As the full severity of the mortgage crisis emerged over the past year, there were still defenders of the free-market system ready to counter every criticism of sub-prime mortgage peddlers and profit-hungry banks by pinning the blame on the real culprits.
"[F]or every 'predatory lender' out there", declared right-winger Michelle Malkin, "you can find a predatory borrower … who secured financing and bought a home he knew he couldn't afford with little money down and bogus or no income verification."
In response to a proposal in Minnesota earlier this year to stop foreclosures, one Republican lawmaker complained, "If you buy more than you can afford, you have to calculate the risk. I'm not sure government can be your saviour every time."
But if you happen to be the fifth-largest investment bank in the US, and your collapse threatens to take down other parts of the Wall Street financial system … well, that's another story, isn't it?
The crackup of the storied Wall Street firm Bear Stearns last month — and especially the unprecedented government intervention that followed — has provided an object lesson in the double standards of US capitalism.
Fall behind on monthly mortgage payments that ballooned when your variable interest rate loan reset, and you're a "predatory borrower" who's getting your just desserts.
Sink billions into incomprehensible investments based on buying and selling dodgy sub-prime loans, and you're too big to go bankrupt — and the US government, in the form of the Federal Reserve Bank, rides to the rescue.
The scale of the financial rescue underway indicates that the federal government's economic policy-makers understand the problem runs deeper than "irresponsible" borrowing.
"The past 10 days will be remembered as the time the US government discarded a half-century of rules to save American financial capitalism from collapse", a Wall Street Journal columnist argued at the end of last month. "It happened without an explicit vote by Congress. And, though the Treasury hasn't cut any checks for housing or Wall Street rescues, billions of dollars of taxpayer money were put at risk."
When all was said and done, JP Morgan Chase looked ready to make off with Bear Stearns for a song. JP Morgan's initial offer was US$2 a share for a company that was valued at $93 a share the month before, and $172 a share a little over a year ago.
But even to go ahead with the purchase of one of the most famous names on Wall Street for pennies, JP Morgan needed a little help from the Fed — an agreement by the country's chief bank to cover losses on up to $29 billion in bad debts held by Bear Stearns.
Not only that, but the Fed then took the unprecedented step of accepting as collateral from all banks the very mortgage-backed securities at the centre of Bear Stearns' near-bankruptcy experience.
So in theory, if any Fed loans to banks go bad, the Fed is supposed to get its money back by selling — securities that are unsellable, one of the causes of the crisis in the first place. It's a bit like getting a loan to buy a new Lexus, and if you stop making payments, the bank takes your 1979 Dodge Magnum.
These actions by the Fed are an acknowledgement — one shared by the US business elite as a whole — that the housing boom and the associated shenanigans on Wall Street that both accompanied and drove it have pushed the US economy to the brink of a crisis unlike any in the US in 30 years, and possibly since the Great Depression of the 1930s.
The impact on working people has already been severe. The February 8 Socialist Worker wrote: "Home foreclosures hit record levels in 2007 — and there's a lot worse to come.
That's the view of both homeowners' advocates and Wall Street companies, based on the upward spike in foreclosures last year and falling home prices that will leave some homeowners paying mortgages that cost far more than their houses are worth.
"According to the company RealtyTrac, an online marketer of foreclosure properties, 2.2 million foreclosure filings were reported in 2007, a 75 percent increase over 2006. The trend, moreover, is for the worse, with foreclosures in December 2007 nearly doubling over the number in December 2006.
Regulating to save the system
"But, says economist Dean Baker, 'We are just seeing the beginning of the crisis'.
"The result, said Baker, will be a major hit to the economy as lenders are forced to take over homes and market them at fire-sale prices. 'If home prices go back to their historic trend line, that's an $8 trillion decline' … which will lead to higher losses for banks."
Regulating to save the system
When Wall Street was lining its pockets after the turn of the century with immense profits by wheeling and dealing mortgage-backed securities and other so-called derivatives, the business press and politicians cheered them on. Now, however, the consensus is that the financial world needs to be reined back with new regulations.
Even the free-marketeers of the Bush administration feel the pressure to act. This week, treasury secretary Henry Paulson released details of a proposed overhaul of the government's financial regulatory system.
Paulson's proposal is still on terms favourable to Wall Street. Analysts say the plan would do nothing to bar mortgage-backed securities or regulate hedge funds and their immensely complicated and risky financial activities.
But it's important to recognise how the mainstream debate has shifted away from the neoliberal dogma of the last several decades — that the capitalist free market held the solutions to all economic problems, as long as "big government" was kept out of the way.
The mortgage meltdown and the threat of a Wall Street crash has exposed the free market, once again, as being, in the words of Karl Marx and Frederick Engels, "like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells".
The proposals being raised now in Washington are the first attempts by the US ruling class to contain the damage caused by the sorcerer run amok.
But pay careful attention to which "victims" of the crisis get help. The unelected and unaccountable Federal Reserve Board committed tens of billions of dollars — ultimately, money from US taxpayers — to try to limit financial damage to the US banking system.
But no one from the political and business elite — not Federal Reserve Bank chairperson Ben Bernanke, not Henry Paulson, not Barack Obama or Hillary Clinton — is proposing that working people facing foreclosure on their homes or ballooning loan repayments, or rising food prices or any of the other consequences of this crisis get the same treatment.