Banks' Health Hinges on Regional Economies

Many people at the moment don't think the FDIC has enough money to cover deposits.  They have no confidence in the banks.  They have no confidence in the insurance system.  They have no confidence in the government.  How can people have genuine confidence in a banking system, insurance system, and government which is debt-ridden and near bankruptcy?  In the first quarter of 2007, 65 percent of the banks in the foreclosure business lost money; 55 percent in the Midwest; 41% in West, 42% in the deep south near Katrina devastation.  In 2007, Detroit Michigan has 5 of the top 10 foreclosure zip codes for the entire nation.  These are just a sampling of the banking crisis in entire states excluding the the devastated Northeast and Mid-Atlantic region. 

The Federal Reserve Bank of New York reported in 2006 that the total domestic debt for the US was $16.7 trillion; with tricky accounting they have covered over 2.5 trillion extra..  Domestically, the federal government is $8.9 trillion in debt and continues to borrow up to $450 billion per year.  With tricy accounting these numbers are abover $10 trillion/$600 billion respectively.  In addition, consumers and corporations are $7 trillion in debt.  In 2006, overall total US debt has increased to $25.5 trillion, not counting the trade deficit.  Assume an interest rate on this debt of 5 percent.  This means that the annual interest rate paid by Americans is over $1.3 trillion for one year, with this amount in interest alone increasing each year. 

America's $25.5 trillion debt load is three times as much as the nations's $8 trillion GNP.  Such a load is 50% higher than the historical debt-to-GNP ratio of the past 42 years.  Corporate debt increased from 30 percent of America's GNP in 1980 to 47 percent of America's GNP in 2005.  At the same time, U.S. government debt rose from 27 percent to 61 percent of GNP (adjusted for inflation)

Due to over-production, concentration of capital, centralization of production, resulting concentration of wealth, and the concentration of a mass of impoverished workers a massive crisis of circulation ensues in the society's financial structure.  Wage-labor is first devalued, then expropriated altogether from the production process.  The consumer market contracts.  As a result, investment by capitalist is not in wage-laborers, but in the most advanced forms of CAMP technology as to increase productivity and cheapen the cost of commodity production.  

The seriousness of this process must not be underestimated.  When the stock market crashed in October of 1987, this phenomenon was only phase one of the US financial crisis. The recent 2001, 2003, and 2006 crises did not have the percent foreclosure disaster looming. Foreclosures are simple, in a 6 month period workers have no income enough to pay their house note, so they lose their homes back to the bank---and their credit rating.  Banks lose a market to make loans, banks have to make loans to stay in business, banks go bankrupt.  Along with the $900 billion Savings and Loan default crisis which working class tax payers paid for, there are now (2007) 10 major crisis phases in the US economy:  (1) collapsing construction and real estate industry, (2) junk bond and leverage-buyout defaults, (3) municipal debts, (4) FDIC and FSLIC liabilities, (5) consumer installment credit defaults, (6) international loan defaults, (7) corporate bond debts defaults, (8) farm debt defaults, (9) federal loan defaults, and (10) state loan defaults.  As this is an unprecedented amount, scope and volume of debt, the fallout will be devastating on a global scale.  This is the beginning of a global depression.      

According to figures compiled by the Federal Deposit Insurance Corporation (FDIC), banks failed in the 1980's-2005 at a rate comparable to the Great Depression.  Since 1945, US banks have failed at the rate of less than 9 per year.  That number rapidly increased in the 1980's.  Over 357 relatively large banks have failed every year since 1987, whereas before 1982, a total of 180 banks had not failed in the last 40 years combined.  In a ten year period dating 1971-1980 a total number of 84 banks failed.  In one year, almost three times that number, over 206, banks failed in 1989 alone.   Since 1985-2004 more than 1,600 banks have failed.  In the same time frame the FDIC insurance fund shrunk by $7.6 billion.  To further illustrate the banking crisis in the US, prior to the 1981-1983 recession, American banks wrote off a mere $3.8 billion in bad loans.  In 2001-2002, US banks wrote off a record $37 billion in lending commitments.  Since  1994-2005, US banks are swamped with $789 billion worth of delinquent loans.  This doesn't include the present 2006-2007 housing foreclosure crisis.

In 1996, over 2950, banks are on the agency's problem list. By 2006 that number was 3611 and rising.  Data is not yet available for the 2007 period which includes the housing foreclosure crisis.  Many banks are in the process of failure and are not even on the troubled listed.  At the end of 2006, the nation's banks held a record $236.4 billion in bad real-estate loans and repossessed property.  This is 15 times as much as was held in 1986.  Over 163 banks are so weak that if they were S&L's, they would have been long shut down.  At the end of the year, they will be shut down given the foreclosure crisis hitting even upper middle-class families.  Banks fail because the money they loaned out cannot be paid by by the person(s) who borrowed it.  It was a good loan when that person had an income.  It became a bad loan when they lost their job, business, or source of income.  They lost their job, business or source of income because the commodity that they were selling could not be sold at a price that was at or above the cost of reproducing it.  They lost their job, business and /or source of income then lost the ability to pay loan payments, went into foreclosure, repossession, or default, diminished their credit rating and as an aggregate forced the bank into crisis.
         

The identical banking crisis that stormed through Texas and New England is now moving down the mid-Atlantic states.  Virginia and Maryland are faced with the specter of attracting deposits by offering artificially high rates.  High tech firms, real estate mortgages, inner-city small businesses, and manufacturing firms are all amassing large debts, and, therefore, being forced into bankruptcy.  As a result, banks are forced to make riskier loans so that they can collect higher fees and interest.  The drying up of mergers and corporate lending has reduced their ability to make profits. 

The funds that ensure bank deposits are already under very substantial stress and will run a $4 billion deficit this year.  The deficit is a problem because it would mean the FDIC would have only 50 to 60 cents for every $100.00 in deposits---an all time low.  The FDIC insures each account for up to $100,000. 

As a region's means of selling what it produces decays, so does its banks.  Laid-off workers cannot buy "big-ticket" items such as cars, houses, televisions, stoves, and furniture.  Unemployed workers cannot repay loans.  Neither can real-estate developers who cannot find tenants for office buildings, houses, malls, and shopping centers.  Being tied directly to the housing industry in a period in which workers cannot pay their house payments either due to unemployment or under employment is fast forcing savings institutions, commercial banks, life insurance companies and mortgage pools into bankruptcy.  This process will ultimately lead to a total financial collapse. 

Entire industries are debt-ridden, and meeting payments with loans.  Banks' real estate loan troubles grew faster in Maryland and the District of Colombia than in any other place in the country, according to the FDIC.  The total dollar value of real estate loans that are not being paid on time in the two jurisdictions doubled in just three months. The FDIC has also reported that the problems of northeastern banks are dragging down the entire banking industry. 

The nonsense about mismanagement is the same distraction fabricated during the Great Depression to mask the fundamental cause of banking crises.  Less than five percent of the money being lost to S&L's can be classified as being caused by fraud and mismanagement.    

Why now is the entire industry in the beginning stages of a national and international collapse?  The nonsense about bad loans is another distraction from the fundamental economic crisis US capitalism.  Why do good loans become bad loans?  The borrower's economic condition worsens and therefore they are unable to make their payment.  Why are individuals, companies, cities, states, and nations unable to pay off their loans in a certain period of history?  Their means of income accumulation has be interrupted, and it is there that solution must be sought---not in any subjective blaming of individuals. 

No one, after reviewing the banking and finance data, could deny that the US banking system is on the verge of collapse.  This collapse will not occur overnight.  Nor will it wipe-out all banks at once.  It will, however, serve to concentrate and centralize all capital assets in the remaining few multinational banks.  These statistics combined places the modern banking crisis in line with the banking crisis of the 1930's Great Depression.   This time, however, an entire globe is tied into the collapse of American banks.  As the US and its commodity-purchase market contracts the entire financial structure of world capitalism is endangered.  The US transition to debtor nation status was precedent shattering: there was no previous case in history of a country reversing so dramatically from creditors to debtor. 

Fundamentals of Financial Crisis in Circulation (C-M-C')

Banks go out of business en masse because they cannot get profitable returns on the money and capital they sold.  When the borrowers, whether they be nations or individuals, cannot sell what they produce, they therefore become unable to repay their financiers.  Machines do not buy commodities.  This is capitalism's death-knell:  Mountains of products can be produced with Computer Automated Machine Production and very little human labor, but people without jobs or income cannot buy them. 

The result?  Perfectly new houses sit empty while homeless, unemployed, nonconsuming nonproducers, sleep in the streets because machines have replaced thin in the labor process.  Mortgage finance is already in crisis with housing prices having already deflated to levels not seen since the Great depression.  In late 2007, a record number of national homes for sale has been amplified by millions of homes facing foreclosure.  There were was nearly a year's supply of homes on the one month market in October---by far the highest number since the National Association of Realtors began tracking this type of data.  The median prices for homes are on a free-fall and are expected to drop even further because of the national credit crisis, debt crisis, and foreclosure crisis.  The financial collapse will take years, even though the stock markets will begin to reflect this crisis.

Commodities are produced by workers, then are sold by capitalists at a profit.  Today almost every industry is characterized by an excess industrial capacity, in other words, a glut of commodities which cannot be sold, given the amount of disposable income in the hands of the bottom 80 percent of the population.  Furthermore, this is not just a US problem, but it is a world problem.  In essence, most industries today are unable to produce more than can be sold profitably.  It is important to recognize that this does not mean that these global industries can produce more than is needed for human consumption.  We mean that with CAMP they can produce more than can be sold profitably on the world market.    

The world glut is a feature of almost every industry.  Consumer industries such as electronic, clothing, food processing, furniture, leather, automobile, housing, banking/finance, social services, transportation, municiple services, state and federal government, education, and even computers have excess industrial capacity.  All areas face budget cuts, layoffs, closures, shut-downs, repossession.  If supply exceeds effective demand then some supply is not going to get sold.  In general that which is not going to get sold is what is sold at the highest price.  What is sold at the highest price is what costs most to produce.  Even so called economic growth is illusionary because it must be financed by larger deficits internationally and nationally.  Even military spending has lost its power to stimulate the economy as it once did.  It is downsizing, closing bases, firing career soldiers, and sending stable families to the streets---jobless.   Expensive CAMP is now used to manufacture the technologically advanced means of military destruction.  This is obvious given the huge deficits which are necessary to invest in military hardware.

Therefore, only the cost effective producers are going to remain in businesses.  The cost effective producers have to utilize Computer Automated Machine Production (CAMP).  First, they must be able to afford it.  Second, after garnering the necessary capital, they must utilize a revolutionary means of production which increases productivity, and lowers cost, but at the same time replaces the worker who could have purchased the commodity with wages accumulated in the labor process.  Thus, more is produced at a faster rate by less well paid workers.  Step by step, the capitalist domestic market is being undercut.  Competition has increased.  Smaller, less profitable, companies are swept aside in the process of bankruptcies, defaults, mergers, sell-outs, leveraged-buyouts, self-inflicted arson,  and simple failures.  The commodities build up; debt builds up; business go bankrupt.  Banks are strained to attract deposits and recover loses.  How can they?  They cannot.  Increasingly, there is no material basis for their existence.

As this process unfolds the banks which had invested good loans in good companies now are left with bad loans which they say come form bad investments in bad companies.  But those investments were not bad when they made them.  They became bad as the material basis for their repayment was eroded by the revolution in the means of production of the society.  With their earnings decreasing, banks must respond by making riskier loans for which they hope to collect higher interest and fees. 

Bank failures have grown steadily nationwide since the mid-1980's.  There were less than seven bank failures in the entire nation in 1977.  Since 1987, there has consistently been over 189 bank failures in the nation.  Objectively, in the late 2007+, these numbers can only increase given the increases in labor replacing technology.  Businesses cannot repay loans if workers cannot purchase the commodity that the business borrowed money to produce and sell at a profit.  Workers saved 10% of their disposable earnings in 1950; by 1999 that percentage was down to 3.2%.  In 2007, the savings rate is -1.32%---in the negative.  This means that most families are in debt, credit debt, installment debt, loan debt, etc.  As a direct result, this only exacerbated the crisis and further forces the concentration of capital, money and wealth in lesser and lesser hands.  At the same time, more and more Americans are being driven out of any means of attaining the necessaries of life.   Their jobs are being cut out, retirements cut or not funded, health care cut or cut out, pensions cut, factories closed and production moved to Asia, etc.  Workers who strike are replaced.  Today, most unions have been reduced to toothless tools of the corporations/industries they serve. Since 1980, and the reinterpretation of labor law, strikers can be replaced with scabs who can then become permanent nonunion employee who are paid much less than the union workers.  Therefore most unions have lost their leverage. 

On an international scale, banks have lent hundreds of billions of dollars over the past 30 years to neo-colonial capitalist countries to build their industries so that they might produce cheap commodities for US consumption and profit.  Due to the glut of the world markets theses countries are no longer able to sell what they produce at a price above the cost of production.  They are losing money, therefore they are unable to repay their debt.  This has caused an international debt crisis wherein American banks have to loan countries money merely to pay the interest on the loan that they loaned them earlier.  But most lending institutions in the US, themselves, are teetering on the brink of bankruptcy. 

Both the Federal Savings and Loan Insurance Corporation (FSLIC), which insures loans to Savings and Loan banks, and the Federal Deposit Insurance Corporation (FDIC) which insures member commercial banks are themselves broke.  The government is giving them money to tide them over but the government itself is $8.9 trillion dollars in debt.  Its interest payments alone have reached over $200 billion per year.  The debt is in the form of U.S. Treasury bills, notes and bonds.  This debt in turn is being placed squarely on the backs of American workers who still have jobs via taxes. It will get worst.  Africans will be hurt most.  African women, who head 70% of Black families, will bear the brunt of suffering.  Careful study will identify what has worked in the past. 

On one hand, an army of unemployed is growing every year without any hope of finding jobs to secure the average standard of living.  And on the other hand, the quantity of produced commodities for mass consumption increases several times due to the high productivity of robotized factories.  These two situations contradict each other: Companies produce goods for mass consumption on an increasing scale, while at the same time eliminating the consumer market by laying off workers. For this reason the companies can't realize their profits, for the sake of which they robotized their production and reduced manpower.  But they are competing against each other for survival.  There is no ceasefire. The result: an economic crisis that can't be solved if policy makers try to use the methods of the old economic policy, the essence of which is to stimulate the private sector by reducing taxes on capital, by reducing the interest on money borrowed from the Federal Reserve, in short, by creating favorable economic conditions for capital to function.

This economic policy has failed in 2003, 2005, and now in 2007+, because : (1) the main reason for the crisis is absence of a solvent market in the face of high unemployment, (2) consisting of workers who never will be engaged in production, and (3) never will restore the market for goods of mass consumption. The old means of treating an economic crisis by stimulation of business, which in turn enhances market solvency by attracting more and more unemployed people into production, will no longer produce improvements, because robots will forever eliminate workers from production. The existence of the global market only postpones the economic crisis in a given country, because capital increases export of its goods abroad for realization of profits when the solvency of the domestic market diminishes. GM, Ford, Chrysler used to move to Mexico, build plants, factories and production facilities.  Now as a standard operating procedure they move to Asia where workers are paid $30 to $35 per hour less than USA workers and $15 per hour less than Mexican workers.  In a socialist society such as China education, health care, housing, recreation is subsidized by the state. In a capitalist country you have to pay for those things and food, clothing, shelter, transportation.  With a 1.8 billion person market, China is its own global economy. They really just need white investment, joint ventures and technology.  They get their oil from Arabs and Africans.  Even world wars (though they surely will be fought) are not enough to stimulate production employment and create artificial scarcity, as was the case with World War II, Korea, Vietnam, Iraq.  Iran is next.  It won't change the new formula.  Anything produced without labor value cannot be sold to unemployed workers who have no wage are income.  Africans must understand what this means.

This process will proceed until the robotization of production in underdeveloped countries in Africa and the African diaspora reaches the same level (in pockets) as it has in developed capitalist countries. International competition will force them sooner or later to implement robotization or literally work their workers to death in competition with robots, computerized assembly lines, and wireless communication/controls technology.  When cheap labor no longer can compete with unmanned factories producing the same product, underdeveloped countries will be compelled to implement robotized production, and they will feel the same consequences that developed countries experience. Being last, their products will have the least marketability and experience in the market.  They will suffer the most.

In other words, a crisis that is now considered an exception in the capitalist economy will become the rule; they will become the usual condition of economic life.