[OPE] Paul Krugman and the political economy of insurance capitalism

Paul Krugman illustrates this quite well with the example of AIG:

During the bubble years, many financial companies created the illusion of
financial soundness by buying credit-default swaps from A.I.G. - basically,
insurance policies in which A.I.G. promised to make up the difference if
borrowers defaulted on their debts. It was an illusion because the insurer
didn't have remotely enough money to make good on its promises if things
went bad. And sure enough, things went bad. So why protect bankers from the
consequences of their errors? Well, by the time A.I.G.'s hollowness became
apparent, the world financial system was on the edge of collapse and
officials judged - probably correctly - that letting A.I.G. go bankrupt
would push the financial system over that edge. So A.I.G. was effectively
nationalized; its promises became taxpayer liabilities. But was there any
way to limit those liabilities? After all, banks would have suffered huge
losses if A.I.G. had been allowed to fail. So it seemed only fair for them
to bear part of the cost of the bailout, which they could have done by
accepting a "haircut" on the amounts A.I.G. owed them. Indeed, the
government asked them to do just that. But they said no - and that was the
end of the story. Taxpayers not only ended up honoring foolish promises made
by other people, they ended up doing so at 100 cents on the dollar. (...) So
here's the real tragedy of the botched bailout: Government officials,
perhaps influenced by spending too much time with bankers, forgot that if
you want to govern effectively you have retain the trust of the people. And
by treating the financial industry - which got us into this mess in the
first place - with kid gloves, they have squandered that trust.
http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&hp

Of course, Paul Krugman is wrong that "the financial industry got us into
the mess". That is just his shallow liberal ideology shining through. The
economy was stagnating already before the financial crisis broke out. Indeed
Bob Pollin devoted a whole book to it in 2003, "Contours of descent".

A low-interest rate, low-inflation economic policy was promoted by the
bourgeoisie as a whole, which powerfully stimulated debt growth to make
money from arbitrage. Debt became big business.

The original neoliberal ideology had been, that if interest rates and price
inflation stayed low, then investors would invest more in production, and
then economic growth would increase. To some extent it did, primarily by
fueling final demand, though not nearly to the extent that you might expect,
given the total volumes of capital involved.

The problem was, that investors mainly invested to take advantage of price
differentials, while at the same time seeking to insure against possible
financial risks (nowadays, the total value of derivatives contracts is in
excess of $1000 trillion). They didn't want to create anything new, but
appropriate more of what was already there. The additional "real investment"
that occurred consisted mainly of producing or buying computers, vehicles,
housing and office buildings.

Portfolio managers and fund managers generally did not invest without their
clients' approval - maybe not always with explicit consent, but their
clients could often have opted out. If today households pay one-fifth or a
quarter of their real disposable income on debt servicing and financial
fees, that is not something financial institutions could accomplish by
themselves. Every major corporation entered into the debt business.

Citizens voted for governments that supported all this activity and indeed
helped to finance it. Everybody was happy to buy houses and cars with cheap
finance, and reap capital gains in a growing market.

The point is, as Dutch economist Dirk Bezemer points out, "The credit crisis
is the symptom, the debt is the cause. Without a debt workout, recovery is
beyond the horizon no matter how many bank bailouts."
http://mpra.ub.uni-muenchen.de/15764/1/MPRA_paper_15764.pdf

The truth is, that what we are witnessing today is "chickenfeed" compared to
what will happen in the future. The main reason is that there exists no
motivation at all to curb aggregate credit growth, and there is also no real
sign that it is abating. As I have argued in previous years, the only thing
that happens is that lending policy becomes more conservative, and that a
fraction of the population goes broke, but all that means is, that part of
the population is shut out from being creditworthy.

In 1844, Marx already indicated the social logic involved:

Credit is the economic judgment on the morality of a man. In credit, the man
himself, instead of metal or paper, has become the mediator of exchange, not
however as a man, but as the mode of existence of capital and interest. The
medium of exchange, therefore, has certainly returned out of its material
form and been put back in man, but only because the man himself has been put
outside himself and has himself assumed a material form. Within the credit
relationship, it is not the case that money is transcended in man, but that
man himself is turned into money, or money is incorporated in him. Human
individuality, human morality itself, has become both an object of commerce
and the material in which money exists. Instead of money, or paper, it is my
own personal existence, my flesh and blood, my social virtue and importance,
which constitutes the material, corporeal form of the spirit of money.
Credit no longer resolves the value of money into money but into human flesh
and the human heart. Such is the extent to which all progress and all
inconsistencies within a false system are extreme retrogression and the
extreme consequence of vileness.
http://www.marxists.org/archive/marx/works/1844/james-mill

The only salient question here is just how many people have to die, or eke
out a miserable existence, as the price for the accumulation of capital,
i.e. how large can the "relative surplus population" grow, without
destroying the bourgeois order. This is more or less the horizon of
bourgeois ideology, endlessly repeated in Hollywood fantasies about the
dehumanizing effects of social decay, and holocaust imagery. Eventually
though, Jews turn into Nazis - the "final solution" is that part of humanity
must be sacrificed, so that the "master race" can live on. The only dispute
is about how many.

Jurriaan

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Received on Sun Nov 22 12:18:42 2009