Calling the Problem Early

By Dave Lindorff

Both Joe Biden and Sarah Palin tried to claim Thursday evening that their presidential-candidate runniing mates, Barack Obama and John McCain had been prescient about spotting the looming financial disaster facing the US--Biden saying Obama had warned Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke several years ago that subprime mortgages would become a serious problem, and Palin saying McCain had called for reform of mortgage backing firms Fannie Mae and Freddie Mac (he actually simply co-sponsored reform legislation by Sen. Chuck Hagel).

But there is someone who called this crisis much earlier, explaining it in astonishing clarity. Here's what he wrote:

"In a system...where the entire continuity of the...process rests upon credit, a crisis must obviously occur -- a tremendous rush for means of payment -- when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realized again. The entire artificial system of forced expansion of the [ecomony] cannot, of course, be remedied by having some bank, like the [Federal Reserve], give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centers where the entire money business of the country is concentrated, like London [or New York]...the entire process becomes incomprehensible."

Note: Except for my updated insertion of the term Federal Reserve for the original reference to the Bank of England, this is a verbatim quote.