United States: The recovery is here — for Wall Street

August 22, 2009

Happy days are here again for super-bank Goldman Sachs.

Less than a year after bankruptcies took down some of the biggest names on Wall Street, and only months since Goldman received US$10 billion in bailout money from the federal government, the bank is looking like a winner again.

It reported record profits of US$3.4 billion for the second quarter of the year. Its executives are looking forward to the return of their mega-bonuses to pre-crisis levels — though CEO Lloyd Blankfein did warn his colleagues to avoid the kind of conspicuous luxury purchases that might pose further public relations hassles.

Goldman isn't alone. JPMorgan Chase recorded $2.7 billion in profits, a 36% increase over the year before. Citigroup, which got about $45 billion in government bailout money, booked $4.3 billion in second-quarter earnings and one of its top oil traders (translation: speculator who gambled on the direction of the oil market) is owed a cool $100 million in bonuses under his contract.

All this good news from corporate boardrooms is feeding the developing consensus in the mainstream media that the economy is on the rebound and the Great Recession turned out not to be so bad after all.

Sure, there are a couple fewer big-name firms on Wall Street, eight dozen fewer banks across the country and a couple of million homes still in foreclosure. But the same commentators who a few months ago were trying to understand how their sacred free market had driven the world economy into a ditch are seeing economic "green shoots" everywhere.

The labor department's monthly report for July showed that the economy lost "only" 247,000 jobs and that the unemployment rate dropped by 0.1%. President Barack Obama's administration took to the airwaves to declare that the economy was on the mend — thanks to its policies, of course.

The statistics revealed that the overall unemployment rate fell even as jobs were lost because of the number of people who had given up actively looking for work — and therefore dropped out of the statistics — was even greater than the decline in employment.

But that information was buried beneath the headlines.

The percentage of US homeowners who owe more on their mortgages than their homes are worth was 26% at the end of March. Housing analysts predict this number will nearly double to 48% by 2011.

The mainstream media have always had an infuriating tendency to judge the health of the US economy on the basis of the Dow Jones stock market average and the latest corporate profit statements.

But the gap between how the economy looks to Wall Street and how it looks on Main Street has grown into a chasm. Corporate America may be celebrating better days, or at least the end of the economic freefall. But for workers and the poor, there's a lot of pain.

If ever there was a reliable purveyor of conventional media "wisdom", it's Newsweek's Fareed Zakaria. He wrote a June article with the incredible title, "A Capitalist Manifesto: Greed is Good (to a point)".

Zakaria said the economy seemed to be stabilising. This was a good thing, he said, as even intelligent mainstream economists had been freaking out and straying from free-market doctrine with proposals to nationalise banks, spend a lot of money to stimulate the economy and develop a national industrial policy.

Fortunately, capitalism has righted itself. Therefore, "even though we've had an imperfect stimulus package, nationalised no banks and undergone no grand reinvention of capitalism, the sense of panic seems to be easing".

That's a remarkable statement after the global financial cataclysm over the past 18 months — and with the signs of a turnaround so tenuous that a good month for jobs is when "only" 247,000 jobs are eliminated in the US.

It's only possible to write such things if you ignore the economic situation for working people and the long-term weaknesses still evident in the system.

Long-term and overall unemployment remains at quarter-century highs. Official unemployment may have dropped by a fraction to 9.4 %, but if you add in those who have given up looking for work and "involuntary part-time workers", you get an unemployment rate closer to 16.5%.

Employers have been cutting hours as well as jobs. If the number of work hours lost in June had been translated into layoffs, there would have been 900,000 more jobs lost. The average work week in the US has fallen by nearly 7% — to just 33 hours.

With declining personal funds available, healthcare costs still on the rise, huge cuts in social spending due to state budget crises, and the shredding of the welfare system since the 1990s, US workers face what the July 4 British Telegraph called an "unemployment time bomb".

The Telegraph said: "The reason why this [current crisis] does not 'feel' like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution.

"Perhaps our greater cushion of wealth today will prevent another 'Grapes of Wrath', but 20 [million] US homeowners are already in negative equity … Evictions are running at a terrifying pace."

Even before the current recession, more than 10% of the US population lived below the official (and absurdly low) poverty line of $21,203 for a family of four. Layoffs and spending cuts have pushed millions more into poverty.

For these people, the crisis is still just beginning — and getting worse.

However, even judging the system on its own terms, reports of the rebirth of economic good times are exaggerated.

With the banks, accounting tricks have obscured the degree to which bad debts are still a problem.

The banks may have staved off collapse with the help of the federal government, but according to the Obama administration's stress tests — far from too pessimistic — large institutions are expected to lose nearly $600 billion in the next two years.

The International Monetary Fund has made the frightening prediction that the world economy will experience its first global contraction in 60 years — an overall drop of 1.4% over the course of the year.

What about Zakaria's claim that "with all its flaws, capitalism remains the most productive economic engine we have yet invented"? His evidence is the US economy seemed to weather periods of financial turmoil in recent decades and still experienced a period of prosperity.

It is true great wealth was created over the past 30 years. But overall, this wealth has gone to a tiny minority at the expense of the majority.

As the recession was beginning, Joel Geier wrote in the International Socialist Review: "The US economy has tripled since 1973, but all the growth has gone to capital, to the employers, to the owners, none to labor. Real wages are lower today than they were in 1973, 35 years ago.

"The only way to keep up living standards was through working longer hours, and two-income families. Even that wasn't enough; real family income is lower today than what it was 10 years ago."

Also, while corporate globalisation did lead to new industry in some developing countries (especially China), the biggest benefits went to Western corporations and local elites. Workers in those countries were exploited at a fantastic rate.

As for the US, the chief character of the preceding era wasn't prosperity but the relentless increase in inequality.

The Economic Policy Institute described the situation in the State of Working America 2008/2009: "Data on income concentration going back to 1913 show that the top 1% of wage earners now hold 23% of total income, the highest inequality level in any year on record, bar one: 1928."

Workers in the US and around the world were already facing tough times before the recession began in 2008 — and now they're being asked to pay for the current crisis.

Zakaria admits the system has flaws. He said the problem was "a crisis of finance, of democracy, of globalisation and ultimately of ethics" — but not of capitalism itself.

The disastrous consequences of the Great Recession are put down to these aberrations, while the capitalist system itself is revered as "the most productive economic engine we have yet invented".

This is hard to take seriously. How and when exactly did Wall Street part company with capitalism?

The same financial wizards who Zakaria criticises for "greed, miscalculation and eventually ruin" were once the toast of all corners of corporate America.

When Zakaria complains about a "crisis of morals", he doesn't mean that society has failed to feed the hungry, house the homeless or provide medicine to the sick.

He's referring to the alleged ethics of "self-regulation" in the business world — that business leaders need to keep their thirst for profit in check to avoid longer-term problems down the road.

But "self-regulation" in business has always been thrown out of the window in favour of quick money. It was so in the speculative bubbles of the late 1920s and the 2000s, and it will be again if the system is allowed to continue.

By a "crisis of democracy", Zakaria isn't referring to big business making wholly unaccountable decisions based on what's best for their bottom line, or to corporate interests dominating the US political system.

Zakaria's problem is with the politicians' "failure" to make "hard decisions" in the interests of capitalism — by which he means the failure to raise taxes (across the board, not just on the rich) and make deeper cuts in government spending.

Capitalism will find a way out of its current crisis. But it will do so on the backs of workers, who will pay for restored profitability with reduced wages, worse jobs, fewer government services, higher tuition, a lower standard of living, and higher healthcare costs.

It doesn't have to be this way. Workers can organise for an alternative social and economic system where the wealth of society is democratically controlled by those who produce it. That system is called socialism.

[Abridged from www.socialistworker.org.]

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