Saturday, January 31, 2009

It Won't Save the Economy; It May Make the Crisis Worse

by Michael Hudson

First, here’s the silhouette of the giveaway, as outlined Thursday in the New York Times:

“Treasury Secretary Timothy F. Geithner said Wednesday the administration is working on a comprehensive plan to “repair the financial system.” … bank stocks surged on hopes the government was moving toward creating a “bad bank” to purge toxic assets from balance sheets that are rapidly deteriorating as the economy worsens… administration officials believe that trillions of dollars more may be needed to buy the majority of bad assets from banks. …

“The concept of a bad bank has gained momentum in the financial industry as the economy deteriorates, slashing the value of risky assets on banks’ books and increasing the need for banks to hold capital against those losses. Shares in Citigroup and Bank of America, which both recently received a second taxpayer lifeline, surged 19 percent and 14 percent respectively as the stock market rose on optimism that the administration would relieve banks of money-losing assets.”

“Geithner Says Plan for Banks Is in the Works”, By Stephen Labaton and Edmund L. Andrews, The New York Times, January 29, 2009.

After (1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation’s retirees, and (2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of (3) some $2 to $4 trillion more to be given in just the next week or so.

Not a single Republican Congressman went along, just as Rep. Boehmer refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. This probably is the only place where I’d like to see “bipartisanship.” Watch the campaign contributions flow for an index of how well this will pay off for the Democrats!

How many families would like a “give-back” on every bad investment they’ve ever made? It’s like a parent coming to a child who has just broken a toy, saying “That’s all right. We’ll just go out and buy you a new one.” This from the apostles of “responsibility” for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can’t afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama “cleanup” has foisted onto the economy. No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century.

After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody – as if “socialism for the rich” were not an oxymoron in the first place. Certainly the banks are not being “nationalized.” Giving away the largest sum of spendable securities in history without direct managerial power that goes with ownership is not “nationalization.” Ask Lenin.

Now that the details of the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more have been leaked out in time for Wall Street’s Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 – or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and “taxpayers.” More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.

Backed by Larry Summers, Boris Yeltsin’s Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats’ bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game. Today’s U.S. giveaway has a new twist. The analogy is the “watered stocks” and bonds of yesteryear that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real “costs.” Today’s version – “watered Treasury bonds” – are being created on the public sector’s balance sheet. “Taxpayers” must pay bear the interest charges – leaving less for the infrastructure investment that Mr. Obama suggests we may need.

The Bush-Obama bailout bore “small print” stipulations that have already given Wall Street a decade’s tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal giveaway, there has been a tax shift off finance onto labor and industry. States and localities already have begun to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to finance their looming budget deficits (which localities are not allowed to run under present legislation) . No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them a spendable money “bonus.” Their role is simply to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. Insolvent debtors are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole.

Whole, and then some! Chris Matthews just reported his statistic of the day (January 29): $18.4 billion in Wall Street bonuses, paid for out of the government giveaway.

This is called “saving the economy.” That is as much an oxymoron as “socializing the losses.” Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books, but for the government to buy them and make the creditors whole – while a quarter of real estate has fallen into Negative Equity as its debts are not being bailed out but kept on the books. The economy’s “toxic waste” remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks!

In the seemingly frenetic ten days since Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing, are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. At least this seems to be their effect. To accuse Obama of a giveaway would seem at first glance to contradict the basic thrust of his actions – or would be if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate.

There is a simple way to think about what has happened – and why it won’t help the economy, but will hurt it. Suppose the new $4 trillion “bad bank” works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government “marking to market.” (So much for the pretense that giving Wall Street credit is “free market” policy. But the alternative to free markets does not turn out to be “socialism” at all, even if “socialism for the rich.” There are worse words for it, which I won’t use here.)

The real question is what the Wall Street elite will do with the money. From Chuck Schumer and Barney Frank through Larry Summers, the Obama administration hopes that the banks will lend it out to Americans. Borrowers are to take on yet more debt – enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets – to earn enough to compensate for their gambling losses.

But this neglects the fact that today’s looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet MORE debt? Is there not something crazy here?

The government’s solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the “real” economy even more highly indebted. All this talk about “more credit” being needed, all this begging of banks to lend more money and then extract yet more interest and amortization from the economy, is leading it even deeper into the debt hole. It is not helping families repay their debts. And indeed, homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more.

It would take only $1 trillion or so – or simply to let “the market” work its magic in the context of renewed debtor-oriented bankruptcy laws – to cure the debt problem. But that obviously is not what the government aims to solve at all. It simply wants to make creditors whole – creditors who are, after all, the largest political campaign contributors and lobbyists these days.

The most important thing to understand about the present economic crisis is that it was not necessary technologically, politically or fiscally. Government at the state, local and federal levels are strapped for funds – but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. That is, whereas property taxes used to finance about three-quarters of state and local budgets back in 1930, today they supply only about a sixth. The shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The rise in market price has been pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus – leaving the public sector starved of cash.

The financial sector also has replaced the government as economic planner. This role has followed from its monopoly in credit creation, which turns out to be the key to resource allocation.

Bank credit is created freely. Governments could do the same. Indeed, this is what the U.S. Treasury did during America’s Civil War, when it issued greenback credit.

If today’s looming economic depression is a manmade (that is, lobbyist-financed) phenomenon, then what policy is needed as a remedy?

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson. com

Wednesday, January 28, 2009

Crisis 'has hit China's economy'

Chinese Premier Wen Jiabao described how his country was tackling the financial crisis

The global financial crisis has had "a rather big impact" on China's economy, the country's Premier Wen Jiabao said in a major World Economic Forum speech.

Speaking in Davos in Switzerland, he said the crisis had placed the world economy in the most difficult situation since the Great Depression.

In China, he said, there was rising unemployment in rural areas and "downward pressure on economic growth".

But he added that China's economy was in good shape "on the whole".

Mr Wen said that among the reasons behind the current global downturn were "inappropriate macro economic policies in some economies, characterised by [a] low savings rate and high consumption".

He also pointed to a "failure of financial supervision and regulation to keep up with innovation which allowed financial derivatives to spread".

'Downward pressure'

China's economy grew by 9% in 2008, but only by 6.8% in the final quarter of the year, as overseas demand for China's exports shrank.

"The Chinese economy is now under mounting downward pressure," said Premier Wen Jiabao.

We are full of confidence

China's Premier Wen Jiabao

"We are targeting a growth rare of about 8% in 2009. It will be a tall order, but I hold the conviction that through hard work, we can reach the goal."

As the demand for China's exports shrinks, he said that as part of relaunching the economy, the country had to focus now on expanding domestic consumer demand.

There would also be a sustained package of measures aimed at increasing economic growth, as well as a series of policy measures in the financial sector to boost economic growth.

New technology

In addition, there would be industrial restructuring - with the phasing out of backward production practices - and particular attention would be paid to the key industries of cars, iron and steel.

An "extensive use of new technology would increase competitiveness", as would an upgrading of science and technology, he said.

"Will China's economy continue to grow fast and steady? Some people may have doubts about it, yet I can give you a definite answer," he said.

"Yes, it will, we are full of confidence."

He said China would "take prompt, forceful and effective measures" to ensure the health of its economy.

Source BBC News

Monday, January 26, 2009

Crisis of Neo-liberalism- Keynesianism no Answer

The Great Depression of the 1930s was finally pulled out of its crisis after World War II together with Keynesian formulas of state intervention nationalization) and the welfare state. In those days it also had to contend with a powerful socialist camp. But with the temporary collapse of socialism worldwide and the retreat of national liberation movements and a persisting economic crisis since the mid-1970s, the neo-liberal formulas were pushed to the fore.

Reaganism,Thatcherism, et al became the fashion and Keynesianism, nationalization were much ridiculed, not to mention the socialist alternative. The 1990s saw neo-liberal economic polices peak where the market was the new god that determines everything.

Fortunes were made on a scale never seen in the history of capitalism; of course, in the wake of immense impoverisation, with the rich-poor gap also becoming the widest ever.

It was even portrayed as “the end of history”, as though the ‘golden’ capitalist era is here for ever and socialism relegated only to history text books. Even welfare was now privatized with a massive mushrooming of NGOs funded by the moneybags and the state.

Growth rates grew compared to the era of the 1970s and that became the irreversible
alibi for the neo-liberal theoreticians. And with it was accompanied the gigantic leaps in communication technology in the form of the computer, internet, cell phone, TV, etc that gave it the glamour of a scientific inevitability. The high profile media portrayed none of the misery below the surface and only promoted the world of wealth and glamour.

The middle class was brainwashed with this continuous bombardment, and a section even got an opportunity to eat off some crumbs from the imperialist/comprador table. The smallest dissidence was labeled ‘terrorist’ and callously dispensed with. Once so branded, one ceased to be human, it was as though a dangerous insect had been crushed. The poverty stricken masses too were a nonentity in this make-believe world.

But now the fantasy world of the neoliberal bubble has burst; and burst in a way that it is unlikely to re-gain for long. Meanwhile it will pull down with it millions more into the mire and suck away lives in lakhs. With one financial bubble after the other bursting the theoreticians of neoliberalism have no answers and seem totally helpless in the face of the continuing collapse of pillar after illar of the financial establishment. The gods of power and wealth are tumbling down.

All these crisies and bursting of bubbles since the 1970s are, at its roots, crises of over-production. Due to levels of extreme exploitation, markets for commodities have scarcely grown while profits and capital accumulation have skyrocketed.

This is clear even from the Fortune 500 listings each year which show negligible growth in sales. So, the accumulated profits has no outlet in industry and the manufacturing sectors. That is why much of the accumulated surplus has gone into the financial sector -in the form of third world debt, and then into speculation and real estate, creating the bubble economies.

They have just their standard fiscal answers — reduction of interest rates is their main tool: to increase liquidity (i.e. money for capitalists) and make available easy credit for the people to spend and revive the slumping market. But it is not working. On Oct 9th, for the first time ever several Central Banks acted in concert to stem the market panic. The US Fed cut interest rates by 50 basic points to 1.5%; while the European Central Bank cut interest rates from 4.25% to 3.75%. The Bank of England and the Central banks of Canada, Sweden, Switzerland and China also cut interest rates within seconds of each other.

But this was not able to stem the rot. The collapse of the banks, financial institutions and now even the industrial giants continue. Interest rates were reduced further and now in the US the rate stands at 1% and in Japan at 0.2%. On Nov 6th England once again slashed interest rates, this time by as much as 1.5% to bring it to 3% — a 53-year low.

In desperation they have thrown all their neo-liberal theories to the winds and governments have intervened with gigantic bail-our packages to rescue the banks, investment institutions and even companies. This is defacto resorting to the much abused ‘nationalization’. As long as they were making huge profits, privatization was the mantra; now when they are making losses and are in fact collapsing it is back to nationalization.

But this Keynesian alternative is no real solution; it is a mere palliative to give immediate relief. The social democrats and the CPI/CPM type socialists may harp on these alternatives but they will have to explain the earlier failures of the Keynesian model of the 1960s resulting in the crisis which began in the 1970s, and still continues. Also they will have to explain the collapse of the Soviet Union (after capitalist restoration) and those of the then East European countries — all of which were built on a powerful state sector.

The present crisis which is reminiscent of the Great depression is a systemic problem of the capitalist mode of production itself. The roots of the crisis lie in the capitalist system itself for which there is no solution within it. The only real solution to revive the economy is through the very overthrow of the system and its replacement with the socialist alternative.

Extract from Article in Peoples Truth India No 4 - Voice of the Indian Revolution

Saturday, January 24, 2009

Crisis - the Over Accumulation of Capital by Brendan M Cooney

We can’t understand anything in isolation. We only understand things by comparing them to something else. If we are to understand why a capitalist economy goes into crisis we need to compare capitalism to something outside itself. Through such a comparison we can begin to see what is distinctive about capitalist crisis.

In order to make the most striking comparison, here we will use the example of a primitive hunter-gatherer society. The economic life of these early societies were extremely simple because there was no differentiation of work activities. Labor was a collective effort in which everyone participated to the best of their ability. The products of that labor were shared amongst the community according to need. The economic structure of these early primitive-gatherer societies was a large undifferentiated whole. There was no possibility of internal economic crisis because there were no internal parts that could be in conflict with each other or get out of synch.

Economic crisis, then, was external. Drought, cold, fire, disease, predators…. The brutal forces of nature had their way with early man. It was this opposition between man and nature that defined life for early man.

Fast forward a few millennium…

Capitalism could be seen as the polar opposite of this. Our vast productive abilities have enabled us, for the most part, to be free of this opposition with the natural world. By producing a social surplus, we can store up goods to feed us in times of drought, to shelter us from the ravages of storm and cold. This tremendous productive ability is accompanied by a tremendous differentiation of economic activity into separate parts- millions of different productive units (workers, companies, banks, governments) all coordinated through capitalist markets. When crisis hits a capitalist society it is not because of some external shock, but because something has gone awry internally. The mechanism by which all these different labors are coordinated has broken down. Crisis in a capitalist society is not a matter of man versus nature but of man versus himself. We might even say that the external conflict has been internalized.

How are all of the different productive activities of a capitalist society coordinated? Rather than sharing in one collective laboring effort like in a hunger-gatherer society, capitalist production is separated into millions of separate labor processes all coordinated through the exchange of commodities. By exchanging commodities in the marketplace the labor of tomato pickers, car makers, hair stylists and coal miners is coordinated. The private labors of these individual labor processes (tomato pickers, car makers, hair stylists and coal miners) each make up just one small part of the total labor process of society. Their labors are represented in the form of commodities. What at first glance appears to be just physical objects exchanging with one another is actually a complicated process whereby the various components of a social labor process are brought together. Karl Marx remarked about this process that, “Material relations between people become social relations between things.” That is, commodities become representations of these tiny parts of the collective labor process.


Commodity exchange implies a notion of value. While in previous eras people labored in order to make things for themselves, capitalist production means working in order to make commodities to sell. Commodities don’t just have a subjective value to the people who use them (a use-value). They also have an objective value, their exchange-value, which expresses their value relative to all other commodities. (We don’t just worry about whether or not we want a commodity; we also worry about how much it is worth relative to other commodities). Value expresses the amount of labor represented by a commodity. It is through this exchange of values in the market that all of the different parts of the social labor process are coordinated. We measure value in money.

So the social relations between people in a capitalist society are regulated by commodity exchanges. And commodity exchange is organized around values. “Value”, in the economic sense, is a very peculiar concept, unique to capitalism. Value is produced by the private concrete labor of an individual worker or group of workers. Yet this labor only has value to the extent that it is part of a larger social labor process happening all over the world. Through exchange the value of my individual labor is measured against the value of everyone’s labor. When we say that crisis in internal to capitalism we mean that something has gone awry with the way value regulates this commodity exchange.

Accumulation and Overaccumulation

[Money is also a very peculiar thing. We use money to measure value. It helps us exchange one commodity for another (C-M-C). In capitalism another use of money also becomes possible- M-C-M: A capitalist begins the day with money (M). (S)he sets this money in motion producing commodities (C) to sell. At the end of the day (s)he has more money (M). Whether a capitalist invests directly in production or loans money out as credit they are engaging in M-C-M. Thus the total amount of value in society is constantly expanding.]

Money is also a very peculiar thing. We use money to measure value. This allows money to act as an intermediate stage in the exchange of commodities: rather than directly bartering I sell a commodity for money and then use that money to buy a different commodity. But the opposite can also happen: I can spend money on the production of commodities and then sell those commodities for money. It only makes sense to do this if I end up with more money. This is exactly what capitalists do all day long. They turn their money into more money by investing in production (or loaning money). When capitalists accumulate more money they are accumulating more value. Thus the total amount of value in society is constantly expanding.

In previous societies the rich were primarily concerned with accumulating specific things (use-values): land, subjects, riches, etc. In a capitalist society it is money itself, as the representation of abstract human labor, that is the goal of accumulation. Instead of pursuing particular qualities of commodities the capitalist is interested in gaining greater quantities of the same thing: money. Because humans can always work more, always produce more value, there is no limit to the amount of value that a capitalist can accumulate.

Eventually Genghis Kahn would have run out of desert to conquer. Pizarro could only steal so many riches from the Incas. The Pharaoh could only build so many pyramids. But the capitalist can grow and grow, seemingly without limit. Hence the amazing, dynamic trajectory of capitals growth- a system that in a few hundred years has conquered the globe, revolutionized the lives of everyone on it, destroying old societies and creating new ones out of their ashes… always getting bigger.

Because there is no limit to the amount of value that can be created the only thing the capitalist worries about is where to invest to make more money. As long as money can be turned into more money the economy is in good shape. But if there is ever a reason why money can’t find profitable investments we are in trouble. When money can’t be turned in to more money the Crisis! sirens go off on Wall Street. Capital freezes in all the stages of it’s circuits and economic activity grinds to a halt. The only solution is to devalue capital: to sell off excess commodities at discounts, to close factories, fire workers, write down assets, foreclose on mortgages, etc. When capitalist accumulation overreaches its own ability to grow it has no choice but a violent purging of value from the system. This is what a crisis is.

Nowadays we talk a lot about the external, ecological limit to capitalist growth. But value theory is interested in a different limit- an internal limit lodged in the very heart of capitalist accumulation. When the accumulation of value hits a limit it appears as a crisis of over-accumulation: an excess of capital that can’t find profitable investments. This manifests itself as idle factories, factories with excess capacity, shelves of unsold commodities or partially finished commodities, unemployed workers, debt which can’t be paid, devalued real estate, etc. Value theory argues that the same process whereby value is accumulated generates its own limits. Let’s take a closer look as to how this happens.

Labor and Capital

In order for a capitalist to turn his money into more money there must be a commodity which is capable of creating more value than it costs. This commodity is, of course, human labor. The amount of money paid to workers in wages has nothing to do with the amount of value they produce. These are two entirely distinct quantities of value. (We often refer to this as the difference between the use-value and exchange-value of labor power. The use-value is the capacity for creating value and the exchange-value is the cost of reproducing the worker.) The more labor a capitalist gets out of his workers relative to their wages, the more surplus value the capitalist makes, the more profit he makes, the more the economy grows.

This means that there is a fundamental antagonism between the interests of capitalists and workers. The more surplus value the capitalist extracts from his workers the better he is at being a capitalist. The better the working class can resist this exploitation the more they defend their own interests. This antagonism lies at the very heart of the way value is created in a capitalist society. Let’s look then at how this antagonism generates limits to accumulation.

Though labor and capital are antagonistic they are also mutually dependent. Without capital workers wouldn’t have jobs. Without labor capital wouldn’t be able to turn itself into more value. When workers become too powerful they can demand higher wages from capital which means less profits. So capital looks for ways to free itself of its dependence on workers. The name for this is “efficiency.”

That sounds like a weird definition of efficiency but this is precisely what lies behind the capitalist obsession with efficiency. When the labor process becomes more efficient it means that the same task can be done with less labor. It also causes much of the labor process to be simplified, meaning that jobs require less skill and lower wages. This all makes workers easily replaceable and makes capital less dependent on labor. Capital can lay off workers or pay them less and workers have less power to resist.

More efficient production also allows capitalists to out compete their rivals. Since prices are set by the average productivity of labor, if a capitalist can cause their workers to be more productive than other firms then they can take advantage of this difference between their firms productivity and average productivity to make extra profit.

But as much as capital may try to free itself from labor it is always ultimately dependent on labor to produce value. So there is a real and dangerous contradiction between the dependency on labor to create value and capital’s drive to rid itself of this dependency. It is this antagonism which creates the crisis of overaccumulation: capital goes looking for profit and can’t find enough places to make profit because it has annihilated its own ability to create value.

Let’s look a little more concretely at how this happens.


Since it’s emergence on the historical stage capitalism has displayed a remarkable ability to innovate. Vast revolutions in our technological abilities, from transportation to communication to production, have created revolutions in every aspect of our lives, altering even the ways we experience space and time. The primary drive in all of this has been to decrease the amount of time required to produce a commodity. Yet while such technological revolutions have often triggered enormous economic booms they have also eventually destabilized value relations and opened the door for crisis. We have to remember that anytime we increase the efficiency of the labor process this means that the product represents less value.

When workers are replaced by machines this means less labor input per commodity… which means less value per commodity. If just one capitalist does this he can produce commodities more efficiently than the social average thus turning the difference into excess profits. But this encourages other capitalists to follow in search of these same excess profits. Once they all introduce more machines into their labor process a lower average productivity is reached and the prices of commodities fall. But the expense of making a commodity has gone up due to the cost of adding new machines. This can manifest itself as a falling rate of profit. (See video on falling rate of profit.) When profit rates fall this means that capital can’t find profitable places to invest. Money can’t be turned into more money fast enough. The circuit if capital (MCM) grinds to a halt.

Fixed Capital

The worker finds himself surrounded by an increasingly complex array of machinery all designed to purge human labor from the production process. Capital finds itself entangled in larger and larger investments in machines while the value of their commodities keeps falling. But what if the price of machines are falling as well? If new machines are constantly being purchased at cheaper prices this could stabilize profit rates in the long run.

But much of the machinery in a capitalist society is built to stay around for a long time. Auto factories, oil refineries, steel plants, gas pipelines, etc. all entail large start-up costs and years of construction. It takes these investments many years, perhaps even decades to pay off these initial start-up costs. We call these machines that stick around for a long time “fixed capital.” Fixed capital introduces all sorts of complications into value relations. Capitalists are committed to the use of fixed capital, to a certain level of efficiency, for some time even if the value relations around them are changing. For instance, if you build a factory for a million dollars in 2000 that has a maximum capacity of producing a thousand widgets a year… and then your competitors all build factories in 2005 that cost half as much to build but produce more widgets… you are screwed because now you have to sell your widgets at a loss. And you can’t just go buy a new factory because you still haven’t paid off the old one.

The current problem in the US auto-industry is a perfect example of this problem. The US auto-industry dominated world markets after World War II. But as the Japanese and German economies began to revive they built more efficient factories with new, cheaper fixed capital. (The costs of these fixed capital inputs had fallen over the years.) The Germans and Japanese began to produce cars more cheaply and undercut American car production. This sort of competition effectively devalued the existing stock of fixed capital in the US, yet the US couldn’t just abandon its factories and build new cheaper ones because it still hadn’t recouped the costs of its initial fixed capital investments! This led to the economic crisis of the 70’s in which Nixon had to devalue the dollar in order to make US commodities more competitive in global markets. (This is all a huge oversimplification.)

The US auto-industry found itself with an overaccumulation of fixed capital that could no longer produce enough value to stay competitive in the world market. This particular overaccumulation manifested itself as excess capacity, but overaccumulation can take a variety of forms. In our current crisis we can see many different types of overaccumulation. Retail sales are down and commodities are bunching up in warehouses. Industries are struggling to shed themselves of excess capacity by closing factories and firing workers. The ranks of the unemployed grow by the tens of thousands every month. Real estate is over-valued. There is an excess of credit unable to be paid off. In all these cases there is too much capital stuck somewhere in the circuit of capital, unable to move to the next stage.


In all these instances the solution to overaccumulation is devaluation. By reducing the prices of commodities, closing factories, firing workers, cutting wages and benefits, writing down debts and slashing real estate values capitalism can devalue capital in all of its stages. This process of devaluation- this violent purging of the system is the necessary antidote to the problem of overaccumulation. This is what a crisis is- a drastic process of devaluation.

Though devaluation will drive many capitalists out of business, some will survive. Those that do survive come out on top. They are able to buy up the assets of their competitors at devalued prices as we have recently seen Bank of America do. Crisis is often a time of massive capital consolidation.

In a crisis the capitalist class battles over who will absorb the brunt of devaluation. Will it be the banks and credit agencies that finance production? Will it be the productive capitalists who drove down profit rates with their fixed capital and excess capacity? Or will devaluation be displaced geographically?

One of the most common strategies for devaluing capital is to devalue the currency. This devalues all capital relative to other countries making a country’s commodities more competitive on foreign markets. Devaluation of the currency effectively socializes the costs of devaluation meaning that all commodities, capital and labor are devalued. When Nixon devalued the dollar in 1971 this made all US commodities cheaper and better able to compete against the Germans and Japanese. But the long term effect of this was to trigger a long process of competitive devaluations as different currencies adjusted relative to other currencies all trying to shift the burden of devaluation onto some other country. The Asian financial crisis of 1997 showed us how reckless and destructive this strategy can become. It will be interesting to see how the process of competitive devaluation plays out in the current economic crisis. Who will be forced to bear the brunt of devaluation? What political alliances and battles will form out of this global conflict over devaluation?

Another strategy is to postpone devaluation in time through the use of credit. This has been a major strategy for displacing crisis since the 70’s. When profitable investments can’t be found in production capitalists can pour their money into loans, mortgages, hedge funds, etc. This creates the illusion that their money is still in motion, that it is still generating more value. But a lot of time this just means that debt is just being passed from capitalist to capitalist… This can create enormous bubbles of credit values not backed by any real value at all. (see my video “What is Credit?”) The insane over-investment in credit markets (accompanied by an insanely low rate of interest) before the recent bubble burst is evidence of the lack of real actual profitable investments in the global economy relative to the amount of capital needing to be invested.


When we say that crisis is internal to capitalism this means several things. It means that the method by which all of the laborers of a capitalist society are coordinated, value, creates antagonisms that destroy that very coordination. Value as a coordinating mechanism spawns class antagonism between a capitalist class that exists to appropriate this value and and a working class that must be exploited if capitalist accumulation is to take place. And this class antagonism is reflected in the antagonism between man and machine- the conflict that drives accumulation forward toward its own destruction.

Capitalism is a system rife with such dynamic, explosive internal antagonisms. What else could explain the cycles of boom and bust that have rocked capitalism since its inception? When we say that crisis is internal to the structure of capitalist social relations we mean that the very way our social relations are structured are dangerously unstable. While the mainstream political discourse debates which capitals to devalue and how to initiate the next boom phase we must remember that a true solution to capitalist crisis is to redraw the basic mechanisms of these social relations. If we can’t understand capitalist crisis without comparing it to something outside of itself we also can’t solve capitalist crisis by confining our logic to the internal logic of the system. We must appeal to a future stage of history: an organization of social relations without accumulation based on exploitation.

Brendan M Cooney


Das Kapital- Karl Marx
Limits to Capital- David Harvey
“Turbulence in the World Economy” by David McNally in the Monthly Review; June 1999 (
I also recommend the following series of papers/lectures:

Thursday, January 15, 2009

Neo Liberalism's intellectual edifice by Gunnar Tomasson

Picture Paul Samuelson

Dear Mr. Dionne,

Re. the following from your column in today's Washington Post:

In [a certain] respect, at least, Obama is rather like Franklin D. Roosevelt, who dismissed the conservative economic doctrines of the 1920s. “We must lay hold of the fact that economic laws are not made by nature,” Roosevelt said, directly countering the central premise of orthodox economics. “They are made by human beings.”


I. In the opening section of a recent paper on Iceland ’s economic collapse I traced the precise source of this "central premise of orthodox economics" to Paul A. Samuelson’s Ph. D. thesis at Harvard in 1942:

Neoliberalism' s ‘intellectual edifice’

The disaster which befell the national economy in early October had long been foreseeable. It reflected the collapse of the business model of the Icelandic commercial banks following their privatization, on the one hand, and the inadequacy of the concurrent economic policies of the government, on the other hand. The business and economic policy practices involved were not specifically Icelandic but mirrored the ideological prescriptions of which former Chairman of the US Federal Reserve Board Alan Greenspan, spoke before a congressional committee two weeks later as follows: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.” As for the presupposition of all mainstream economics that automatic corrective forces ensure financial market equilibrium, Greenspan said: “The whole intellectual edifice collapsed in the summer of last year.”

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Greenspan confessed. “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” The committee chairman sought clarification of the matter: “In other words, you found that your view of the world, your ideology, was not right, it was not working,” “Absolutely, precisely,” Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Greenspan’s ideology is labeled The Washington Consensus because it has shaped the views of the principal institutions in the field of monetary and economic issues in Washington D.C. , including the International Monetary Fund (IMF). In the wake of the privatization of the banking system, the Central Bank of Iceland, the Ministry of Finance and the Financial Supervisory Authority were guided by Greenspan’s ideology. And they were not alone in this for as John Maynard Keynes, the foremost economist of the last century, observed, “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men ... are usually the slaves of some defunct economist.”

Keynes wrote this at the end of his best-known work, General Theory (1936), but in a preface to Tract on Monetary Reform (1924, a book dedicated “without permission” to the Bank of England’s Court of Directors ) he had expressed his disagreement with the view that bankers could not understand the business of banking. Instead, the problem was – and, as indicated by Greenspan's ”shocked disbelief”, still remains – that theoretical economists have not had anything sensible to say on the subject matter. Since 1976, as it happens, this writer has repeatedly drawn attention to the flaw which shocked Greenspan 32 years later. At the time I was doing research in connection with a Ph. D. thesis at Harvard University while working as an economist at the IMF. My drawing attention to the flaw was not well received, to put it mildly. My adviser, the Chairman of the Harvard Economics Department, chose to withdraw from that role and colleagues at the IMF were not amused for, as a very senior official put it: “Mr Tómasson thinks he is right and the world is wrong.”

Four weeks before Greenspan’s appearance before the committee, Fréttablaðið published an article by me on the flaw in question (‘Crisis in economics’, Sept. 25). Since it addresses the root cause of ongoing problems in world monetary and economic affairs as well as that of Iceland ’s economic disaster, my article’s key point bears repeating now:

The flaw resides in an innocent-looking hypothesis which Paul A. Samuelson advanced in a 1942 Ph. D. thesis at Harvard expressly for the purpose of paving the way for use of algebra and calculus in the analysis of theoretical economic models. It reads as follows: A market economy is a “system in 'stable’ equilibrium or motion”. Embedded here is the idea that any incipient displacement of the conditions of market equilibrium triggers offsetting corrective reactions by the forces which drive the market system along its path of dynamic equilibrium. This notion is borrowed from Newtonian mechanics in which gravity is held to steer the path of all material particles in the universe.

Samuelson’s hypothesis is no worse than much else which academic scholars can imagine and it was benign while ensconced within academe’s ivory tower. Also, it is fair surmise that the hypothesis would not have passed muster had it occurred to anyone that it would be taken seriously by the world’s monetary authorities after 1970. For it implies that national and world monetary equilibrium is certain to be ensured if the world's governments and central banks step aside to make way for the equilibrium which the hypothesis holds to reside in market forces. Now that many national monetary systems and that of the world as a whole are in turmoil, it can no longer be denied that the hypothesis is counter-factual.

Indeed, it is self-evident that ’laws of nature’ differ from regulations established by national and international authorities in light of their best judgment at any given time. Still, Iceland’s Minister of Finance viewed government intervention in the decision-making of the country’s banks as ill-advised because they were operated by experts. Iceland ’s monetary authorities may not have heard of Samuelson's hypothesis, yet it is reflected in their worldview.

II. I commented on the dire real-world implications of this “central premise of orthodox economics” in a Letter to the Editor of the Washington Post on September 20, 2008 as follows:

Your Sept. 20 editorial ('Day of Reckoning') refers to "greedy Wall Street executives and the inattentive Washington regulators who enabled them to build what we now know was a financial house of cards.”

As a former senior IMF staff member (1966-1989) and critic of mainstream economics and The Washington Consensus, I have long viewed post-Bretton Woods world monetary arrangements as fatally flawed. In this respect, John Maynard Keynes cautioned: “Soon or late, it is ideas, not vested interests, which are dangerous for good or evil."
One such idea is Paul A. Samuelson's “hypothesis that [a real-world market] system is in “stable” equilibrium or motion.” (Foundations of Economics, p. 5) For, when applied to policy-making, it implies that monetary stability is best served by the IMF, governments, and regulatory institutions getting out of the way of self-correcting market forces.
In fact, it is not rocket science to figure out that an ever-increasing ratio of world paper 'wealth' to real output is unsustainable. But, once the inevitable happens, those in authority will feign surprise and assert it could not have been forseen. In late 1996, therefore, I advised Fed Governor Laurence Meyer, inter alia, as follows:
“It is fair surmise that macro-economic forecasting models predicated on mainstream monetary thought, which have detected no signs of a global crisis during the rapid rise in the ratio of paper wealth to real output during the past quarter century, are once again setting policy-makers up for a nasty “surprise”.”
Also, in early 1997 I wrote to Professor Patrick Minford, economic adviser to Margaret Thatcher, concluding with respect to post-Bretton Woods world monetary arrangements that “[This] house of cards is certain to come crashing down."
III. A refresher economics course for President Obama’s brilliant economic team is in order.

Sincerely yours,

Gunnar Tomasson

Tuesday, January 13, 2009

The Global Capitalist Crisis and India: Time to Start the Discussion

by Analytical Monthly Review

We have not yet seen the start of an adequate discussion of the consequences for India of the global capitalist crisis. We cannot in these few pages correct that inadequacy, but perhaps can suggest some reasons why the discussion has been inadequate, and some lines along which the discussion might usefully develop. The decline of political economy as the central tool of analysis, above all in the mass media but even among the left, is most to blame. The “reform” of the last decades had seen a deformation of economic discourse, with discussion frequently reduced to imbecilities about the rise in aggregate growth rates and a hypnotic stunned fixation on the apparently inexorable rise in Sensex stock exchange index numbers. Those who were paid to beat the ideological drum in the business press have been left stranded and exposed by the events of the last months, their few pet arguments in ruins. Some of that rubble remains to be cleared away, if a useful discussion is to start.

To restore a proper perspective we need to focus on growth rates, since they occupy what space has been given to date to discussion on the consequences of the world capitalist crisis. More than 70% of the total population of India is rural. In 1990-91 GDP composition by sector showed agriculture with around 32%, the industry sector with 27%, and the services sector with 41%. In 2007-08 it is 17.8% from agriculture, 19.4 from industry and 62.9% from service — which include construction, trade, hotels and restaurants, transport, storage and communications, finance, insurance, real estate and business services, community, social and personal services. The growth rate of these sectors from 2001 to 2008 is respectively 2.8 for agriculture, 7.1 for industry, and 9.0 for services, with the highest growth rates in services to be found in finance and finance–related sectors. Thus a primary force of the supposed high growth has come from the opening of the Indian economy to the vast financial bubble generated by the rulers of the United States (see John Bellamy Foster and Fred Magdoff, Financial Implosion and Stagnation: Back to the Real Economy” ( For this article scroll down this page)

These much-publicised high growth rates of the last several years have been largely irrelevant to the majority of the population.

A recent World Bank report finds that 42 percent of the population, or 456 million people, are living below the official — and criminally low — poverty lines. Of course it is not the case that all the growth of the last few years is the result of the financial explosion and the penetration of U.S. global finance capital. There has been increased productivity from technological progress, continuing infrastructure development, and growth in IT to some degree represents activity useful to humans irrespective of what social system predominates. But from what we have seen of the relevant research, the historical growth rates predating the “reforms” approximate what growth has occurred in the real economy, and the recent upward deviation from the mean is largely accounted for by growth in finance and finance-related sectors.

Yet the diseased growth spreading from the financial sector has not been without consequences. A significant sector of comparatively well paid and high-consuming small property owners has been created, linked to global financial circuits but contributing little or nothing to the real economy — beyond the construction of multistoried air-conditioned palatial apartment blocks that overlook hectares of crumbling huts and slums. And as has always marked the progress of global monopoly finance capital, this period has seen the benefits of all growth, both in the real economy and in the finance-related sectors, accrue primarily to the rich, with an enormous increase in the already existing severe inequality. In March, Forbes magazine reported that the number of billionaires had increased to 53 and their combined wealth was equal to 31 percent of the country’s GDP. As these billionaires have multiplied, lakhs of farmers committed suicide in the country, the employment rate declined, the pre-”reform” rate of decrease in the poverty rates — even according to official estimates — declined, children remained malnourished and millions died of curable diseases. Only within this context should we approach the discussion of the effect of the world capitalist crisis on growth rates.

Every day now brings new revisions downward of the expected growth rates for the coming months and years. The repeated announcement by the now departed Finance Minister and the Prime Minister that the impact of the world financial crisis is going to be insignificant is already a curious memory of the past. And given what we know of the finance-related contribution to recent growth rates, a sharp decline is indeed inevitable — and the only reason that it will not be more severe is that Chidambaram’s aggressive privatisation program for the finance sector was effectively resisted. It is evident to all now that the private finance sector is in deep trouble, while the state banking sector stands firm. Growth in the real economy has also ceased. The Index of Industrial Production (IIP) has been slowing for months, and in October recorded its first year-on-year decline since April 1993, dropping 0.4% compared to October 2007. The manufacturing component of the IIP fell yet more sharply, by 1.2%. November shall be worse, as it is already announced that passenger car sales declined 19% in that month. The IIP decline was offset by an increase in the mining sector, an offset that is unlikely to continue given the global collapse in mining. Insofar as finance-sector explosion led to increased real economy activity by bolstering the effective demand of the new high-consuming (and creditworthy) strata via credit expansion, to at least the same degree the contraction of credit contracts their demand and the real economy. In October the decline in manufacturing was led by a three percent drop in consumer durables. It is clear that an industrial pullback is now under way, and certain that growth in the economy as a whole shall sharply decrease.

The 1991 “reforms” led to the “Washington Consensus” expansion of the export sector, with results that exaggerate the effect of the global capitalist crisis. India’s trade to GDP ratio increased from 15 percent to 34.8 percent between 1990 and 2007. Exports have grown at an average annual rate of 23 percent (in dollar terms) since 2002-03. In October, for the first time in five years, exports fell year-on-year. October exports were 12 percent lower than the corresponding month of 2007. Severe job cuts have been reported in the textile sector, which employs 3.5 crore workers. There have been 7 lakh job losses reported by November, with speculation of as many more by January. And of course the young “globalised” IT sector is very exposed.
Girish Mishra reported a finding of the Economic Times:

“In India, around 60 percent of the companies operating in the IT-BPO sector have been working for American financial corporations like Goldman Sachs, Washington Mutual, Citigroup, Bank of America, Morgan Stanley and Lehman Brothers. Tata Consultancy Services and Satyam Computers have been working for Merrill Lynch, and Wipro has a number of American corporations as its clients that are bruised by the present collapse.” Mishra added: “It is anybody’s guess that layoffs are certain to take place in Bangalore, Hyderabad, Chennai, Gurgaon, Noida, etc.”
The Economic Times predicted, according to Mishra, that “around 2.3 million young and energetic people working in India’s information technology and BPO” would be left jobless by the financial crisis.

As for the most immediate effect of the global capitalist crisis, nothing compares to the outflow of foreign institutional investment from the equity market. Over the financial year 2007-08, net FII investment inflows into India amounted to $20.3 billion. Since July, FIIs have pulled out more than $12.5 billion so far and the rupee has fallen by 20 percent. The Sensex index, which in its rise from the 4,000 range in 2002-3 to over 20,000 at the start of 2008 produced both endless ecstatic drivel in the business press and a flood of FII, has tumbled down to the 9,000 range as we write. The WEF-CII report, released ahead of the India Economic Summit that began on 16 November, said that “India’s dependence on capital flows to finance its current account deficit is a macroeconomic risk and the global crisis could generate a sharp increase in capital outflows and a reduction in the availability of finance.” In summary, as the winter of 2008 begins we are faced with a widening current account deficit, depleting foreign exchange reserves, depreciation of the rupee, the emergence of a balance of payment problem, credit crunch, and an accellerating contraction in industrial production.

It is surely appropriate that this moment should see the departure from the Finance Ministry of Chidambaram, as the “Washington Consensus” policies that he attempted to impose on the Indian economy suffer a total squalid collapse. Such protections as India has from the global credit implosion lie precisely in those remaining capital market and currency controls that Chidambaram sought relentlessly to destroy. Dishonest to the end, in his last weeks as Finance Minister Chidambaram tried to deny the evidence of the approaching contraction as shown by the negative trend of the Index of Industrial Production.

As Amiya Kumar Bagchi said in an interview with Radical Notes, “it is disingenuous of the Finance Minister to call the IIP ‘not very reliable’ when his government has done so much to massage the official statistics so as to produce a favourable picture of its performance in the economic field”.

Already Chidambaram’s programme for further financial sector “reform” is but a bad memory. The Government hints at different packages to arrest the slowdown of the economy, including the increase of public expenditure and public debt. The different parties propose strict controls for the financial sector, reversing those financial sector “reforms” put into effect. No one defends the “Washington Consensus” policies that have produced the disaster, but as yet no one is questioning their cornerstone: the focus on exports, foreign capital and technology, and 10-15% of the population as “modern” consumers. The business press has been reduced to babbling, and is taken by surprise and shocked by each new piece of economic news, even when it is no more than a continuation of a marked trend. The old religion, as set out by U.S. Treasury Secretary Paulson in Beijing in March, 2007 (”[a]n open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention”), is dead. But the discussion of the path of planning and democratic socialist management has not yet come to life. We suggest this impasse is in part due to the clear necessity that any such programme must first address the unfinished business of Indian Independence, the failure to carry out the agrarian revolution in the countryside, where to this day most people live.

And when the discussion does begin, it must take as its subject matter more than economics or politics in isolation, but political economy. From the perspective of political economy there has been a single overarching process at work, the subjugation of India by world imperialist capital — a global capital market dominated by the United States — with interrelated consequences in the economy, international relations, domestic politics, and culture, including intellectual discourse. British colonialism successfully relied for generations upon a broad base of (often tacit or even disguised) cooperation and support in the possessing classes, including the Congress leadership.

Only with its global crisis in World War Two could colonial hegemony be shaken and Independence become possible. Today the hegemony of imperial capital in India is at least parallel in power and sources of support, but its global crisis also opens the possibility for carrying forward the aborted promise of Independence: revolutionary change in the countryside and self-determination for the great majority.

Tuesday, January 6, 2009

Outlook (Liaowang) Magazine says faltering growth could spark anger in China

By Chris Buckley (extract from report)

BEIJING (Reuters) - China faces surging protests and riots in 2009 as rising unemployment stokes discontent, a state-run magazine said in a blunt warning of the hazards to Communist Party control from a sharp economic downturn.

The unusually stark report in this week's Outlook (Liaowang) Magazine, issued by the official Xinhua news agency, said faltering growth could spark anger among millions of migrant workers and university graduates left jobless.

"Without doubt, now we're entering a peak period for mass incidents," a senior Xinhua reporter, Huang Huo, told the magazine, using the official euphemism for riots and protests.

"In 2009, Chinese society may face even more conflicts and clashes that will test even more the governing abilities of all levels of the Party and government."
President Hu Jintao has vowed to make China a "harmonious society," but his promise is being tested by rising tension over shrinking jobs and incomes, as well as long-standing anger over corruption and land seizures.

China also faces a year of politically tense anniversaries, especially the 20th year since the June 1989 crackdown on pro-democracy protesters in Tiananmen Square. That date has already galvanised the "Charter 08" campaign by dissidents and advocates demanding deep democratic reforms.

While foreign commentary about risks to China's recipe of fast economic growth and one-party control are common, the nation's leaders are usually reticent about such threats.

This report and other recent open warnings may be intended to help snap officials to attention, said one Chinese expert.

Sunday, January 4, 2009

China factory output dips further

The global economic downturn is hitting China's growth
China's manufacturing output fell for a third consecutive month in December as the global economic slowdown continued to impact on its economy.

The official purchasing managers' index moved slightly higher than November's all-time low to 41.2 with any figure under 50 indicating a contraction.

The fall was caused by falling demand especially from abroad.

The latest data adds to fears that the slump is worsening despite Beijing's efforts to protect the economy.

The official figure, from the China Federation of Logistics and Purchasing, is likely to prompt further worries of more substantial job losses.

Thousands of factories have closed as a result of the sharp drop in orders - prompting fears that employment worries could lead to unrest.

China's President Hu Jintao has warned that the global financial crisis is hitting the country's competitiveness.

China's economic growth is expected to fall to about 9% in 2008 from 11.9% in 2007 while this year it is forecast to be as low as 6%.

Saturday, January 3, 2009

Financial Implosion and Stagnation

Financial Implosion and Stagnation
Back To The Real Economy
John Bellamy Foster and Fred Magdoff

John Bellamy Foster is editor of Monthly Review and professor of sociology at the University of Oregon. He is the author of Naked Imperialism (Monthly Review Press, 2006), among numerous other works. Fred Magdoff is professor emeritus of plant and soil science at the University of Vermont in Burlington, adjunct professor of crops and soils at Cornell University, and a director of the Monthly Review Foundation. This article is the final chapter in John Bellamy Foster and Fred Magdoff's book, The Great Financial Crisis: Causes and Consequences (Monthly Review Press, January 2009).

But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed… We will then be in a new situation as unprecedented as the conditions from which it will have emerged.

—Harry Magdoff and Paul Sweezy (1988) 1

“The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.”2 In response to a financial crisis of a magnitude not seen since the Great Depression, the Federal Reserve and other central banks, backed by their treasury departments, have been “bailing like hell” for more than a year. Beginning in July 2007 when the collapse of two Bear Stearns hedge funds that had speculated heavily in mortgage-backed securities signaled the onset of a major credit crunch, the Federal Reserve Board and the U.S. Treasury Department have pulled out all the stops as finance has imploded. They have flooded the financial sector with hundreds of billions of dollars and have promised to pour in trillions more if necessary—operating on a scale and with an array of tools that is unprecedented.

In an act of high drama, Federal Reserve Board Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson appeared before Congress on the evening of September 18, 2008, during which the stunned lawmakers were told, in the words of Senator Christopher Dodd, “that we’re literally days away from a complete meltdown of our financial system, with all the implications here at home and globally.” This was immediately followed by Paulson’s presentation of an emergency plan for a $700 billion bailout of the financial structure, in which government funds would be used to buy up virtually worthless mortgage-backed securities (referred to as “toxic waste”) held by financial institutions. 3

The outburst of grassroots anger and dissent, following the Treasury secretary’s proposal, led to an unexpected revolt in the U.S. House of Representatives, which voted down the bailout plan. Nevertheless, within a few days Paulson’s original plan (with some additions intended to provide political cover for representatives changing their votes) made its way through Congress. However, once the bailout plan passed financial panic spread globally with stocks plummeting in every part of the world—as traders grasped the seriousness of the crisis. The Federal Reserve responded by literally deluging the economy with money, issuing a statement that it was ready to be the buyer of last resort for the entire commercial paper market (short-term debt issued by corporations), potentially to the tune of $1.3 trillion.

Yet, despite the attempt to pour money into the system to effect the resumption of the most basic operations of credit, the economy found itself in liquidity trap territory, resulting in a hoarding of cash and a cessation of inter-bank loans as too risky for the banks compared to just holding money. A liquidity trap threatens when nominal interest rates fall close to zero. The usual monetary tool of lowering interest rates loses its effectiveness because of the inability to push interest rates below zero. In this situation the economy is beset by a sharp increase in what Keynes called the “propensity to hoard” cash or cash-like assets such as Treasury securities.

Fear for the future given what was happening in the deepening crisis meant that banks and other market participants sought the safety of cash, so whatever the Fed pumped in failed to stimulate lending. The drive to liquidity, partly reflected in purchases of Treasuries, pushed the interest rate on Treasuries down to a fraction of 1 percent, i.e., deeper into liquidity trap territory. 4

Facing what Business Week called a “financial ice age,” as lending ceased, the financial authorities in the United States and Britain, followed by the G-7 powers as a whole, announced that they would buy ownership shares in the major banks, in order to inject capital directly, recapitalizing the banks—a kind of partial nationalization. Meanwhile, they expanded deposit insurance. In the United States the government offered to guarantee $1.5 trillion in new senior debt issued by banks. “All told,” as the New York Times stated on October 15, 2008, only a month after the Lehman Brothers collapse that set off the banking crisis, “the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.”5 But only a few days later the same paper ratcheted up its estimates of the potential costs of the bailouts overall, declaring: “In theory, the funds committed for everything from the bailouts of Fannie Mae and Freddie Mac and those of Wall Street firm Bear Stearns and the insurer American International Group, to the financial rescue package approved by Congress, to providing guarantees to backstop selected financial markets [such as commercial paper] is a very big number indeed: an estimated $5.1 trillion.”6

Despite all of this, the financial implosion has continued to widen and deepen, while sharp contractions in the “real economy” are everywhere to be seen. The major U.S. automakers are experiencing serious economic shortfalls, even after Washington agreed in September 2008 to provide the industry with $25 billion in low interest loans. Single-family home construction has fallen to a twenty-six-year low. Consumption is expected to experience record declines. Jobs are rapidly vanishing. 7 Given the severity of the financial and economic shock, there are now widespread fears among those at the center of corporate power that the financial implosion, even if stabilized enough to permit the orderly unwinding and settlement of the multiple insolvencies, will lead to a deep and lasting stagnation, such as hit Japan in the 1990s, or even a new Great Depression. 8

The financial crisis, as the above suggests, was initially understood as a lack of money or liquidity (the degree to which assets can be traded quickly and readily converted into cash with relatively stable prices). The idea was that this liquidity problem could be solved by pouring more money into financial markets and by lowering interest rates. However, there are a lot of dollars out in the financial world—more now than before—the problem is that those who own the dollars are not willing to lend them to those who may not be able to pay them back, and that’s just about everyone who needs the dollars these days. This then is better seen as a solvency crisis in which the balance sheet capital of the U.S. and UK financial institutions—and many others in their sphere of influence—has been wiped out by the declining value of the loans (and securitized loans) they own, their assets.

As an accounting matter, most major U.S. banks by mid-October were insolvent, resulting in a rash of fire-sale mergers, including JPMorgan Chase’s purchase of Washington Mutual and Bear Stearns, Bank of America’s absorption of Countrywide and Merrill Lynch, and Wells Fargo’s acquiring of Wachovia. All of this is creating a more monopolistic banking sector with government support. 9 The direct injection of government capital into the banks in the form of the purchase of shares, together with bank consolidations, will at most buy the necessary time in which the vast mass of questionable loans can be liquidated in orderly fashion, restoring solvency but at a far lower rate of economic activity—that of a serious recession or depression.

In this worsening crisis, no sooner is one hole patched than a number of others appear. The full extent of the loss in value of securitized mortgage, consumer and corporate debts, and the various instruments that attempted to combine such debts with forms of insurance against their default (such as the “synthetic collateralized debt obligations,” which have credit-debt swaps “packaged in” with the CDOs), is still unknown. Key categories of such financial instruments have been revalued recently down to 10 to 20 percent in the course of the Lehman Brothers bankruptcy and the take-over of Merrill Lynch. 10 As sharp cuts in the value of such assets are applied across the board, the equity base of financial institutions vanishes along with trust in their solvency. Hence, banks are now doing what John Maynard Keynes said they would in such circumstances: hoarding cash. 11 Underlying all of this is the deteriorating economic condition of households at the base of the economy, impaired by decades of frozen real wages and growing consumer debt.

‘It’ and the Lender of Last Resort

To understand the full historical significance of these developments it is necessary to look at what is known as the “lender of last resort” function of the U.S. and other capitalist governments. This has now taken the form of offering liquidity to the financial system in a crisis, followed by directly injecting capital into such institutions and finally, if needed, outright nationalizations. It is this commitment by the state to be the lender of last resort that over the years has ultimately imparted confidence in the system—despite the fact that the financial superstructure of the capitalist economy has far outgrown its base in what economists call the “real” economy of goods and services. Nothing therefore is more frightening to capital than the appearance of the Federal Reserve and other central banks doing everything they can to bail out the system and failing to prevent it from sinking further—something previously viewed as unthinkable. Although the Federal Reserve and the U.S. Treasury have been intervening massively, the full dimensions of the crisis still seem to elude them.

Some have called this a “Minsky moment.” In 1982, economist Hyman Minsky, famous for his financial instability hypothesis, asked the critical question: “Can ‘It’—a Great Depression—happen again?” There were, as he pointed out, no easy answers to this question. For Minsky the key issue was whether a financial meltdown could overwhelm a real economy already in trouble—as in the Great Depression. The inherently unstable financial system had grown in scale over the decades, but so had government and its capacity to serve as a lender of last resort. “The processes which make for financial instability,” Minsky observed, “are an inescapable part of any decentralized capitalist economy—i.e., capitalism is inherently flawed—but financial instability need not lead to a great depression; ‘It’ need not happen” (italics added). 12

Implicit, in this, however, was the view that “It” could still happen again—if only because the possibility of financial explosion and growing instability could conceivably outgrow the government’s capacity to respond—or to respond quickly and decisively enough. Theoretically, the capitalist state, particularly that of the United States, which controls what amounts to a surrogate world currency, has the capacity to avert such a dangerous crisis. The chief worry is a massive “debt-deflation” (a phenomenon explained by economist Irving Fisher during the Great Depression) as exhibited not only by the experience of the 1930s but also Japan in the 1990s. In this situation, as Fisher wrote in 1933, “deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes.” Put differently, prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more defaults, leading to yet lower prices, and thus a deflationary spiral. 13

The economy is still not in this dire situation, but the specter looms.As Paul Asworth, chief U.S. economist at Capital Economics, stated in mid-October 2008, “With the unemployment rate rising rapidly and capital markets in turmoil, pretty much everything points toward deflation. The only thing you can hope is that the prompt action from policy makers can maybe head this off first.” “The rich world’s economies,” the Economist magazine warned in early October, “are already suffering from a mild case of this ‘debt-deflation.’ The combination of falling house prices and credit contraction is forcing debtors to cut spending and sell assets, which in turn pushes house prices and other asset markets down further… A general fall in consumer prices would make matters even worse.”14

The very thought of such events recurring in the U.S. economy today was supposed to be blocked by the lender of last resort function, based on the view that the problem was primarily monetary and could always be solved by monetary means by flooding the economy with liquidity at the least hint of danger. Thus Federal Reserve Board Chairman Ben Bernanke gave a talk in 2002 (as a Federal Reserve governor) significantly entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” In it he contended that there were ample ways of ensuring that “It” would not happen today, despite increasing financial instability:

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed, could find other ways of injecting money into the system—for example, by making low-interest-rate loans to banks or cooperating with fiscal authorities. 15

In the same talk, Bernanke suggested that “a money-financed tax cut,” aimed at avoiding deflation in such circumstances, was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”—a stance that earned him the nickname “Helicopter Ben.”16

An academic economist, who made his reputation through studies of the Great Depression, Bernanke was a product of the view propounded most influentially by Milton Friedman and Anna Schwartz in their famous work, A Monetary History of the United States, 1867-1960, that the source of the Great Depression was monetary and could have been combated almost exclusively in monetary terms. The failure to open the monetary floodgates at the outset, according to Friedman and Schwartz, was the principal reason that the economic downturn was so severe. 17 Bernanke strongly opposed earlier conceptions of the Depression that saw it as based in the structural weaknesses of the “real” economy and the underlying accumulation process. Speaking on the seventy-fifth anniversary of the 1929 stock market crash, he stated:

During the Depression itself, and in several decades following, most economists argued that monetary factors were not an important cause of the Depression. For example, many observers pointed to the fact that nominal interest rates were close to zero during much of the Depression, concluding that monetary policy had been about as easy as possible yet had produced no tangible benefit to the economy. The attempt to use monetary policy to extricate an economy from a deep depression was often compared to “pushing on a string.”

During the first decades after the Depression, most economists looked to developments on the real side of the economy for explanations, rather than to monetary factors. Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient 1920s, leading to a crash when the returns on those investments proved to be less than expected. Another once-popular theory was that a chronic problem of “under-consumption”—the inability of households to purchase enough goods and services to utilize the economy’s productive capacity—had precipitated the slump. 18

Bernanke’s answer to all of this was strongly to reassert that monetary factors virtually alone precipitated (and explained) the Great Depression, and were the key, indeed almost the sole, means of fighting debt-deflation. The trends in the real economy, such as the emergence of excess capacity in industry, need hardly be addressed at all. At most it was a deflationary threat to be countered by reflation. 19 Nor, as he argued elsewhere, was it necessary to explore Minsky’s contention that the financial system of the capitalist economy was inherently unstable, since this analysis depended on the economic irrationality associated with speculative manias, and thus departed from the formal “rational economic behavior” model of neoclassical economics. 20 Bernanke concluded a talk commemorating Friedman’s ninetieth birthday in 2002 with the words: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”21 “It” of course was the Great Depression.

Following the 2000 stock market crash a debate arose in central bank circles about whether “preemptive attacks” should be made against future asset bubbles to prevent such economic catastrophes. Bernanke, representing the reigning economic orthodoxy, led the way in arguing that this should not be attempted, since it was difficult to know whether a bubble was actually a bubble (that is, whether financial expansion was justified by economic fundamentals or new business models or not). In addition, to prick a bubble was to invite disaster, as in the attempts by the Federal Reserve Board to do this in the late 1920s, leading (according to the monetarist interpretation) to the bank failures and the Great Depression. He concluded: “monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy… Although eliminating volatility from the economy and the financial markets will never be possible, we should be able to moderate it without sacrificing the enormous strengths of our free-market system.” In short, Bernanke argued, no doubt with some justification given the nature of the system, that the best the Federal Reserve Board could do in face of a major bubble was to restrict itself primarily to its lender of last resort function. 22

At the very peak of the housing bubble, Bernankfe, then chairman of Bush’s Council of Economic Advisors, declared with eyes wide shut: “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”23 Ironically, it was these views that led to the appointment of Bernanke as Federal Reserve Board chairman (replacing Alan Greenspan) in early 2006.

The housing bubble began to deflate in early 2006 at the same time that the Fed was raising interest rates in an attempt to contain inflation. The result was a collapse of the housing sector and mortgage-backed securities. Confronted with a major financial crisis beginning in 2007, Bernanke as Fed chairman put the printing press into full operation, flooding the nation and the world with dollars, and soon found to his dismay that he had been “pushing on a string.” No amount of liquidity infusions were able to overcome the insolvency in which financial institutions were mired. Unable to make good on their current financial claims—were they compelled to do so—banks refused to renew loans as they came due and hoarded available cash rather than lending and leveraging the system back up. The financial crisis soon became so universal that the risks of lending money skyrocketed, given that many previously creditworthy borrowers were now quite possibly on the verge of insolvency. In a liquidity trap, as Keynes taught, running the printing presses simply adds to the hoarding of money but not to new loans and spending.

However, the real root of the financial bust, we shall see, went much deeper: the stagnation of production and investment.

From Financial Explosion to Financial Implosion

Our argument in a nutshell is that both the financial explosion in recent decades and the financial implosion now taking place are to be explained mainly in reference to stagnation tendencies within the underlying economy. A number of other explanations for the current crisis (most of them focusing on the proximate causes) have been given by economists and media pundits. These include the lessening of regulations on the financial system; the very low interest rates introduced by the Fed to counter the effects of the 2000 crash of the “New Economy” stock bubble, leading to the housing bubble; and the selling of large amounts of “sub-prime” mortgages to many people that could not afford to purchase a house and/or did not fully understand the terms of the mortgages.

Much attention has rightly been paid to the techniques whereby mortgages were packaged together and then “sliced and diced” and sold to institutional investors around the world. Outright fraud may also have been involved in some of the financial shenanigans. The falling home values following the bursting of the housing bubble and the inability of many sub-prime mortgage holders to continue to make their monthly payments, together with the resulting foreclosures, was certainly the straw that broke the camel’s back, leading to this catastrophic system failure. And few would doubt today that it was all made worse by the deregulation fervor avidly promoted by the financial firms, which left them with fewer defenses when things went wrong.

Nevertheless, the root problem went much deeper, and was to be found in a real economy experiencing slower growth, giving rise to financial explosion as capital sought to “leverage” its way out of the problem by expanding debt and gaining speculative profits. The extent to which debt has shot up in relation to GDP over the last four decades can be seen in table 1. As these figures suggest, the most remarkable feature in the development of capitalism during this period has been the ballooning of debt.

This phenomenon is further illustrated in chart showing the skyrocketing of private debt relative to national income from the 1960s to the present. Financial sector debt as a percentage of GDP first lifted off the ground in the 1960s and 1970s, accelerated beginning in the 1980s, and rocketed up after the mid 1990s. Household debt as a percentage of GDP rose strongly beginning in the 1980s and then increased even faster in the late 1990s. Nonfinancial business debt in relation to national income also climbed over the period, if less spectacularly. The overall effect has been a massive increase in private debt relative to national income. The problem is further compounded if government debt (local, state, and federal) is added in. When all sectors are included, the total debt as a percentage of GDP rose from 151 percent in 1959 to an astronomical 373 percent in 2007!

This rise in the cumulative debt load as a percentage of GDP greatly stimulated the economy, particularly in the financial sector, feeding enormous financial profits and marking the growing financialization of capitalism (the shift in gravity from production to finance within the economy as a whole). The profit picture, associated with this accelerating financialization, is shown in chart 2, which provides a time series index (1970 = 100) of U.S. financial versus nonfinancial profits and the GDP. Beginning in 1970, financial and nonfinancial profits tended to increase at the same rate as the GDP. However, in the late 1990s, finance seemed to take on a life of its own with the profits of U.S. financial corporations (and to a lesser extent nonfinancial corporate profits too) heading off into the stratosphere, seemingly unrelated to growth of national income, which was relatively stagnant. Corporations playing in what had become a giant casino took on more and more leveraging—that is, they often bet thirty or more borrowed dollars for every dollar of their own that was used. This helps to explain the extraordinarily high profits they were able to earn as long as their bets were successful. The growth of finance was of course not restricted simply to the United States but was a global phenomenon with speculative claims to wealth far overshadowing global production, and the same essential contradiction cutting across the entire advanced capitalist world and “emerging” economies.

Already by the late 1980s the seriousness of the situation was becoming clear to those not wedded to established ways of thinking. Looking at this condition in 1988 on the anniversary of the 1987 stock market crash, Monthly Review editors Harry Magdoff and Paul Sweezy, contended that sooner or later—no one could predict when or exactly how—a major crisis of the financial system that overpowered the lender of last resort function was likely to occur. This was simply because the whole precarious financial superstructure would have by then grown to such a scale that the means of governmental authorities, though massive, would no longer be sufficient to keep back the avalanche, especially if they failed to act quickly and decisively enough. As they put it, the next time around it was quite possible that the rescue effort would “succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and precarious level. But sooner or later, next time or further down the road, it will not succeed,” generating a severe crisis of the economy.

As an example of a financial avalanche waiting to happen, they pointed to the “high flying Tokyo stock market,” as a possible prelude to a major financial implosion and a deep stagnation to follow—a reality that was to materialize soon after, resulting in Japan’s financial crisis and “Great Stagnation” of the 1990s. Asset values (both in the stock market and real estate) fell by an amount equivalent to more than two years of GDP. As interest rates zeroed-out and debt-deflation took over, Japan was stuck in a classic liquidity trap with no ready way of restarting an economy already deeply mired in overcapacity in the productive economy. 24

“In today’s world ruled by finance,” Magdoff and Sweezy had written in 1987 in the immediate aftermath of the U.S. stock market crash:

the underlying growth of surplus value falls increasingly short of the rate of accumulation of money capital. In the absence of a base in surplus value, the money capital amassed becomes more and more nominal, indeed fictitious. It comes from the sale and purchase of paper assets, and is based on the assumption that asset values will be continuously inflated. What we have, in other words, is ongoing speculation grounded in the belief that, despite fluctuations in price, asset values will forever go only one way—upward! Against this background, the October [1987] stock market crash assumes a far-reaching significance. By demonstrating the fallacy of an unending upward movement in asset values, it exposes the irrational kernel of today’s economy. 25
These contradictions, associated with speculative bubbles, have of course to some extent been endemic to capitalism throughout its history. However, in the post-Second World War era, as Magdoff and Sweezy, in line with Minsky, argued, the debt overhang became larger and larger, pointing to the growth of a problem that was cumulative and increasingly dangerous. In The End of Prosperity Magdoff and Sweezy wrote: “In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government rescue measures to prevent collapse of the financial system merely lay the groundwork for still more layers of debt and additional strains during the next economic advance.” As Minsky put it, “Without a crisis and a debt-deflation process to offset beliefs in the success of speculative ventures, both an upward bias to prices and ever-higher financial layering are induced.”26

To the extent that mainstream economists and business analysts themselves were momentarily drawn to such inconvenient questions, they were quickly cast aside. Although the spectacular growth of finance could not help but create jitters from time to time—for example, Alan Greenspan’s famous reference to “irrational exuberance”—the prevailing assumption, promoted by Greenspan himself, was that the growth of debt and speculation represented a new era of financial market innovation, i.e., a sustainable structural change in the business model associated with revolutionary new risk management techniques. Greenspan was so enamored of the “New Economy” made possible by financialization that he noted in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”27

It was only with the onset of the financial crisis in 2007 and its persistence into 2008, that we find financial analysts in surprising places openly taking on the contrary view. Thus as Manas Chakravarty, an economic columnist for India’s investor Web site, (partnered with the Wall Street Journal), observed on September 17, 2008, in the context of the Wall Street meltdown,

American economist Paul Sweezy pointed out long ago that stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse. He said the stagnation of the underlying economy meant that business was increasingly dependent on the growth of finance to preserve and enlarge its money capital and that the financial superstructure of the economy could not expand entirely independently of its base in the underlying productive economy. With remarkable prescience, Sweezy said the bursting of speculative bubbles would, therefore, be a recurring and growing problem. 28
Of course, Paul Baran and Sweezy in Monopoly Capital, and later on Magdoff and Sweezy in Monthly Review, had pointed to other forms of absorption of surplus such as government spending (particularly military spending), the sales effort, the stimulus provided by new innovations, etc. 29 But all of these, although important, had proven insufficient to maintain the economy at anything like full employment, and by the 1970s the system was mired in deepening stagnation (or stagflation). It was financialization—and the growth of debt that it actively promoted—which was to emerge as the quantitatively most important stimulus to demand. But it pointed unavoidably to a day of financial reckoning and cascading defaults.

Indeed, some mainstream analysts, under the pressure of events, were forced to acknowledge by summer 2008 that a massive devaluation of the system might prove inevitable. Jim Reid, the Deutsche Bank’s head of credit research, examining the kind of relationship between financial profits and GDP exhibited in chart 2, issued an analysis called “A Trillion-Dollar Mean Reversion?,” in which he argued that:

U.S. financial profits have deviated from the mean over the past decade on a cumulative basis… The U.S. Financial sector has made around 1.2 Trillion ($1,200bn) of ‘excess’ profits in the last decade relative to nominal GDP… So mean reversion [the theory that returns in financial markets over time “revert” to a long-term mean projection, or trend-line] would suggest that $1.2 trillion of profits need to be wiped out before the U.S. financial sector can be cleansed of the excesses of the last decade… Given that...Bloomberg reports that $184bn has been written down by U.S. financials so far in this crisis, if one believes that the size of the financial sector should shrink to levels seen a decade ago then one could come to the conclusion that there is another trillion dollars of value destruction to go in the sector before we’re back to the long-run trend in financial profits. A scary thought and one that if correct will lead to a long period of constant intervention by the authorities in an attempt to arrest this potential destruction. Finding the appropriate size of the financial sector in the “new world” will be key to how much profit destruction there needs to be in the sector going forward.
The idea of a mean reversion of financial profits to their long-term trend-line in the economy as a whole was merely meant to be suggestive of the extent of the impending change, since Reid accepted the possibility that structural “real world” reasons exist to explain the relative weight of finance—though none he was yet ready to accept. As he acknowledged, “calculating the ‘natural’ appropriate size for the financial sector relative to the rest of the economy is a phenomenally difficult conundrum.” Indeed, it was to be doubted that a “natural” level actually existed. But the point that a massive “profit destruction” was likely to occur before the system could get going again and that this explained the “long period of constant intervention by the authorities in an attempt to arrest this potential destruction,” highlighted the fact that the crisis was far more severe than then widely supposed—something that became apparent soon after. 30

What such thinking suggested, in line with what Magdoff and Sweezy had argued in the closing decades of the twentieth century, was that the autonomy of finance from the underlying economy, associated with the financialization process, was more relative than absolute, and that ultimately a major economic downturn—more than the mere bursting of one bubble and the inflating of another—was necessary. This was likely to be more devastating the longer the system put it off. In the meantime, as Magdoff and Sweezy had pointed out, financialization might go on for quite a while. And indeed there was no other answer for the system.

Back to the Real Economy: The Stagnation Problem

Paul Baran, Paul Sweezy, and Harry Magdoff argued indefatigably from the 1960s to the 1990s (most notably in Monopoly Capital) that stagnation was the normal state of the monopoly-capitalist economy, barring special historical factors. The prosperity that characterized the economy in the 1950s and ’60s, they insisted, was attributable to such temporary historical factors as: (1) the buildup of consumer savings during the war; (2) a second great wave of automobilization in the United States (including the expansion of the glass, steel, and rubber industries, the construction of the interstate highway system, and the development of suburbia); (3) the rebuilding of the European and the Japanese economies devastated by the war; (4) the Cold War arms race (and two regional wars in Asia); (5) the growth of the sales effort marked by the rise of Madison Avenue; (6) the expansion of FIRE (finance, insurance, and real estate); and (7) the preeminence of the dollar as the hegemonic currency. Once the extraordinary stimulus from these factors waned, the economy began to subside back into stagnation: slow growth and rising excess capacity and unemployment/underemployment. In the end, it was military spending and the explosion of debt and speculation that constituted the main stimuli keeping the economy out of the doldrums. These were not sufficient, however, to prevent the reappearance of stagnation tendencies altogether, and the problem got worse with time. 31

The reality of creeping stagnation can be seen in table 2, which shows the real growth rates of the economy decade by decade over the last eight decades. The low growth rate in the 1930s reflected the deep stagnation of the Great Depression. This was followed by the extraordinary rise of the U.S. economy in the 1940s under the impact of the Second World War. During the years 1950–69, now often referred to as an economic “Golden Age,” the economy, propelled by the set of special historical factors referred to above, was able to achieve strong economic growth in a “peacetime” economy. This, however, proved to be all too temporary. The sharp drop off in growth rates in the 1970s and thereafter points to a persistent tendency toward slower expansion in the economy, as the main forces pushing up growth rates in the 1950s and ’60s waned, preventing the economy from returning to its former prosperity. In subsequent decades, rather than recovering its former trend-rate of growth, the economy slowly subsided.

It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s. 32 But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality. 33 Chart 3 shows a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present. This reflected the fact that real wages of private nonagricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades. 34

This was part of a massive redistribution of income and wealth to the top. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000. In the United States the top 1 percent of wealth holders in 2001 together owned more than twice as much as the bottom 80 percent of the population. If this were measured simply in terms of financial wealth, i.e., excluding equity in owner-occupied housing, the top 1 percent owned more than four times the bottom 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth. 35

The truly remarkable fact under these circumstances was that household consumption continued to rise from a little over 60 percent of GDP in the early 1960s to around 70 percent in 2007. This was only possible because of more two-earner households (as women entered the labor force in greater numbers), people working longer hours and filling multiple jobs, and a constant ratcheting up of consumer debt. Household debt was spurred, particularly in the later stages of the housing bubble, by a dramatic rise in housing prices, allowing consumers to borrow more against their increased equity (the so-called housing “wealth effect”)—a process that came to a sudden end when the bubble popped, and housing prices started to fall. As chart 1 shows, household debt increased from about 40 percent of GDP in 1960 to 100 percent of GDP in 2007, with an especially sharp increase starting in the late 1990s. 36

This growth of consumption, based in the expansion of household debt, was to prove to be the Achilles heel of the economy. The housing bubble was based on a sharp increase in household mortgage-based debt, while real wages had been essentially frozen for decades. The resulting defaults among marginal new owners led to a fall in house prices. This led to an ever increasing number of owners owing more on their houses than they were worth, creating more defaults and a further fall in house prices. Banks seeking to bolster their balance sheets began to hold back on new extensions of credit card debt. Consumption fell, jobs were lost, capital spending was put off, and a downward spiral of unknown duration began.

During the last thirty or so years the economic surplus controlled by corporations, and in the hands of institutional investors, such as insurance companies and pension funds, has poured in an ever increasing flow into an exotic array of financial instruments. Little of the vast economic surplus was used to expand investment, which remained in a state of simple reproduction, geared to mere replacement (albeit with new, enhanced technology), as opposed to expanded reproduction. With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry (see chart 4)—and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic.

Hence, profits were increasingly directed away from investment in the expansion of productive capacity and toward financial speculation, while the financial sector seemed to generate unlimited types of financial products designed to make use of this money capital. (The same phenomenon existed globally, causing Bernanke to refer in 2005 to a “global savings glut,” with enormous amounts of investment-seeking capital circling the world and increasingly drawn to the United States because of its leading role in financialization.)37 The consequences of this can be seen in chart 5, showing the dramatic decoupling of profits from net investment as percentages of GDP in recent years, with net private nonresidential fixed investment as a share of national income falling significantly over the period, even while profits as a share of GDP approached a level not seen since the late 1960s/early 1970s.

This marked, in Marx’s terms, a shift from the “general formula for capital” M(oney)-C(commodity)–M¢ (original money plus surplus value), in which commodities were central to the production of profits—to a system increasingly geared to the circuit of money capital alone, M–M¢, in which money simply begets more money with no relation to production.

Since financialization can be viewed as the response of capital to the stagnation tendency in the real economy, a crisis of financialization inevitably means a resurfacing of the underlying stagnation endemic to the advanced capitalist economy. The deleveraging of the enormous debt built up during recent decades is now contributing to a deep crisis. Moreover, with financialization arrested there is no other visible way out for monopoly-finance capital. The prognosis then is that the economy, even after the immediate devaluation crisis is stabilized, will at best be characterized for some time by minimal growth, and by high unemployment, underemployment, and excess capacity.

The fact that U.S. consumption (facilitated by the enormous U.S. current account deficit) has provided crucial effective demand for the production of other countries means that the slowdown in the United States is already having disastrous effects abroad, with financial liquidation now in high gear globally. “Emerging” and underdeveloped economies are caught in a bewildering set of problems. This includes falling exports, declining commodity prices, and the repercussions of high levels of financialization on top of an unstable and highly exploitative economic base—while being subjected to renewed imperial pressures from the center states.

The center states are themselves in trouble. Iceland, which has been compared to the canary in the coal mine, has experienced a complete financial meltdown, requiring rescue from outside, and possibly a massive raiding of the pension funds of the citizenry. For more than seventeen years Iceland has had a right-wing government led by the ultra-conservative Independence Party in coalition with the centrist social democratic parties. Under this leadership Iceland adopted neoliberal financialization and speculation to the hilt and saw an excessive growth of its banking and finance sectors with total assets of its banks growing from 96 percent of its GDP at the end of 2000 to nine times its GDP in 2006. Now Icelandic taxpayers, who were not responsible for these actions, are being asked to carry the burden of the overseas speculative debts of their banks, resulting in a drastic decline in the standard of living. 38

A Political Economy

Economics in its classical stage, which encompassed the work of both possessive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and socialist thinkers such as Karl Marx, was called political economy. The name was significant because it pointed to the class basis of the economy and the role of the state. 39 To be sure, Adam Smith introduced the notion of the “invisible hand” of the market in replacing the former visible hand of the monarch. But, the political-class context of economics was nevertheless omnipresent for Smith and all the other classical economists. In the 1820s, as Marx observed, there were “splendid tournaments” between political economists representing different classes (and class fractions) of society.

However, from the 1830s and ’40s on, as the working class arose as a force in society, and as the industrial bourgeoisie gained firm control of the state, displacing landed interests (most notably with the repeal of the Corn Laws), economics shifted from its previous questioning form to the “bad conscience and evil intent of the apologetics.”40 Increasingly the circular flow of economic life was reconceptualized as a process involving only individuals, consuming, producing, and profiting on the margin. The concept of class thus disappeared in economics, but was embraced by the rising field of sociology (in ways increasingly abstracted from fundamental economic relationships). The state also was said to have nothing directly to do with economics and was taken up by the new field of political science. 41 Economics was thus “purified” of all class and political elements, and increasingly presented as a “neutral” science, addressing universal/transhistorical principles of capital and market relations.

Having lost any meaningful roots in society, orthodox neoclassical economics, which presented itself as a single paradigm, became a discipline dominated by largely meaningless abstractions, mechanical models, formal methodologies, and mathematical language, divorced from historical developments. It was anything but a science of the real world; rather its chief importance lay in its role as a self-confirming ideology. Meanwhile, actual business proceeded along its own lines largely oblivious (sometimes intentionally so) of orthodox economic theories. The failure of received economics to learn the lessons of the Great Depression, i.e., the inherent flaws of a system of class-based accumulation in its monopoly stage, included a tendency to ignore the fact that the real problem lay in the real economy, rather than in the monetary-financial economy.

Today nothing looks more myopic than Bernanke’s quick dismissal of traditional theories of the Great Depression that traced the underlying causes to the buildup of overcapacity and weak demand—inviting a similar dismissal of such factors today. Like his mentor Milton Friedman, Bernanke has stood for the dominant, neoliberal economic view of the last few decades, with its insistence that by holding back “the rock that starts a landslide” it was possible to prevent a financial avalanche of “major proportions” indefinitely. 42 That the state of the ground above was shifting, and that this was due to real, time-related processes, was of no genuine concern. Ironically, Bernanke, the academic expert on the Great Depression, adopted what had been described by Ethan Harris, chief U.S. economist for Barclays Capital, as a “see no evil, hear no evil, speak no evil” policy with respect to asset bubbles. 43

It is therefore to the contrary view, emphasizing the socioeconomic contradictions of the system, to which it is now necessary to turn. For a time in response to the Great Depression of the 1930s, in the work of John Maynard Keynes, and various other thinkers associated with the Keynesian, institutionalist, and Marxist traditions—the most important of which was the Polish economist Michael Kalecki—there was something of a revival of political-economic perspectives. But following the Second World War Keynesianism was increasingly reabsorbed into the system. This occurred partly through what was called the “neoclassical-Keynesian synthesis”—which, as Joan Robinson, one of Keynes’s younger colleagues claimed, had the effect of bastardizing Keynes—and partly through the closely related growth of military Keynesianism. 44 Eventually, monetarism emerged as the ruling response to the stagflation crisis of the 1970s, along with the rise of other conservative free-market ideologies, such as supply-side theory, rational expectations, and the new classical economics (summed up as neoliberal orthodoxy). Economics lost its explicit political-economic cast, and the world was led back once again to the mythology of self-regulating, self-equilibrating markets free of issues of class and power. Anyone who questioned this, was characterized as political rather than economic, and thus largely excluded from the mainstream economic discussion. 45

Needless to say, economics never ceased to be political; rather the politics that was promoted was so closely intertwined with the system of economic power as to be nearly invisible. Adam Smith’s visible hand of the monarch had been transformed into the invisible hand, not of the market, but of the capitalist class, which was concealed behind the veil of the market and competition. Yet, with every major economic crisis that veil has been partly torn aside and the reality of class power exposed.

Treasury Secretary Paulson’s request to Congress in September 2008, for $700 billion with which to bail out the financial system may constitute a turning point in the popular recognition of, and outrage over, the economic problem, raising for the first time in many years the issue of a political economy. It immediately became apparent to the entire population that the critical question in the financial crisis and in the deep economic stagnation that was emerging was: Who will pay? The answer of the capitalist system, left to its own devices, was the same as always: the costs would be borne disproportionately by those at the bottom. The old game of privatization of profits and socialization of losses would be replayed for the umpteenth time. The population would be called upon to “tighten their belts” to “foot the bill” for the entire system. The capacity of the larger public to see through this deception in the months and years ahead will of course depend on an enormous amount of education by trade union and social movement activists, and the degree to which the empire of capital is stripped naked by the crisis.

There is no doubt that the present growing economic bankruptcy and political outrage have produced a fundamental break in the continuity of the historical process. How should progressive forces approach this crisis? First of all, it is important to discount any attempts to present the serious economic problems that now face us as a kind of “natural disaster.” They have a cause, and it lies in the system itself. And although those at the top of the economy certainly did not welcome the crisis, they nonetheless have been the main beneficiaries of the system, shamelessly enriching themselves at the expense of the rest of the population, and should be held responsible for the main burdens now imposed on society. It is the well-to-do who should foot the bill—not only for reasons of elementary justice, but also because they collectively and their system constitute the reason that things are as bad as they are; and because the best way to help both the economy and those at the bottom is to address the needs of the latter directly. There should be no golden parachutes for the capitalist class paid for at taxpayer expense.

But capitalism takes advantage of social inertia, using its power to rob outright when it can’t simply rely on “normal” exploitation. Without a revolt from below the burden will simply be imposed on those at the bottom. All of this requires a mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds—using the power for change granted to the people in the Constitution; even going so far as to threaten the current duopoly of the two-party system.

What should such a radical movement from below, if it were to emerge, seek to do under these circumstances? Here we hesitate to say, not because there is any lack of needed actions to take, but because a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.

Some liberal economists and commentators argue that, given the present economic crisis, nothing short of a major public works program aimed at promoting employment, a kind of new New Deal, will do. Robert Kuttner has argued in Obama’s Challenge that “an economic recovery will require more like $700 billion a year in new public outlay, or $600 billion counting offsetting cuts in military spending. Why? Because there is no other plausible strategy for both achieving a general economic recovery and restoring balance to the economy.”46 This, however, will be more difficult than it sounds. There are reasons to believe that the dominant economic interests would block an increase in civilian government spending on such a scale, even in a crisis, as interfering with the private market. The truth is that civilian government purchases were at 13.3 percent of GNP in 1939—what Baran and Sweezy in 1966 theorized as approximating their “outer limits”—and they have barely budged since then, with civilian government consumption and investment expenditures from 1960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 The class forces blocking a major increase in nondefense governmental spending even in a severe stagnation should therefore not be underestimated. Any major advances in this direction will require a massive class struggle.

Still, there can be no doubt that change should be directed first and foremost to meeting the basic needs of people for food, housing, employment, health, education, a sustainable environment, etc. Will the government assume the responsibility for providing useful work to all those who desire and need it? Will housing be made available (free from crushing mortgages) to everyone, extending as well to the homeless and the poorly housed? Will a single-payer national health system be introduced to cover the needs of the entire population, replacing the worst and most expensive health care system in the advanced capitalist world? Will military spending be cut back drastically, dispensing with global imperial domination? Will the rich be heavily taxed and income and wealth be redistributed? Will the environment, both global and local, be protected? Will the right to organize be made a reality?

If such elementary prerequisites of any decent future look impossible under the present system, then the people should take it into their own hands to create a new society that will deliver these genuine goods. Above all it is necessary “to insist that morality and economics alike support the intuitive sense of the masses that society’s human and natural resources can and should be used for all the people and not for a privileged minority.”48

In the 1930s Keynes decried the growing dominance of financial capital, which threatened to reduce the real economy to “a bubble on a whirlpool of speculation,” and recommended the “euthanasia of the rentier.” However, financialization is so essential to the monopoly-finance capital of today, that such a “euthanasia of the rentier” cannot be achieved—in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”50

October 25, 2008


Harry Magdoff and Paul M. Sweezy, The Irreversible Crisis (New York: Monthly Review Press, 1988), 76. Back to Article
James K. Galbraith, The Predator State (New York: The Free Press, 2008), 48. Back to Article
“Congressional Leaders Were Stunned by Warnings,” New York Times, September 19, 2008. Back to Article
Manas Chakravarty and Mobis Philipose, “Liquidity Trap: Fear of Failure,”, October 11, 2008; John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973), 174. Back to Article
“Drama Behind a $250 Billion Banking Deal,” New York Times, October 15, 2008. Back to Article
“Government’s Leap into Banking Has its Perils,” New York Times, October 18, 2008. Back to Article
“Single-Family Homes in U.S. Fall to a 26-Year Low,”, October 17, 2008; “Economic Fears Reignite Market Slump,” Wall Street Journal, October 16, 2008. Back to Article
See “Depression of 2008: Are We Heading Back to the 1930s,” London Times, October 5, 2008. On the Japanese stagnation, see Paul Burkett and Martin Hart-Landsberg, “The Economic Crisis In Japan,” Critical Asian Studies 35, no. 3 (2003): 339–72. Back to Article
“The U.S. is Said to Be Urging New Mergers in Banking,” New York Times, October 21, 2008. Back to Article
“CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic,”, October 22, 2008. Back to Article
“Banks are Likely to Hold Tight to Bailout Money,” New York Times, October 17, 2008. Back to Article
Hyman Minsky, Can “It” Happen Again? (New York: M. E. Sharpe, 1982), vii–xxiv; “Hard Lessons to be Learnt from a Minsky Moment,” Financial Times, September 18, 2008; Riccardo Bellofiore and Joseph Halevi, “A Minsky Moment?: The Subprime Crisis and the New Capitalism,” in C. Gnos and L. P. Rochon, Credit, Money and Macroeconomic Policy: A Post-Keynesian Approach (Cheltenham: Edward Elgar, forthcoming). For Magdoff and Sweezy’s views on Minsky see The End of Prosperity (New York: Monthly Review Press, 1977), 133–36. Back to Article
Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, no. 4 (October 1933): 344; Paul Krugman, “The Power of De,” New York Times, September 8, 2008. Back to Article
“Amid Pressing Problems the Threat of Deflation Looms,” Wall Street Journal, October 18, 2008; “A Monetary Malaise,” Economist, October 11–17, 2008, 24. Back to Article
Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” National Economists Club, Washington, D.C., November 21, 2002, Back to Article
Ethan S. Harris, Ben Bernanke’s Fed (Boston, Massachusetts: Harvard University Press, 2008), 2, 173; Milton Friedman, The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing, 1969), 4–14. Back to Article
Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2000), 5; Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963). For more realistic views of the Great Depression, taking into account the real economy, as well as monetary factors, and viewing it from the standpoint of the stagnation of investment, which above all characterized the Depression see Michael A. Bernstein, The Great Depression (Cambridge: Cambridge University Press, 1987), and Richard B. DuBoff, Accumulation and Power (New York: M.E. Sharpe, 1989), 84–92. On classic theories of the Great Depression see William A. Stoneman, A History of the Economic Analysis of the Great Depression in America (New York: Garland Publishing, 1979). Back to Article
Ben S. Bernanke, “Money, Gold, and the Great Depression,” H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia, March 2, 2004, Back to Article
Ben S. Bernanke, “Some Thoughts on Monetary Policy in Japan,” Japan Society of Monetary Economics, Tokyo, May 31, 2003, Back to Article
Bernanke, Essays on the Great Depression, 43. Back to Article
"On Milton Friedman’s Ninetieth Birthday,” Conference to Honor Milton Friedman, University of Chicago, November 8, 2002. Ironically, Anna Schwartz, now 91, indicated in an interview for the Wall Street Journal that the Fed under Bernanke was fighting the last war, failing to perceive that the issue was uncertainty about solvency of the banks, not a question of liquidity as in the lead-up to the Great Depression. “Bernanke is Fighting the Last War: Interview of Anna Schwartz,” Wall Street Journal, October 18, 2008. Back to Article
Ben S. Bernanke, “Asset Prices and Monetary Policy,” speech to the New York Chapter of the National Association for Business Economics, New York, N.Y., October 15, 2002,; Harris, Ben Bernanke’s Fed, 147–58. Back to Article
Ben S. Bernanke, “The Economic Outlook,” October 25, 2005; quoted in Robert Shiller, The Subprime Option (Princeton: Princeton University Press, 2008), 40. Back to Article
Magdoff and Sweezy, The Irreversible Crisis, 76; Burkett and Hart-Landsberg, “The Economic Crisis in Japan,” 347, 354–56, 36–66; Paul Krugman, “Its Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, no. 2 (1998), 141–42, 174–78; Michael M. Hutchinson and Frank Westermann, eds., Japan’s Great Stagnation (Cambridge, Massachusetts: MIT Press, 2006). Back to Article
Magdoff and Sweezy, The Irreversible Crisis, 51. Back to Article
Magdoff and Sweezy, The End of Prosperity, 136; Hyman Minsky, John Maynard Keynes (New York, Columbia University Press, 1975), 164. Back to Article
Greenspan quoted, New York Times, October 9, 2008. See also John Bellamy Foster, Harry Magodff, and Robert W. McChesney, “The New Economy: Myth and Reality,” Monthly Review 52, no. 11 (April 2001), 1–15. Back to Article
Manas Chakravarty, “A Turning Point in the Global Economic System,”, September 17, 2008. Back to Article
See John Bellamy Foster, Naked Imperialism (New York: Monthly Review Press, 2006), 45–50. Back to Article
Jim Reid, “A Trillion-Dollar Mean Reversion?,” Deutsche Bank, July 15, 2008. Back to Article
See Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, The Dynamics of U.S. Capitalism (New York: Monthly Review Press, 1972), The Deepening Crisis of U.S. Capitalism (New York: Monthly Review Press, 1981), and Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). Back to Article
Bellofiore and Halevi, “A Minsky Moment?” Back to Article
See Michael Yates, Longer Hours, Fewer Jobs (New York: Monthly Review Press, 1994); Michael Perelman, The Confiscation of American Prosperity (New York: Palgrave Macmillan, 2007. Back to Article
Economic Report of the President, 2008, Table B-47, 282. Back to Article Back to Article
Correspondents of the New York Times, Class Matters (New York: Times Books, 2005), 186; Edward N. Wolff, ed., International Perspectives on Household Wealth (Cheltenham: Edward Elgar, 2006), 112–15. Back to Article
For a class breakdown of household debt see John Bellamy Foster, “The Household Debt Bubble,” chapter 1 in John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009). Back to Article
Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond Virginia, March 10, 2005, Back to Article
Steingrímur J. Stigfússon, “On the Financial Crisis of Iceland,”, October 20, 2008; “Iceland in a Precarious Position,” New York Times, October 8, 2008; “Iceland Scrambles for Cash,” Wall Street Journal, October 6, 2008. Back to Article
See Edward J. Nell, Growth, Profits and Prosperity (Cambridge: Cambridge University Press, 1980), 19–28. Back to Article
Karl Marx, Capital, vol. 1 (New York: Vintage, 1976), 96–98. Back to Article
See Crawford B. Macpherson, Democratic Theory (Oxford: Oxford University Press, 1973), 195–203. Back to Article
Friedman and Schwartz, A Monetary History of the United States, 419. Back to Article
Harris, Ben Bernanke’s Fed, 147–58. Back to Article
See John Bellamy Foster, Hannah Holleman, and Robert W. McChesney, “The U.S. Imperial Triangle and Military Spending,” Monthly Review 60, no. 5 (October 2008): 1–19. Back to Article
For a discussion of the simultaneous stagnation of the economy and of economics since the 1970s see Perelman, The Confiscation of American Prosperity. See also E. Ray Canterbery, A Brief History of Economics (River Edge, NJ: World Scientific Publishing, 2001), 417–26. Back to Article
Robert Kuttner, Obama’s Challenge (White River Junction, Vermont: Chelsea Green, 2008), 27. Back to Article
Baran and Sweezy, Monopoly Capital, 159, 161; Economic Report of the President, 2008, 224, 250. Back to Article
Harry Magdoff and Paul M. Sweezy, “The Crisis and the Responsibility of the Left,” Monthly Review 39, no. 2 (June 1987): 1–5. Back to Article
See Keynes, The General Theory of Employment, Interest, and Money, 376, and Essays in Persuasion (New York: Harcourt Brace and Co., 1932), 372; Paul M. Sweezy, “The Triumph of Financial Capital,” Monthly Review 46, no. 2 (June 1994): 1–11; John Bellamy Foster, “The End of Rational Capitalism,” Monthly Review 56, no. 10 (March 2005): 1–13. Back to Article
In this respect, it is necessary, we believe, to go beyond liberal economics, and to strive for a ruthless critique of everything existing. Even a relatively progressive liberal economist, such as Paul Krugman, recent winner of the Bank of Sweden’s prize for economics in honor of Alfred Nobel, makes it clear that what makes him a mainstream thinker, and hence a member of the club at the top of society, is his strong commitment to capitalism and “free markets” and his disdain of socialism—proudly proclaiming that “just a few years magazine even devoted a cover story to an attack on me for my pro-capitalist views.” Paul Krugman, The Great Unraveling (New York: W. W. Norton, 2004), xxxvi. In this context, see Harry Magdoff, John Bellamy Foster, and Robert W. McChesney, “A Prizefighter for Capitalism: Paul Krugman vs. the Quebec Protestors,” Monthly Review 53, no. 2 (June 2001): 1–5. Back to Article

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