Centre for Research on Globalisation
Centre de recherche sur la mondialisation

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TURMOIL: STOCKS YO-YO AS MARKETS REVEAL $7 TRILLION LOSS

by Deirdre Griswold

July  , 2002.
Centre for Research on Globalisation (CRG),  globalresearch.ca ,   July  2002

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The connection of the banking system to the meltdown on Wall Street has at last been dragged into the open with the revelation that Citigroup and J.P. Morgan Chase made secret deals with Enron to help cook its books.

These deals, in which the giant banks helped cover up Enron's losses, were not undertaken out of compassion or even a buddy-buddy mentality among the CEOs. They are evidence that the biggest banks resorted to criminal conduct in order to keep investors and the public at large from knowing how shaky the entire structure of monopoly capitalism was becoming.

Will the disaster now unfolding on Wall Street end in a grimly familiar scene: the twin towers of U.S. capitalism, the stock markets and the banks, swiftly crumbling right before the eyes of a horrified public?

$7 TRILLION UP IN SMOKE

In just 10 trading days in mid-July, beginning with the day President George W. Bush went to Wall Street to "calm investors' fears," the Dow Jones Industrial Average lost nearly 1,500 points, or 16 percent. The carnage in New York is now dragging down global markets as well.

More than two years of decline in the U.S. stock markets have already evaporated $7 TRILLION worth of paper wealth. This is nearly a year's worth of goods and services produced by the workers of this country.

How could this unimaginable volume of wealth just disappear?

In this chaotic economic system, the stock markets anticipate future production.

It is true that they can move upward because of pure speculation, producing what is called a bubble. The easy credit of the last decade helped inflate stock prices. Eventually, prices rise far above the earnings of the companies, and the bubble can burst. This happens periodically.

But this is not the decisive factor in the current sell-off, which has vaporized so much wealth, including the retirement funds of tens of millions of workers. It is a crisis of overproduction.

In a general way, it is the expansion of production that drives up the price of stocks. Had the capitalist economy continued to grow, the future wealth represented by high stock prices would have been realized.

However, the prices have dropped like a stone, especially over the last three months. Some $7 trillion in anticipated value has disappeared--not only because trend-setting big investors now expect production to decline, but also because they know that a depression will actually destroy a great deal of what value has already been produced.

THE DREADED D-WORD

Depression! Is that an appropriate word to describe the current crash and its effects?

Investor's Business Daily seems to think so. On July 3 the New York financial newspaper published a graph on its front page showing an uncanny resemblance between the movements of the Nasdaq high-tech market over the period 1992-2002 and the Dow Jones Industrial Average for 1921-32, the years of boom and bust that ushered in the Great Depression.

CBS MarketWatch on July 23 also referred to a depression. It reported that "Analysts at research and money management firm Bridgewater Associates point out that this is the first time since 1930 that the stock market has fallen in the face of aggressive Fed easing [the lowering of interest rates by the Federal Reserve Bank--DG].

" 'In that sense, we are in uncharted waters. Clinically speaking, a recession is an economic contraction brought on by tightening and ended by easing. A depression is a self- reinforcing economic contraction, perpetuated by debt liquidation in which central bank easing is impotent to reverse the contraction. Recent market action is symptomatic of depression,' Bridgewater pointed out."

Actually, these turbulent waters are not completely uncharted. This country has been in a depression before.

MASSIVE DESTRUCTION OF WEALTH

In a depression, factories and offices stand idle, sometimes abandoned. The equipment in them grows obsolete or rots away. Even brand-new goods, like today's computers and their software, sit on the shelves only to finally be thrown away, outmoded long before they could have been sold.

In the Great Depression of the 1930s, this destruction of goods and the equipment and facilities used to produce them led to outrageous scenes of oranges being dumped in the sea and wheat plowed under, even as hungry people lined up for a bowl of thin soup and a crust of bread. Agriculture had become very productive, but this bounty of nature could not be sold--not at a profit, anyway. The bosses preferred to have it destroyed than give it to hungry people.

The capitalist market could not meet people's most basic needs. Almost 30 percent of the workers were unemployed-- human beings cast out just like the machines that were no longer needed. Without jobs, millions couldn't afford food, clothing or shelter.

A generalized capitalist crisis can also bring on an even greater destruction of the wealth produced over generations by the working class: it can lead to war.

Directly after the Great Depression came World War II. In addition to the tens of millions of lives lost, there was widespread destruction of the means of production. Intense competition for markets and resources among the huge corporations and banks of different capitalist countries had led to the war. This competition was resolved in the most horrible way, through wholesale destruction of factories, farms and infrastructure.

The countries being fought over as the spoils of that war-- the colonized nations of Africa and Asia--had nothing to gain and everything to lose. Their people were left starving and their territories in ruins after the armies of the competing exploiters swept through.

COLLAPSE NOT PSYCHOLOGICAL

Everyone in the capitalist establishment, from CEOs to analysts and politicians, is treating the market collapse as a psychological phenomenon. If only investor "confidence" could be turned around, they say, the market rebound would make everything all right.

They point hopefully to signs that consumers are still buying homes and other items. What they are ignoring, however, is that depressions don't start because consumers suddenly, inexplicably lose "confidence."

They start because of overproduction, which is brought on by the overbuilding of the means of production by the huge corporations. They are all trying to undercut each other by using the latest technology in order to produce cheaper than their competitors. This investment in technology expands the means of production at a breakneck pace that sooner or later ends in a catastrophe.

Fed chair Alan Greenspan himself, in testimony to Congress on July 16, confirmed that it was overproduction in the area of capital goods like fiber-optic cables and computers that was pulling the market down.

Once the markets starts to plunge, then layoffs of workers and caution among consumers can have a snowballing effect as they stop buying. But, as Karl Marx pointed out long ago, the crisis begins not in consumption but in production itself.

HOW BANKS HID ENRON'S TROUBLES

The latest phase of this tumultuous market contraction started when the role of the banks in Enron's dirty deals became public.

Examiners for the Senate Permanent Subcommittee on Investigations and shareholders' lawyers say that the banks structured billions of dollars of transactions for Enron in a way that hid the company's growing indebtedness.

The latest revelation involved a "handshake" deal between Citigroup and Enron code-named Roosevelt that allowed the energy company to conceal a $500-million loan it got from the bank by listing it as a commodity transaction.

Senate investigator Robert Roach told a hearing of the investigative panel of the Senate Governmental Affairs Committee on July 23 that, "The evidence indicates that Enron would not have been able to engage in the extent of the accounting deceptions it did, involving billions of dollars, were it not for the active participation of major financial institutions willing to go along with and even expand upon Enron's activities."

Roach said there also is evidence that some of the banks "knowingly allowed investors'' to rely on Enron financial statements they knew were misleading.

According to the July 23 Associated Press, "The banks used complex financial schemes to boost Enron's anemic cash flow to match its profit growth on paper, according to lawmakers. The energy-trading company recorded the money from the bank loans as prepaid trades of natural gas and other commodities with an entity based in the Channel Islands off Britain."

Besides Citigroup and J.P. Morgan Chase, the shareholders' suit named Credit Suisse First Boston USA Inc., Canadian Imperial Bank of Commerce, Bank of America Corp., Merrill Lynch & Co., Lehman Brothers Holding Inc., Britain's Barclays Bank PLC and Germany's Deutsche Bank AG.

The AP story added, "Houston-based Enron, which filed for bankruptcy in December, taking the investments of millions of people with it, used a web of thousands of off-balance- sheet partnerships to hide some $1 billion in debt from investors and federal regulators."

All this crooked finagling was to hide another feature that Marx showed triggers a capitalist crisis: a falling rate of profit.

WHAT CAN BE DONE?

What can the working class and all those whose lives are ripped up by an economic crisis do to stop the super-rich ruling class from dumping this one on their heads?

In the 1930s, the first reaction of stunned shock gave way to anger and eventually mass action. It soon became clear that all the promises made by the great captains of industry and finance that the crisis would be short-lived were just deceptions. They were trying to cover themselves while they worked feverishly to make sure their own fortunes were secure--in the same way the Enron executives and the others have been doing.

The working class became more organized, militant and cohesive as the depression deepened. They organized as the unemployed, as tenants, as farm workers, and in the factories. Huge crowds stopped evictions by putting people's furniture back in their homes. Workers went on strike and eventually sat in the factories to demand higher wages and union recognition.

They also put demands on the government to provide jobs as well as food, shelter and clothing for the unemployed. The capitalist government responded with different tactics, first using repression, then some concessions. The objective was the same: to divert the workers from taking over what they had built and running it for the good of all, not the profits of a few.

The working class movement of the 1930s, powerful as it was, with a long-lasting impact through such programs as Social Security, welfare and unemployment insurance, did not unseat the ruling class from its positions of economic and political power. It did not liberate the means of production from the hands of the privileged super-rich few, whose wealth had been amassed directly from the labor of the workers.

The inability of the working class--not just in the United States but in Europe and other centers of world imperialism-- to overturn capitalist rule allowed the exploiting class to resolve the depression through the most horrendous war the world had ever seen.

The present deepening crisis is sure to arouse the workers in the U.S. and around the world, at first in a defensive struggle against the miseries inflicted on them by the capitalist system. It carries within it the potential, however, of making such a crack in this rotten system that the workers and all humanity will be able to widen it and pour through.

Capitalism must be replaced by its opposite: a society based on social ownership of the means of production, administered democratically by the masses of workers themselves and not by a tiny elite who have shown that they will do anything, no matter how heinous, in the pursuit of profit.

 


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