While some may take “what-goes-around-comes-around” satisfaction at the ruin facing Bear Stearns and other Wall Street investment firms, a financial meltdown could result in a freezing up of credit and growth for everyone. What happens on Wall Street might mean real hard times on Main Street. It could take a decade to recover.
The immediate cause is the unraveling of the real estate and mortgage speculation frenzy of the last few years. It is now likely to reduce homeowners’ equity by 30 percent to 50 percent, for a total of $6 trillion to $10 trillion. Home values have already dropped 10 percent.
Complete “unwinding” can spread the ruin to all, not just the speculators. Consequently the Bush administration is now jumping in to bail out these securities firms. In doing so, it is telling us to ignore its ritual worship of the “genius of markets,” its “no problem” commentaries, and its warnings against creating “moral hazards” by saving homeowners. But this also means we should scrap the Bush stimulus package, which contains no banking reform, no taxation of the speculators and little relief for those facing the risk of a genuine depression. Some say that perhaps it’s time to consider nationalization of banks and financial institutions that are responsible for gross management or market failures, as the UK did with Northern Rock last week.
The problem is, because of the war in Iraq and the Bush tax cuts, there very likely may not be enough money to finance the scope of this bailout. This meltdown is not simply a dip in the business cycles of capitalism. Instead, the current business cycle appears to be feeding into a pronounced major economic event — a prolonged recession or even depression. It is being fueled by the growth of parasitic financial activity like borrowing and lending money, and making huge profits, from trading pieces of paper such as mortgage securities that are not backed by any real value.
Huge layoffs, bank runs, long-term stagnation and a decade or more of low growth are now imminent dangers. If one follows the thinking of “big picture” economists from Karl Marx to MIT’s Charles Kindleberger, a structural realignment of global dimensions could be at hand, coinciding with the most important presidential election since that of Franklin Delano Roosevelt in 1933.
One result will be the weakening of U.S. economic strength relative to the rest of the world. In particular, the European Union and the emerging “middle” economies of the developing world, such as China, Brazil and India, are moving forward. The 1930s witnessed a realignment of this scope that favored the U.S. The 1970s through the 1990s saw powerful technological transformations that built the material foundation of the global high-tech and supply infrastructure that sustains globalization. The “new world order” of 1990 may have looked to the first President Bush like an era of U.S. world domination, but in fact it was the beginning of the end of U.S. dominance. Although the wealth of the new era has spread unevenly, and is in dire need of reform and regulation, it has nonetheless spread far beyond U.S. influence and control.
So it should be no surprise that the Bush administration has decided to welcome investments by “sovereign wealth funds” of cash-rich China, Saudi Arabia, Abu Dhabi, Kuwait and South Korea. Some are editorializing their patriotic disapproval — but have no alternative to propose themselves.
Yes, foreign countries not under the control of the U.S. government are about to help finance the bailout. They will obtain in return ownership and control of significant pieces of world financial capital and capital markets, at the expense of U.S. capital.
However, many believe, this will, and must, be just the beginning if the economic crisis is to find solution. The time is at hand, many observers say, for reform of major international financial and trade institutions, such as the International Monetary Fund, World Bank and World Trade Organization, to redress the inequities generated by the “long wave” of technological revolution and subsequent economic expansion. Labor unions, both here and abroad, are increasingly arguing that workers of the world, of all occupations and trades, need seats at negotiations on these issues. They argue that workers are the ones who bear the burdens of the inequities. They also look to presidential and congressional candidates to support trade union participation. Hooking workers into the world debate will provide answers that no one else is likely to provide.