Wednesday, September 12, 2007

Will Capitalism Eat Itself?

In the news lately has been the growing concern over the collapsing "housing bubble" and the phenomenon known as sub prime mortgages. The complex situation involving these mortgages is starting to turn sour and already having negative impacts on American financial markets. Even though the long-term effect on the overall economy remains to be seen, it often elicits dire warnings of impending collapse and depression. At the core of the situation are disproportionate amounts of home mortgages that were sold to people who were not likely to pay them back. These people are referred to as the "sub prime" mortgage market and the moniker has been applied by the press as a catch-all to the thousands of loans with variable (and frequently exotic) terms often given to borrowers with low incomes or damaged credit histories.

Traditional home mortgages are for 15 to 30-year terms with a fixed annual percentage rate of interest. In the past, lenders would ask for 10-20% of the price of a house as a down payment as a way of ensuring the borrowers' ability to make good. Sub prime mortgages, on the other hand, involve little or no money down and an adjustable interest rate that "resets" periodically. Often, the terms are set up so that only interest is paid for the beginning of the mortgage, lowering payments while little or no balance is reduced. What is happening now is that large numbers of these mortgages are going into foreclosure, particularly a few months after the interest rates reset. The next major reset will be happening at the end of 2007, so people paying attention are predicting tens of thousands of people, mostly low-income families, losing their homes.

While the media typically focus coverage on these mortgages around lower-income borrowers who may have jumped at the chance to buy a house during the so-called "housing bubble" of the early 2000's, it should be noted that more exotic versions of these loans have often been obtained by capitalist speculators who buy houses at a low price and "flip" them (i.e. re-sell them at higher price without actually living in them), sometimes in a matter of weeks after buying them. These mortgages defer much of the payment until after the time the buyer expects to flip the house, so as to maximize the profit for the speculators and facilitate economy-boosting activity in what was for years a seller's market.

If it wasn't bad enough that the self-imposed prudence of the financial industry concerning mortgages was gradually thrown out the window in a me-first orgy of easy-money lending facilitated by years of low Federal Reserve-set interest rates, the primal greed of capitalists led them to increasingly use bundles of mortgages containing a high percentage of sub primes as loan collateral for even higher levels of financial speculation, often taking the form of hedge funds.

Rather than let all this financial terminology get out of hand, let's summarize: lenders, spurred on by easily available Fed money, offer mortgages with less than desirable terms to people who have a high probability of not paying them off. Those risky mortgages are then bundled with other traditional mortgages into securities that are then used for, among other things, speculation in unregulated hedge funds.

What eventually happened is a) people stopped paying on their sub prime mortgages due to rate resets so large numbers went into foreclosure, and b) the housing market for overpriced "flipped" properties started to dry up, leaving speculators with no one to buy their McMansions - thus leading to further defaults as the terms demanded more payment. As more and more foreclosures occurred, word got around and people started looking at these bundles of mortgages that contained more and more rotten eggs. Hedge fund money secured by these bundles started to dry up, and a few notable hedge funds themselves collapsed. Luckily for some of the capitalist scum involved, the Fed made billions in bail out money available to stem the tide of hedge fund putrefaction and made some mortgage lenders more willing to restructure some of the onerous mortgages that hadn't foreclosed already. This is still going on right now.

Why is this phenomenon involving a small but important part of the population being seriously considered by some as the beginning of the end of capitalism? Well, a lot of it is wishful thinking, particularly when coupled with Peak Oil predictions, but it does shine a light on a dark "secret" of the American economy – that more and more of what is called "wealth" is actually not real and exists as credit – not just in the form of home mortgages but as the entire realms of Consumer and National Debt. All debt is predicated on the assumption that at some point the borrower is going to pay back the amount borrowed plus some amount of interest that is profit for the lender. Preferably, the debt is incurred in order to create more wealth in the form of investment or building of a business enterprise. Debt is a fundamental building block of capitalism and is nothing new, or secret, but has never existed in such astronomical amounts or made up such a large part of the American economy.

Consumer debt, which is money owed by people (not including things like mortgages), is according to the Federal Reserve close to $2.5 trillion dollars. This wealth, which actually doesn't exist, is counted in the economy (though this fact is not brought up in polite company). The fundamental weakness of such a high consumer debt is that at some point, people can decide to stop paying back money they owe. Therefore, the sub prime fiasco is serving as a canary in a coalmine to an economy primarily fueled by consumer spending (i.e. debt). If people can start defaulting on mortgages en masse, where the potential self-harm in doing so is rather severe, what is to stop them from defaulting on credit cards, payday loans, and other consumer credit devices and in doing so wash away the very foundation of the American economy like a broken sewer line buried beneath a downtown street? Yes, there have been a few hedge fund managers fired and a few extra yachts put up for sale, but so far there is no indication that this toxic mess has any danger of spreading into the murky and uncharted waters of consumer debt, which has in fact stayed level for 2007.

In 1929, the American economy, and with it the world's, took a plunge into depression due to careless and rampant speculation in stocks. Many then thought capitalism would collapse and the way become clear for the seizing of power by the working class. The SPGB wrote about it in 1932 in a pamphlet called "Why Socialism Will Not Collapse". While much of the work cites previous examples of financial crises that did not spell the death of capitalism and then attempts to explain the then-current state of affairs, their argument is plainly stated up front:

"The basis of Capitalism is the private ownership of the land, the factories, the railways, and the rest of means of life. This is the root cause of poverty, insecurity and wars, and a whole host of other evils."

In these two sentences we are assured that no matter what heights of greed or convoluted displays of smoke and mirrors the capitalist class achieves, and no matter how devastating their blunders may have on the short term conditions of the economy, the foundation of private property, and thus Capitalism itself, will remain intact so long as we continue to accept it. And by continuing to search for leaders and laws that will prevent economic calamity from ever happening again, as has happened after the many meltdowns of centuries past, we sadly ensure that it does happen, again and again! See, capitalism - no matter how bleak the outlook may seem, whether due to Peak Oil or endless war, or consumer debt – will remain as long as we allow it to by accepting its laws and playing its game. Only when the majority of the human species decides to reject the rule of property law, and the class that benefits from it, can Capitalism finally be defeated!


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