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In recent weeks, the main
flashpoint of the global economic downturn has been Greece, where
strikes and demonstrations continue to challenge attempts by the
continent’s ruling classes to force workers to bear the burden of the
country’s deepening debt crisis. But in the U.S. all eyes were on
charges filed by the Securities and Exchange Commission (SEC) against
Goldman Sachs.
There is a connection
between the two stories—and not just because Goldman helped plunge
Greece into crisis through the same kind of financial finagling which
has put it on the hot seat in the U.S. In both cases, seemingly unique
events mask underlying systemic causes.
On April 16, the SEC filed
a civil suit against Goldman charging “fraudulent misconduct” for
mortgage securities it sold in 2007. The firm got $15 million from
hedge fund operator John Paulson to market a package of securitized
home loans he had put together in a collateralized debt obligation
(CDO). Paulson then bought credit default swaps (CDS), which would rise
in value when the loans behind the CDO went sour—that is, he bet
against (went “short” on) the very package he had put together. The
heart of the SEC’s case is that Goldman knew the loans were worthless
yet sold them to clients with positive recommendations.
(The issuing and purchase
of CDSs was a tactic widely used by many big banks themselves to hedge
on their own account against mortgage-based securities during the
housing bubble. And just as Goldman and its partners made money by
betting homeowners would become homeless, so too it issued Credit
Default Swaps in order to profit if manufacturing firms went bankrupt
and workers lost their jobs, a prime example being trucking giant YRC
Worldwide, which then used the threat of bankruptcy to get the
Teamsters bureaucracy to force concessions on its 30,000 employees.)
Ratings agencies gave the
Goldman CDO a triple-A rating. Yet by January 2008, 99% of the CDO’s
loans had been downgraded. Paulson’s hedge fund, having bet on
precisely this outcome, made about $1 billion—the same amount lost by
Goldman’s customers.
The CDS bought by Paulson
was sold by insurance giant AIG, whose impending bankruptcy due to this
and many other shady investments was one of several moments when the
country’s entire financial edifice appeared to be crumbling. Paulson
got his money thanks to one of the government’s many infusions of cash
to save AIG as well as Goldman and other megabanks to whom AIG was on
the hook.
As they did during the
height of the mortgage securities crisis, this April many commentators
blamed Goldman and co-conspirators for creating and then popping the
housing bubble, ignoring the factors underlying the crisis of
profitability that provided the basis for the speculative mania in the
first place.
The media also speculated
on the timing of the SEC announcement, suggesting that the SEC had
waited until April to file charges in order to boost Obama’s efforts to
get Senate approval for his financial regulation reforms.
This speculation is
plausible even though Obama’s “reform”—like his just-passed health-care
reform—is a mish-mash of tweaks to existing regulation and enforcement
practices, a package so weak that Obama is asking the megabanks to
endorse it (Goldman was quickly dropped from the list of solicited
endorsees after the SEC’s action). But the banks, like health-care
insurers before them, smell blood and are insisting on no “reform” in
order to weaken even further the final bill.
There is no suggestion in
the bill of banning any of the various types of investment tools (like
CDSs and CDOs) that make profit not by producing goods or services, but
by betting on other investments, or on swings in prices, or similar
financial activities.
The same week that Goldman
executives were being grilled in the Senate, two gatherings were held
with the avowed aim of “solving” the country’s budget deficit problem
by savaging Social Security, Medicare and other programs. These were
the Peter G. Peterson Foundation’s “Fiscal Summit” and the first
meeting of Obama’s recently constituted National Commission on Fiscal
Responsibility and Reform (see the March 2010 Socialist Action
for more on these bodies).
So while Democrats in
Congress and the White House give a legislative “tut, tut!” to the
megabanks they so recently and richly rewarded with bailouts, the first
steps are being taken for an even richer bailout of the ruling class by
drastic cuts in workers’ old age and health benefits.
Crisis in Greece
Just such cuts are at the
heart of the crisis in Greece, which in April threatened once again to
bring down the economies of other second-tier eurozone countries such
as Spain, Portugal, and Italy, which would inevitably be followed by
crises in even the strongest ones.
Germany, the continent’s
industrial powerhouse, is playing the central role in demanding that
Greece get its fiscal house in order by draconian cuts to workers’
jobs, wages, and benefits.
Goldman Sachs played a role
in helping Greece hide its deficits for a time, selling complex swaps
in which it paid the Greek government for future revenue streams. The
swap allowed the Greek government to avoid entering the borrowed money
on its books as a loan, which would have raised its budget deficit
above the eurozone limits.
But Goldman can no more be
said to have caused Greece’s crisis than it and the other banks can be
blamed for the crisis in the U.S. These banks took advantage of the
ability to speculate, in the case of the United States through
financing a housing bubble, in the case of Greece with shady deals
involving public budgets (deals which have also brought some state and
city budgets in the U.S. to the brink of insolvency). That ability only
arose because of the glutting of global markets for goods and services,
leaving trillions of dollars (or euros, yuan, etc.) with no productive
investment outlets.
Now the fallout from the
bursting of those speculative activities—which certainly took on a life
of their own once they got started, and are further wrecking an already
moribund global economic system—is rebounding from country to country.
An April 29 Los Angeles
Times article titled “Greece’s fiscal woes threaten the U.S.”
reported that “a widening financial crisis in Europe is threatening to
put a damper on the economic recovery here and abroad just as the
American economy is gathering steam.”
The article is a stark
counterpoint to the plethora of stories this month claiming to see
recovery under every bush in the U.S.: “‘It’ll take years of savage
spending cuts, wage cuts and welfare-pension reform to eventually grow
out of the [European] debt situation,’ said an economist for Moody’s
Economy.com, which shaved its forecast for economic growth in the
European Union this year to less than 1%. That’s not good news for
American businesses, which count on Europe as a major market but
already have felt the winds of an economic slowdown.”
The euro’s slide thanks to
the crisis has helped make U.S. exports more expensive in Europe. Yet
projections of 3% growth in the United States, based on modest growth
in the first quarter of this year, rested heavily on export growth.
Europe’s troubles, said The
Times, probably contributed to the Federal Reserve’s decision to
keep interest rates at historically low levels and to offer no
timetable for raising them. What’s more, “despite a tentative increase
in spending by consumers and signs of a stabilizing housing market,”
said The Times, “a number of domestic factors, including
barely visible job growth and still-depressed home values, warrant
keeping rates unusually low. And now Europe has joined the list of
risks.”
Labor, liberal
response
In response to demands for
austerity, unions in Greece have engaged in repeated general strikes.
As we go to press, on May 5, reports are coming in that over 200,000
have marched in Athens at the apex of a gigantic general strike, and
tens of thousands have marched in other cities, often battling police.
But in the United States,
the response to the financial scandals and the misery that has
accompanied them has been tepid, with small, tame rallies organized by
the AFL-CIO. The federation organized 200 small protests around the
country in April “to publicly shame bankers.” The culmination of these
actions was a march on Wall Street of about 2000—a pathetic turnout
considering how layoffs have already affected New York City transit
workers, teachers, construction workers, and others, with far more
drastic cuts predicted for coming months, and similar cuts affecting
workers throughout the country.
The weak turnout was
matched by an equally weak program for the actions. The federation
said, “Wall Street bankers should pay for the disastrous job loss this
country has seen … we’re asking for a modest financial transaction tax
… that would help generate $100 billion to $300 billion annually to pay
for job creation.” The AFL-CIO claimed that such a tax would also
diminish incentives to engage in fraudulent financial practices and issuing
shady products.
The AFL-CIO also proposed
new fees on banks to pay the cost of the bank bailout, a levy on Wall
Street bonuses, and taxing hedge fund and private equity managers at
ordinary income rates.
AFL-CIO President Richard
Trumka told the New York crowd, “The message we bring is this: Wall
Street, fix the mess you made.” Needless to say, not a word was said
about nationalizing the banks (and meanwhile, many of the federation’s
liberal friends in academia and the NGO world are calling for breaking
up the banks, a middle-class fantasy).
Trumka, however, pleaded
with the banks “to start paying back for the damage caused by their
risky actions: Stop fighting Wall Street reform. Stop acting like what
happened to our economy was some kind of accident. … Take some
responsibility for what you did. Call off the lobbyists. … Stop
speculating and start lending. Take responsibility for the clean-up of
the mess you made. Pay your fair share of the cost of creating the jobs
you destroyed.”
A fine lecture, but one
whose moral will certainly be lost on the billionaires. Instead of
trying to shame the bankers, labor needs to demand access to their
books to see where the money has gone. Such a demand would be part of a
program demanding—not pleading—that the banks’ assets be put to use
creating jobs for every worker needing one, regardless of how much it
costs. And the capstone of such a program would be the nationalization
of the banks should they resist these demands.
At the height of the
mortgage securities scandal, some liberal pundits called for
nationalizing the banks—not for the benefit of workers, but as had
previously been done in Western Europe, in order to save the system for
its current rulers.
The only thing stopping
labor from demanding nationalization on workers’ behalf is a leadership
that, in contrast to the fighting spirit displayed in Greece, is too
frightened of its “partners” on Wall Street and in Washington to do
more than plead.
But we can be sure that the next phase of the
crisis—coming sooner than the media would have us believe—will usher in
a new round of questioning among workers, and an openness to discussing
more radical actions and solutions.
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