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Commentary :: Globalization : Labor

The Royal Prerogative

The present economic crisis has the capitalist class calling for state intervention again. They claim another bout of memory loss, they simply "forgot" the business cycle exists.
Richard Mellor
AFSCME Local 444, retired
Oakland CA
8-25-07

“In an era of easy money, the pros forgot that the party can’t last forever” Does this subheading in the September 3rd issue of Business Week’s cover story present a valid argument as to the cause of the present economic crisis? Is that it? The pros forgot that in a market economy at some point what goes up must come down? How simple, the misery of billions of people the result of memory lapse.
But I haven’t forgotten. This is not the fist time this has happened in the history of the so-called free market. Surely the victims of past crashes haven’t forgotten.

The Savings and Loan crisis will mean nothing to many young people, or at best it will be stashed away in the back of the mind somewhere. But it was a major issue back in the 80’s. The same with the name, Michael Milken, who was one of the numerous infamous figures of that time.

But crashes like the S&L’s have occurred consistently throughout the history of the capitalist system; they are nothing new. Two hundred and fifty years ago when capitalism was still relatively youthful the Dutch tulip crisis rocked the system.

The credit crunch, subprime crisis, whatever you want to call it, is today’s S&L crisis only potentially much more damaging and destructive. There are many more Michael Milken’s but today with all the secrecy that surrounds the Private Equity business and money markets, they are harder to find.

People suffer tragedy and die through these crises. But that’s the market. We are taught that this is the way it is. Like the Royal Prerogative or the Divine Right of Kings that began in the feudal economic system that preceded the present capitalist one, the perpetrators of these crimes have privilege, are protected by the very laws they themselves enact through their representatives. (1) But the most important conclusion we as workers must draw, is that crashes, like the after effects of Katrina, are not “natural” disasters.

Does anyone believe that the idea of the Royal Prerogative came from the mind of the peasant or serf that served the King, that fought his wars and on whose backs his wealth was created? Of course not! The King dreamed it up. And, with the support of a layer of clerks, academics, priests and all sorts of other flunkies, the resources were there to make it the ideology of the land.

The owners of Capital, the capitalist class, have their prerogative. Their rights are God given and the business cycle and its horrific by-products are simply a consequence of human nature run amok. Their prerogative absolves them from blame for the system that they perpetuate; for the crimes for which they are responsible.

Writing about the boom and bust cycle in the Financial Times, Samuel Brittan relieves any lingering guilt the money lords may have for their actions, relieves them of responsibility for the homelessness, the misery and poverty that follows the bubble, “These fluctuations can, with a bit of luck and good policy, be tamed but not abolished.” he writes (2) A collective sigh of relief is heard. How can someone be responsible for something that cannot be avoided? The preachers will follow up with sermons on the inherent wicked nature of the human race, born with sin and redeemable only in the next world where the poor will get their fair shake and the evil their punishment.

To ensure workers don’t draw certain conclusions about this system, that we buy the idea that recessions and slumps, in other words, what are referred to as the business cycle, is unavoidable, there is limited analysis of it outside of the serious journals of capitalism; the journals that are for their reading only. Recessions and slumps, we are told, occur because demand is weak. But ut why is demand weak? Don’t people need things, clothes, houses etc? Even among themselves, they are in a state of self-denial and attribute the causes, as Brittan does, to “human cycles of greed and fear.” (3) John Devaney, a coupon clipper with United Capital Asset management is more specific, “The consumer has to be an idiot take on those loans” he says of the present bubble. (4) But in the main the mortgage holder took the loan in order to buy shelter, a place to live. They didn’t borrow money to speculate with it.

The S&L crisis, like the subprime, was the product of concrete policies instituted by human beings. Are they motivated by greed? Of course. But what is greed? Is owning a home, or wanting a neighborhood pool greed? Is expecting free public education or more public transportation greed? The conclusion we must draw is that the policies that led to these crisis occur, and the humans that enact them do so, because the laws of the system, an economic system in which the wealth in society is created by those who sell their labor power but owned by those who buy it, demands such policies for its very existence.

What happened in the S&L crisis was very similar to the present situation. S&L’s faced many more limits and restrictions on their ability to loan money. Credit allows the capitalist system to reach beyond its limits, puts money in the hands of the consumer and the speculator or the business-person; it stimulates demand. During the Carter administration caps were lifted on S&L’s to facilitate this process and the amount the government insured per account rose to $100,000. (5) In conjunction with this, the amount of the accounts that would be repaid was raised from 70% to 100%. Naturally, this increased speculation and risk taking. After all, what money-lender or speculator wouldn’t be prepared to take more risk when if anything goes wrong the US taxpayer will cover it?

These S&L’s were chartered federally or through the states but just like cheaper labor and less regulated capital environments attract the industrial capitalist, once the de-regulation hit the federal charters, state chartered thrifts rushed to get the more lucrative deal. Like the present crisis, speculation was rampant.

Over the last 40 years, the money lending business has blossomed. Not just credit cards and such but mortgages and the selling of loans that are packaged in to all sorts of obscure deals.

Outstanding US Mortgage Loans:

1955: $55 billion
1976: $500 billion
1980: $1.2 trillion
2007: $10 trillion

Eventually, the orgy of speculation and profit taking came to an end and the bubble burst; debt has its limits. Hundreds of S&L’s went bankrupt and many people lost everything they had. The debt of the S&L’s was taken over by the government and paid by the US taxpayer, including interest. The worst case S&L’s were thrown out but those that were salvageable were sold back at bargain basement prices to the same crooks that caused the problem. With the exception of Charles Keating the culprits had the Royal Prerogative. But even keating, whose actions caused massive suffering and probably death in some cases, got off light—a little over four years in jail. George Bush’s brother, Neil, was director of Silverado Savings and Loan when it collapsed costing the US taxpayer $1.6 billion. (6) He received no punishment. The Royal prerogative in action again.

This crisis was not an accident. The laws that enabled it to occur were passed by politicians, some of them still around today, some of them so-called champions of the poor and oppressed, the workers of America. And how did the state respond to this crisis? The government “nationalized” the debt of the S&L’s. They didn’t let the market sort it out like they tell us we should do with health care, education, drug prices and everything else we need. They took the debt they had created and placed it under social ownership. They may oppose socialized medicine but they support socialized bail-outs when their system whacks them up side of the head.

Among those on Capitol Hill that voted in the interests of the moneylender:

To remove caps Deregulate S&L Restrict Risky S&L
on interest rates investments investments

Victor Fazio Yes Yes No

Barbara Boxer NA NA No

Nancy Pelosi NA NA NA

Leo Panetta Yes Yes No

Ron Dellums Yes Yes No

Fortney Stark Yes Abs Abs

Norm Mineta Yes Yes No

Charles Rangel Yes Yes Abs

Barney Frank NA Yes No

All these politicians are supposed to be “friends” of Labor. With the exception of Dellums and Fortney Stark who voted no and Charles Wrangel who was absent, the rest all voted to have the taxpayer pay the bill. (7)

Interestingly enough, in the recent garbage collector’s strike here in the East Bay, Dellum’s a darling of the Bay Area labor movement, or more accurately, the leadership of it, was asked by a reporter if the lockout “was a test of his leadership” to which he replied, "I don't take it to have anything to do with me. It has to do with a company in a dispute with a labor union. It would be a gigantic mistake for me to personalize this. That's a journey I choose not to go on." (8)

Barney Frank, another so-called “friend of labor”, received $132,000 in financial industry PAC money for his efforts back then according to Michael Waldman (see note 7). He plays the game well, pretending to be a voice for America’s working men and women. Some politicians in Congress are “pounding the table for the little guy” and barney Frank is one of them, Business Week informs us. He is threatening to hold hearings on the role of ratings agencies in the present meltdown. (9) But only the heads of organized labor give will give Frank’s remarks any credibility. For their own members and workers as a whole, politicians like Frank and the party he is in have no credibility whatsoever.

Are these politicians greedy? Maybe they are, maybe they aren’t. But the point is that they are representatives of capital in a capitalist party. Political parties do not exist in a vacuum; they represent social forces and these politicians were simply defending the interests of the class they represent, before and after the crisis.

Michael Milken, one of the money traders who played a prominent role in the destruction of people’s lives during the eighties, was found guilty of racketeering and fraud but accepted a plea bargain and served 22 months. Alan Dershowitz helped him out. (10) On his release he was still worth $1billion despite having paid $900 million in fines and, according to Forbes magazine, he is presently worth $2.1 billion, number 458 on its list of world’s richest men. He gives money to charity for the tax benefits and to appease his conscience.

Consider the working class people that languish in prison. Sent there by the judges who hang around with the CEO’s, the junk bond kings and the Masters of the Universe as the heads of the major Private Equity houses are called. Working class people are executed by their system for much less.

Today’s Crisis
The present crisis is very similar. The world is awash with cash as the serious journals of capitalism constantly remind their readers. Capital and its allocation is determined in secret by those that own it; capitalists. The structures that the capitalist class has set up to bring some sort of order to the creation and allocation of wealth do not negate this secrecy, but to modify it; they are there to ensure that certain rules are followed in order to protect each other against their own rapacious appetites for robbery. They are an attempt to bring order to the anarchy of the market.

But the recent binge, the growth of private equity firms, hedge funds and numerous complex financial structures with little or no accounting has created an economic climate that is unmanageable and when it reaches a breaking point threatens the entire global economy. The subprime, a relatively small percentage of the US mortgage industry, has had repercussions around the world as loans, based on the ability of the US worker to repay them, have been sold, not once, but twice or three times, to investors from Maine to Mannheim, from London to Tokyo. No one knows who owns what or where the money is, “There’s billions and billions of dollars racing around the economy that no one can track.” says Michael Greenberger, former director of at the Commodity Futures Trading Commission. (11) He presently teaches law at the University of Maryland. What “law” does the working class reader think he teaches? (a) The need to enact laws that guarantees health care for all? (b) How laws are made and by whom? (c) How to enact legislation to protect workers on the job? (d) How to enact legislation to protect employers on the job and give free rein to capital? If your answer is (d) you get an A+. The business cycle is not an accident folks.

The capitalist class and the system the govern, possesses these features not because of greed in the abstract. The Finance capitalist acts as they do because they are the owners of capital and capital must multiply, must grow, must be “augmented” as Marx explained. Having productive forces at their disposal that are too powerful for the market they serve, that produce more than the working class can buy back because we are paid less in wages than we produce in value, the owners of capital invest less in society’s productive forces and more and more in speculation, gambling, money lending and other parasitic ventures. They become coupon clippers.

As capital personified, they cannot avoid this activity, they are driven to do this. Marx explains it best:

“The restless never-ending process of profit-making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh in to circulation." (12)

With money so readily available and at historically low interest rates it has flooded the market. The bankers, the investors, moneylenders all have had a feast deploying their money in all sorts of ventures. After all---they’re not misers; they are brave, bold risk takers; they are to be respected. The subrime mortgage industry has been one area where capital flowed. Money was lent to anyone whether they could pay it back or not. For the vast majority of the victims in the subrime fiasco it was borrowed for good cause, for shelter, shelter that is removed as quickly as it appeared when the bill became unbearable. The moneylenders got their interest though. Any worker knows that this part of the bill is paid first.

Money was everywhere and cheap to obtain. More and more debt has been used to finance buyouts and mergers in the “real” economy. Capital was so abundant that one CEO describes a conversation with a hedge fund manager who had invested, had bought, part of a loan he was selling. ”we syndicated a loan for one of our companies recently and I noticed that one of the hedge funds had bought it, bought a small piece, a $10 million piece, but never came to any of the diligence meetings. So I called the fellow who runs the hedge fund, because I know him, and said: thank you for participating, but I was surprised nobody came for diligence. He said: for a $10 million loan it is not worth sending someone to a meeting.” (13) Last year, 25 top hedge fund managers on Wall Street made $15 billion; $10 million is a drop in the bucket. Michael Milken is small potatoes by comparison. But don’t tell me there’s no money in society.

Now the strategists of capital, the champions of the market, are calling for government intervention and increased regulation. New rules are needed for the “wider financial system” says Clive Crook of the Financial Times, “…new scrutiny and disclosure requirements for secretive investors such as hedge funds and private equity firms must be part of the remedy.” he adds. (14) They are squabbling between themselves over the Federal reserve’s interest rate cut as many coupon clippers think that those who have gorged themselves the most in this recent credit boom should not be assisted in any way including through interest rate cuts which will lower the cost of capital. This should only be done if the system itself is threatened they argue; if the “real” economy is threatened. But highly leveraged hedge funds and private equity companies have invested in the real economy buying utilities, and other major industries. Pension funds have also increased their investments in this area. There are real dangers and as the situation deteriorates, there will be more calls for the taxpayer to step to the plate in one way or another; the market be damned.

In one way, Samuel Brittan is right, the business cycle cannot be abolished; not under the present economic system; not in a capitalist economy; it is an inherent part of it. But the economic system we call capitalism has not always dominated our lives, it need not be the end of history. These periodic economic crisis that devastate people’s lives can only be ended when the wealth of society, it’s creation and distribution, is not owned and determined by a tiny minority that sets the forces of production in motion only for their personal gain regardless of society’s needs. The collective purchase by the capitalist class of the labor power of billions of workers, is the root of the problem.

And the concern of the ruling class that social upheavals could result form their mismanagement of society is not unfounded. Around the globe there is increasing opposition to the rule of capital from Bangladesh to Venezuela. In the U.S., the limited social services and the slavery of debt along with the class collaboration of the heads of organized labor is a major contribution to the passivity of the U.S working class and it’s failure to fulfill its historic role. But it will be forced to act, and act it will. The leaders of the working class will not be able to suppress the anger of those they represent forever.

But the capitalist class is well aware of the dangers. As a warning to its class, Business Week shares this fear with its readers. The writer describes a conversation he had with his father, an 87 year-old lifelong Republican who left the party over Iraq and Global warming:
“How about that crazy market? he asks.
“It’s terrible” the father replies “bitterly.” “I think we need a revolution in this country……All these excesses, the hedge funds, private equity, and these CEO’s who pay themselves incredible salaries—the greed is outrageous…and we all pay the price.” (15)

Meanwhile, the outright crooks, the speculators, the heads of mortgage companies and lending institutions that lied to the worker who desperately needed a home and a place to live free from the clutches of the landlord. What will happen to them? Nothing…like the politicians that legalize the robbery, they are protected by the Royal Prerogative.

(1) As by prerogative ‘the king can do no wrong’, the monarch is immune from prosecution. The royal prerogative is traceable to the days before Parliament existed. Examples include the conduct of foreign relations, making war and peace, the dissolution of Parliament, assent to bills, and the choice of ministers. www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0033869.html
(2) The Crooked Path of Capitalism: FT 8-17-07
(3) ibid
(4) Not So Smart: Business Week cover story 9-3-07
(5) S&Ls or thrifts have existed since the 1800s. They originally served as community-based institutions for savings and mortgages. en.wikipedia.org/wiki/Savings_and_Loan_crisis
(6) ibid
(7) Who Robbed America: Michael Waldman
(8) SF Chronicle 7-26-07
(9) Not So Smart: Business Week cover story 9-3-07
(10) en.wikipedia.org/wiki/Michael_Milken
(11) Not So Smart: Business Week cover story 9-3-07
(12) Karl Marx The Transformation of Money in to Capital, the General Formula for Capital
Capital, Vol 1 part 2 Chapter 4
(13) FT.com: Interview With Wilbur Ross 4-18-07
(14) The Next Financial Crisis Starts Here FT 8-23-07
(15) Main Street is Fed UP: Business Week, 9-3-07
 
 

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