Notes on
the Last Few Months OpenPublishing
|
Submitted by mute on Wednesday, 19 November,
2008 - 17:32
By Hillel
Ticktin
Here is Hillel Ticktin's editorial for the forthcoming
issue of Critique #46, due on
December 1st, analysing the current crisis and its denouement:
http://www.critiquejournal.net
The most important ongoing event is the
spectacular implosion of the financial system and the ongoing downturn. We will
be having a number of articles on the subject in the next issue. These notes
have conducted a running theoretical and empirical commentary but we will have
more articles to supplement those in the April 2008 issue in the next issue-due
to come out at the end of January.
The Implosion of Finance Capital-Depression and
Deflation
It is almost impossible to open a newspaper
without some reference to the historically important nature of our times. It is
clear that we are living through a period comparable to that of the Great
Depression in its political economic importance, even though it is unlikely to
reproduce its length, depth and misery. These same establishment newspapers and
journals find it necessary to defend and justify capitalism as a system, when
there is no important movement challenging it. Marx is frequently quoted, both
to support and criticise capitalism.1 Nor is it only the media who are
enamoured of Marx and gripped with self-doubt. Bankers and other establishment
figures have excused themselves for not taking Marx seriously. Banks’ advice now
includes the caution that Marx may be right about capitalism collapsing under
the weight of its own contradictions.2 Although, we may assume that the
authors are not entirely serious, it is nonetheless a sign of the times.
Karl Marx appears then to have made a
return from the grave to which he had been assigned in the nineties. Marxism has
been declared wrong, irrelevant and worse for one and half centuries, only to
return with renewed force. The suddenness of the conversion was unexpected.
After all, far-left parties are marginal at best and detested at worst. The
economics profession is, as ever, pro-market. Why then has there been this
criticism of capitalism itself?
It was almost an orthodoxy that capitalism
could always re-invent itself. That has been repeated by the historian Tristram
Hunt 3 He points out that Engels had
repeatedly expected a crisis to crack the system. He derives his material from
Engels’ letters to Marx and concludes that capitalism gets through its crises.
There is no doubt that capitalism is not at an end not least because there is no
working class movement for socialism. However, Tristram Hunt has missed the
point. We are now living in a period of instability, and the instability is that
of the system itself. When someone argues that capitalism has survived, the
question is always by what means. After all, the system has survived through
repression, imperialism, and war as well as through the welfare state. We have
never had a peaceful capitalism in the developed countries, without exploiting
peoples beyond its borders. In the third world, the situation was and remains
dire, with certain exceptions.
It is not accidental that Marx can be
quoted and that the system itself be questioned by those at the heart of the
system. This is in part because those personages know the weaknesses of the
system in some detail but it is also in part because the Cold War is over and
Marx is no longer tarnished with the taint of Stalinism. It is of particular
note that these writers and commentators see capitalism as a system even if they
argue that there is no replacement. Once capitalism is perceived as a system,
its limitations can also be discussed and then it is a short step to perceiving
capitalism itself as in evolution from its birth to its dotage.
Defence of Capitalism in the
Downturn
The wave of questioning has led to three
lines of defence. We are told that in the end we will be back where we were
before the downturn or perhaps before the speculative rise in asset prices from
2004. Simon Jenkins, a liberal commentator, has argued that all the discussion
of the limits of capitalism is just hot air.4 The failure lay in the regulators
and the politicians who removed the regulation or who urged banks to extend
their lending. Rationally considered, it can be argued that the financial crisis
was an accident of history caused by the greed or incompetence of bankers or
lack of regulation over a market which has to be regulated in order to function
properly. In fact, there are three theses being put forward
here.
Firstly, it is argued that capitalism is
necessarily cyclical, but eternal, and hence the economy will recover and be
better than ever, having learned its lesson. Secondly, it is maintained that the
market requires regulation and regulation was systematically reduced over a
period of more than twenty years, notably through the repeal of the
Glass-Steagall Act in 1999 in the USA, allowing commercial banks to operate as
investment entities as well as continue their everyday functions.5 Thirdly, it is held that things
might not have gone awry had not a number of individuals been so greedy for ever
higher rewards. A fourth thesis could also be put forward. The contradictions of
capitalism are showing themselves but the system will continue as long as there
is no political movement to replace it. The first view merges with the fourth.
Much of the organised left effectively supports the last view, having given up
on the idea of capitalism entering a systemic crisis. Tristram Hunt’s argument
fits in here.
Clearly, none of these arguments says much
for the capitalist system itself but then ‘the danger of meltdown’ has been a
constant refrain in all the media. It would appear that both the capitalist
class and those who manage their operations have been seriously frightened.
Indeed, the two weeks that followed the nationalisation of the mortgage
companies was described in graphic detail in the media, ‘Nightmare on Wall St’
being probably one of the best headline.
At the same time, although there is no
organised left of any importance in the USA or Europe, the population is both
worried and angry. It is one thing for a factory owner to receive a subsidy but
another for bankers to be bailed out. Most people do not see bankers as anything
but parasitic, receiving huge salaries for receiving other people’s money and
lending that money out at exorbitant rates of interest. While financial capital
is necessary for the capitalist system to function, the dominance of finance
capital and the huge rewards it receives are a function of the present stage of
capitalism itself and that view is widely held. Outside of the Anglo-Saxon
countries, industrial capitalism plays a greater role and finance capital is
often resented. As a result, Finance Capital and its functionaries see
themselves as beleaguered, and in a fragile situation, both because of the
threat to their ‘business’ and because of a possible systemic threat.
The Implosion of Finance Capital - A Turning Point in
History
In these notes, we have made the point that
we are living through a turning point in history6. Finance capital itself has
imploded and as the USA is the heart of finance capitalism, the dominance of the
USA as the controlling world power is in decline, without a successor. One
author writes that it is “inevitable that the Anglo-Saxon model of unfettered
capitalism that has dominated thinking for half a century will be much
diminished. What will replace it is unclear, but it may well look more like a
form of state capitalism - perhaps not full-blown, but something much closer to
Chinese capitalism than would have seemed conceivable just a month ago.” 7 However, it is clear that that the
USA will remain the dominant power and China will continue to be dependent on it
for investment, for technology and for the market for its goods. Another
writes:”The autumn of 2008 marks the end of an era............To invert Karl
Marx, investment bankers may have nothing to gain but their chains”. 8
At this point, it is worth defining Finance Capital.
Finance capital is a Marxist concept, which is often misunderstood and
insufficiently theorised. It is defined as abstract capital: that is to say,
abstracted from its conditions and locality and hence automatically global as
opposed to industrial capital, which is confined to a locality or a number of
localities. It is financial capital become independent and dominant over the
process of accumulation. It is unproductive of value and so must extract it from
the productive sector. It is predatory and parasitic in that it transfers
capital from where it is originally accumulated to itself. It then invests where
it can obtain the maximum return in as short a time as possible. It therefore
invests in unproductive areas like property speculation, commodity speculation,
equity and bond speculation as well in itself –in derivatives of all kinds. It
invests in industry but in so doing it distorts the economy and industry in its
own interests in order to obtain maximum returns as soon as possible. It
therefore has every incentive to bend the rules, change accounting practices,
and avoid tax. In the present period, it has extended the practice of asset
stripping enterprises, the most obvious examples being given by private equity.
It avoids investing in innovations that require long-term involvement,
preferring industry that will give high returns quickly. Even where industry
does not borrow capital, the norm is set by finance capital. In general, finance
capital is global and so dominated by the major economic power-the USA, with the
assistance of the UK, but not all countries conform to the same degree-witness
Germany and France.
In the 1970s, finance capital returned to
its former role, replacing industrial capital as the dominant sector of capital.
The theory of monetarism was its economic policy while so-called
‘neo-liberalism’ was its political-economic strategy. This was a deliberate
shift in order to contain the working class, who were demanding more control
over production, higher wages and better conditions. Industrial growth shifted
downwards, unemployment rose, the government found itself with a fiscal deficit
and so reduced welfare and other government expenditures. The levels of
unemployment were hidden by shifting the long-term unemployed onto new
categories. For example, in the UK, they receive disability benefit, over
fifties receive pensions and the young go onto various training schemes. The
reality is that the number of economic inactive rose from around 1 per cent in
1970 to figures lying between 10 and 20 per cent, depending on the years
involved. On the other hand, profits rose, and management incomes rose many
times. As is well known, income distribution has never been so skewed since the
Second World War. On the one hand, there were large sums of money to invest but
on the other hand, there were limited investment opportunities. This was all the
more so once the Cold War came to an end. Official military expenditure in the
US budget as a percentage of GDP fell to well under half of what it had been in
1986 by 1997. The Iraq and Afghan wars have doubled the figure of military
expenditure but the budgeted military expenditure as a percentage of GDP is
still not much more than half of what it had been in 1986.
The point of the last two paragraphs is to
provide the background to the current implosion. Apart from the flows of money
coming from pension funds and insurance companies, the rich and seriously
wealthy have had huge resources looking for an investment. The Swiss Bank UBS
has the largest total of ‘Assets under Management’ of any bank- some 3.2
trillion Swiss francs. One estimate argues that there is over 500 billion
dollars of money per annum, looking for investment coming from the third world,
apart from official flows. While the Chinese and Japanese governments have
accepted the need to put much their money into US government bonds, private
investors prefer to get higher returns. The pressure, therefore, on the
investment houses was enormous, given the competition, which exists among them.
Capital, therefore, turned to investing in itself. We have given the figures in
the previous Critique Notes,9 but it is enough to note that the
total over the counter derivatives rose five times from 2001, while credit
default swaps rose from almost 1 trillion dollars to 62 trillion dollars. The
Dow Jones index of shares rose 7 times from 1987. There was a huge asset
inflation during this period of revived finance capital. The house price rise in
the USA and the UK was just one aspect of this asset inflation. At the same
time, the rewards to finance capital soared: “As the financial industry
prospered, its share of the American stock market climbed from 5.2% in 1980 to
23.5% last year”.10
Derivatives became an arcane way of
extending credit on a huge scale, as banks could ‘securitize’ their loans and so
extend new loans. Combined with the expansion induced by the Iraq War, there was
a short-lived boom on a global scale. It was global because finance capital both
invested capital in China, which then expanded industry on a vast scale, and
vastly extended worldwide credit. The increasing US balance of payments deficit
temporarily boosted third world balance sheets and so left the IMF with a
weakened hand. The vast expansion of derivatives, particularly credit swaps,
could only end in grief, given the limited base. Given the static nature of real
incomes, demand for goods and services, and Chinese industrial goods in
particular, could only reach a ceiling and go down. Without an extended war, the
system had to crack. The fact that it did so over house prices was not
coincidental since they embodied both the derivative expansion and the limit on
workers’ incomes
The Current Crisis and Its
Denouncment
The fall of commodity prices, including oil
in particular, preceded the threat of meltdown. Oil had dropped by almost half
from 147 US dollars in July to 70 dollars in October. We have asserted over a
number of issues in these Notes that the impetus behind the rise
in prices was the same as the reason for the credit crunch and overall
downturn-the very- the large surplus of capital over areas of profitable
investment. Finance capital has turned to derivatives, wherever it looked a
possible haven, and so implicitly to loan packages of various kinds, as well.
While the press has been divided between the viewpoint that shortages forced up
the prices and the impact of speculation, it has become known that the Federal
Reserve played a role in helping to bring down commodity prices11. It is, therefore, clear that
speculation played a crucial role in the price rises, even if shortage had some
part to play. The division between the West Europeans and the Anglo-Americans
over the cause of the price rises ran exactly between those where finance
capital was dominant and those whose economies remained primarily industrial.
It has to be said that there was every
indication that the US government needed to intervene in the world economy in
order to ensure its own stability both internally and internationally. So much
for the market bringing order or stability. The nationalisation of Fannie Mae
and Freddie Mac has made this point very clear. It seems that the Bush
administration did not want to do it and so took longer than was wise to put the
two firms into conservation, as it is put. The fact that a conservative
administration has had to intervene in saving Bear Stearns and the two mortgage
wholesale enterprises plus AIG has been justified by arguing that these are
temporary measures. However, commentators, like Martin Wolff in the Financial
Times, have pointed out that privatisation will take a long time and certainly
not two years. 12
It is possible that the subsequent threat
of meltdown would not have happened if the US Government had acted faster and
had it also saved Lehman brothers. It is clear that market ideology prevented
them acting until too late. In a sense, it was too late because the end result
has been an extinction of the investments banks combined with the prospect of a
tight regulatory regime, over partly or wholly nationalised banks. Finance
Capital will not be able to play its previous role.
The subsequent passage of the Troubled
Assets Relief Program (TARP) by Congress was assailed as being socialist by the
right and the left has had much fun with the ultra-montane Congressmen, who saw
freedom coming to an end with the advent of ‘socialist intervention’. There is,
however, a serious side to their complaints, in that government intervention
does limit the operation of the market and so the functioning of capital. It
does lead to the growth of government and so of bureaucracy under capitalism.
Without question, this is a far better solution than a deep downturn or a
depression. At the same time, Congress and the capitalist class are faced with a
choice of two evils, from the point of view of capitalism, but only seriously
stupid or blinkered politicians could want to cut their noses off to spite their
faces, and refuse to bail out the banking system, so precipitating a possible
repeat of 1929.
The Effects of the
Solution
There are two results that follow here. The
first is the question of ideology. The doctrines propounded by finance capital
going under the name of ‘neo-liberalism’ now look dated at best and a failure at
worst. The market does not know best and in fact would collapse without
government intervention. As the downturn is likely to last several years with
further government intervention quite certain, these issues will continue to
come to the fore. Governments have been pushed to intervene and will continue to
be forced to intervene to help those evicted from their homes and those living
in fuel poverty, while continuing to nationalise banks and probably industrial
firms, as well as to prevent a systemic collapse. Countries, particularly those
in the third world, will have to be helped to survive both for their own sake
and in order to avoid a domino effect.
Commentators talk of the socialisation of
risk and the privatisation of profit. In fact, this has always been the case,
but the absurdity of the Thatcherite claim that you cannot buck the markets has
brought reality to the fore. As the downturn continues, we might expect ‘market
fundamentalism’ and even the concept of ‘lassiez faire’ to lose their dominance.
Keynesianism has returned, at least in name. Sam Brittan, a deputy editor of the
Financial Times announced that:
“There will be no “glad confident morning”
for free-market principles for a long time to come.”13
The second question concerns the extreme
nature of the dangers facing the capitalist system. Again, it is clear that
without the nationalisation of the two mortgage companies and AIG there was a
risk that many non-US banks, who had invested in these companies, would be in
grave trouble. Given the fact that banks, like the Swiss bank, UBS, had already
suffered huge losses this could tip them over the edge. This situation would
apply to hedge funds and other financial institutions. The danger to the system
as a whole was considerable and had to be quickly dealt with. In fact, it took
some time for the government to make up its mind, and for Congress to pass the
administration’s preferred bill, so prolonging the risks and the agony. The
nationalisations combined with the proposed government purchase of ‘toxic debt’,
supply of money to the money markets and further purchase of shares in troubled
banks have steadied the world monetary and credit system for the time being. If
the US government had followed the advice of its right wing and let the market
take over, then the crash of 1929 would have looked like a picnic. Engels dictum
that every crisis is worse than the last would have been proven. The failure to
pass the initial bill had led to precisely such fears: “Terrified of a
catastrophic Wall
Street meltdown, the House Friday approved an
unprecedented $700 billion bailout bill - and President Bush quickly signed it into law”.
14
Keynesianism and Social
Democracy
While commentators may accept criticisms of
capitalism, they remain bound to the system itself. Will Hutton speaks for them
when he argues that the issue is not capitalism itself but the necessity of a
fairer and more redistributive form.15 However, the capitalist class will
not willingly return to the social democratic form of the immediate post-war
period, as it would be far too dangerous to the system itself. Full employment,
a high rate of growth, a rising standard of living, free health and education
and affordable housing provide a springboard for the working class to demand
greater control over its own life, better working conditions and higher wages.
In Marxist terms, the abolition of the reserve army of labour and the removal of
the fetishism of the commodity leaves the system without control over labour. It
only worked in that period because the working class had come through a much
worse period of fascism, depression and war and was still contained within a
Cold War.
The frequent references to ‘moral hazard’
indicate that that the ideology of the market remains. The fact that dithering
over nationalisations due to worries around the ‘moral hazard’ involved has
receded shows that market ideology is losing some of its hold.
The strategy of Finance Capital has gone
into meltdown and there is no replacement. We are at the end of the beginning of
this downturn. The next phase involves declines in industrial production, and
overall profits and a large rise in unemployment. Governments are talking of
investment in infrastructure. Will Hutton points out that it makes sense to
raise unemployment benefit.16 At the same time, contemporary
economic ideology dictates a balanced budget or at least the lowest possible
deficit. There is no question that governments could pour money into the
economy, nationalising failed concerns where necessary and so limit the
downturn. However, the concept of workers’ wages being raised in order to
increasing spending power is unlikely to be endorsed, as it would obviously
reduce profits not just immediately but for some time in the future.
The Military Solution - A New Cold
War?
The usual alternative of increasing
military expenditure is not an option at this time because of the failure of
Iraq war and the absence of a Cold War. It is possible that the sabre rattling
over the Russian invasion of Georgia was seen as an alternative rallying point,
raising the spectre of a new Cold War. However, the idea that modern Russia
could conduct a Cold War is so absurd that one wonders whether the British and
US foreign offices knew what they were doing. Russia today is a weak power. Its
troops went into South Ossetia, in Georgia, in large part because of its
weakness. Its Southern borders are permanently unstable. Chechnya remains under
occupation there. The Russian elite took the opportunity to raise its standing
among one section of the population in that area and warn off the rest. No doubt
the Russian elite harbours expansionist tendencies but that does not mean that
they are about to invade former Soviet countries. Russia’s military forces and
thermo-nuclear weapons are not those of the USSR. They have been run down and
the military personnel remain demoralised.
The strong stand taken against Russia
directly conflicted with Western aims in the area of the former Soviet Union.
Hitherto their aim has been one of helping to remove the remnants of Stalinist
forms and replacing them with the market. Since that has turned out to be an
elongated and possibly unsuccessful process, Western governments, or the
capitalist class, have every interest in encouraging Russian governments to
participate in global market forms. Instead, there were demands that Russia not
be admitted to the World Trade Organisation. Since the dominant section of the
Russian elite does not want to join the WTO, and is being pushed by the more
liberal section of the Russian elite as well as by the West that demand seemed
absurd.
The Western campaign did lead to a massive
outflow of money from Russia. When the financial crisis emerged Russian finance
capital was badly hit. With the continuing decline in prices of raw materials,
the Russian economy will be in more trouble than most countries, other than
Iceland, to which it is, paradoxically, giving a loan. There is every
probability that at the end of the downturn Russia will have achieved a more
substantial return to state control of the economy.
Depression or
Recession
What the downturn will now be called is a
question of economists’ vanity. For some time, downturn was used rather than
recession. Then recession became acceptable. Today the question is whether one
can call this downturn a depression. In any reasonable discussion, it would be
called a depression, since the word recession was invented to avoid the odious
associations of a depression, of unemployment, hunger and suicides but did not
add any more meaning to the discussion. After all one can have a shallow
depression and a deep depression. Today there are discussions whether the
recession will be shallow or deep, with many opting for the latter. As Paul
Krugman noted:
“ Just this
week, we learned that retail sales have fallen off a cliff, and so has
industrial production. Unemployment claims are at steep-recession levels, and
the Philadelphia Fed's manufacturing index is falling at the fastest pace in
almost 20 years. All signs point to an economic slump that will be nasty,
brutish - and long”17
One may add that the upturn, when it comes,
is likely to weak.
As there is no comparison with any other
downturn other than the 1929 depression it is clear that we are in a classic
depression, with somewhat more spectacular fireworks but with much more
government intervention. Whereas the downturns in the last century after the
last World War were largely a result of anti-inflationary measures, the
downturns of March 2000 and August 2007 are a result of surplus capital not
finding a profitable outlet.
Footnotes
1 One of many instances is that of John Plender: "Shut
Out" in the Financial Times, 18-10-2008, p.11, in
which cites a very pertinent paragraph from Marx: "Karl Marx was wrong about
many things, but in 1893 he provided as good an account of today's financial
implosion as any living commentator. "To the possessor of money capital, the
process of production appears merely as an unavoidable intermediate link, as a
necessary evil for the sake of money- making. All nations with a capitalist mode
of production are therefore seized periodically by a feverish attempt to make
money without the intervention of the process of
production."
That passage from Das Kapital
is a fine description of the financialisation of the economies
of the English-speaking countries in recent years and of the resulting credit
bubble." Das Kapital first appeared in 1867, as is well known, and Marx died in
1883.
2 Eye on the Market - A commentary written
for JPMorgan clients by its Global Chief Investment Officer Michael Cembalest
and Private Wealth Management Chief Investment Officer Hans Olsen, New York:
JPMorgan, 7 October 2008, Paragraph 6. "How will we ever get out of this
mess?"
"Most of our professional careers were spent watching
global central banks fight (and then win) a battle against inflation. The tragic
irony is that if nothing is done to prevent this credit spiral, those inflation
gains will be for naught, with economic activity crumbling in a deflationary
spiral. The stakes are high, with each region having its own visceral memories
of what it's like to get it wrong. For the U.S., the Depression of the
1930's. For Japan, the 15-year deflation of the 1990s. Instead of history,
the greatest fear for Europe might be that Karl Marx was right: that capitalism
is a system doomed to destroy itself through its own internal contradictions.
So to answer the question, I think that global consciousness has been
rudely awakened: while the decision to build a market economy based on massive
amounts of debt was left to the private sector (see second chart below), the
consequences of unwinding it cannot be. The flurry of public sector activity in
the last 12 months and 12 days suggests to me that by the end of the year, we
will see more explicit plans to safeguard the surviving banks, which will mark
the beginning of the long road back."
3 The Guardian, London, 20th September,
2008. Tristram Hunt.
4 Simon Jenkins: "The end of capitalism? No, just another
burst bubble.Those drooling over the free market's collapse are wrong: this
passing crisis is down to lax regulation and craven ministers"
Guardian, 15 October 2008, p.29.
5 A short history of modern finance, Link by Link, Economist,
16 October 2008, p.96-98
6 Critique Notes, Critique
44, p;1-4.
7 Andrew Graham, 'If China spends its trillions,
recession could be averted', Guardian, London, 15 October 2008, p.28:
8 A short history of modern finance, Link by Link, Economist, 16 October 2008,
p.96.
9 Critique Notes, Critique
45, p.172.
10 A short history of modern finance: Link by Link, Economist, 16 October 2008, p.
97.
11 This report refers to the July 11th 2008 decision to
support Fanny Mae and Freddy Mac.
According to Mr. Coxe, the Fed's ultimate goal was to
trigger a rally in financial stocks, which would, in theory, help banks hammered
by the credit crisis raise fresh capital and repair their balance sheets. To
accomplish this, the decision to support Fannie and Freddie was deliberately
announced on a Sunday, which had the effect of maximizing the reaction from
thinly traded financial stocks on overseas markets.
Because many hedge funds were using massive leverage to
short financials and go long on commodities, when North American markets opened
and banks initially rallied, the funds were forced to cover their short
positions.
At the same time, the U.S. dollar was rallying because
the risk of holding Fannie and Freddie paper had diminished. The rising dollar,
in turn, made commodities less attractive, giving funds that were already
scrambling to cover their financial shorts another reason to dump oil, grains
and other commodities.
The losses were swift and dramatic. On the Friday before
the July 11 announcement, crude oil closed at $145.18 a barrel. Over the
following five days, it plunged 11 percent. "Leverage was being unwound
dramatically," Mr. Coxe said on a conference call last week. "We had a true
panic."
As oil and other commodities were tumbling, fears about
the slowing global economy were mounting, giving resources another push
downhill. This was also in keeping with the Fed's wishes, because lower
commodity prices would help quell fears about inflation. http://ftalphaville.ft.com/blog/2008/09/11/15798/the-fed-is-long-financialsshort-commodities/
Accessed 11 September 2008.
12 Martin Wolff: Financial
Times, 10 September 2008, p.2.
13 'Capitalism and the credit crunch'
By Samuel Brittan, Financial
Times, 11 September 2008 18:33, Last updated: September 11 2008
18:33 Accessed:
http://www.ft.com/cms/s/0/b1e7adb2-801a-11dd-99a9-000077b07658.html?nclick_check=1
14New York Daily
News, http://www.nydailynews.com/money/2008/10/03/2008-10-03_house_of_representatives_passes_controve.html
, accessed 5 October 2008.
15 Will Hutton, Observer, 19 October 2008, p.
29.
16 Op. Cit.
17 Paul Krugman: 'Let's Get Fiscal', New York
Times, 17 October 2008.