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ARE THE colossal financial frauds exposed recently just the swindles of a small minority or a symptom of the collapse of the boom of the 1990s? Socialist Party general secretary PETER TAAFFE analyses developments in the world economy.
Behind The Financial Scandals
These are excerpts from a document from the Committee for a Workers' International, the international organisation to which the Socialist Party is affiliated. The full text is available from www.socialistworld.net
THE LATEST financial collapses and scandals show how correct Karl Marx was well over a century ago to write in Capital that the "principal spokesmen of credit" had the "character of swindlers and prophets"... who engage in the "purest and most colossal form of gambling".
However, these collapses - Enron, Global Crossing, World-Com, Xerox, Vivendi - have thrown up modern swindlers - Kenneth Lay of Enron, Bernard Ebbers of WorldCom - who make the swindlers of Marx's day appear like house burglars compared to bank robbers.
Even the Daily Mirror [29 June 2002] concedes: "How Karl Marx must be rubbing his hands with glee and saying 'I told you so'."
The vast majority of capitalist commentators, however, are rushing to defend their system with such headlines as "US capitalism down, not out" [Financial Times]. The capitalists and their hirelings fear that the whole house of cards, built up in the 1990s, is facing collapse.
When the Asian crisis broke in 1997, US economic commentators growled about 'crony capitalism'. Now however the much-vaunted neo-liberal Anglo-Saxon model of capitalism is an even more blatant example of crony capitalism and lies in ruins.
The parasitical character of this model - decisions on the basis of shareholder pressure and value, the colossal process of mergers and acquisitions amounting to at least $1 trillion in Europe and the US alone in 1999 - is clear. It has now produced the world's largest bankruptcy (Enron) and the world's greatest accounting fraud (WorldCom).
In addition, the two largest acquisitions in history, Vodaphone-Mannesmann and AOL-Time Warner, have "destroyed hundreds of billions of dollars of shareholders' funds." [The Guardian].
Will Hutton, former editor of The Observer, and defender of 'European capitalism' against the US model, remarks acidly: "The majority of mergers and takeovers in this stock market dominated (US) economy have proved destructive; few had any value and most lower it.
"Between 1993 and 2000, Wall Street had brought 3,500 small hi-tech companies to the stock market; even before the dotcom bubble had burst, more than half were trading below their initial offer price or had gone bust. While dividend distributions have doubled as a proportion of profits, investment in the core of American business was troublingly low, the US has less invested capital per employee than France or Germany".
The US giants, largely financially driven and slaves to 'shareholder value', have done everything to maximise the share value of a company, including lining the pockets of the chief executives (CEOs).
Share prices slump
CAPITALIST COMMENTATORS comfort themselves with the notion that all booms bring with them 'overheads' (read swindling on a massive scale). Yet, never has financial chicanery, fraud and 'crony capitalism' taken place on such a scale as during the 1990s boom..
As The Guardian commented: "...The late 1990s ...was a time when many turned a blind eye and levels of corporate governance and auditing clearly became, in many cases, lax."
The term "lax" is a massive understatement. Accountants are the alleged watchdogs of industry, yet accountancy firms like Andersen are complicit in the cover-up which allowed the perpetuation of massive fraud, in the case of Enron for instance.
The huge fees paid out to accountancy firms, which are themselves multinationals, ensures their complicity in the fraud taking place.
CEOs, with more than 50% of their salary in the US paid in 'stock options', also have an interest in ensuring a rise in the share price, which in turn ensures a rise in their income.
This led to the covering up of a $4 billion 'black hole' in the case of WorldCom as shares were boosted to unprecedented levels of 30, 40 or even 50 times the real value of assets.
No matter; the bosses' salaries soared. In 1980, a chief executive (CEO) in the US made $42 for every $1 earned by one of his or her blue-collar workers. By 1990 that had stretched to $85 and by 2000, CEOs were earning $531 for every $1 taken home by an ordinary worker!
The average industrial worker has been impoverished, relatively speaking, and many in real terms. But most voters in US elections have also lost out in the share collapse. 50% of those who voted in the last US elections own stocks and shares.
The drop in share prices affected them but the process has not finished yet. In 1996, the chairman of the Federal Reserve, Alan Greenspan, attacked the "irrational exuberance" of investors in equities. But the value of shares kept rising, at one stage reaching 50% above the level of 1996.
Even with the recent drop it has still not returned to the 1996 level. Further drops in equities are likely which will not be compensated for completely by a rise in house prices.
WHAT THESE events underline is the completely false picture of the 1990s boom presented by capitalist economists at the time.
US capitalism, they said, had initiated a new long-term phase of growth, stretching into the indefinite future and buttressed by an unparalleled growth in the productivity of the US in particular. All of this has now been shown to be bogus, with profits artificially inflated and the balance sheets of companies 'poisoned'.
The much vaunted 'productivity miracle' was accepted as a fact at the time, but the CWI and Socialist Party argued strongly against this idea in written material.
Of course, the ruling class claim that all these developments are so much 'froth' because the 'fundamentals' of the US and world economies remain 'healthy'.
Capitalist economists have claimed that we have gone through the "recession that never was". Comparing the world economy to an aeroplane, they argue that rather than landing - a recession - it merely experienced "touch down" on the runway and was poised once more to soar into the heavens.
This is entirely false. Not only has there been a considerable slowdown in the growth of the world economy but the increase in world trade contracted from 12% to almost zero in 2001. This is an even bigger drop than in the 1990-92 recession.
The OECD now expects employment in the advanced capitalist countries to fall this year for the first time in two decades.
The US economy is still the key. US consumers were the consumers of last resort, which managed to bale out the world through the Asian financial crises of 1997, the financial collapse of Russia in 1998, the problems of Brazil in 1999 and even during the latest slump.
They sucked in imports from the rest of the world and more importantly, foreign investors were happy to pour money into the US markets to cash in on booming hi-tech industries. Now, they are deterred from pumping more money into the US economy.
The huge current account deficit of 4.3% of US gross domestic product in the first quarter of 2002 was plugged by the $1 billion a day which foreign investors poured into the US markets.
However, the recent depreciation of the dollar, precisely because the 'fundamentals' of the US economy are far from sound, threatened to go into freefall without the intervention of the Bank of Japan and probably, behind the scenes, other central bankers as well.
If the dollar were to go into freefall that could trigger a world financial crisis which could choke off even the first 'shoots' of a claimed recovery in the world economy.
THE COLLAPSE of equities and the decline of the dollar, which will push up the price of imports into the US, are bound to hit the US population's famed propensity to consume at ever faster rates.
Some capitalist commentators take comfort in the fact that US manufacturing industry appears to have slightly improved in the past period.
However, this is largely accounted for by the rebuilding of stocks with a slight improvement in employment, particularly in temporary workers. The US, in effect, is now suffering from triple deficits: households in debt, the government in debt and the nation as a whole in debt.
Will the consumer be allowed to continue 'consuming'? If Greenspan has his way this will continue to be the case as the Fed has pursued a policy of reducing the cost of credit with rates of interest below inflation.
The boom in the housing market in Britain and the US in particular is a factor in allowing house owners to borrow against the increased value of their house and hence to keep spending. On the other hand, the deflation of equities could convince consumers, particularly in the US, to pull in their horns and rebuild their savings.
'Hot money' went into the US in the recent period but is now leaving for the safer and more lucrative haven of Europe. The Financial Times sums up the US economy's prospects with the headline: "The Eagle is landing".
Once more, capitalist economists have begun to worry about the dreaded 'double dip' in the US economy, which they dismissed up to recently. Some now say that this crisis is 'systemic'.
Crucially, profits and investment have dropped in the last two years and are now stagnant. The Experian company, which analysed the profitability of 2,000 businesses generating three-quarters of the UK's non-financial GDP, reports that "the average return on capital of companies fell to 8.37% compared with 9.05% the previous quarter and 10.84% in the first quarter of last year.
It continued: "Profitability among engineering companies dropped from 6.93% to 4.81% year-on-year, taking the decline to about 60% over three years.
"However, the sharpest fall in returns was among motor dealers, hit by price-cutting by manufacturers which also triggered a drop in used car prices. Here, return on capital declined by more than a third during the year to 6.16% ...The ratio of household debt to incomes is at an all-time high". [Financial Times]
This is against the background of large-scale redundancies of failing firms, particularly in the ailing telecoms and technology sectors of industry.
A period of insecurity
IF THE US economy should go into a tail-spin - a slump or serious recession - it will tip over countries and even regions of the world economy, which are either in economic meltdown - Argentina - or threaten to lever others over the abyss, like Brazil, Uruguay and Paraguay in Latin America.
The Bush administration, despite disclaimers to the contrary, is one of the most interventionist in recent US economic history. It has ploughed in huge liquidity, through the measures of the Fed in cutting interest rates, tax cuts, increases in military spending, etc., in the aftermath of 11 September.
Indeed, one consequence of this crisis worldwide is the compulsion felt by different capitalist governments to sin against the 'non-interventionist' creed which was supposed to be the 'holy of holies' of seamless globalisation.
Now, with the crisis in just its first stages, the capitalists are touching the economic gear stick which threatens to throw it into reverse. Even Chirac's right-wing regime in France intervened, behind the scenes, in the collapse of media conglomerate Vivendi, and is examining the possibility of renationalising privatised France Telecom.
This is the music of the future in the event of a serious economic recession or slump. It is an indication of the uncertain period for capitalists that they move out of equities into the 'safe haven' of so-called real assets: property, gold, mining shares and long-term securities in the form of bonds.
Whether or not this betokens a new deep slump of capitalism or a serious recession, a double dip, remains to be seen. A leading share analyst in Britain has predicted stagnation in equities for the next 10 years ˆ la Japan.
The economic future for the foreseeable period is one of stagnation, rising unemployment, of contracting living standards for significant sections of the population.
The fall-out from the deflation of the 1990s bubble has already been felt in the pensions sector. Millions of workers in the US and Europe have had the prospects of a relatively secure future snatched away as the pension funds have lost billions.
At the same time the ruling class, faced with a so-called demographic time bomb - people living longer - as part of the general offensive against the living standards of the working class, are attempting to extend the age of retirement for women and of men. A major battle by workers in defence of past gains is posed.
Make the rich pay
AFTER EVERY series of major financial scandals, the cry goes up from the capitalist commentators that the financial 'watchdogs' have not done their job in sounding the alarm bells about companies' financial improprieties.
The Financial Times wrote: "The [Enron] board also failed to ask questions about conflicts of interest that harmed shareholders' interests. Executives were allowed to run off-balance-sheet partnerships that realised hundreds of million of dollars at Enron's expense."
Their solution is to appoint further 'watchdogs'. After the 1929 Wall Street Crash, the US Congress passed the 1934 Securities Exchange Act. But as John Galbraith comments in his book The Great Crash of 1929 it was "not at that time especially necessary. Markets and financial adventures were then and for a long while after restrained not by the SEC but by the memory of what happened in 1929."
However, these 'controls' did not deter the "prophets and swindlers" from carrying out greater and greater fraud later, no more than appointing 'watchdogs' to watch over the 'watchdogs' will today. The capitalists will find ways to circumvent any restrictions on them.
The very minimum that should be demanded by working people - who pay for these swindles - is the opening of the books of big business to committees of workers, trade unionists and representatives of consumers.
So-called 'business secrets' should be abolished. They are a means of keeping the dark secrets - financial chicanery - hidden from public gaze. When we are all 'whistle-blowers' about the financial cheating and crimes of big business, then there will be no need for any more 'whistle blowing'.
This financial crisis is already having an impact on working people. Jobs are being lost as companies implode and millions face losses in their savings and pensions.
The call for the defence of jobs and the taking into public ownership of companies cutting employment needs to be taken up by the labour movement. Above all the demand that only the rich should pay for this crisis needs to be heard, and the state should guarantee decent pensions for all.
Capitalism offers a period of insecurity and uncertainty. It is a blind system, with even its 'experts' consulting the 'tea leaves' for predictions for the future. Lodged in the situation today is the possibility of another devastating slump like 1929.
On the other hand, a period of stagnation, of deflation, of an extended period of economic depression with only small anaemic growth in production and a growth in the social malignancy associated with this, of poverty, rising unemployment, increased class conflict, etc., is possible.
We must be prepared for a change in the situation, which will present big opportunities for socialists and Marxists.
In The Socialist 19 July 2002: