[OPE] The myth of the meltdown

I don't want to concern myself at all with "the characteristics of the next period" and things like that.

When a major significant event occurs forcing a change in capitalist policy, many Marxists try to extrapolate this into a grandiose prophecy about how things will be different in the future. Without research, they mistake the surface phenomena for the underlying trend, confusing short-term trends and long-term trends. They think that a sea-change or watershed has already occurred, when all that has happened is that the bourgeois classes have shifted from plan A to plan B.

The idea of the meltdown is, that the whole credit system gets "locked in" or "ratchets" into a downward spiral, through a perpetual destructive chain reaction, where one debt default leads to the next debt default, a sort of avalanche which wipes out businesses until there is mass unemployment and negative output growth. If the fears get big enough (i.e. people believe the banks will no longer be able to pay out), then there is a "run on the banks" where a large number of people withdraw their money from the bank and either hold it cash, or buy other assets of which they think that they will hold their value. But to understand the possibility of such a meltdown, you really need to understand the total global debt/credit structure and the legal framework, which most people do not.

Such a complete meltdown is very unlikely, that's not really how it works, although particular institutions or even particular countries may experience a run, and thus go technically bankrupt. In reality, there exist huge amounts of idle capital which do have to be invested somewhere, and, if there is a real threat of an accelerating meltdown, they will be invested where required, even just to reduce losses. If necessary governmental institutions become a clearing house for idle capital. Credit instruments can be used with a great deal of flexibility to spread repayments out in space and time, and so all that really happens in aggregate, is a gradual or staggered "devolution" to a lower level of production and sales activity than there was before - a recession (slower output growth) or at worst a depression (negative output growth). True, a lot of savings or capital that was the basis for claiming tomorrow's wealth today will be wiped out in the process, but the system just grinds on, at a lower level of activity, until the expectation of newly rising demand, as a result of reorganisation, and renewed trust in the credit system, lead to new investment in output growth.

Previously, people operated euphorically on the basis of "live now, pay later", utilizing cheap credit and projecting the consequences of their own current activity in space and time, the idea being that the future (or someone else) will generate sufficient income to repay the consumption expenditure which they have now... later. Obviously if you cannot even predict whether you will still have your job in a few year's time, never mind what retirement income you will get, it becomes pointless to save now for an uncertain future.

But, as the circuit of credit tightens, people are just no longer able to do that on the same scale. So all that really happens is that people are no longer able to borrow and lend so much, and on the same favourable terms as they did before - the whole banking business becomes more conservative. And people think twice before spending cash, particularly on durables and luxuries. It becomes much more a question of : either you have the cash, the income or the asset ownership, or you do not. And if you do not, then you cannot get the access to funds, so your current consumption or use of funds will be lower. Now guess who has the cash, the income and the asset ownership, and who doesn't?

The real dispute is not about meltdown - the dispute is more about how draconian you need to get, in order to discipline the lending and borrowing process as a whole, and how you would actually do it. Liberal ideology says the economy functions best if people operate with maximum private initiative with minimum constraint, and so the idea is that you try to get the maximum effect with the minimum intervention in the markets. You don't try to get anymore draconian than you need to. Indeed, the idea is that the markets will discipline themselves, to the extent that if people don't have the money, they will not spend as much and change their behaviour. But if necessary, business and the state can apply a whole set of tools and techniques to ruthlessly force more discipline in the lending and borrowing process. They have a whole century of financial experience to draw on.

What is happening now, is in reality chickenfeed compared to the problems people faced in the inter-war and immediate postwar period, or in the transition economies, or in Third World debt crises, it is just that nowadays the global volumes of capital flows is so large and so fast that 2.5 trillion dollars can vanish worldwide in a very short space of time, and then people start to say wow, how is it possible that we can keep going? The same problems which previously only happened in particular countries or sectors now happen worldwide, simultaneously, and all the governments try out the same techniques more or less in concert. But 2.5 trillion dollars is only a fraction of a percent of the global asset base, and anyway a lot of that money only exists in bank accounts held by a rather select group of rich people and a select number of fund managers and states. Ordinary people are affected only because they can buy less and borrow less, and they may become unemployed. The price of capitalist recovery is just austerity, and more unemployment, with all that entails. The strong lever the costs of the crisis on the weak. People have to do the same things, with less money.

Sure, the state may nationalise financial institutions or even whole industrial corporations, but only to prevent them from entering into certain kinds of deals or rationalize operations - as soon as the enterprises are deemed "healthy" they are sold off again. In reality, therefore, a political power struggle erupts among fractions of capitalists about who is best able to control the capital in the interests of the health of the system as a whole, with threats and counterthreats. This affects bourgeois political ideology: there are "good" capitalists and "bad" capitalists as Mr Cameron argues in the UK, and then they try and get you to side with who they think are the good ones, and oppose the bad ones... But ultimately, what "good" or "bad" means, is just whether you can pay on time, whether you can organise your life without financial problems and do something for other people. The overall end result of all that is a sort of "ghettoisation" or "segmentation" - circles or groups of people who consider each other credit worthy, who live in the same areas, and refuse to deal with or live with other people whom they think are not creditworthy.

Jurriaan

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Received on Sat Oct 11 06:42:26 2008