The ABC’s of the Economic Crisis: What Working People Need to Know – Breaking Down the Chapters

Chapter 1: The Calm before the Storm

  • Before the recession began in December of 2007; things were looking very promising in 2006. Wages were rising, the unemployment rate was 4.7 % and the home construction industry was booming.
  • There was a perception that the president’s economic policies were working and that financial markets acted as stabilizers. If anything did go wrong, the Fed would be able to take care of it before it became a crisis.
  • What we are looking at today: Thousands of workers lose their jobs every day, many are in household debt as housing prices keep falling, states are running out of money for unemployment compensation while Wall Street keeps looking to the government to bail them out of bankruptcy or ask for more money.
  • Furthermore, there have been increases in murder and other acts of violence coupled with depression as more and more people seek treatment from mental health professionals.
  • We are currently experiencing the most severe economic crisis since the Great Depression. Although the Fed has pushed down interest rates and the government has spent hundreds of billions of dollars to encourage banks to lend to consumers and businesses, economic activity is still declining and is likely to stabilize at a low level.

Chapter 2: What Makes Capitalism Tick

  • An economy is a system of production of at least some useful outputs.
  • Those who sell complex financial instruments do not produce anything tangible as they are simply converting money into money. No society can survive if the only economic activity or the dominant activity is lending and borrowing money.
  • Our system of production is capitalism, which involves a relatively small number of people (capitalists) who control the organization of the means of production, where the main goal is to produce enough output in order to make as much money as possible.
  • Characteristics of capitalism are:
    • Most of society’s productive resources (land, raw materials, machinery, factory buildings) are owned by a small % of the population
    • Most people have no way to live but to sell their capacity to work (labor power) to the highest bidder
    • Non-stop profit seeking by business owners
    • Reliance by most people on wage work in order to survive (so people sell their ability to work which then becomes the property of our employers.)
    • Profits are the result of the exploitation of workers.
    • Since employers own our work, this gives them the legal right to keep changing the way labor is produced including the machines and tools necessary to complete the job. Therefore, they introduce machines to replace us.
    • This essentially creates a reduction in the need for skill and leads to a reserve army of labor, which is defined as a group of people in an uncertain situation of going from being unemployed to employed and back again. Depending on economic activity, large sums of workers can be laid off/fired or hired.
    • Due to competition in the market, businesses are always looking for ways to grow (efficiency, expanding the market, and gaining a larger share of it) which is defined as the accumulation of capital.
    • However, once capitalism becomes mature its main goal is to make money without production. The economy then revolves around buying and selling while employing financial transactions such as: banks, insurance companies, stock and bond brokerages, exchanges for buying and selling foreign currencies etc.
    • Although a financial economy is not always connected to production, it has the potential to negatively affect the real economy.
    • There is a close connection between politics and the drive to accumulate capital.

Chapter 3: Capitalist Economies Are Prone to Crises

  • Overall, capitalist economies are unplanned.
  • Mainstream economists claim that even though this is the case, capitalism still provides for people’s needs because buyers and sellers seek only their own interests.
  • However, there are a lot of indicators pointing to the falsity of this claim. For example, the system is unable to provide jobs for everyone who needs to work in order to purchase the necessities of life, and those workers who receive low-wages still do not have enough to provide for themselves and their families.
  • A disruption in the accumulation of capital is defined as a crisis. If it is a short disruption, then it is a recession. If it lasts for a long period of time and becomes more severe, it turns into a depression. Right now, the U.S. is in a deep recession.
  • By nature, capitalist economies are prone to crises as it creates long-term and difficult barriers for achieving profits and capital growth.
  • Two possibilities:
    • As workers are replaced with machines, businesses can produce more with less. However, since there is competition to sell a greater supply, prices are pushed down. This ultimately leads to the reduction of the rate of profit on the invested capital.
    • The trend for production to be dominated by relatively few companies and the trend for a lack of investment opportunities in the production of goods and services.

Chapter 4: Mature Capitalism’s Concentration of Production and Slow Growth

  • In mature capitalist economies (i.e. U.S., Japan, Germany) capital accumulation is characterized by a rising concentration of production, where there is a trend for production and market to be dominated by a relatively small number of very large firms.
  • Another relative term: oligopoly, which occurs when a large number of small firms have been dispersed to a much smaller number of giant corporations. It is easy for this to happen during steep recessions and depressions.
  • Slow growth or stagnation means that there is a shortage of investment outlets in the productive economy and a concentration of the production that exists (low inventories and wages lower overall cost for companies), which in turn, raises profits.
  • Companies do not build more efficient plants/buildings until absolutely necessary to keep cost down, and as a result, reduces investment opportunities.
  • In order for a surplus of profits to increase accumulation, it needs to be reinvested. If it is not, accumulation will slow down and the growth of the economy will decrease until new investments are discovered to put the surplus of profits to use.
  • If this trend continues over a long period of time, the economy will not achieve its potential growth and a long period of stagnation will widen the gap between what could be produced and what is produced.

Chapter 5: Can the Tendency to Slow Growth Be Overcome

  • In the past, there have been three historical instances of a counter-effect of stagnation. They are described as epoch-making innovation as they provided large amounts of investment and they are: the steam engine, the railroad, and the automobile.
  • Another instance worth noting, the Second World War, as it absorbed excess amount of surplus of profits into military spending. However, this is only successful when a government produces war materials on a nonprofit basis.
  • Another possibility is civilian government spending. But this is successful under certain conditions such as spending on projects that do not raise the surplus of profits.
  • Something important to remember is the following:
    • If there is no social movement to force the government to absorb the excess of profits and create socially useful public expenditures (create new affordable housing) then the government will maintain the current system and its relationships that will ultimately perpetuate stagnation.
    • Stagnation has led capitalists to develop new ways to utilize the surplus and make even more money that is done in a manner where no product or service is created.

Chapter 6: Economic Stagnation Sets in Following the Second World War

  • Modern U.S. economic history shows that periods of high growth are attributed high levels of investment demand. Wartime is generally a time period where investment demand is at its highest. (i.e. Second World War)
  • The investment demand for the war effort during the 1930’s ultimately eliminated the effects of the Great Depression. Without this factor, the economy would have continued to stagnate, characterized by high unemployment and low growth.
  • Although the U.S. economy began to slow after the war effort, GDP growth leveled off at 4 percent during the 1950s and 1960s for a number of reasons.
    • Pent-up demand of consumer goods such as automobiles.
    • The physical capital of the U.S. was not destroyed as WWII was fought in Europe.
    • This caused an export boom within the U.S. as European nations began to rebuild their economies.
    • The expansion of U.S. infrastructure due to the growing popularity of the automobile and the creation of suburbs.
  • Government spending did not revert back to prewar levels as most of it was focused on defense spending, which added to total demand. The government also increased spending for sectors such as college education and subsidized home ownership.
  • This economy of real goods and services gave capitalists an outlet for their investment, which in turn, maintained high demand and growth rates.
  • However this secure economy began to face problems in the 1970’s. Opportunities for investing in real goods began to decrease as the world became equipped with factories, tools and machinery. During this time, the U.S. began to experience competition from Japan and Germany as their economies consisted of technologically efficient capital. The U.S. also began to engage in social welfare spending on a broader basis such as unemployment compensation, Social Security, Medicare, Medicaid, food stamps, low-cost and free lunches for children at school, public housing and more.
  • One of the most prominent factors of protracted slow growth is the decline in capacity utilization in manufacturing. This has been declining since the 1970s with no signs of improvement as the automobile industry has lost its ability to contribute to the accumulation process. (Capitalist nations are saturated with cars/trucks and poor nations do not have the mass market to engulf the excess capacity)
  • Since WWII, it takes the U.S. economy increasingly longer to make up for jobs lost in recessions.
  • There has been no transformative innovation since the automobile that has the capability to produce prolonged high rates of growth.
  • The wars waged against Afghanistan and Iraq has not produced the results seen during the WWII era.
  • The 1970s marked the beginning of reduced profits, attributed to slow growth. This is the trend we have been experiencing ever since due to the reasons aforementioned.

Chapter 7: Neoliberalism

  • Capitalists ignited an insistent campaign to maintain their profit margins once it began to wane in the 1970s and 1980s. Capitalists advocated for the reduction in labor costs, the dismantlement of New Deal programs, and to allow owners of the economy to have greater control over their ability to produce profits.
  • Through their lobbying efforts, the capitalist agenda was accepted by liberals and conservatives alike. Their ideals developed into what is known as “neoliberalism”, which is the politics of “free market economics”. This agenda is characterized by the following (48):
    • Removing barriers to the flow of physical and money capital
    • Privatizing public projects
    • Placing strict requirements upon those who seek assistance from entitlement programs or ending those programs indefinitely while allowing business to easily obtain money from government
    • Cutting taxes for the rich and major corporations
    • Making it harder to formulate unions
    • Ensuring inflation is kept as low as possible
  • The proponents of neoliberalism became recognizable through the election of Ronald Reagan. From 1980 to 2008 we have experienced anti-labor trade agreements, privatizations, deregulation of financial instruments such as hedge funds and the erosion of entitlement programs.
  • According to the authors, there are three consequences of neoliberalism:
    • Slow growth means cutting costs to enhance profits; for example, many companies utilize their income for profits rather than wages for their workers which has led to a greater inequality of income
    • The deregulation of global markets and trade agreements has caused international financial transactions to occur at a rapid pace.
    • A large focus on inflation has caused capitalists to utilize worker’s wages and benefits for investing in the stock market.
      • This caused a wealth effect which means that higher stock prices increase household wealth, creating the perception that households have the ability to spend more and save less. This can cause households to take on more debt as stocks can be borrowed against.
  • In order to increase profits, financial institutions must simultaneously market and invent new products. Their success is attributed to their ability to persuade consumers to purchase provisional products that guarantee high returns, while maintaining a gimmick that the product is somewhat risk-free.

Chapter 8: The Financial Explosion: Introduction

  • In the past, the financial sector of the capitalist economy assisted with economic growth by loaning money to businesses for development, new processes and for managing resources. The invention of stock certificates has played an integral role for business profits as it allows the ownership of a company to be divided and sold. In turn, insurance was sold to businesses and individuals to protect their investments in the case of extreme downturn.
  • Over the last few decades, capitalists have been trying any maneuver to increase their profits which has led to the massive expansion of the financial sector. Making money on intangible items has now become the biggest sector of the economy since the 1980s.
  • Although this unprecedented growth led to increased employment, it was not sufficient to keep up with its effects on the economy. For example (56), “In 2006, the financial sector employed about 6 percent of workers but “produced” 40 percent of all the profits of domestic industries. In 1960, by contrast, the FIRE (financial firms, insurance companies and real estate) sector of the economy accounted for 15 percent of the profits of all domestic firms.”
  • Due to political debates in the 1980s, the world’s richest countries formulated the World Trade Organization which allows the world to utilize the financial corporation’s of these respective countries. Essentially, this is condones the deregulation of global trade.

Chapter 9: How did it happen?

  • How did the financial sector grow exponentially? There were a variety of mechanisms utilized simultaneously that led to this unprecedented growth.
    • Financial companies loaned rising amounts of money to the public for homes, cars, and credit card debt.
    • Financial companies primary source of income was through the speculation, development and peddling of increasingly intricate financial instruments.
      • A notable instrument is a derivative, which is defined as a value derived from the value of something else.
        • Interest rates
        • The value of currency against another currency
        • Stock market index
        • Difference of prices over a period of time
        • The bundling of different loan qualities
          • Higher quality loans with low-interest rates
          • Lower quality loans with high-interest rates
          • Many of these financial instruments were not backed by assets.
          • There were also instruments that guaranteed a profit if certain events happened; essentially making it possible for the buyer or seller to bet on anything.
  • Financial companies acquired large quantities of debt as a means to make higher profits on their own investments.
    • This was done through a process called leveraging. This is defined as the act of financial companies utilizing X amount of borrowed dollars for every dollar they have contributed for the investment. Consequently, highly leveraged bets could produce a high return rate. Due to this potential for massive profits, leveraged bets occurred very frequently.
  • Financial companies promoted deregulation of its sector and were a frequent culprit of fraud and/or lenient business practices.
  • Ultimately, these practices are in sync with the ideology of neoliberalism. Lobbying groups representing the financial sector helped to avoid scrutiny from the economics profession.
  • Furthermore, a misleading reform, entitled “1999 Financial Services Modernization Act” repealed the Glass-Steagall Act that was a focal point in averting the crisis of the Great Depression. The Glass-Steagall Act was so important because it separated commercial banks from investment banks. This reform enacted the Securities Exchange Commission rule asserting that financial companies had the right to decide how much leverage to utilize based on their mathematical risk models.

 

Chapter 10: The Explosion of Debt

  • The unprecedented debt acquired by the United States is directly related to the leverage of financial institutions.
    • Most of this debt is concentrated in housing debt and financial business debt.
    • An economy becomes weakened when the level of debt outweighs its GDP.
    • A weakened economy limits the ability of people and companies to pay off their debt. The only factor that prevents the economy enduring an even deeper downturn is increased debt and buying.
    • Another factor that has added to the problem is the fact that the U.S. consumes more than it produces. Although the U.S. dollar is the prominent currency used for international transaction it has also led to an oversupply of the dollar as compared to other currencies.
    • However, a currency crisis will begin to develop if dollars do not return to the U.S. Even though a weakened dollar will persuade other countries to buy U.S. exports, it may not be enough to stave off the devaluation of the dollar in the long run. Thus far, due to its overarching power as a global leader, countries around the world continue to use the dollar for exchanges and the purchase of goods in services abroad. The United States ability to create substantial international debt and maintain low interest rates is a unique characteristic as compared to other countries. This allowed other countries to finance the housing boom and all other spending connected to borrowing.
    • The economic landscape created by the financial sector has essentially created a class war against the middle class. Along with the premeditation of this environment, the social safety nets of our nation have become and will continue to be unstable.
    • The ideology of neoliberalism really took hold through the election of Ronald Reagan in the 1980s in which he proclaimed that the rich needed to become richer as a means to make jobs for the economy, while the poor don’t deserve to receive the benefits of entitlement programs as it presumably acts an incentive to not work.
    • What we have seen is that the wealthy have too much wealth, and in turn, have no effective way to utilize it except for personal indulgences. Conversely, money in the hands of the middle class would have led to increases in the purchase of real goods and services, while vitalizing output and employment.

Chapter 11: The Great Unraveling

  • The new economy created by the use of the aforementioned financial instruments was characterized by the following:
    • A huge amount of debt across the financial sector
    • An extraordinary amount of highly leveraged speculation coupled with escalating prices
    • The redistribution of wealth and income to the upper class causing considerable hardships for the working class
    • Instantaneous and nonstop economic connections through finance and trade
    • Ongoing U.S. negative trade balance across the globe
    • The unfathomable crisis that was to ensue was put off many times through monetary policy before the bubble erupted.
      • U.S. markets were inundated with money
      • The Asian financial crisis of the late 1990s maintained low interest rates and created the tech stock bubble
      • The burst of this bubble led to the rise of housing prices through low interest rates and easy access to money.
      • Economists utilized one remedy after the other to deal with the crises that continued after the tech stock bubble. However, these remedies failed in the long run because they did not solve the root of the problem as the severity of crises increased with time.
      • As home prices began to increase substantiality in 2001; extremely low interest rates, lenient lending practices, the sale and purchase of mortgages and speculation contributed to the mass of the housing bubble.
      • The adverse effects of these financial practices began to surface in the summer of 2007 as two hedge funds managed by Bear Stearns failed. The financial system, pension funds and other large institutions began to recognize the futility of subprime mortgages as more and more were unable to meet their promised returns. By fall of 2008, economists predicted that more money was owed versus the value of approximately 12 million homes as many people were unable to make their mortgage payments. Foreclosures ensued soon after.
      • As banks began to fail, problems erupted within commercial real estate, consumer credit debt and products based on these debts. This caused consumers to spend less money and as a result, credit stalled. The U.S. officially entered a recession in December of 2007. As of 2009, approximately 7 million jobs have been lost since the beginning of the recession. We can be sure it will take many years before the economy is able to regain all the jobs lost since then.

Chapter 12: The Government to the Rescue?

  • It is important to consider the role of financial executives in government economic policy as most of them have very close ties with elected officials. Many top executives have or do hold positions as government appointed officers and advisors. Therefore, there almost leaves no reason to believe that the government will focus their policies on mostly helping the working class.
  • The growth of the financial sector in the U.S. has led to the mindset exemplified through our economic public policies that what is good for Wall Street is good for America.
  • The authors make note of the fact that it is “remarkable” that President Barack Obama has not recruited mainstream economists such as Paul Krugman, Joseph Stiglitz to advise the government on averting the recession. Subsequently, it is evident that these renowned economists have a better idea for handling the current crisis.
  • At the time of this writing, the authors suggest that the environment that arose due to the irresponsible practices of the financial sector can create consequences around the world that have not been experienced since the 1930’s. (i.e. severe economic depressions and political strife)
  • Types of federal government economic policy:
    • Monetary – Federal Reserve; serves to influence the availability of credit and affects rates of production, spending and employment
    • Fiscal – Congress and president; serves to alter the government’s budget by raising or lowering taxes, increasing or decreasing spending and acquiring or reducing debt.
    • In the past, the Federal Reserve handles bouts of economic downturn and upturns and has done so successfully. However, the current chair of the Federal Reserve has implemented a variety tools that has not been utilized prior to this current crisis, such as:
      • Pushed interest rates close to zero
      • Launched a number of special lending services in an attempt to increase the amount of money in the financial system
      • Gave hundreds of billions of dollars to central banks around the world through exchanges of dollars for foreign money.
      • Once the Federal Reserve commenced these tools, the U.S. Treasury Department carried out the same mechanisms. In attempts to regenerate credit markets, the government has provided large bailouts to investment banks, commercial banks, AIG, General Motors, Chrysler, and many other companies. Through these massive loans, the government has received favored stocks which entitle them to partial ownership of these companies. At the time of this writing, the government has expended approximately $15 million dollars as a means to fix the economy, a number that is larger the Gross Domestic Product.
        • There are two things to consider about the government’s approach:
          • The Federal Reserve and U.S. Treasury are able to inject several trillions of dollars into the economy as a means to help out financial endeavors through the utilization of money in the vaults of the Federal Reserve and by printing more money.
          • Despite their efforts, none of this has helped our economy get back on its feet.
            • This is counterintuitive because of the pessimism ingrained the minds of the American people. When people are pessimistic about the future, they will not spend their money.
            • According to the philosophy of John Maynard Keynes, the only way to fix our economy would be through government spending. However, this is belief is not widely accepted by mainstream economists and conservative politicians who assert that tax cuts are the ideal way to increase demand via fiscal policy.
            • Despite this philosophy, the right wing continues to advocate for tax reductions, primarily for the upper class.
            • A variety of recommendations that mirror the assertion of Keynes has been advocated by Paul Krugman and Joseph Stiglitz. The following are types of government spending, financed by borrowing, that have the highest likelihood of influencing demand and employment:
              • Assist state governments
              • Direct assistance to the unemployed
              • Mortgage relief
              • Infrastructure spending
              • Although Obama conjured a fiscal stimulus that became law in February 2009, it has not produced the results needed to truly help the economy. As a means to gain bipartisan support, Obama had to make many compromises which ultimately brought on a miniscule plan characterized by ineffective tax cuts and incentives for businesses. There are a number of other plans that have been utilized since Obama came into office in 2008 but neither fiscal nor monetary policy has been strong enough to affect a majority of the U.S. population.
              • The authors conclude the chapter by noting that the future of our society does not look great for most people.

Chapter 13: Summary and Conclusions

  • The neoliberal policies of the United States has reverberated across the world as many nations have been experiencing the same degree, and in some cases worse, of downturn. For instance, the decline of demand in the United States has produced lower incomes elsewhere.
  • The authors suggest that the following actions must be taken to revamp capitalism:
    • The nationalization of large banks, removal of their shareholders and to subject them to strict regulation
    • Nationalized health care
    • Relieve homeowners of a portion of household debt
    • Strict regulation of the financial system as a means to avoid bubbles
    • Redistribution of wealth
    • A rise in wages
    • While these changes can help a lot, many capitalists are not favorable of such measures; therefore it is not likely they will be made. There are many obstacles in the way due to efforts of many lobbying groups.
    • To keep people above water as best as possible, it’s important to maintain programs such as food stamps, unemployment benefits, and providing jobs through spending projects.
    • The authors speculate that the government’s goal is not to necessarily reform the entire system, but to bring our economy back to a pre-crisis environment. With these tactics, the sustainability of the U.S. economy depends on the exploitation of workers compensated by increasing private consumption. In turn, this promotes a sales effort to produce high profits characterized by rapid invention and waste. Consequently, our society is bound to a system that guarantees inequality as we constantly try to catch up to the consumption of the wealthy. Moreover, this economic model will continue to produce adverse consequences for most of the population and is also ecologically unsustainable. (examples include lower life expectancies, higher rates of imprisonment, and soaring levels of insecurity)
    • The authors ask “what is worth fighting for?” and create a preliminary list as to what we should be most concerned with in regards to the future of society:
      • Adequate food for everyone
      • Decent housing
      • Universal health care
      • Full employment/good jobs
      • Quality education for all
      • Adequate income in old age
      • Enhanced public transportation
      • A commitment to a sustainable environment
      • Progressive taxation
      • A non-imperialist government
      • Labor and environmentally friendly trade
      • Most of these items cannot be achieved in our current economic system. Realists believe that this viewpoint is impractical as they believe we can only work towards these goals in an incremental fashion. The authors believe that society must steadfastly demand the basic needs of human beings in order to make this so-called dream a reality. Ultimately, the author’s conclusion echoes the principles of socialism.
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