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The economic witch-doctors and soothsayers of capitalism were wrong and thesocialists and Marxists were right. This is what the collapse of Lehman Brothers -the fourth largest investment bank in the world - means.

The financial 'bloody Sunday' was followed by 'meltdown Monday' and the collapseof share prices worldwide. This has shattered the current ideological foundations- and much more besides - of capitalism.

Capitalism's representatives argued that the collapse of Stalinism and, with it,the planned economies of Russia, Eastern Europe and elsewhere, left capitalism asthe only effective vehicle for delivering goods and services to the peoples of theworld. The future was one of endless rises in living standards.

We argued that the inherent contradictions within capitalism - a system based onproduction for profit and not need - remained, particularly the economic cycle of'boom and bust'. These, however, were masked for an historical period by theunprecedented 'financialisation' of the system through the massive extension ofcredit.

But like an elastic band stretched to breaking point, it was bound to snap at somestage. Lehman Brothers, for instance, was 'leveraged' - that is, borrowed - on a

monumental scale of 35 times the value of its assets. It was 164 years old, hadsurvived two world wars, the depression of the 1930s and a collapse and rescue in1984 but has now been brought to its knees by this crisis. Yet its chief, DickFuld, known as the 'gorilla' for his aggressive manner, paid himself 22 millionlast year when the weaknesses of the bank were already obvious! He will not suffer- except from loss of face - but the 25,000 Lehman Brothers employees will.

The roots of the crisis are well known. They lie in the disintegration of thehousing market in the US and particularly the subprime sector which lent to mostlypoor people who had no prospects of repaying their inflated mortgages. However,there is not just one financial problem but now a chain of looming crises,unexploded bombs, which could yet ignite, with further huge slabs of masonryfalling off the 'financial architecture' of US and world capitalism.

Why did the US Federal Reserve bail out Bear Stearns, and Freddie Mac and FannieMae, and not Lehman? The simple answer is that Hank Paulson, US TreasurySecretary, and the economic strategists of US capitalism believed that unless theformer were rescued, a new financial crash like 1929 was possible. NourielRoubini, a capitalist economist who has consistently agreed with us Marxists onthe seriousness and scale of this crisis, called Paulson's action "socialism forthe rich".

Other threatened banks and industries therefore lined up with their begging bowls,asking for bail-outs from the state, which they previously maintained had 'norole' in the workings of so-called free market capitalism. If they were to behelped, what about the two million US workers who have already lost their homes -

estimated to rise possibly to ten million by Roubini - who would demand equaltreatment with the financial plutocrats? Failure to do so could undermine McCain,the right-wing Republican presidential candidate, who would be seen as openly onthe side of the rich, who have been 'saved' by his friends in the Fed.

Therefore, Lehman Brothers has been allowed to die but an 'unofficial' rescueoperation was undertaken to save Merrill Lynch. Another financial whale, AmericanInternational Group (AIG), responsible for insuring against 'risk' in the hugederivatives market - and also the sponsor of Manchester United - is teetering onthe brink. But Ken Lewis, the chief executive of Bank of America, said the failureof AIG would be a bigger shock to the system than the bankruptcy of Lehman. He

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urged the authorities to find a way to support the company. "I don't know of amajor bank that doesn't have some significant exposure to AIG," he said. "Thatwould be a much bigger problem than most that we've looked at."

Lehman was, it seems, not crucial for the US economy whereas Fannie, Freddie andeven Bear Stearns are major players in US local government finance. Half of the9,000 banks in the US could have collapsed if they were not rescued. But, thefall-out from the collapse of Lehman could still be very severe, with big

international repercussions; debts to Japanese investors in Lehman areconsiderable, for instance.

Instability

US capitalism - and particularly the financial sector - is therefore not yet outof the woods. The derivatives 'industry' is highly unstable, commercial propertyprices are declining and, crucially, 'insurance' institutions (as a safeguardagainst the financial collapse of firms) also could collapse. A financial dominoeffect threatens, which means that this crisis is no 'five-minute wonder'.

It will extend - in fact, it already has done - into the 'real economy', both inBritain - which has entered a recession - and in the US. This has inevitably drawn

in Europe, Japan, the rest of Asia and, ultimately, China. It will be the workersin the finance sector - and most of them are white-collar workers - who will bethe first to suffer. Sixty-three thousand have already gone down the road, mostlyin London and New York. A further 20,000 jobs in UK financial services couldvanish in the next year or so.

Some 1.04 million people work in banking, finance and insurance in Britain. Someaffected have posted heartbreaking messages on websites: "dh (slang for dearhusband) lost job. No savings and likely not getting paid this week... How onearth will we manage? How long will the lenders give you if you can't pay themortgage?"

Spare a tear for these workers but not for the well-oiled, well-dressed 'masters

of the universe' who, despite their crocodile tears, will not really suffer.Unemployment will now rise substantially, with an estimated half a million lostjobs adding to the dole queues in Britain. These events represent a massiveindictment of neo-liberal capitalism, the untrammelled rule of the 'market', inwhich a handful of billionaires can ruin the lives of millions.

Moreover, they do not fully understand the workings of their own system. AlanGreenspan, former chairman of the US Fed, confessed with regards to the "newfinancial instruments" that "he didn't get it". Eddie George, former governor ofthe Bank of England, has also admitted that he did not understand them! Whatchance then for the rest of us understanding these devices which have become"financial weapons of mass destruction"?

The solution is not just the 'de facto' capitalist nationalisation of Bear Stearnsor the more explicit example of the US government's takeover of Fannie andFreddie. These failing banks should not only have been nationalised, but put underworkers' control and management, with compensation based on proven need andprotection of small depositors. Moreover, it should be just the first step to themjoining a socialist and democratic plan of production for the economy as a whole.

Great events either confirm or falsify ideas. Capitalism has failed in a periodmost favourable to this system. If working people are not to be dragged into theabyss of unemployment and poverty, they should embrace the political weapons ofsocialism and Marxism.

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Editorial from The Socialist, paper of the the Socialist Party, cwi in England andWales17 September 2008