An economic tsunami is ravaging Wall Street, shaking the citadels of American finance to their core, sinking celebrated investment banks into insolvency, sending stock markets into freefall, swelling the lines of unemployment with stunned MBAs, sweeping into oblivion the fantasies of free market infallibility, souring the mood of a country already depressed from eight years of economic and political mismanagement. It is a hurricane that threatens to sink the over-inflated financial economy into the recession of the real economy as the credit crunch tightens, pensions lose value, bankruptcies increase, and consumer and business spending and confidence shrinks.
The avalanche began with the collapse of the eighty-five year old Bear Stearns, the seventh largest securities firm, in March, followed last week by the nationalization of the mortgage giants, Fannie Mae (Federal National Mortgage Association), founded in 1938, and Freddie Mac (the Federal Home Loan Mortgage Corporation, created in 1970, which between them owned or guaranteed about half of the country's $12 trillion mortgage debt. Then today, Lehman Brothers, established in 1850 and America's fourth largest investment bank, imploded as it filed the biggest bankruptcy in history, and Merrill Lynch, the venerable financial services company set up in 1914 was swallowed by the Bank of America. In the meantime, AIG (American General Life Insurance), the world's largest insurance company, desperately pleaded for $40 billion from the U.S. government to avoid crashing. And the world's major banks created $70 billion emergency fund to shore up tottering financial institutions from the financial tsunami.
The world's stock markets reeled. The US Dow Jones Industrial Average fell by 504 points, losing 4.4 percent of its value, the largest fall since the terrorist attacks of September 11, 2001, and one of the largest plunges in its history. London's FTSE fell by 4 percent. Others folowed suit, from Sydney to Singapore, Tokyo to Toronto, Paris to Johannesburg. The media screamed with fear: both The Wall Street Journal [1] and The Financial Times [2] commiserated about the "Crisis on Wall Street;" similarly, The Guardian [3]the British liberal paper and The Economist [4] the conservative British magazine jointly bemoaned the "Nightmare on Wall Street"; The Washington Post [5] proclaimed "Massive Shifts on Wall Street" as The New York Times [6] warned of "Jittery Road Ahead." The Nation [7] the liberal American magazine, was among the few to see "Creative Destruction on Wall Street."
The immediate cause of this financial meltdown is the subprime mortgage crisis, rooted in the bubble of the American housing market and the bungling of the financial system. The two are interconnected by avarice. On the one hand, millions of mainly poor Americans bought and were allowed to buy homes without sufficient means to pay for their mortgages on the assumption that housing values would keep rising, while on the other lenders sought to reduce their risks and increase profits by rolling the mortgages into bonds, the so-called mortgage-backed securities (MBS), which were converted, in turn, into collateralized debt obligations (CDOs) and sold to other financial organizations. Thus was created a complex web of financial transactions which rested on unsustainable consumer illusions of prosperity and unscrupulous credit instruments of greed.
When the bubble burst, the highly leveraged charade crumbled, leaving behind it a trail of wanton economic destruction. Unprecedented mortgage defaults and home foreclosures rippled through the highly integrated and globalized financial industry. This toxic maesltrom can easily be blamed on the deregulation of financial markets and the failures of regulators to mind the store, the insatiability of a financial system that has become adept at creating ever more sophisticated and speculative tools of profiteering unrelated to the productivity of real economies, and an addictive popular culture of instant consumption on credit.
The larger story is far more complex and more sobering. It is instructive that some alarmed commentators see this as the worst financial crisis in decades, if not since the Great Depression. The parallels are indeed discomforting. Whatever the accuracy of such diagnoses and comparisons, it shows that neoliberalism and its deregulatory dogmas and financial sophistries have not banished periodic crises from capitalism. Already discredited in many parts of the global South, as a result of this crisis neoliberalism's fallibility becomes more evident to people in the global heartlands of capitalism. It is a cruel irony that the high priests of the free market on Wall Street are now clamoring for state bailouts. The incongruity between their rhetoric and reality, the privatization of profit and socialization of risk might open policy discourse in more fruitful directions concerning the respective roles of markets and states, the intersections of private and public good.
The crisis also points to another reality that for all its wealth and power, the United States has been living above its means for decades. It has become increasingly dependent on borrowed money from other nations, whose capital inflows facilitated the subprime crisis and have more and more financed the country's skyrocketing debts and deficits. The United States currently boasts the highest levels of indebtedness of any country in the world, indeed of any nation in history: by the beginning of this month the total U.S. federal debt was a staggering $9.7 trillion (about 38% of GDP and $32,000 per resident), 25% of which is owed to foreigners, double the figure in 1988. If unfunded Social Security, Medicare and Medicaid commitments were included the national debt rises to more than a mindboggling $59 trillion. The question is: how long will foreigners keep pumping money into this profilgate economy, propping up the pyramid scheme that is the American financial system? How long will the Chinese, Japanese, and other Central banks and sovereign funds keep buying American treasury bonds?
Even if the current crisis does not bring the chickens of America's indebtedness home to roost, these high levels of domestic and external debt are simply unsustainable. It is not farfetched to argue that the current financial and economic crises might be tips of a much bigger iceberg, pointing to the relative historic decline of the United States as a global hegemon as other powers rise, in this case China in particular, which holds a large chunk of America's debt. This is not the first time in history that a hegemonic nation has sunk under the weight of indebtedness, financial crises, and the rising competitiveness of new economic powers unencumbered by the unsustainable burdens of empire abroad and overconsumption at home. Ask the British.