AIG as the symptom, not the disease

Dilbert Bailout HearingsI keep receiving these sorts of petitions in my inbox:

Dear Friend,

AIG Financial Services — through gross greed and negligence —
brought our entire economy to the brink. And it cost us $170
billion in tax payer money to bail them out (more than $500 from
every American)!

We bailed out AIG because it’s massive size and reach in the
world economy, its failure would have meant a true economic
catastrophe.

But that’s just what they’ve done. $450 million in bonuses.
President Obama has called it an outrage.

Join our campaign to stop the AIG bonuses and get our money
back. Click here now to send a message to the AIG Board and your
elected officials in Washington.

These petitions are pointless.

Now, I don’t want to stop people from taking action. In fact, appropriate and informed community action is what will eventually get us all out of the multiple interlocking messes of which the AIG imbroglio is merely a tiny bit. However, those who think that signing such petitions will bring about the sort of transformation we need are either misinformed or fundamentally delusional.

Basically, AIG is a symptom of the underlying disease of the current moment and not the cancerous growth of the financial establishment that has long typified American business.  An otherwise sane, healthy sociopolitical establishment is no more a part of contemporary America than it was an aspect of Germany in the late 1930’s.

A core problem with the way that we’re looking at AIG is that, as is far too often the case, we lack a conceptual framework to guide us to a fuller comprehension that might empower our anger. So our being pissed off doesn’t help much. We’re angry but refuse to to look at it analytically. We must examine matters objectively the way that Marx did, which led him to find that a free market economy cannot, ultimately, produce anything except what has occurred so far.
Here are some good resources to amplify this point:Labor and Monopoly Capital

Baran and Sweezy Monolopy Capitalism

Harry Braverman – Labor and Monopoly Capital

William Appelman Williams –The Great Evasion

For those unwilling or unable to sit down for a moment in order to mull over these texts, I offer here a lightning version of the market phenomena that have landed us where we are today.

The beauty of capitalism, of course, mainly to those who through foresight, chicanery, or lucky connections, have benefited from it for generations and generations, is that it provides the framework for getting rich. This carrot of wealth is, furthermore, waved in front of our faces, as a motivation to buy into a system that promises equal rewards for all those who choose to participate–the promise that hard work will yield remunerative results. The system not only promises to reward those willing to undertake the effort to bring something to the marketplace, but also those who are willing or able to invest in these ventures.

“Real wealth” requires “real work” aptly enough. And after a period such as the 1940’s and 1950’s, when the U.S. was busy building destruction machines and then rebuilding the parts of the world that had been destroyed(and building ever more destructive engines), plenty of places to put assets existed, places that through ‘real work’ would build more wealth for the investor.

But, as inevitably happens, as more and more capital investment further and further upped productivity, so that fewer and fewer workers were obtaining wages necessary to purchase the goods that the productive process was capable of producing and, increasingly, overproducing, investment opportunities dried up.

But capitalism is not a ‘steady state’ system. It must, like the shark, keep swimming forward in order to breathe.  New technologies–Vannevar Bush’s “endless frontier” of science–and the markets for what they provided took up some of the slack.  Militarism and prisons and fetishes and finagling energy and gold gave some slack to the necessity of finding investment opportunities for more and more capital when the very dynamic of the investment process diminished relative purchasing power among workers, again guaranteeing glut and the snorting dread of a suffocating economic stillness.

How, then, to find profit for ever expanding pools of capital in an economic environment that has impoverished more and more consumers and thus made fewer and fewer commodities profitable? The math wizards’ solution was to expand the capacity to leverage and hedge so that all those folks chasing after the carrot of wealth didn’t have to invest in the actual production of marketable things – actual, real products – suddenly anyone with a little loose cash could just bet that the Chilean peso would rise or fall,  or that the cost of producing soybeans in Brazil  would get higher or lower or that Alicia or Jimbo or bunches of bundled homeowners would default on their mortgage.

Not only could someone with capital make such bets, but folks with real means could make multiple bets–a factor of ten or more was easily within the reach of big pools of money.  Thus, with a million bucks, a Credit Default Swap fund or a commodities fund or a currency fund or an interest rate fund could make ten million dollars worth of such bets.  They could use their million dollars of loose change to borrow ten million and then place a hundred million in bets.

Individually, all of these kinds of hedge bets are no worse than any bet; nobody loses more than he puts on the table.  However, in a highly ‘leveraged’ position a string of bad luck can mean that a million dollar investment turns into a hundred million dollar sinkhole.

AIGThis is where AIG comes into the picture; capitalists would rather walk naked down the   interstate than take a risk with their own funds.  And fiduciary duty suggested that they ought to take out insurance for these wagers.  These pools of money were essential to the ‘boom’ of the past twenty to thirty years, and killing the goose laying this gigantic golden egg appealed to no one with a seven figure income or higher.  Thus,  for a buck or 2 or some other nominal charge, AIG would guarantee $1,000 worth of these kinds of investments, which after all had little or even nothing to do with production of goods and services and everything to do with parking the funds of capital in some niche or other that would produce the 5-10% a year that is the necessary lubrication of bourgeois life.

When  AIG agreed, ‘OK, if these investment positions go south we’ll pay them off’, they were taking a systematic risk.  Even though those bets had little day-to-day connection with underlying economic activity, paradoxically any serious problem back in the real world could multiply its impact in the ethereal realm of hedge bet, inasmuch as that realm had taken a dollar and bet it on the underlying reality a hundred times or so.

AIG and others of its ilk had basically accepted a small profit for 10 to 12 years to insure a quadrillion dollars or some other indeterminate megatrillion in bets–pure and simple bets: the stuff of horseraces and office Football pools. The thing is that their income from all this amounted to only 30 or 40 billion a year, so that when a significant fraction of those bets collapsed, they suddenly found themselves unable to come through. Now they’re on the hook for untold hundreds and billions or some number of trillions and if they default then all those people they insured are also on the hook- and all of those people own the world and all of those people are the basis of China continuing to finance the US government.

The cumulative effect of this entire process was a total “Value at Risk” somewhere between 100 trillion and 1.5 quadrillion dollars, which is to say, up to 30 times the annual global GDP. Obviously under such circumstances the promulgators of such processes were wild and crazy gambling fools. They were also the owners of worldwide capitalism and were doing what they had to do so as to allow capitalism to survive as free enterprise: private ownership of the means of production. Thus, the problem with all of the cabal and kvetching about AIG is that very few of those who are complaining are willing to acknowledge that the problem stems from the system and not the character of those who run the system. If we want to improve our lives and security and communities in the context of contemporary capitalism, the only way to do so is to rid ourselves of capitalism. Attacking AIG does nothing to accomplish this necessary end.

Part of Capitalism’s mystique comes from its alleged egalitarianism –  the Horatio Alger myth – the idea that anyone, with just a bit of wit, lots of hard work, and a product that society needs, can make it big. This mythos stops most people from even entertaining the notion that the only cure to the AIG fiasco is to eliminate the mythos itself since the average Joe finds this idea much more attractive than its ideological counterpart, which everything in every school teaches us purveys only a dark and morbid existence in which everyone, regardless of effort or ability, must conform to a standard of mediocrity–the John Galt view of life, basically . Of course, conceivably, social democracy could create ‘a comfortable and fulfilling life for all brothers and sisters’, something which we would be tickled pink to see a bit of just now, since anyone who has bothered to read to this point, or who has been conscious of reality around them for the past few years, can see that this ideal condition is one that the Capitalist ideology has failed to create.

If we are unable to come to terms with the fact that the underlying problem is capitalism, then we really will be able to do absolutely nothing about the government allowing most of the nation’s citizens to lose their homes, lose funding for education, see their possibilities for affordable healthcare diminished at the same time that they see the government continue to channel all available funds towards saving AIG and others in the casion capital class. And not all the protests, petitions, gnashing of teeth or rending of garments will prevent this eventuality.

Instead of multiplying redundant safety systems, we have been living as if we want to multiply redundant risk systems.  The real point, however, is that this is in fact the system under which we live, and unless we are willing to make some effort to transform our relationships with each other in such a way as to make possible a transformation in our relationships with economic activity, one way or another, AIG and its formulas will be back again in another form.

The rich have nowhere to put their money, since the poor have no money to buy their shit.  The relations of production and distribution have to change, or AIG is the best we can hope for.

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2 responses to “AIG as the symptom, not the disease

  1. Fantastic work. Keep up the great stuff.

  2. frightening.

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