Searching for Answers on the Financial Crisis

How did the world come to this point? Analysts are blaming Wall Street executives with their fat compensation packages and “golden parachutes” ( attractive severance packages). But is the deep economic and financial crisis the handiwork of a few executives? That seems hard to believe.

Searching for answers, I came across an old book. And what it says seem all to familiar.


Stock markets are at a free fall after a brief recovery last October 13, especially after economic data from the US shows a decrease in retail sales by 1.2 percent in September. This is really bad news since consumer spending has been one of the main fuels for economic growth in the US for the last decade or so, accounting for two thirds of US economic activity. It has been said that the world’s largest economy is gearing for a long, severe recession. European Union leaders are talking about restructuring financial markets after being hard hit by the crisis. Japan is said to be in a worse state.

How did the world come to this point? Analysts are blaming Wall Street executives with their fat compensation packages and “golden parachutes” ( attractive severance packages). But is the deep economic and financial crisis the handiwork of a few executives? That seems hard to believe.

Searching for answers, I came across an old book. And what it says seem all to familiar.

“As banking develops and becomes concentrated in a small number of establishments, the banks grow from modest middlemen into powerful monopolies having at their command almost the whole of money capital of all the capitalists and small businessmen…”

And so we have 20 banks and insurance companies among the top 50 of Global Fortune 500 in 2007. They are topped only by Walmart and oil companies, and joined by automotive and other manufacturing industries such as General Electric and Siemens. The top banks and insurance companies are the ING Group #7, Fortis #14, AXA #15, Citigroup #17, Dexia #19, HSBC Holdings #20, BNP Paribas #21, Allianz #22, Credit Agricole # 23, Deutsche Bank #26, Bank of America #28, Berkshire Hathaway #30, UBS # 31, JP Morgan Chase #32, Assicurazioni Generali #34, AIG #35, Royal Bank of Scotland #36, Societe Generale #43, and HBOS #45; this despite the fact that the subprime mortgage crisis began to unravel in 2007. The ING Group alone reported gross revenues of $201.516 billion and profits amounting to $12.649 billion.

The power of banks could be seen by the finances they control. During the 1980s world financial stock was equal to world GDP; by 1993 it was double; by 2005, world financial stock was 316 percent of world GDP. It has controlled the world’s financial activities including the stock market.

“The stock exchange has long ceased to be an indispensable medium of circulation that it formerly was when the banks were not yet able to place the bulk of new issues with their clients.”

“…the stock exchange is steadily losing the feature which is absolutely essential for national economy as a whole and for the circulation of securities in particular-that of being not only a most exacting measuring-rod, but also an almost automatic regulator of the economic movements which converge on it.”

Indeed from being a source of capital for corporations, through the issuance of shares, the stock market has become a secondary market, mainly for speculation. Stocks, which have long been issued in Initial Public Offerings, are sold and resold over and over again to gain profit, not through dividends but through speculation, with investors betting on the rise in stock prices. Whoever is left holding the stocks when stock prices go down, loses out on his/her “investment”. From October 6-10, the US stock market plunge made investors lose $2.4 trillion, while last October 15 alone, losses amounted to $1.1 trillion. This demonstrates the volatility of speculative investments in the stock market.

Consequently, the stock market is no longer a measure of the state of companies and the economy in general, but rather indicates the state of portfolio or speculative investments, and the financial sector.

The business of selling real shares of corporations are now left either with commercial banks, which have taken over corporations that fail to pay its loans, or with financial investment banks, which broker mergers and acquisitions.

Some analysts are also blaming the complicity of and lack of regulation by government for the abuses committed by commercial and financial investment banks.

“The personal link-up between the banks and industry is supplemented by the personal link-up between both of them and government.”

Bank directors being in the Board of corporations and vice versa is common place. What is worse is what analysts now call the “government-industry revolving door”, especially in advanced capitalist countries. For example, current US Vice President Richard Cheney was Chairman and Chief Executive Officer of Halliburton Company from 1995-2000. Halliburton was able to corner oil and construction contracts in Iraq after the 2003 US invasion. Another prime example is US Treasury Secretary Henry Paulson. Before becoming Treasury secretary, Paulson was the Chairman and Chief Executive Officer of Goldman Sachs, a financial investment bank that stands to gain from the $700 billion bailout fund approved by the Bush administration.

“Finance capital concentrated in a few hands and exercising a virtual monopoly, exacts enormous and ever-increasing profits from the floating of companies, issue of stock, state loans, etc. strengthens the domination of the financial oligarchy and levies tribute upon the whole society for the benefit of monopolists.”

The book described the practice of banks, which control companies, of “watering” the capital of said companies through issuing loans or bloating the value of the declared capital to increase the prices of its stocks and entice the public into buying shares. When the real value of the company is revealed, stock prices plunge and the public loses its investments.

This practice was the target of the Glass-Steagall Act of 1933, which sought to regulate the practice of commercial banks of issuing “unsound” loans to companies in which the bank has invested to encourage the public into buying shares. The law was repealed in 1999 because it was inconsistent with the deregulation regime. Nevertheless, the law never had any effect as commercial banks have departments engaging in financial investments, and financial investment banks have ventured into commercial banking operations.

Today this phenomenon of “watering” capital is called as stock “bubbles” where stock prices such as in high technology firms in the 1990s, and housing mortgage and construction firms during the early part of the century rose until the real value of the companies’ businesses were revealed and stock prices plunged.

The book also described how banks profit from the issuance of bonds and securities, and speculation in land. The “real estate bubble” is an example of speculation in land by banks and mortgage companies. The value of residential property in advanced capitalist countries rose by more than $30 trillion to $70 trillion from 2000 to 2005 until it started to plateau and interest rates started to rise leading to defaults, foreclosures, and a drastic plunge in housing values.

This also explains why in the US, speculative investment was 23 times the net fixed capital stock of the private sector during the 1990s; why government and private debt securities account for more than half of the overall growth in financial assets from 2000 to 2004; and why in 2004 daily trading in derivates and the foreign exchange market reached $7.6 trillion, this did not yet include the value of trade in other speculative investments such as stocks and real estate.

“No banking operation brings in profits comparable with those obtained from the issue of securities!”

And so we have all these exotic sounding names such as “Collateralized Debt Obligations”, “Credit Default Swaps”, as well as futures contracts, options contracts, forwards, swaps, swaptions, etc. But after these banks have profited and have caused the world economy to plunge into crisis, the people are made to bear the losses through the $3 trillion in bail out funds for ailing banks, which are being financed by taxpayers’ money.

The book explained that the crisis of overproduction from 1900-03 was the turning point in the dominance of finance capital.

“ was the crisis of 1900 that enormously accelerated and intensified the process of concentration of industry and of banking, consolidated that process, for the first time transformed the connection with industry into the actual monopoly of the big banks, and made this connection much closer and more active.”

The book did not only explain the workings of financial capital and the financial oligarchy but described the state of the world economy at the turn of the 20th century. It described how the series of crisis led to the concentration and centralization of production and capital to a few giant companies and cartel – thereby explaining the mega-billion mergers and acquisitions, how global companies in oil, automotive, weapons, airline, and even consumer durables and goods, among others, developed, operates, and how it is able to control production and prices, negating the sacrosanct law of supply and demand; it stated that with the development of finance capital, the export of capital occupied an increasingly bigger role – thus, the programmed dependence of backward countries such as the Philippines to loans and foreign investments; it described the division of the world among capitalist associations – providing explanations to the seeming division of the developing world among advanced capitalist countries; lastly, it declared that the territorial division of the world among advanced capitalist countries is complete and any changes in the balance of power results in war – thus, explaining the two world wars and the dynamics between the US and Britain versus Germany, France, and Russia when the US invaded Iraq, or between the US and Russia over Georgia and South Ossetia.

It concluded that the world is in a state of parasitic, decaying capitalism that would make the peoples of the world suffer from one crisis to another – providing an overall picture of what happened during the crisis and stock market crash of 1873 and 1900, as well as what eventually happened during the Great Depression of 1930, the implosion of the crisis in 1970, the early part of the 80s, the latter part of the 80s up to the early part of the 1990s, the 1997 Asian financial crisis, and the years 2000 and 2007.

What it described seems as true today as it was in 1916 when the book was written, although we are at an even worse state now.

By the way the author of the book is Vladimir Lenin and the title is Imperialism, the Highest Stage of Capitalism. And I thought, as pundits always say, militants shouting “Down with Imperialism” are archaic. Bulatlat

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