Record Corporate Bailout Reveals
the Bankruptcy of American Capitalism
by Barry Grey, WSWS
September 13, 2008
The US government takeover of the mortgage
finance giants Fannie Mae and Freddie Mac has dealt a shattering
blow to the ideology of market capitalism, which has been used
for decades to justify a relentless assault on the working class
and a vast transfer of wealth to the American ruling elite.
The endless invocations of the virtues
of private enterprise, individual entrepreneurship and self-reliance,
used to demonize socialism and defend a system that exploits the
vast majority for the benefit of a financial elite, have been
exposed as frauds. When it comes to big capital, losses are socialized.
Only profits remain private.
The same forces who year after year have
inveighed against "big government" in order to justify
the removal of all legal impediments to the accumulation of corporate
profits and private fortunes, and carry out the destruction of
social safeguards for the working class, have engineered a massive
expansion of government power to safeguard the interests of the
The bailout has as well exposed the real
relations of political power and influence behind the façade
of American democracy. The largest government bailout of private
companies in world history-whose ultimate cost to taxpayers is
likely to reach hundreds of billions-was sanctioned in advance
by the Democratic Congress and given instant approval by the leadership
of both parties and both of their presidential candidates.
There have been no investigations into
the greatest financial scandal in world history. Neither party
has any interest in bringing to light the swindling and skullduggery
of the Wall Street moguls, because they are both bound hand and
foot to those responsible for the financial debacle.
What has been revealed is the existence
in the United States, behind the increasingly tattered veneer
of democratic institutions, of a plutocracy-the political rule
of the rich. When it comes to the basic interests of the financial
aristocracy, both parties and all of the official institutions
of society snap to attention and do the bidding of their Wall
The bailout of the two mortgage giants-which
account for 80 percent of new home mortgages in the US-is a demonstration
of the historic failure of American capitalism and the profit
system on a global scale. It was precipitated by the deepest economic
crisis since the Depression of the 1930s, whose epicenter is the
United States. The Bush administration moved to take over Fannie
Mae and Freddie Mac under conditions of a rapid erosion of international
confidence in the solvency of not only these two companies, but
of the United States government itself.
Over the past several months, global investors,
including central banks and government investment funds, primarily
in Asia and Russia, have been dumping their vast holdings in mortgage-backed
securities issued by the US government-sponsored firms. Fannie
Mae and Freddie Mac have a combined liability of $5.3 trillion
in mortgage-backed securities which they own or guarantee. The
run on their assets has not only intensified the crisis of the
two companies, which are massively leveraged and have suffered
billions of dollars in losses as a result of the collapse of the
US housing market, it has thrown into question the status of all
US government debt, including US Treasury bonds.
The US, by far the world's largest debtor
nation, with a current account deficit of nearly $800 billion,
is sustained by the inflow of hundreds of billions of dollars
from abroad. It currently imports $1 trillion in foreign capital
every year, or over $4 billion every working day.
But the assumption by the US government
of the debts of the two mortgage companies, while averting an
immediate financial meltdown, only compounds the crisis of American
capitalism. As Martin Wolf, the financial correspondent of the
Financial Times, wrote on Tuesday, "As a result, US housing
finance has been brought under direct government control and,
in the process, the gross liabilities of the US government, properly
measured, have increased by $5,400 billion, a sum equal to the
entire publicly held debt and 40 percent of gross domestic product."
At a stroke, US sovereign debt has doubled
and is now roughly equal to America's gross domestic product.
On July 14, one day after US Treasury Secretary Henry Paulson
called for legislation to give him unilateral and unlimited powers
to use public funds to rescue Fannie Mae and Freddie Mac, the
Wall Street Journal editorialized on the implications of a government
bailout of the two companies. It wrote: "But with financial
woes mounting, some investors are betting they may profit from
weighing the unthinkable question: Could the US government default?"
This immense increase in US government
indebtedness can only further undermine international confidence
in the credit-worthiness of US Treasury bonds, resulting in a
further decline in the dollar and a sharp increase in the interest
paid by the US to borrow from its international creditors.
The claims made by the Bush administration,
echoed by the US media, that the bailout of the two mortgage finance
companies will consume at most $200 billion in public funds-itself
a massive amount that eclipses previous corporate bailouts, including
the $160 billion bailout of the savings and loans industry less
than two decades ago-are not credible. An indication of the sums
envisioned by US policy makers is the fact that the legislation
passed last July giving Paulson the power to bail out Fannie Mae
and Freddie Mac raised the US debt limit by $800 billion, increasing
the cushion between the debt limit and current government indebtedness
to $1.1 trillion.
Some sense of the social priorities of
the US ruling elite and its two parties can be gleaned from a
comparison between the sums being extended to bail out just these
two companies and those allocated by the federal government in
2008 for education ($67.5 billion), unemployment benefits ($37.3
billion), highways and mass transit ($53.1 billion) and housing
Moreover, the bailout of Fannie Mae and
Freddie Mac is only the prelude to a far broader use of public
funds to bolster the balance sheets of major corporations. Democratic
presidential candidate Barack Obama and his Republican opponent
John McCain are both supporting a $50 billion bailout of the US
auto companies, which will inevitably entail further cuts in jobs
and wages. And the plunge of the Wall Street investment bank Lehman
Brothers toward bankruptcy-the firm's stock fell by 45 percent
on Tuesday-poses another rescue operation similar to the $29 billion
bailout of Bear Stearns last March.
It is already being widely broached that
the government establish a permanent mechanism for using taxpayer
funds to buy billions of dollars in failing assets from major
banks and financial companies. The Wall Street Journal wrote on
Tuesday, "Creating a government-backed entity to buy up these
assets could jump-start the market for home loans and relieve
banks and other financial institutions, which are taking big hits
to their balance sheets as they fall in value."
The Financial Times sounded the same theme,
declaring, "The US government might end up having to support
the recapitalization of a much wider range of financial institutions
in order to curb the credit crunch."
These statements give the lie to the attempt
to portray Fannie Mae and Freddie Mac as aberrations, which in
their reckless speculation and pursuit of super profits departed
from the norm. On the contrary, they typify the financial parasitism
and outright criminality that have become pervasive characteristics
of the workings of American capitalism and the social physiognomy
of the US corporate elite.
The operations of the two government-sponsored
firms are entirely in line with the unbridled speculation, based
on an immense expansion of debt, that has become the hallmark
of American capitalism. Their role in the housing and credit boom
that has now come crashing down was of a piece with the creation
of the vast edifice of paper values, engineered through the so-called
"securitization" of debt, which sustained the super
profits and immense salaries raked in by Wall Street.
In the wake of the bailout, press reports
have noted the bloated salaries of the companies' CEOs. Before
they were sacked as part of the government takeover, Fannie Mae
CEO Daniel Mudd and Freddie Mac chief Richard Syron took in between
them $29.5 million over the several years they headed their respective
corporations. And they stand to receive another $29 million as
part of their exit packages.
But these sums are by no means exceptional.
The Financial Times reported last week that compensation for major
executives of the seven biggest US banks totaled $95 billion between
2005 and 2007.
The collapse of Fannie Mae and Freddie
Mac is a paradigm of the US economy as a whole. Over the past
three decades, the decay of American capitalism has taken the
form of a vast growth of financial parasitism. At its heart, this
involves the separation of wealth creation from the creation of
real value in the production process. The American ruling elite
has largely dismantled the productive base of the US economy,
ruthlessly downsizing manufacturing at the cost of millions of
jobs and the destruction of working class living standards, in
order to reap higher profits from increasingly reckless forms
of financial speculation.
The indices of the growth of financial
speculation in the US economy are staggering: In 1982, the profits
of US financial companies accounted for 5 percent of total after-tax
corporate profits. In 2007, they made up 41 percent of corporate
This process has generated ever greater
levels of social inequality, the most telling symptom of the degenerate
state of the US profit system. A report by the Congressional Research
Service, updated July 31, provides a measure of the ever growing
chasm between the ruling elite and the broad mass of the American
people. It states that the share of national income accounted
for by the top 1 percent of earners (as reported on tax returns)
reached 21.8 percent in 2005-a level not seen since 1928. The
report further noted that in 2006, corporate profits totaled 12.4
percent of national income, a level not reached in 50 years.
The cost of the ever-expanding bailout
of American big business will be borne squarely by the working
class. Even in the midst of growing unemployment and poverty and
a flood of home foreclosures, there is much talk in the media
about the American people "living beyond their means."
That the next administration, whether
headed by McCain or Obama, will sharply intensify the assault
on working class living standards was spelled out by the New York
Times, which editorialized Tuesday: "Senators John McCain
and Barack Obama have both voiced support for the bailout, which
shows good judgment. But what the next president will need to
worry about, and both candidates need to talk about, is the depth
of the country's economic problems. It will take discipline and
sacrifice to address them."
The only alternative to a rapid lowering
of working class living standards and the only rational and progressive
solution to the financial crisis is a socialist program of nationalization
of the entire financial system under the democratic control of
the working people, with provisions to secure the investments
of small depositors and share-holders. The wealth and resources
of the country must be developed and allocated to meet the social
needs of the population, not the money-mad strivings of financial
This policy can be carried out only through
the independent political mobilization of the working class in
opposition to the two-party system and the financial aristocracy
which it serves. The Socialist Equality Party is dedicated to
the building of such a mass socialist movement of the working