Finances and the current crisis: How did we get here and what is the way out?
Author: Sam Webb
People's Weekly World Newspaper, 09/27/08 20:49
In a vote that was heard around the world, reactionary Republicans along with some progressive Democrats in the House torpedoed a bill to stabilize financial markets. The compromise deal was better than what was initially proposed by Bush and Paulson, but did little to stimulate the economy or attend to the crisis of everyday living experienced by millions of ordinary Americans — who, it should be said, played by the rules. In fact, the plan goes in the opposite direction — it asks the American people to pony up to the tune of $700,000,000,000 even though they had no hand in causing this crisis.
As this point it is unclear whether some form of the existing deal will manage to finally squeak through. One thing is clear though — the American people are furious at Wall Street, the Bush administration and congressional leaders of both parties.
We should see this struggle over the bailout package as a skirmish, an eventful and seismic one, but a skirmish nonetheless, in a protracted struggle that labor and its allies can win.
One immediate line of action is to fight for a moratorium on foreclosures, debt forgiveness, and renegotiation of mortgage terms going forward. As long as the housing slump continues, the overall economy will slide downward and markets will churn.
Another is to demand the passage of a stimulus bill of a half trillion dollars, paid for by repealing the Bush tax cuts and by a special tax on financial transactions and institutions.
Still another is to impose a new regulatory environment on financial markets.
A fourth is to rapidly end the Iraq war and initiate a peace process in Afghanistan that helps the people of that country.
Finally, a debate over the merits of public takeover of our financial and energy complex is in order. Can our country, given the challenges we face now and through this century, afford to allow these industries to remain in the hands of profiteers?
Defeat for U.S. capitalism
The prevailing ideologies and practices that have driven U.S. capitalism for the past three decades have run up against their own contradictions and conjured up new and old oppositional forces both domestically and internationally. Notwithstanding the agreement on a bailout package, what we are seeing is a massive defeat for U.S. capitalism.
Financialization, financial-led globalization and neoliberalism are not yet corpses. But their future is very problematic, although I would add that history tells us that discredited ideologies and practices never exit from the stage voluntarily. They have to be pushed, and pushed by a new political coalition that commands broad-based support, is united in action and possesses the skills to construct a people’s alternative. But isn’t such a coalition, of which we are a part, forming before our very eyes?
Moreover, this coalition is ready to strike the first and absolutely necessary blow in a few weeks, that is, to elect Barack Obama and bigger majorities in the House and Senate by a landslide.
If people haven’t enough reasons to join this effort, the current implosion on Wall Street and the new constraints it will place on the federal budget should give them reason to roll up their sleeves and get the job done on Election Day.
From another angle, the implosion of U.S. financial markets has delivered a debilitating body blow to the hopes of U.S. imperialism for unrivaled hegemony in the 21st century. When combined with the Iraq disaster, the worldwide anger over global neoliberalism and structural adjustment policies, and the emergence of new global powers in nearly every region of the world — China in the first place, it signals a new stage in the hegemonic crisis of U.S. imperialism and the final chapter of a unipolar world. Giovanni Arrighi, a world systems theorist, says that at the end of what he calls a systemic cycle of capitalist accumulation, leading hegemonic states invariably pursue a path of financial expansion, and its aim is to re-inflate its declining powers. The Dutch pursued this path in the 17th century, followed by the British in the 19th and early 20th century — successfully for a while, but in the end to no avail. Both eventually lost their leading position in the world capitalist economy and were replaced by another hegemonic state that established the rules, conditions and institutional framework for capital accumulation and system-wide governance.
Much the same fate, according to Arrighi, now awaits U.S. imperialism. The only question that Arrighi doesn’t answer is: will U.S. imperialism adapt peacefully to new world realities or will it engage in, to use his words, a policy of “exploitative domination” to maintain its standing in the world? Bush tried the latter, but failed and will leave the White House in January completely discredited.
While the present turbulence was triggered by mountains of borrowing on thin capital reserves, predatory lending, risky financial instruments, deregulation and bubble economics, it is also the outgrowth of longer-term processes that go back to the mid-’70s.
At that time, the U.S. economy was stumbling along, battered by the combination of inflation, high unemployment, slow economic growth and a declining rate of profit across U.S. industries. The confluence of these conditions prompted Paul Volcker, then chairman of the Federal Reserve Bank, to drive up interest rates to nearly 20 percent. Not surprisingly, this spike in interest rates reined in inflation, restored confidence in the dollar, and attracted mobile capital around the globe to U.S. financial and real estate markets.
It also generated an unprecedented shift of wealth in favor of the very wealthiest families and financial institutions, and set off an explosion in the financial sector in terms of its size, scope of activities, debt obligations and players.
At the same time, rising interest rates slowed down the economy, big swathes of industry shut their doors, union jobs were lost, wages stagnated, the social safety net was hollowed out, entire communities nearly collapsed and the labor movement was thrown on the defensive. Not since the Great Depression has productive capital been destroyed, living standards driven down and the relative strengths of competing financial and non-financial corporations reshuffled so fast and so broadly.
Much the same was occurring in the global South. In these countries finance-led globalization was responsible for massive drops in living standards, astronomical indebtedness to U.S. banks, privatization of industries and services, currency devaluations and unconscionable poverty. It was the convergence of these conditions that set into motion the eruption of political movements in Latin America that are either winning or contesting for state power.
Of course, it took more than shock therapy in the form of high interests rates to effect changes of this magnitude. If Volcker struck the first blow, it was the Reagan administration entering the White House less than a year later that was the main political agent of this upheaval.
The Reagan counterrevolution
At the ideological level, the Reaganites said that government is best that governs least; that markets are self-correcting; that income inequality is a good thing; that deregulation and privatization are the best fix for what ails the economy; that we live in a post-civil-rights era where affirmative action has no place; and that tax cuts for the rich trickle down to working people, thereby lifting all boats.
At the political level, the Reaganites framed the agenda of struggle and employed state power in its varied forms with a ruthlessness seldom seen. Remember PATCO.
Finally, at the economic level, the Reaganites dismantled much of the old Keynesian model of economic governance at the state and corporate level — a model that had its origins in the New Deal and was expanded by successive administrations in the next three decades. It rested on a measure of class compromise, societal obligations, formal equality and expansive macro-economic policies that favored broadly shared prosperity.
In its place, they constructed a new model of economic governance, popularly called neoliberalism. Its main features included flexible production networks on a global scale, union-busting, deregulation, low-wage labor, low inflation, free flow of goods, services and capital, shrinkage of the public sector, re-embedding of racist and sexist practices into political, economic and social life, restructuring of the state’s role and functions, and reassertion of finance.
It is against this backdrop that I will discuss financialization.
The turmoil in financial markets and the bailout to the tune of $700 billion has turned the public eye and wrath on Wall Street and Washington. While millions are aware of the triggering causes, ranging from predatory lending to deregulation to insatiable greed, what isn’t so obvious is the longer-term process that brought our financial system and economy to the edge of the abyss.
I call this process financialization. According to economist Gerald Epstein, financialization is a process in which “financial motives, financial markets, financial actors, and financial institutions come to play an increasing role in the operation of domestic and international economies.” (“Financialization and the World Economy,” 2005, introduction)
It started in the 1970s
In its present form, financialization goes back to the mid-1970s. At that time U.S. capitalism was beset by seemingly intractable and contradictory problems — high inflation and unemployment, declining confidence in the dollar, faltering competitiveness, slow growth, and a falling profit rate.
Faced with this unraveling of the economy and weakening of the position of U.S. imperialism on a global level, then-chairman of the Federal Reserve Paul Volcker stepped into the breech and pushed up interest rates to record levels. This wrung inflation out of the economy, but it also sent unemployment rates to the highest level since the Great Depression, forced the closing of scores of manufacturing plants and many more family farms, brought incredible hardship to the working class and especially the African American, Latino and other communities, and negatively impacted the global economy, particularly the developing countries in Asia, Africa and Latin America.
At the same time, the spike in interest rates to record levels redirected domestic and foreign capital abruptly and massively into financial channels where returns to capital were now extremely high. Volcker, as an experienced banker, knew that the capitalists’ problem wasn’t too little money capital, but rather too few opportunities to profitably invest a surplus of capital — a crisis of over-accumulation of capital.
Moreover, once in financial channels, money capital remained there, but not idly. Driven by its own nature to constantly expand and reinforced by competitive pressures of competing capitals (grow or die) in a permissive regulatory environment, the financial agents of capital (banks, investment houses, hedge funds, private equity firms and so on) raced at breakneck speed into a massive buying and selling and borrowing and spending spree for the next three decades — all of which led to an explosion of the financial sector in terms of employment, transactions, instruments, players and profits. In other words, financialization proceeded at a feverish pace and with a broad sweep.
Capital that produces little, destroys much
Unlike productive capital that reproduces and expands itself by extracting surplus value and profits from labor power in the production process, money capital is much more footloose and impatient. Its time frame is short term. It travels the globe in an instant thanks to computerization and the web. Sinking itself into longer-term investments in plants, equipment and new technologies that create jobs and grow the economy is something that financial capital does, but this is not its favorite cup of tea, especially in recent years. In fact, money capital is as likely to destroy plants and equipment as invest in them — witness our Rust Belt and the structural adjustment policies imposed on developing and former socialist countries.
Where possible, money capital hides in the shadows beyond the eyes of weakened regulatory authorities. Like a good entrepreneur, it invents new “products” (options, swaps, futures, derivatives), but highly risky ones, and then sells, buys and profits from them. When turmoil seizes the financial markets as is happening now, money capital cashes out and runs to safety until the storm blows over. In the event that it doesn’t reach a safe haven and absorbs huge losses, it is relieved in the knowledge that the federal government and Federal Reserve stand ready to bail out massive failures of big financial institutions, as we are seeing.
The lubricant of financialization is the production and reproduction of staggering amounts of debt — corporate, consumer and government. Debt is as old as capitalism, but what is different in this era of financialization is that the production of debt, speculative excesses and bubbles are now essential to the functioning of U.S. capitalism.
A two-edged sword
As it gained strength and scope in the late 1980s and ’90s, financialization grew to the point where it became the main determinant shaping the contours, structure, interrelations and evolution of the national and world economy. While financialization was an outgrowth of the systemic weaknesses and contradictions of U.S. capitalism, it was also the leading edge of a neoliberal model of capital accumulation and governance, designed to restore U.S. capitalism’s momentum, profitability and dominant position in domestic and world affairs.
But as we are painfully learning, financialization is a two-edged sword, not all peaches and cream. Indeed, its very successes opened up new fault lines in the U.S. and global economy, making it, as we so graphically see, unsustainable.
While it stimulated the domestic and global economy, it also left our nation with an astronomical pileup of household, government and corporate debt which can’t be unwound overnight.
While it gave an impulse to economic growth, it also introduced enormous instability into the arteries of the U.S. and world economy, evidenced by the frequent financial contagions at home and globally over the past two decades.
While it prolonged the upward cyclical movements of capitalism, it has also set the stage for a hard economic landing and a much deeper crisis eventually, which is what we are experiencing now.
While it created wealth on a substantial scale, it also successfully engineered the biggest transfer of wealth in our nation’s history from wealth creators — the world’s working people — to wealth appropriators, the upper crust of U.S. finance capital.
While attracting mobile capital to our financial markets, it also has made us dependent on the willingness of foreign investors to absorb massive amounts of debt, something that they are increasingly less inclined to do, as the dollar drops in value on international currency markets and our markets collapse.
While the debt-driven purchasing power of American consumers bolstered global demand, it also tied the world’s economy to our heavily financialized, indebted, and unstable economy.
New model of economic governance needed
And yet, despite this incredible wreckage, this almost incomprehensible corruption, this reckless speculation, these merchants of plunder, debt and hardship are still attempting to resolve this financial crisis in a way that continues to leave them in charge of the main levers of power and their wealth intact.
This is not “socialism,” as we hear from the extreme right. It is parasitic state monopoly-finance capitalism. Or, in more colorful language, out-of-control cowboy/casino capitalism.
The American people and their friends in Congress are faced with a first-class challenge. In the near term, some immediate measures must be taken to restore the orderly functioning of financial markets, to recharge the economy, and, above all, to improve living conditions for the American people.
In the longer term, what is required is a new model of economic governance at the state and corporate level. By that I mean a reconfiguring of the role and functions of government and corporations so that they favor working people, the racially and nationally oppressed, women, youth and other social groupings. This will not only require the election of Democratic Party nominee Barack Obama, but also a sustained struggle by a labor-led people’s coalition in concert with its allies in the nation’s capital on what will be new political terrain.
Recent events have undermined the legitimacy of the neoliberal model of governance and accumulation so eagerly embraced by the Bush administration and Republicans in Congress. (No wonder they say they don’t want to play the “blame game.”)
But a substitute is not in place. Instead, we have a political vacuum into which various contending forces will try to impose their model of governance as we go forward.
In my view, such a model should draw from the New Deal experience, but in the end it has to be shaped in the first place by today’s conditions and requirements for political and economic advance for our nation’s working people and oppressed people, broadly defined. It won’t be socialist, but it would challenge the power and practices of the agents of capitalism, insist on peace and equality, consider public takeover of our energy and financial complex, and de-militarize and green our economy and society.
Depression conditions prompted Franklin Delano Roosevelt and his advisers — albeit with a mighty assist from a powerful all-people’s coalition led by the industrial unions and the multiracial working class — to reconfigure the role and functions of the state to the advantage of the ordinary people. We should draw inspiration and energy from this and set a similar course.
Sam Webb (swebb @ cpusa.org) is chairperson of the Communist Party USA.