, pockets the difference, and returns the gold.

That’s wonderful for the “bullion bankers,” as they are called—so long as capitalism is in an upswing, stock prices are soaring, real interest rates are relatively high, and not too many well-endowed institutions or wealthy individuals around the world are interested in buying gold. But when all that begins to go into reverse, the demand for gold starts increasing and its price begins edging up. All those outstanding bets on a declining future price of gold—amounting to tens of billions of dollars—don’t look so good anymore. The derivatives become time bombs. The banks face a tightening squeeze. And they will fight to avoid the destabilizing consequences of violent swings not only in gold prices but also in all major commodities and the prices of major currencies in the imperialist world.

What’s more, those wagers on the price of gold are themselves only a small fraction of the overall outstanding bets—on the direction of interest rates, of the value of the dollar and other currencies, of the prices of stocks and commodities, and of many others. Worldwide, the nominal value of those bets—those derivatives—more than doubled between 1995 and 2001, to a total of about $120 trillion. And in the United States, 60 percent of derivatives are held by only five financial institutions, with J.P. Morgan Chase holding the largest share—some $25 trillion—followed by Bank of America and Citigroup.1 So, as the direction of interest rates, the dollar, stocks, gold, and other commodities began rapidly shifting over the past two years, those long-term bets started getting shaky. It’s a bit as if the undisputed favorite had broken his leg halfway through the Kentucky Derby, when the bets are already down. So much for another “sure thing.”
 
 
Related articles:
‘Workers need to take political power’
Róger Calero, socialist presidential candidate, speaks out on capitalist crisis
Banks seek gov’t bailout as credit tightens  
 
 
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