Three Short Essays On The Crises
The Voag was checking out the news today and came across these three articles, which we figured were worth reposting.
These essays have been republished without permission.
Bond Markets Have The United States In Their Sights
Gerry Gold, 20 April 2011
Assessing the significance of credit rating agency Standard & Poor’s historic decision to downgrade the debt outlook for the USA is complex. But significant it definitely is. S&P and Moody’s, which between them control 80% of the rating market, act as intelligence gatherers and forecasters on behalf of capitalist investors. They examine relevant aspects of an institutional issuer of debt – usually a corporate entity or a state body – and assess the risk to an investor of placing their money with that institution.
The higher the risk, the more the issuer of debt has to pay to the investor in interest or “yield”, and consequently, the more the corporation has to make from its operations, or in the case of a state, the more it has to extract from its citizens in taxes. So, you might say, the increasing burden being placed on the populations of effectively bankrupt countries like Ireland and Greece is largely on the say-so of these agencies.
Like all these agencies, S&P is a competitive, for-profit operation. In order to keep its customers paying their fees – and that is mostly the corporations whose performance is being assessed – it needs to show that it is getting its assessments right, more than it gets them wrong.
In the run-up to the 2007-8 global crash, S&P was itself mesmerised by the hysterical expansion of fantasy finance in which products derived from the issue of traditional forms of credit and debt based on real value multiplied the amount in circulation many times over. The big players issued monumental quantities of derivatives and they paid the ratings agencies huge fees to provide the market with favourable assessments. Money talks. So the agencies failed to provide any warning about the impossible state of Lehman Brothers which crashed out of existence in 2008.
Governments, on the other hand, don’t pay the agencies to assess the health of their economies, or to assess the risk that they might default on interest payments to the investors who lend them money through the bonds they purchase.
The rating agencies make their assessments as part of the fees paid by corporations who want to know whether the state’s debt is more or less risky. The big, or even only question at stake is: will the government act sufficiently strongly to provide the conditions for the corporations to intensify the extraction of profit from their population?
So when S&P decides to downgrade the outlook for US debt, it is taking into account many factors. These days the judgement is more political than it is economic. The on-going Punch & Judy style shadow-play between Obama and the Republicans over the $4-5 trillion programme of cuts to be visited upon the American people is one aspect of the analysis.
As one economist observed: “The key question is whether the gridlocked US political system can respond in time to avert a bond market revolt.” Some commentators say that S&P’s action is a warning to Obama from the world of finance. If they don’t crack down hard enough, investment money will go elsewhere and interest rates will rise. But they’ll also be assessing the likely contagion effect of the wildfire of revolt spreading outwards from Tahrir Square throughout the Middle East, North Africa and taking in Gabon in Central Africa.
They’ll be weighing up the likely outcome of the political struggle against the regimes that have ensured the supply of cheap oil to fuel growth over the last forty years. They’ll be closely examining the protest movement in Europe for signs that it is moving beyond resistance. And they’ll be studying developments like the People’s Assembly arising from the occupation of the State Capitol in Wisconsin. It’s no wonder S&P has downgraded the US government’s prospects for paying back its loans.
Gerry Gold, 20 April 2011
The S&P Debt Warning: Wall Street Extortionists Demand
WSWS, 20 April 2011
Five days after the US Senate Permanent Subcommittee on Investigations released a voluminous report detailing the criminal activities of the banks and credit rating firms that precipitated the 2008 Wall Street crash and global recession, one of the named culprits, Standard & Poor’s Credit Ratings Services, issued an ultimatum to the White House and Congress demanding an agreement on savage austerity measures ahead of the 2012 elections.
In lowering its outlook from “stable” to “negative” on the top AAA rating for US Treasury bonds, S&P spoke Monday for the entire financial mafia that is headquartered on Wall Street. The ratings firm declared in a press release that failure to reach an agreement in the coming months to reduce the federal deficit by at least $4 trillion over the next decade “could lead us to lower the rating.”
This amounts to a threat to crash the US and global economy and undermine the status of the dollar as the world reserve currency. The move is part of an internationally orchestrated drive by the major banks and speculators to push through devastating attacks on the living standards of the American working class.
They are applying to the United States the extortionate methods used previously to stoke up speculative attacks on the sovereign debt of a number of European countries, including Greece, Ireland, Portugal and Spain. S&P and its major ratings rivals Moody’s and Fitch have issued strategically timed credit warnings and downgrades to create a crisis atmosphere, which governments have then utilized to override popular opposition and impose mass layoffs and wage cuts and shred social programs.
John Chambers, chairman of the sovereign ratings committee at S&P, virtually admitted as much, according to a report in Tuesday’s Wall Street Journal. The Journal wrote: “If the US reaches a British-style resolution, S&P will restore the US outlook to stable, Mr. Chambers said.”
In May of 2009, S&P lowered Britain’s credit outlook. It reversed the action 17 months later after the newly elected Conservative-Liberal Democrat coalition government announced a program of draconian cuts that will shatter the country’s social safety net.
Readers can make their own judgment as to S&P’s standing to be issuing such ultimatums. The Senate report on the Wall Street crash describes the corrupt process by which S&P routinely slapped AAA ratings on worthless securities marketed by the banks as follows: “Credit rating agencies were paid by Wall Street firms that sought their ratings and profited from the financial products being rated… The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.” Senator Carl Levin, the chairman of the subcommittee, described what the investigation uncovered as “a financial snake pit rife with greed, conflicts of interest and wrongdoing.”
By rights, the top S&P executives who presided over this fraud and pocketed multi-million-dollar salaries in the process should be sitting in prison. Instead, still at their posts and having suffered no consequences, they are using the disaster of their own making to gut bedrock social programs such as Medicare, Medicaid and Social Security upon which tens of millions of people depend.
The statement issued by S&P on Monday described both the Republican fiscal year 2012 budget plan and that outlined by President Obama last week as a basis for cutting the federal deficit by $4 trillion. However, the two sides had to come to an agreement before the national election in 2012, the company insisted.
This demand underscores the anti-democratic character of the so-called budget debate. It is an elaborate charade, behind which stands the dictatorship of the banks. The deal to eviscerate what is left of the social reforms of the 20th century has to be sealed before the elections to make sure that the vote in no way becomes a referendum on austerity and the electorate has absolutely no say in the matter.
The mass opposition to the measures being proposed by both parties is well known to Wall Street and its political servants in Washington. On Monday, the same day as the S&P announcement, McClatchy Newspapers published the results of a McClatchy-Marist poll showing that voters by a margin of 2-to-1 support raising taxes on incomes above $250,000, with 64 percent in favor and 33 percent opposed. They oppose cutting Medicare and Medicaid by 80-18 percent.
S&P intervened at the behest of the banks to shift the phony budget debate even further to the right and create the conditions for even deeper cuts than those being currently proposed. Interviewed Monday on Bloomberg Television, David Beers, S&P’s global head of sovereign finance ratings, said the $4 trillion deficit-cutting target was “not enough to ultimately halt the rising trajectory of US debt.” It was, he said, merely “a useful starting point.”
The establishment media immediately signaled that it had gotten the message. The Los Angeles Times editorialized that “Congress and the White House can’t afford to ignore this warning shot.” The Financial Times of London published an editorial that declared, “S&P’s warning shot should galvanise America’s leaders.”
Democratic leaders rushed to reassure Wall Street that they were on board. Speaking at a community college in Virginia Tuesday, Obama said, “I believe that Democrats and Republicans can come together to get this done.”
Steny Hoyer of Maryland, the No. 2 Democrat in the House of Representative, said Monday, “Today’s revised outlook shows the urgent, bipartisan action needed to put our nation on a serious path to reduce deficits.”
Erskine Bowles, a former White House chief of staff for Bill Clinton and co-chair of last year’s bipartisan fiscal commission, was even more emphatic. Speaking to the Financial Times, he said S&P had been “absolutely right” in lowering it outlook on US debt. “If anything, they understate the extent of the problem,” he said.
Only a mass, independent movement of implacable opposition by the working class can defeat this criminal conspiracy. The World Socialist Web Site and the Socialist Equality Party urge workers and young people to reject the entire framework of the so-called budget debate. There must be uncompromising opposition to any cuts in jobs, wages or social programs and services. The working class bears no responsibility for the crisis of the capitalist system.
We propose an alternate policy. As a down payment, to begin to recoup the wealth plundered by the financial elite, we propose a 50 percent tax surcharge on all household wealth over $5 million. This should be supplemented by raising the income tax on households taking in more than $500,000 a year to 90 percent. These measures will not only generate hundreds of billions of dollars for jobs, schools, health care, housing and pensions, they will attack the profligate squandering of resources and contribute mightily to the moral as well as the economic health of society.
These initial steps lead inexorably to the nationalization of the banks and major corporations and their transformation into public utilities under the democratic control of the working population. This is a socialist program. It requires that the working class break politically from the two parties of big business and build a mass movement to fight for a workers’ government.
Barry Grey, 20 April 2011
Portugal: Another Triumph For The Bond Dealers
Paul Feldman, 8 April 2011
As Portugal declares state bankruptcy, after its Socialist Party government failed to get an austerity package through parliament, it’s another triumph for the dictatorship of the money markets and bond dealers. Now, even though Portugal is without a government, the price demanded by Germany and the richer EU countries for an €80 billion bail-out is even deeper cuts in public spending than were first proposed. The upcoming general election is definitely one to lose.
Portugal’s finances collapsed because its budget deficit grew rapidly following the onset of the global recession. But the money markets drove up interest rates until Portugal was borrowing at over 8.5%, adding to the total deficit at a rate which made it impossible to repay.
In the last year, Greece – which still has a ‘socialist’ government and Ireland, which saw the ruling party wiped out at the recent general election, have suffered the same fate. Does the ‘contagion’ stop at Lisbon, or is Madrid next?
Spain’s government – yet another one that claims the rubric ‘socialist’ – is confident it can avoid Portugal’s fate – because it says it’s already making deep cuts in public spending! Youth unemployment is running at over 40% as a consequence. Meanwhile, Spanish bank assets are worth far less than before because of the collapse in property values and refinancing is increasingly expensive and hard to come by.
You can cut – as the Coalition is doing in Britain – to avoid higher borrowing rates but that only deepens the recession. Spending more would leader to higher borrowing rates, which the banks won’t like. Why? Because in the perverse world of capitalist finance, the value of the government bonds, which they hold as assets, depreciates as rates rise.
At the same time, British banks are steadfastly refusing to resume rates of lending last seen before the credit crunch of 2007. That’s because their balance sheets remain toxic and full of bad debt. Even the right-wing press is fed up with the banks.
On Monday, the Independent Commission on Banking set up by the government reports, and no one expects it to suggest any fundamental changes. The Daily Telegraph’s Jeff Randall reported: “The banks have captured our money twice over: as cash in their vaults and investments in their shares. We own all of Northern Rock, most of Royal Bank of Scotland and nearly half of Lloyds Banking Group. We rescued them – and in so doing became their prisoners.
But this is not a new problem. By the outbreak of World War One, the banks and the monopolies had formed an unholy alliance against ordinary working people and elected governments alike. After creating the Federal Reserve – America’s central bank – President Woodrow Wilson declared:
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilised world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men”.
In the recent period of corporate-driven globalisation, the tensions and contradictions between the capitalist state and capitalist finance have deepened to the point where governments tread warily. The only way to sort that out is to put an end to the power of the bond dealers, banks and money markets and create a new, socially-driven financial system. It doesn’t need me to tell you that bourgeois governments are not capable of such a revolutionary change.
Paul Feldman, 8 April 2011