Karl Marx famously wrote that “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie”.
But the political leaders of the US looked more like a shambles when they met in the White House on Thursday of last week.
Republican congressmen ignored George Bush’s plea that “if money isn’t loosened up, this sucker could go down”. Hank Paulson, the US treasury secretary and ex-boss of Goldman Sachs, half-jokingly went down on one knee to Nancy Pelosi, Democratic speaker of the House of Representatives, to beg for her support.
Where does this chaos come from? Essentially, over the past three weeks the global financial system has completely seized up. The turning point seems to have been Paulson’s decision last month to let the Wall Street investment bank Lehman Brothers go bust. Since then banks have simply stopped lending to each other.
The basic problem is that banks are stuck with so called “troubled assets” – mortgages repackaged into dodgy financial securities – that no one wants to buy. Paulson wants the US Congress to vote him $700 billion to buy these assets to get the bad debts out of the banking system.
A White House meeting was supposed to rubber stamp this “Troubled Assets Recovery Programme”. Barack Obama and the Democrats were ready to back it. It was the Republicans who ignored Bush – now the lamest of lame ducks – and scuppered the deal.
This was partly because of John McCain launching another of those wild but meaningless gambles that may yet get him into the White House. More importantly there was a rebellion by the right wing Republican Study Committee in the House of Representatives.
These are the products of the “Republican Revolution” that swept through Congress in the mid‑1990s. Bush was meant to be their man, reversing the 20th century expansion of “big government”.
Instead, Bush has presided over yet more public spending, with the budget deficit continuing to balloon. And to cap it all he is asking Republicans to sign up to what Senator Jim Dunning of Kentucky called “financial socialism” to rescue Wall Street.
They have a point. Paulson’s rescues of firms such as AIG and Washington Mutual have been, in effect, confiscations that wiped out the shareholders. He is willing to use state power ruthlessly to try and rescue US capitalism.
There are also technical problems with Paulson’s programme. For it to work the US government will have to buy the assets for higher prices than they would currently sell for on the market. Otherwise the banks wouldn’t be getting any extra money.
But if the state is pumping money into the banks like this, why not do this openly and take a share in them to reflect this investment? Indeed, the compromise plan announced on Sunday provides for the government to receive an equity stake in some of the companies it rescues.
The political disarray in the US isn’t surprising. Never in the history of capitalism has the state made such dramatic inroads into the private sector to prevent economic collapse. That this unfolds during the dominance of an ideology that proclaims that the market should rule unchallenged makes the shift all the more dramatic.
Despite all the manoeuvring, the House of Representatives threw out Paulson’s plan on Monday this week. And even if Congress does eventually accept some version of the bailout scheme, it is doubtful if it will work.
Nouriel Roubini, whose thoroughly pessimistic commentary on the evolution of the credit crunch has consistently been proved right, predicts “a severe US recession”, spreading to the eurozone, Britain and “most advanced economies”.
For Kenneth Rogoff, the former chief economist of the International Monetary Fund, the rise in US government borrowing demanded by the bailout “will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar”. This really is a turning point.
The following should be read alongside this article: » No bailout for banks - seize their profits!» Europe’s economies teetering on the edge» Turmoil on Wall Street hammers Moscow’s markets» US war woes intensify as instability spreads» Africa: a continent living in fear of starvation» Shockwave hits China and Japan» Playing a dangerous game with our pensions