Monday, December 8, 2008

Hillel Ticktin's editorial in the new issue of Critique


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.


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 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
http://www.ft. com/cms/s/ 0/b1e7adb2- 801a-11dd- 99a9-000077b0765 8.html?nclick_ check=1

14New York Daily News,
http://www.nydailyn 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.