Desperate times call for desperate measures. The capitalist class and its state are getting increasingly desperate as they attempt to stave off a global collapse of the financial system.
On July 13 the U.S. Treasury Department and the U.S. Federal Reserve unveiled a hastily devised plan aimed at rescuing Fannie Mae and Freddie Mac, the mortgage lending behemoths, from the brink of bankruptcy.
Combined, Fannie Mae and Freddie Mac own or insure half of the more than $12 trillion mortgage debt in the U.S. Bonds issued by Fannie and Freddie are held in massive quantities by governments and institutional investors around the globe.
The bailout plan is essentially a promise by the capitalist state to help finance Fannie and Freddie for the foreseeable future.
Officials from the Treasury and the Fed have been in constant contact with Wall Street in recent days in panicked attempts to persuade investors to stop dumping Fannie and Freddie stock and to continue purchasing bonds issued by the once-hallowed financial institutions.
The story of Fannie Mae and Freddie Mac begins back in the Great Depression. In 1938 President Franklin Roosevelt initiated the creation of Fannie Mae as a public financial institution. Roosevelt’s aim was to resuscitate the ailing Depression-era housing market by having the government back low-cost, fixed-rate mortgage loans. Fannie operated in this form until 1968.
That year, President Lyndon Johnson, who was growing increasingly worried about the escalating costs of the Vietnam War, pushed to have Fannie taken off the federal books. Johnson didn’t like having to devote part of the budget to mortgages for working families; instead he preferred to spend it on imperialist war in Southeast Asia. From that point forward, Fannie became a quasi-private institution known as a Government Sponsored Entity.
GSEs are shareholder-owned companies, but they have the expressed backing of the capitalist government. GSEs are owned and operated like private companies but are promised public funds if they should ever get into financial trouble. Freddie Mac was established in 1970 to operate as a sibling company to Fannie Mae.
Since decoupling from the federal books in 1968, Fannie and Freddie have taken on an ever-increasing role in the U.S. housing market. The two companies have moved steadily away from Fannie’s once chartered role of providing low-cost, fixed-rate mortgages. They have increasingly assumed the role of massive banks for the vast network of financial institutions involved in the U.S. housing market.
Fannie and Freddie facilitate lending in the U.S. housing market by issuing bonds to investors and then using the money from the bond sales to buy blocs of mortgages from banks. In this way, they grease the wheels of lending in the United States by taking illiquid assets off the banks’ hands and pumping money capital into the system.
During the housing bubble of 2002-2006 Fannie and Freddie grew astronomically as they became the two largest players in the unprecedented housing market boom. The ability of Fannie and Freddie to purchase massive blocs of mortgage loans from the banks helped set the stage for the proliferation of a host of dubious mortgages with untenable rates. The ability of mortgage holders to pay their mortgages was no longer important to many lenders, as they knew they could easily, and quickly, sell the loan to a larger institution.
Fannie and Freddie raked in massive profits for their shareholders during the bubble years, but, like seemingly every other financial institution, insatiable greed led them to become increasingly leveraged and loaded down with fictitious capital.
Around the globe, banks—the heartbeat and lifeblood of modern monopoly capitalism—are steadily becoming insolvent. Banks of all shapes and sizes are going belly up.
From investment banks like Bear Stearns, to commercial lenders like IndyMac and Northern Rock, and now to the GSEs like Fannie and Freddie, it has been one bank-run after another. There is no end in sight as the largest housing market collapse since the Great Depression continues to drag a multitude of large financial institutions to the brink.
Capitalism: exploitative, crisis-prone and not worth saving
As with the Bear Stearns collapse in March, the capitalist-controlled media have been pumping out the message that the bailout of Fannie and Freddie is necessary because the institutions are “too big to fail.” The refrain goes that if Fannie and Freddie go down, the systemic damage their collapse would unleash would cause even greater economic suffering.
How many companies need to be bailed out with public money before it becomes clear that this rotten, exploitative and crisis-prone economic system is not worth saving? The capitalist bankers and bosses have run their ships into the ground. Why should the workers, whom they daily oppress, be forced to provide them with lifeboats?
In any bailout of Fannie and Freddie, the money should go directly to workers who have faced or are facing foreclosure, or the workers who have suffered when their pensions and retirement savings were invested in these companies. But the capitalist state would never truly get behind that kind of a rescue plan. The state’s only loyalty is to the capitalist class.
It is painfully clear that the growth and expansion of free markets, which took place in the wake of the dissolution of the Soviet Union, have been an unmitigated disaster for workers and oppressed around the globe.
In the past two decades, proponents of free-market economics have denounced socialism as inefficient and utopian. They claimed that the growth of “democracy and free markets” would bring about a post-Cold-War era of global prosperity.
Yet with the global financial system on the precipice of collapse, millions of workers forced from their homes by foreclosure, skyrocketing energy prices and nearly 1 billion people going hungry every year, the idea that “democracy and free markets” will bring about an era of global prosperity seems ridiculously utopian.
Capitalism is clearly failing, but what is the alternative? The answer lies in the development of working class consciousness and the renewed struggle for socialism.
Karl Marx wrote that the capitalist state is set up to manage the common affairs of the capitalist class. This fact is evident today as Republicans and Democrats hastily put aside their manufactured election year differences in order to legislate the bailout plans being concocted by the Treasury and the Fed.
The working class, long subject to the divisive prejudices deliberately sown among us by the ruling class, must unite in our own common class interest and take the offensive against the capitalist class.
Private ownership of the means of production is at the root of this deepening economic crisis. The abolition of private property and the development of socialism can provide the way out of this crisis, and ensure that the kind of economic suffering this crisis has wrought never occurs again.
While the abolition of private property sounds like a daunting task, the reality is that the ruling class has already laid the foundations for its own demise.
By organizing billions of workers into a vast productive network, where everything from the extraction of raw materials to the sale of the final commodity is linked, the ruling class has already socialized the productive capacity of society. An organized army of workers already has the reins to the productive apparatus.
In this period of extreme economic crisis, the capitalist class would find itself in even bigger trouble in the face of concerted and well-organized strikes, walkouts, plant takeovers and militant resistance to the banks that are seizing our homes. A united working class could quickly bring the vast machinations of global capitalism to a screeching halt.
In the coming period, which will be marked by ever-increasing economic instability, it is incumbent upon the entire revolutionary left to do everything possible to help foster militant working-class solidarity and to renew and reenergize the global class struggle. There is a world to win.
Articles copyright 1995-2008 Workers World. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.