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The global crisis is a crisis of capitalism
by Workers' Party - Philippines
21 Nov 2008
It is time for the workers and the poor in the Philippines to prepare for the worse the moment its government keeps on repeating the mantra that the economic fundamentals remain good and thus there is little to worry about effects of the global recessionary trend. The world found itself in the present mess precisely because of such blind faith in neoliberal fundamentalism.
The shallow basis for such declarations from the government is supposedly the fact that most of Philippine exports are being sent to China rather than the US. But China is just a transit point or a gigantic department in the assembly line that spans the globe. Thus exports to China will simply be assembled there and then ultimately sent to the US, Japan or Europe as finished products. Such is the international division of labor under the era of globalization.
Now here’s the rub. Japan just recently admitted that it is in recession. It is now officially in the same rickety boat as Germany and Italy, or for that matter most of the European Union countries. Despite the Bush government still being in denial about a recession, there are already some pundits in the US that are talking about the prospect of a depression.
The fact that US and Japan, the two biggest economies in the world and the final market for most exports, are in recession spells double trouble for the Philippines. In addition, US, Japan and Europe are the destination for a significant section of the nine million overseas Filipinos and the source for a large part of their $14 billion yearly remittances through official channels. Therefore Filipino migrants and their precious dollars, yens and euros are in clear and present danger when the recession extends and deepens. There is no doubt about the fact that migrant workers will be the most vulnerable when layoffs and closures hit their host countries.
While it may take some time for the howling winds of the so-called perfect economic storm to hit the shores of the Philippines, the initial impact is already being felt in the export-oriented factories whose clients are in the US, Japan and Europe. Reductions in the workforce and workdays are being implemented in the export zones and industrial estates in proportion to the reduction of orders from abroad. The permanent closures, temporary shutdowns and work rotation have happened in the last three months. And they have affected not just hundreds but thousands of garments, electronics and furniture workers in these industrial areas. These retrenchments and rotations are the herald of the grave unemployment that will result when the global recession reaches maturity and fully impacts the Philippines.
Myths about the crisis should be cleared up so that its real roots can be examined. The popular explanations peddled by the mainstream media and government officials in the US is that the crisis is simply due to the corruption, excess and greed of the investors, brokers and speculators of Wall Street.
It would be hard to accept as gospel truth such conventional opinion in the US. Just before the undeniable meltdown in the financial markets and the rapid descent to an economic recession, the American government officials and mainstream media were saying that the economic fundamentals are sound and that the problems are manageable. Yet we have to understand that such errors and hubris are not borne out of stupidity but of hypocrisy, for such well-told lies serve the purpose of conditioning the minds of the American people, especially workers.
It is indeed true that good old capitalist greed played its part in the disaster on Wall Street. Still corruption, excess and avarice are all in the nature of capitalism since the motor of this system is intense competition and the race for profit. It is simply business as usual for capitalists to covet the most profit in the shortest time. And yet it is not everyday or every year that capitalism falls into a historic crisis. Therefore the roots of the crisis go beyond capitalist greed.
Practically everyone agrees that the immediate cause of the present problem lies in the subprime housing loan failure. It has been more than a year since the subprime housing crisis erupted with millions of ordinary Americans having risky credit ratings duly failing on their amortizations.
The crisis exploded with the number of homeowners unable to pay amortizations reaching a critical mass. This September, four million Americans, about 10% of the total, were either very late in their payments or were having their homes repossessed. Thus Freddie Mac and Fannie May, the two main mortgage companies in the US, were in the red by $3.1 billion just for the three months from April to June.
The fact that several millions of working class American families could not afford to shell out money for their monthly home amortizations is already a sign of the contradiction that ultimately lies behind the economic crisis in the US. The wages and income of the ordinary American family cannot keep up with the escalating costs of living, including home payments. And this is all due to the changes wrought by globalization—the wave of retrenchments and layoffs, the temporary and part-time nature of jobs, the continuous decline in real wages and the dismantling of the social wage and welfare for the poor. The discrepancy between the nominal wage and the cost of living reflects in the oversupply of housing compared to the capacity to pay of the people. The crisis of overproduction (oversupply of commodities vis-à-vis effective demand for it) is an essential characteristic of capitalism. And it is clearly illustrated in the sector of housing for the working class.
Deregulation and financialization
The quantum leap from a problem in just one line of industry (in this case the subprime housing sector) to a crisis of the whole of the economy is due directly and entirely to the deregulation and financialization that has become defining features of the era of globalization. The mortgage companies sold their mountains of mortgage papers to the banks. The banks in turn resold these subprime mortgage papers (repackaged as securities called collateralized debt obligations or CDO’s) to so-called institutional investors such as other banks, investment houses and pension funds.
The complicated and repeated selling of these papers, and the invention of different financial instruments called derivatives, and even the exotic credit default swaps, is the way for financial institutions to make profit out of the money capital of investors. In the world of finance capital, profit is magically squeezed out from paper, even debt papers of risky debtors.
Here we can see an element of the so-called excess and corruption. Though lacking the capability to pay, ordinary Americans were enticed by various gimmicks (like the floating interest rate) to take out risky loans.
Still it is important to understand that this is not just the dishonesty of some individuals but the irresponsibility of the system itself. In a situation where so much of the wealth in the US and the world is in the form of finance capital that seeks big returns in the quickest time, it becomes entirely natural even logical for investors to grab the opportunity of a “get rich quick scheme” in the subprime housing sector, and the buying and selling of CDO’s and other financial instruments.
It is in this way that the subprime housing sector is connected to the world of finance capital. That is why the moment millions of high-risk Americans defaulted on their mortgages, the biggest commercial and investment banks, and even insurance companies, were suddenly left holding toxic debts and tons of debt papers that had no way of being paid.
The problem is similar to, though not exactly the same as, the Asian financial crisis of 1997. It is no different since it is due to speculation by finance capital. In the years before 1997, finance capital flooded the stock exchanges and real estate markets of the so-called emerging countries of Asia, including the Philippines. But the underlying economic problems cannot be hidden, especially from speculators, and when the time of reckoning came, finance capital withdrew in a flash and thus the stock markets and exchange rates collapsed like a house of cards. In the present case, finance capital descended upon the subprime housing sector and the business of trading CDO’s until the new bubble burst in due time.
There is no more apt word to describe the modus operandi of finance capital than speculation. “Profit” from speculation does not arise from the creation of new wealth and new value as in the case of production of commodities.
New wealth or value is generated in society only through the investment of money capital in the world of production, and the creation of products after the expenditure of labor power. Profit is extracted from the unpaid labor of workers and is then realized after the sale of the commodities.
Speculation by finance capital is however as different as heaven is from earth. “Profit” is fashioned not through the exploitation of workers but through trading in the stock exchanges, real estate, mortgage papers, futures market or other financial instruments. In the world of speculation, money miraculously generates “profit” from money without the mediation of the process of production. In essence, this is no different from gambling.
So on the one hand, there is the real economy where new wealth is created from the application of labor power to produce goods and services. On the other hand, there is the casino economy of finance capital where speculation is the mode of operation. With capitalism entering the stage of financialization, the shadow of speculation is not far behind.
Speculation is the illegitimate child of the deregulated world of finance capital. Finance capital rushes into a mania of investing in the popular business of the day where there is an expectation of high profits. Prices and profits thereby artificially inflate as long as investments keep pouring in. At the start the bubble will grow bigger and bigger seemingly as if the sky is the limit. But the bubble will burse the moment it becomes clear that the prospect of high profits is all hot air. All speculative ventures or bubbles can only end in a crash since no new wealth is created in this world. But like an addict that cannot kick the habit, finance capital will just move on to the next mania of the moment.
The crucial question is why such a significant part of the wealth of the US and the world is tied up as speculative investments? Why is this money capital not invested in the production of goods and services, in the creation of jobs in the light of massive unemployment? Or why is it not invested in agricultural production, in the farming of land in the light of the food crisis besetting the world? In answering this question, we can arrive at the roots of the present crisis.
Capitalists would rather put in their money capital in the mania of speculation instead of the world of production since the rate of profit is greater. It is in the nature of capital that it seeks the level where the rate of profit is higher, just like water seeking the lowest point due to the pull of gravity. It does not matter to capitalists whether it is speculation or production. The important thing is profit, and the bigger the profit in the shorter amount of time, the better.
Crisis of overproduction
Yet why is it that the rate of profit is greater in speculation rather than production given that new wealth in created only in the making of commodities? Thus opens up the secret of the innate contradictions of capitalism. If there is a glut in a certain sector of the market then profit is difficult to realize. The rate of profit falls and capitalists are obliged to shift their money capital to other lines or industries. But if the glut permeates all industries, if the crisis of overproduction is generalized, then the prospect of a bigger rate of return in the world of speculation and its mania of bubbles beckons the capitalists.
In the age of globalization, two factors come together to explain this situation. First, the innate tendency to overproduction has been exacerbated by the cheapening of wages in combination with a gigantic increase in the productivity of labor in the era of globalization. Surplus commodities clog the markets as people do not have the capacity to buy since their wages come up short and many do not have work. The crisis of overproduction is worldwide in scale as the epidemic of wage cheapening, work flexibilization, factory closures, job retrenchments, union busting, cutback in social spending, regressive taxation and other policies accompanying globalization are being implemented across the board and across all borders.
The great inequality of wealth in the US is a key link in explaining overproduction. The productivity of the American worker rose by 60% since 1979 but the wage of male workers fell by 5% over the same period. Some 33 million, one out of every four US worker, live below the poverty line. From 2000 to 2007, the number of poor in the US jumped by 15% or 5.4 million. In the same span of time, wages were frozen but profits leaped by 13% every year. The share of profit in the national wealth is at its peak in the US for the past 64 years while the share of salaries is at its lowest since 1929.
The leap in productivity is expressed in the flood of products and services. Yet the expansion of markets is hindered by the lack of effective demand. The crisis of overproduction is at the root of the recession in the US and global economy.
The reason the crisis exploded only now is that for a time the extension of consumer credit delayed the onset and attenuated the gravity of the problem. As a result millions of Americans are buried in credit card debt or have taken out second mortgages on their houses. One in every four American spends 40% of their monthly income just to pay their debts. The personal savings rate of Americans went negative in 2005 for the first time since the Great Depression of the 1930’s.
The “comfortable” lifestyle of the US worker was sustained only by accumulating debt. In truth, the American dream was only a myth and the middle class status of the working class was only an illusion. Only by extending consumer credit was the US able to extend the economic boom and delay the inevitable crash. Yet delaying the onset of the crisis only meant a more severe crash when the hour of reckoning came. The mountain of consumer debt could not remain unpaid without destabilizing both the real economy and the financial markets.
Second, the crisis of overproduction squeezed the rate of profit and led capitalists to make a detour from the world of production to the mania of speculation. The deregulation of financial markets in the period of globalization aggravated the crisis. The lifting of controls and supervision by the government over the movement of finance capital led directly to the excess and insanity of investors, brokers and speculators in Wall Street. Exotic financial instruments were invented, and then sold and resold all for the purpose of squeezing more “profit” from “paper.”
By the time millions of Americans defaulted on their mortgages and the subprime housing bubble exploded, the madness of finance capital was exposed for all to see. The biggest commercial and investments banks in the US and in the world, together with other financial institutions like insurance companies, were left holding bundles of worthless papers. In an instant, billions of dollars worth of financial papers evaporated.
Punishing the innocent
In short, finance capital lost in a high-risk gamble. But on the argument that they are too large to go under, they are being bailed out by the US and other OECD governments. And ultimately it will be the mass of workers who will foot the bill of saving the finance capitalists. It will be the taxes of autoworkers, teachers and janitors who will rescue the bankers, investors and brokers.
In the US, the $700 billion fund reserved as bailout, in addition to the more than $100 billion already spent to rescue some financial companies, will eventually come from the pockets of the workers. Thus while capitalist profit remains private, the business losses are socialized.
Imagine Joe the plumber handing over his hard-earned tax dollars to the CEO of AIG on the premise that the investors, speculators and bankers are too big to fail. When a worker loses his daily pay betting on lottery, he cannot ask for food stamps from the state, especially with the dismantling of the welfare system. But now governments are handing out corporate welfare to the rogues whose excess and greed are the immediate cause of the financial meltdown.
The crisis that is ultimately rooted in the contradiction of overproduction has led to the mania of speculation by finance capital. And the bursting of the finance bubble is now on a blowback to the world of production. The extensive and deep losses by the finance capitalists has now made them misers and reluctant to extend loans to industrial capitalists lest they bleed even more. Industrial capitalists are squeezed by the credit crunch precisely at the time that they need the lifeline of commercial credit with profit realization hindered by glutted markets.
Permanent closures, temporary shutdowns, work rotation and cost cutting will be the coping measures of industrial capitalists. Retrenchments, layoffs, wage cuts, reduced work hours and informalization of jobs for the workers will be the inevitable result.
Therefore the workers and the poor will be made to bear the burden of resolving the crisis that is not of their own making. The innocent masses are being punished for the crimes of a few.
The working class all over the world will be asked by the ruling classes to sacrifice for the sake of the nation. The workers and the poor must not buy into this cheap sales talk. Workers are the last to benefit from an economic boom but now they are the first to be sacrificed in the midst of a global recession.
The workers must fight for its independent demands and its own class interests. The unprecedented crisis that capitalism is passing through is also a historic opportunity for the workers to advance its immediate and ultimate agenda.
Partido ng Manggagawa (Workers' Party) is a political party of the Filipino Working Class.
Philippine Congress asked to investigate impact of crisis on workers
The Partido ng Manggagawa (PM - Workers’ Party) today formally asked Congress to initiate a legislative inquiry into the effects of the ongoing global recession on the workers as reports pile up on job layoffs and work rotation in export-oriented factories. “The recession in the US and Japan, the two biggest economies in the world and the main market for our exports, spells double trouble for the Philippines,” averred Renato Magtubo, PM chairperson.
In separate letters to Sen. Jinggoy Estrada and Rep. Magtanggol Gunigundo, chairpersons of the Senate and House Labor Committtees respectively, PM asked for an investigation “for the purpose of enacting legislation that will assist workers in coping with the economic downturn.”
In its appeal the labor group also asked the Labor Committees to invite representatives of the Department of Labor and Employment (DOLE) and the Philippine Export Processing Zone Authority (PEZA) to the hearings. “Congress must compel the DOLE and PEZA to disclose data about permanent closures, temporary shutdowns and work rotations that has happened in the last three months,” Magtubo argued.
PM has complained that its local leaders were given the runaround by the DOLE Region IV-A and Region VII offices when they requested for data on the impact of the crisis on workers.
Magtubo added that “While it may take some time for the howling winds of the perfect economic storm to hit the shores of the Philippines, the initial impact is already being felt in the factories whose clients are in the US, Japan and Europe—all in recession. The three are also the destination for a significant section of the nine million overseas Filipinos and the source for a large part of their $14 billion yearly remittances through official channels.”
The group also suggested to the Labor Committees to table for deliberation its proposals for a subsidy for workers who will be laid off due to the crisis, for tax breaks for all employees as a form of economic stimulus, and for a thoroughgoing reform of the public employment program so that the millions of unemployed Filipinos can get jobs.
Magtubo announced that “We intend to cooperate fully with the Senate and House Labor Committees. If they need our assistance, we will help them in identifying export zone workers who have fallen victim to job loss or reduction of workdays.”
Partido ng Manggagawa
Our dream is a world that gives due importance to the role of the working class and respects the dignity of labor. A social order where the working men and women of the world live together in peace, harmony and progress.
Our aspirations lie in the emancipation of labor. A government that is truly of the workers, by the workers and for the workers.
Our hopes rest in a future where social progress thrives not for the benefit of a few people but for the development and richness of the entire humankind. A society that is free from the chains of wage slavery and where oppression does not exist.
Our mission is to forge the unity of the workers into an independent working class party to organize them as a potent political force in social transformation towards the advancement and protection of labor from the scourge of globalization, establishment of a genuine workers’ government and the emancipation of the working class from capitalist exploitation and wage slavery.
The Partido ng Manggagawa (Workers’ Party) was born on the very day the late labor leader Filemon “Ka Popoy” Lagman was laid to rest, on the very place where the working class champion was treacherously slain. The triumphant formation of the Partido ng Manggagawa amidst the trying times marks the assumption of the working class to the center stage of the country's political arena. From time on, no longer will labor's voice be unheeded and our demands be disregarded.
This work is in the public domain