Black People : How Racism Sparked the Financial Crisis

Discussion in 'Black People Open Forum' started by oldsoul, Feb 5, 2009.

  1. OldSoul

    OldSoul Permanent Black Man PREMIUM MEMBER

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    The following is a rather lengthy article but highly informative. You may download the entire article as a pdf or go to the source:

    The End of Neo-Liberalism and Bush's Last Scam: How Racism Sparked the Financial Crisis
    by Joe Sims Publisher of Political Affairs​
    With the collapse of several banks and insurance companies, the near bankruptcy of Detroit automakers, a 50 percent drop in world stock exchanges and an almost complete arrest of credit markets, an economic era has ended. It seems almost an understatement to say that capitalism has entered a new stage of a protracted systemic crisis. The crisis of the economy is at once a crisis in ideology. After 30 years of worship at the shrine of the free market, Reaganomics and other branches of conservative and neo-conservative thought seem bankrupt and thoroughly discredited if not dead – and not only right-wing schools. Deregulation, privatization, intense financial speculation on debt, the scaling back if not elimination of government social spending, in a word, “neo-liberalism” has reached its extreme limit almost bursting state-monopoly capitalism’s seams and triggering a worldwide financial meltdown.
    Many causes have been attributed to the turmoil. Among the main contenders: “financialization” or the capitalism-on-crack of the bond markets and banks, a crisis of overproduction (too many goods chasing too few dollars), and a weak “real” economy due to insufficient allocation of surplus capital to productive investment. Some point to objective processes, others stress mistaken policy decisions. Clearly all were to one degree or another at play. Caution is in order, however. Objective economic processes, mistaken fiscal policies or even chance economic accidents, taken together or alone do not sufficiently explain the impetus behind the ongoing calamity. Also at work was the pernicious influence of institutionalized racism. In fact racist lending practices may have triggered the global financial collapse.
    Slouching Toward Collapse
    The origins of how the unraveling began is to be found in capitalism’s attempt to resolve ongoing crises. In fact, the neo-liberal model itself arose in response to attempts in advanced capitalist countries to maintain profits and find new markets. Faced in the 1970s with a declining rate of profit, a fractured world economy divided into “socialist” and capitalist camps, structural and fiscal crises along with spiraling inflation, capitalism’s generals undertook a re-forging of economic policy in the form of a wholesale assault on the edifice of the New Deal. Keynesianism had run into wall – at least from the point of view of big capital – and policy was now modulated to fit the maximum profit categorical imperatives of the new period. International trade pacts were formed, unions were rolled backed or held in check and fiscal policy was loosened as a new “post-industrial” service-oriented economy emerged.
    At the center of this process was a huge transfer of wealth to the super rich, accomplished by means of tax cuts and a huge leap in labor productivity, as the corporate class acquired an even greater share of the surplus. For a period, neo-liberal economic policy seemed to work, lending the appearance of stability with low unemployment, relative labor peace and mild inflation, causing some to wonder if capitalism had become crisis free.
    Finance capital began to play an increasingly dominant role. Stressing this aspect CPUSA Chair Sam Webb writes:
    …what is different in this period of financialization is that the production of debt and accompanying speculative excesses and bubbles were not simply passing moments at the end of a cyclical upswing, but essential to ginning up and sustaining investment and especially consumer demand in every phase of the cycle.
    When at times confronted with cyclical episodes of economic instability amid the bursting of speculative bubbles, monetarist solutions were seen as a panacea. Strengthening money supply from monopoly capital’s point of view may have helped but in contradictory ways as wages, particularly after the recession of 2001, remained stagnant or declined. At key moments in the cycle, crisis emerged. With worker compensation nearly frozen, where was the purchasing power necessary to keep the circulation process moving? Resolving this problem was a chief preoccupation of bankers, CEOs and bureaucratic policy-makers alike.
    Indeed, a study of productivity and wages over the last quarter century reveals the acuteness of the problem. From the mid-1970s on, driven by speed-up and new technology, productivity increased dramatically, particularly after 2000. Pay however, remained stagnant. Tracing patterns of pay and productivity, labor-affiliated commentator Jonathan Tasini noted:
    If the lines [productivity and wages] had continued to track closely together as they did prior to the 1970s, the minimum wage would be more than $19 an hour. The minimum wage!!! (emphasis in the original). So, in short: people had no money coming in in their paychecks so they were forced to pay for their lives through credit – either plastic or drawing down equity from their homes.
    John Bellamy Foster and Harry Magdoff in an important article in Monthly Review, entitled Financial Implosion and Stagnation, also mention the equation of productivity and wages:
    This reflected the fact that real wages of private nonagricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades.
    Debt accumulation was key. Speculative bubbles (in information technology and housing) became a driving force in overcoming each new crisis point. Low long-term interest rates had allowed large numbers of people to purchase homes. With rising home prices, experiencing growing debt – and lured by an intensive marketing campaign in the ‘90s by Citicorp and others – families took out second mortgages en masse.
    “Until the early ‘90s,” commented Robert Brenner at the November 2008 Berlin symposium organized by the Rosa Luxemburg Foundation, “Bubblenomics allowed people to get wealthy they thought on paper. One hundred percent of wealth is driven by borrowing and consumption, borrowing and residential investments.”

    Desperately Seeking Higher Profits
    Capitalism hit another wall, however. During the boom, purchase costs rose quickly pricing new buyers out of the market. Standard mortgages plummeted. In addition, low long-term interest rates meant low profit returns for investors. New problems emerged. In these circumstances confronted with the need to maintain profit rates and find new markets in conditions of declining wages, bankers deliberately devised loan strategies with hidden fees and ballooning interest rates that would greatly elevate the rate of return, targeting unsuspecting and ill informed consumers. Under the ideological guise of George W. Bush’s “Ownership Society” credit would be extended to potential homeowners with low incomes and allegedly marginal or bad credit – the subprime crisis was born.
    The proliferation of subprime loans can be traced to the aftermath of the dot-com bubble. After the bubble burst, speculators turned to the housing market. As Yale economist Robert Shiller asked in 2005, “Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents?”
    As it turned out, the supply-sider’s solution to the precipitous decline in technology stocks achieved a momentary short-term fix, but carried within it seeds of a more profound and destructive practices. The editor’s of the German magazine, Der Spiegel, in a recent article spelling the displacement of US capital, argued that “once again, Greenspan flooded the economy with money and, yet again, Wall Street started looking for a new market for its growth machine. This time it discovered the American homeowner, convincing him to take out mortgages at favorable terms, even when there was practically no collateral.”
    Capital then flooded the housing market as real estate became a national corporate mania. "These days, the only thing that comes close to real estate as a national obsession is poker,” commented Shiller.
    Brenner suggested that this mania peaked in 2003: “Mortgage origination (house purchases) peaks in 2003 … but the economy expanded through 2007, after which there is a decline.” He continued, “Normal mortgages, called conforming mortgages in which people have to have a certain income and put up certain collateral or down payment … plummeted in 2003 and 2004.”
    “What saved the day? Just when the conforming mortgages were falling non-conforming mortgages, subprime or ‘alt A’ or ‘liars loans’ take over in driving the bubble.”
    The Federal Reserve, as suggested by Der Spigel, was directly responsible. Brenner confirmed this thesis; “Subprime mortgages,” he said, “became so possible, because Greenspan came in again and reduced short term interest rates to one percent in 2003, the lowest of the postwar period in the face of this problem, which meant that for two years real short term interest rates were below 0. And he did that because subprime mortgages are governed by variable interest rates.”
    In article at entitled "The End of Wall Street's Boom," writer Michael Lewis also emphasized the role of the new niche market: “More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population.”
    The growth of this niche market was spectacular. In 2000 there was between $60 and $130 billion invested in subprime mortgages. By 2005 the amount had grown to $605 billion. This increase was largely attributable to Wall Street banks, conniving with lower level mortgage companies to devise schemes to make huge sums of money by placing side bets on bad loans likely to default. They did so knowingly creating “exotic financial instruments” and then short selling the market.
    Lewis described with precision the means by which the process was begun – short selling the market – and uncovers just how deep finance capital’s complicity ran. “The big Wall Street firms," Lewis argued, "had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets.”
    Lewis, himself the author of a best selling whistle-blowing 1980s expose of Wall Street, Liar’s Poker, interviewed some of the key players in the subprime swindle, including a hedge fund’s primary trader, one Steve Eisman, who realized what the big investment houses were doing and profited handsomely from it. Lewis described Eisman as "perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short.”
    The answer: profits. So profit hungry were the Wall Street traders that they pushed these new mechanisms to their farthest limit, creatively manipulating what Marx called fictitious capital. Lewis noted:
    In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.
    But that’s when I realized they needed us to keep the machine running. I was like, this is allowed?”
    Not only did banks and investment firms create this phony capital, there was ruling class complicity all down the line, a complicity that included in addition to the Republican standard bearers, Democratic centrists like former Treasury Secretary Robert Rubin, then an executive of the recently bailed out Citigroup.
    The beginning of the end came in 2006, according to the editors of Monthly Review: “The housing bubble began to deflate in early 2006 at the same time that the Fed was raising interest rates in an attempt to contain inflation. The result was a collapse of the housing sector and mortgage-backed securities.” ...

  2. Clyde C Coger Jr

    Clyde C Coger Jr going above and beyond PREMIUM MEMBER

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    In the Spirit of Sankofa!

    How Racism Sparked the Financial Crisis

    This report inculcates the answer provided to the question of racism’s connection to economics in the Lokman thread: ''Racism''/''White Supremacy''... Fact or Fiction?