Whenever socioeconomic issues emerge and are discussed there tends to arise the common misconception that economic crises, such as increasing national dept, are entirely independent of social crises, such as an increase in infant mortality rates, and that “the economy” is some sort of transcendent entity unto itself.
In the final analysis, economic issues are social issues, and the economy, as Karl Marx revealed, is nothing more than the social relations of production, the asymmetrical relations of power – with bosses and workers and with, as Cornel West observes “those at the top who will be able to live lives of luxury and those whose labor will be both indispensable, necessary, but also exploited in order to produce that wealth” – and the disunity between the forces of production and the relations of production.
For instance, the ability to drill for oil and to use the oil drilled to produce fuel is socially in common, it is a collective effort, however, the final product and the capital there from earned is not shared, it’s usurped by a small, elite class, the bourgeois. Thus, to speak of “the economy” as some sort of singular, transcendent entity unto itself is erroneous.
Turning now to the interrelation of economic and social crises, the current sub-prime mortgage crisis provides and illuminating example.
The sub-prime mortgage crisis is a prime example of the crises provoked by capitalist socioeconomics long ago exposed and critiqued by, most famously, Karl Marx and socialists such as Rosa Luxemburg.
The sub-prime mortgage crisis is in essence the inevitable manifestation of the crisis of overproduction Marx wrote about, despite the adaptation of capital through credit, which Luxemburg wrote about. Luxemburg observed that “[w]hen the inner tendency of capitalist production to extend boundlessly strikes against the restricted dimensions of private property, credit appears as a means of surmounting these limits in a particular capitalist manner.”
The sub-prime mortgage boom, a boom the Economist called the “largest financial bubble in history,” was fueled by credit. People seeking to obtain new houses, borrowers who had low credit and/or low income, were directed towards sub-prime mortgages, the interest rates of which were usually two to five percentage points higher than on prime loans. The idea being that these mortgages provided a way for borrowers who might not otherwise qualify for loans to buy homes.
However, as Petrino DiLeo writes, “this sector has morphed into a classic predatory lending environment. Stories are emerging of mortgage brokers fudging applicants’ incomes on forms or ignoring it entirely--and rushing through approvals on loans that have little prospect of getting paid back.”
This “predatory lending environment” emerged because Wall Street banks, investment firms, mortgage companies and even the storefront mortgage broker operations were motivated to push this boom forward – “even if that meant making loans to borrowers who wouldn’t be able to afford the terms, or steering customers with better credit into more unstable mortgages that, at first glance appeared cheaper” – because of the prospects of profits in the millions; “whether borrowers missed payments, refinanced their loans or paid off the mortgage too early.”
Petrino DiLeo points out that the sub-prime loans “were enticing to a secondary market” also, “in which bankers packaged mortgage loans in large numbers and sold them to the biggest investors as giant bonds.”
While it lasted the sub-prime mortgage and housing boom was a great success, “the largest financial bubble in history,” yet no so great for the borrowers who had been huckstered into the shyster deals when their mortgage rates were adjusted and they were forced to foreclose and lose their homes. Unfortunately for many of those who exploited the situation and benefited from the boom, the crisis soon became there’s also.
As Rosa Luxemburg explains: “If it is true that crises appear as a result of the contradiction existing between the capacity of extension, the tendency of production to increase, and the restricted consumption capacity of the market, credit is precisely…the specific means that makes this contradiction break out as often as possible. To begin with, it increases disproportionately the capacity of the extension of production and thus constitutes an inner motive force that is constantly pushing production to exceed the limits of the market. But credit strikes from two sides. After having (as a factor of the process of production) provoked overproduction, credit (as a factor of exchange) destroys, during the crisis, the very productive forces it itself created. At the first symptom of the crisis, credit melts away. It abandons exchange where it would still be found indispensable, and appearing instead, ineffective and useless, there where some exchange still continues, it reduces to a minimum the consumption capacity of the market.”So, when the market began overproducing houses and the borrowers were unable to pay off the loans, the “largest financial bubble in history” exploded. As Joel Geier points out, proving Marx’s theory of capitalism’s crisis of overproduction and Luxemburg’s theory of the role credit plays in such crises, “the enormous profits from [the sub-prime mortgage boom] produced the typical capitalist cyclical outcome - an overproduction of houses, which could not be sold at the usual profit. A year ago construction activity and housing prices stagnated and then fell, coincidentally just as the resetting of mortgage rates began. People found that with falling home prices they could not refinance, and were now stuck with these higher, unaffordable rates. Within a few months, half a million families couldn’t make their mortgage payments and lost their homes…Beyond the human tragedy, this will add to the large inventory of unsold houses, further depressing prices. Many mortgages will be greater than the house is worth, which in turn will lead more people to walk away from homes with inflated prices, producing even more forecloses, and further price declines. And of course the banks are now refusing to make mortgages in declining or unstable markets, narrowing the pool of potential buyers [just as Luxemburg argued, “credit melts away”]. It is the mad logic of the capitalist market in crisis spiraling downward and producing the worst housing depression since the 1930s.”
As is illustrated by the specific example of the economic crisis of the sub-prime mortgage bust, economic crises are also necessarily social crises because they carry with them consequences for the society as a whole and, in fact, the world. The housing crisis has now rippled around the globe. The crisis is in fact provoking a possible recession. Joel Geier explains: “Now that housing prices are falling, increasing house debt as the vehicle to maintain living standards is over, and retail sales to working-class families are sliding.All of this is cutting into profits, the dynamic that drives the capitalist engine. In the last quarter, profits fell by 8 percent from a year ago, the first decline in the mass of profits since the last recession. With less profit, business spending for capital goods is being cut back. All the elements of a recession have been slowly unfolding for months. But this is more than an ordinary recession, it is also the opening of an international financial crisis unlike any in the post-Second World War period. The massive build-up of toxic debt is threatening the functioning of the international financial system. The banks have been forced in the last two months to write down $80 billion of bad mortgage debt. Conservative estimates are that they will have to take losses of $300–400 billion in the next year—if the economy doesn’t go into recession. Citibank, the largest American bank, had to take a $6 billion loss in November, and is expected to take between $10–15 billion more in the next three months, on its worst subprime mortgages alone. Like other banks it also has severe problems with its corporate debt book, and its off-balance-sheet subsidiaries, which it did not put up capital reserves for. The most important international bank may face a capital crisis because it does not have adequate reserves to cover all of its bad loans.”
In the final analysis, it is always the working class that pays the bills. All the recent talk about “fiscal responsibility” means cuts in social spending and a renewed propaganda campaign for privatization, which is most assuredly a social problem; it’s not just a social problem, it’s actual class warfare. Unemployment is rising, wages are stagnating and have been for several years, inflation in the price of food and fuel has also risen and this is all destructive of working-class living standards. Not to mention the millions likely to lose their homes due to the sub-prime disaster.
These are the results of the inevitable crisis of the capitalist system, a system founded upon avarice and exploitation, yet, unlike the formulations of many Marxist theoreticians, capitalism is not going to by its own internal contradictions dismantle itself. It is going to take dedicated, sustained and renewed activism from the left to ensure that rather than the capitalist system driving the majority of society into the ground, it is dismantled and replaced with a just socialist system. As Rosa Luxemburg aptly summarized it, we must decide between either “socialism or barbarism.”