Wednesday, 26 March 2008

Respect goes west. Mikes Letter from America #5

Get stimulated!

‘Bear Stearns’ sounds like the name of a survivalist TV presenter: ‘This week, Bear Stearns climbs Everest one-handed, before feasting on caterpillars and patronizing the natives in East Borneo’. In reality, Bear Stearns is the name of an investment back, and is far from being rugged and sturdy right now. Last week, it became the latest ‘victim’ of the sub-prime mortgage crisis. The term ‘victim’ is relative: unlike the thousands of Americans who are suffering foreclosure on their homes, Bear Stearns was bailed out by J P Morgan, with the obliging aid of the Federal Reserve (the US equivalent of the Bank of England).

This was just the latest in a series of blows that have hit the US economy over the last few months. The sub-prime crisis broke last year, followed by: a stock-market crash (sorry, ‘correction’); the major bank Citigroup wobbling before being bailed out by the oil-sheikhdom of Abu Dhabi; oil prices soaring above $100 a barrel; and the dollar continuing to plunge. The Federal Reserve, led by the hapless Ben Bernanke, has been cutting interest rates faster than a carpet warehouse slashes its prices. All this is set against a global picture where US hegemony is threatened by the rising economies of India and China.
Economists often warn us not to read too much into financial ups and downs on Wall Street, and reassure us that these will not affect the ‘real world’. I would say that the 63,000 American workers who lost their jobs in February (the worst month for job losses in five years) are certainly feeling the effects in their ‘real world’. But in other ways, it’s true that the world of the bankers and that of the ordinary citizen don’t seem to connect. Not wishing to sound cynical, but you would think that this would at least be a good time to buy a house, with house prices at rock-bottom and interest rates plummeting. Yet while the banks benefit from low Fed lending rates, the borrowing rate for ordinary lenders is actually INCREASING! Not content with a planned bail-out by central banks, the predatory lenders who got us into this mess to begin with are trying to steady the ship by screwing extra money out of borrowers.

What is really galling about the credit crisis (apart from the obvious - working class people losing their homes) is the sheer hypocrisy. The people who tell us that the free market is the only system that works, and who laud the ‘risk takers’, are now happy to bail out the banks after their ‘risk-taking’ back-fired. Now here’s a novel idea – instead of spending public funds to prop up the banks, why not use them to help the people who are losing their homes to foreclosure? No, wait, we can’t do that – that would be state intervention, that would be dangerously close to (whisper it) socialism!

At least we still have the Bush administration’s ‘stimulus package’, which gives tax rebates in the hope of re-inflating the economy. Now, I have to confess that my wife and I are bad consumers – we put our tax rebate into our savings, instead of doing our patriotic duty by spending it on an American car or gambling it on the stock exchange. At $600 a head, the stimulus cheques are hardly an invitation to workers to spend, spend, spend. And there lies the basic problem with the US economy – American workers simply don’t earn enough. They have not had a pay-rise in real terms for the last 5 years – and in 4 of those 5 years, their salaries actually went down. And what happened to corporate profits in the same period? Why, they went up! [Statistics junkies can see this and other charts and analysis here: ]

As Robert Reich – Clinton’s former Labor Secretary – pointed out on NPR*, people took on sub-prime mortgages not because they were foolishly trying to get rich quick, but because they were struggling to survive on less than a living wage. With their homes gone, those families literally have nothing left to give. Reich is hardly a socialist – on his blog, he writes “I’m not suggesting anything so draconian and ideologically objectionable as public ownership. Perish the thought. Let the Brits bail out their big bank and nationalize it …” Rather, he realizes that a mass-consumer capitalist economy cannot function without workers who can afford to buy the goods that they produce.

The question is, how will the working class react? They are being offered no solutions by the Democratic candidates in their increasingly bitter feud for the nomination. The left in the US is weak, and its pro-Democrat section is busy campaigning for the pro-business Barrack Obama. So where does workers’ anger go? Does it go in nationalist and anti-immigrant directions? Or – to paraphrase the poet Langston Hughes – “does it explode”? There may not be an explosion on the horizon, but last year’s strikes in the entertainment industry showed there are sparks of militancy in the most unexpected areas. Something’s got to give.

*National Public Radio: the equivalent of BBC Radio 4, only with less funding but – on the plus side - no John Humphries.