[Marxism] Eight Theses on the Economic Crisis

[brad bauerly <bbauerly@xxxxxxxxx>]

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A Socialist Project e-bulletin .... No. 189 .... February 25, 2009
___________________________________________________

>From Global Finance to
the Nationalization of the Banks:
Eight Theses on the Economic
Crisis<http://www.socialistproject.ca/bullet/bullet189.html>

Leo Panitch and Sam Gindin

1. *The current economic crisis has to be understood in terms of the
historical dynamics and contradictions of capitalist finance in the second
half of the 20th century*. Even though the spheres of capitalist finance and
production are obviously intertwined (in significant ways today more than
ever before), the origins of today's US-based financial crisis are not
rooted in a profitability crisis in the sphere of production, as was the
case with the crisis of the 1970s, nor in the global trade imbalances that
have emerged since. Although the growing significance of finance in the
major capitalist economies was already strongly registered by the 1960s, it
was the role finance played in resolving the economic crisis of the 1970s
that explains the central place it came to occupy in the making of global
capitalism. The inflation that was the main symptom of that crisis had a
strong negative impact on those holding financial assets and destabilized
the international role of the dollar. Under the guidance of the US Federal
Reserve, financial markets used very high interest rates to drive up
unemployment, defeat trade union militancy and restrict public welfare
expenditures in the early 1980s - all of which had come to be seen as the
source of the intractable profitability and inflation problems of the
previous decade. Yet it was precisely the contradictory ways finance
contributed to global capitalism's successes in the closing decades of the
20th century that laid the foundation for the massive capitalist crisis that
now closes the first decade of the 21st century.

2. *The spatial expansion and social deepening of capitalism in the last
quarter century could not have occurred without innovations in finance*. The
development of securitized financial markets and the internationalization of
American finance allowed for the hedging and spreading of the risks
associated with the global integration of investment, production and trade.
This provided risk insurance in a complex global economy without which
capital accumulation would otherwise have been significantly restricted. At
the same time, finance penetrated more and more deeply into society,
integrating subordinate classes as debtors, savers, and even investors
through private pensions, consumer credit and mortgages for private housing.
This became especially important in facilitating the maintenance of consumer
demand in a period of wage stagnation and growing inequality. In terms of
directly fostering capital accumulation, finance was not only an important
site of technological innovation in computerization and information systems,
but also facilitated innovation more generally in high tech sectors through
venture capital, especially in the US. The central role of the US dollar and
Treasury bonds in the global economy as the key store of value and the basis
for all other calculations of value, alongside the global institutional
predominance of US financial institutions, acted as a vortex for drawing the
global surplus to American financial markets and instruments. This allowed
for the mobilization of cheap global credit for the US economy, and
sustained its place as the major import and consumer market in the global
economy. The lowering of US interest rates was important to the
macroeconomic stability reflected in the fewer and milder recessions within
the US in comparison with the post-war era (‘The Great Moderation,’ as
economists refer to the 1983-2007 period).

3. *The competitive volatility of global finance produced a series of
financial crises whose containment required repeated state
intervention.*Global financial competition for higher yields led to
institutional and
market innovations that allowed greater leveraging and therefore more credit
relative to the capital base. This in fact amounted to a vast increase in
the effective money supply, but rather than yielding the price inflation
that monetarists predicted, the defeat of labour and the increased corporate
ability to fund investments with internal funds meant that increased
liquidity translated into asset inflation. This asset inflation was uneven
across sectors, producing financial bubbles from stock markets to real
estate at various times, while the size of these bubbles was expanded by
virtue of the material expansions in the real economy related to each of
these areas. The bursting of these bubbles became a common feature of
capitalism and the state interventions required to contain them reinforced
the confidence that supported future bubbles. The alleged withdrawal of
states from markets amidst the globalization of capitalism was a neoliberal
ideological illusion: states in the developed capitalist countries pumped
more liquidity into the banks in the face of financial crises, while they
ensuring that crises in the developing countries were generally used to
impose financial discipline. The neoliberal American state played the most
active role as the imperial guarantor, coordinator and fire-fighter-in-chief
for global capitalism.

4. *Both finance's central role in the making of global capitalism and the
American state's role in sustaining it produced the bubble that emerged
inside the US housing sector.* Rising demand for home ownership at all
income levels, partly reflecting limits on public housing since the crisis
of the 1970s, was encouraged by US government support for meeting housing
needs through financial markets backed by mortgage tax deductions. And,
reflecting the increasingly unequal income distribution that was the
consequence of the defeat of labour generally and the restructuring of
production and employment, a broad stratum of the working class population
also sustained their consumption through taking out second mortgages on the
bubble-inflated values of their homes, But all this was really only made
possible by the acceleration of financial securitization and the creation of
a broader market for mortgage-backed securities in particular. This
developed amidst rising house prices that apparently increased the wealth
and credit-worthiness of those borrowing, and gave rise to the acceptance of
lower standards (including for ‘teaser’ subprime mortgage rates) by
regulatory agencies, largely supported by both parties in Congress. The
Federal Reserve's low interest rate policies, especially in the wake of the
bursting of the dot-com bubble, reinforced by the high demand for US
Treasury securities as the safest store of value in a highly volatile global
financial system, intensified competitive pressures on finance everywhere to
get higher yields through greater leveraging of assets and innovative
securitization to stretch the boundaries of risk. The historical safety of
collateralized home loans (with such a large portion having been backed by
the US government) reinforced the confidence in perpetually rising home
prices and made housing debt the most attractive arena for the systemic
exercise of arbitrage between low-interest US Treasury bonds and
high-interest mortgage-backed securities.

5. *The inevitable bursting of the housing bubble had such a profound impact
because of its centrality to sustaining both US consumer demand and global
financial markets.* The eventual bursting of the housing bubble was
inevitable once, as was the case by 2005, housing prices peaked. By this
time, not only had the Fed's low interest rate policy come to an end, but
teaser rates on many subprimes had run out. The rise in foreclosures and the
number of houses offered for resale had immediate effects on housing prices,
new home construction and furniture and appliance sales. Moreover, by virtue
of the loss in value of the primary asset figuring in workers' perceptions
of their personal wealth, this in turn led to an overall decline in US
consumer spending and import demand in a way that the bursting of stock
market bubbles had not. At the same time, since the spreading of risk in
subprime mortgages had been effected through their packaging into derivative
securities with more highly-rated tranches of debts, the housing crisis
undermined the econometric equations that valued these assets in global
financial markets. Mortgage-backed securities became difficult to value and
to sell, and this produced a contagion throughout financial and inter-bank
markets that spread the collapse internationally. Taken together with the
impact of the housing crisis on mass consumption behaviour, and thus on the
US economy's ability to function as the key global consumer, illusions that
other regions might be able decouple from the US in this crisis were quickly
dispelled.

6. *The crisis reinforced the centrality of the American state in the global
capitalist economy while multiplying the difficulties entailed in managing
it.* The rise of the US dollar in currency markets and the enormous demand
for US Treasury bonds as the crisis unfolded reflected the extent to which
the world remained on the dollar standard and the American state continued
to be regarded as the ultimate guarantor of value. Treasury bonds are in
demand because they remain the most stable store of value in a highly
volatile capitalist world: illusions that foreign states were previously
doing the US a favour by buying Treasury securities may finally be dispelled
by this crisis. The American state's central role in terms of global crisis
management - from currency swaps to provide other states with much needed
dollars to overseeing policy cooperation among central banks and finance
ministries - has also been confirmed in this crisis. Yet despite its very
active interventions, the American state has proved unable to contain the
effects of this particular crisis. The massive drops of liquidity that it
has helicoptered onto the financial system since August 2007 have not
restored the banks' capacity or willingness to lend at anything like
previous rates - even to each other, let alone to firms or to consumers. The
whole system of securitized finance that has grown up over the past few
decades - whereby the risk on mortgages, consumer credit and business loans
is sliced, diced, repackaged and traded around the world - has imploded.

7. *The scale of the crisis today is such that nationalization of the
financial system cannot be kept off the political agenda.* It is
increasingly apparent, that monetary and fiscal stimulation alone are
unlikely to succeed in ending the crisis since the banking system's
dysfunctionality today undermines the multiplier effect, just as new
regulations are supposed to make finance more cautious and prudent in their
lending. Indeed, there has been an increasing realization that it may not be
possible to keep off the political agenda much longer the issue of bringing
large portions of the financial system into public ownership. This is
advanced today along the lines of the temporary nationalizations that took
place in Sweden and Japan during their financial crises in the 1990s whereby
the state took on the banks' bad debts and then passed the banks back to the
private sector. It is a measure of the severity of the crisis that
nationalization is now being quite generally proposed even within the US
although it poses a host of problems as a way of saving global capitalism.
It is highly significant that the last time the nationalization of the banks
was seriously raised, at least in the advanced capitalist countries, was in
response to the 1970s crisis by those elements on the left who recognized
that the only way to overcome the contradictions of the Keynesian welfare
state in a positive manner was to take the financial system into public
control. Now that bank nationalization is back on the political agenda
(albeit now coming from very different sources), it is very important to
contrast the type of band-aid nationalization now being canvassed with the
demand for turning the whole banking system into a public utility, which
would allow for the distribution of credit and capital to be undertaken in
conformity with democratically established criteria. And it is necessary to
point out that this would have to involve not only capital controls in
relation to international finance but also controls over domestic
investment, since the point of making finance into a public utility is to
transform the uses to which it is now put.

8. *The call for nationalization of the banks provides an opening for
advancing broader strategies that begin to take up the need for systemic
alternatives to capitalism.* The severity of today's economic crisis once
again exposes the old irrationality of the basic logic of capitalist
markets. As each firm (and indeed state agency) lays off workers and tries
to pay less to those kept on, this has the effect of further undercutting
overall demand in the economy. At the same time, the financial crisis
exposes new irrationalities, not least those contained in the widespread
proposals for trading in carbon credits as a solution to the climate crisis,
which involve depending on volatile derivatives markets that are inherently
open to the manipulation of accounts and to credit crashes. In the context
of such readily visible irrationalities, a strong case can be made that - to
save jobs and the communities that depend on them in a way that converts
production to ecologically-sustainable priorities during the course of this
crisis - we need to break with the logics of capitalist markets rather than
use state institutions to reinforce them. We need to put on the public
agenda the need to change our economic and political institutions so as to
allow for democratic planning to collectively decide how and where we
produce what we need to sustain our lives and our relationship to our
environment. However deep the crisis, however confused and demoralized are
capitalist elites both inside and outside the state, and however widespread
the popular outrage against them, making this case will certainly require
hard and committed work by a great many activists, many of whom will see the
need for building new movements and parties to this end. This is what is
really needed if this crisis is not to go to waste. •

Leo Panitch is Canada Research Chair in Comparative Political Economy at
York University. His most recent books are American Empire and the Political
Economy of International Finance and Renewing Socialism: Transforming
Democracy, Strategy and Imagination. Sam Gindin, formerly Chief Economist
and Assistant to the President of the Canadian Autoworkers Union, holds the
Packer Professorship in Social Justice at York University. He is the author
of The Canadian Auto Workers: The Birth and Transformation of a Union and
(with Panitch) Global Capitalism and American Empire.

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-- 
Brad A. Bauerly
PhD Candidate,
Political Science
York University
Toronto, Canada
647-345-2072
bauerly@xxxxxxxx
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