Tuesday, May 26, 2009

Russian economic slide worsening

There are concerns Russia's worsening economic situation is adding to poverty
Russia's economy contracted sharply in April - shrinking by 10.5% from the same month a year ago - Deputy Economy Minister Andrei Klepach has said.

The data came as officials were quoted as saying Russia would have a budget deficit equivalent to 9% of GDP in 2009, from an earlier 7.4% prediction.

Russia's economy had been growing thanks to high oil prices, which peaked at about $147 a barrel last summer.

But since then, the price of oil, a key export, has fallen by more than half.

The sharp drop in the economy in April came after Federal State Statistics figures showed that, on a year-on-year basis, output dropped 9.5% in the first three months of the year.

'Tough regime'

Industrial output has slowed in the wake of the global economic slowdown, and investors have withdrawn from Russia.

There are fears that poverty levels are rising - with Russian churches reporting a rise in the number of people seeking free meals as a result of the global financial crisis

On Monday, Russian President Dmitry Medvedev gave downbeat comments on the country's economy - though he avoided giving precise statistics on how bad it had become.

However, he called for sharp cutbacks in government spending in a "shift to a regime of tough economising of budget funds".

Mr Medvedev also hit out at corrupt officials for "sucking" away state funds.

Russia's regions should be less reliant on Moscow and be prepared to fend more for themselves, he added.

Source:BBC News

Saturday, May 23, 2009

Chinese banks' surge in lending to support the government's stimulus package is leading to excessive risk taking

China is growing much faster than other major global economies

Chinese banks' surge in lending to support the government's stimulus package is leading to excessive risk taking, said the Fitch ratings agency.
Banks lent 5.2 trillion yuan ($762bn; £489bn) in the first four months of the year, encouraged by government backing for infrastructure projects.
Ambitious profit targets also contributed to the massive volumes of money being lent, Fitch said.

Last year, the Chinese government announced a 4tn yuan stimulus package.
This was designed to boost economic activity during the downturn.
Bad loans

"This emphasis on short-term profit may be contributing to excessive risk-taking by banks, particularly in corporate lending, which could lead to material losses in these portfolios," Fitch said.

The importance of profit targets in driving lending should not be underestimated, the agency argued.

China's central bank said in its quarterly report that regulators were looking into where exactly all the bank loans were going.

"We know this is not being totally dictated by the government, because if it were they would know exactly where it is going," said Charlene Chu at Fitch.

Lower interest rates are also encouraging banks to lend more as margins shrink, the agency added.

Ms Chu said the massive loan volumes could be storing up trouble for the future, as some would inevitably go bad.

"Over the medium term, we do believe that at some point these losses are going to start to come out, and that is going to take its toll on the banks," she said

Source: BBC News

Friday, May 22, 2009

Kenneth Rogoff "I think the US faces a decade of recession, similar to what happened in Japan"

Kenneth Rogoff, professor of economics, Harvard University

"I think the US faces a decade of recession, similar to what happened in Japan.

We are not going to be 'off to the races' any time soon in any of the countries that were the 'ground zero' of the financial crisis, such as the US, the UK, Ireland and Spain.

Neither Britain or the US has really fixed the problems in their financial sector, and it is hard to see really robust growth returning in the next few years.

It is in the interest of policy-makers and politicians to trumpet any green shoots in order to encourage investment and talk up the market, but it is very unclear whether they really exist.

The huge government spending is providing a temporary boost to the economy, but it will have to be paid for in higher taxes or higher inflation which could reduce economic output in the future."

Source BBC News

Robots vs. Luddites by Brendan M Cooney

In 1812 sabotage crept through the British countryside. By the cover of darkness gangs of weavers organized under their anonymous leader “General Ludd” broke into factories by night and smashed the new automated looms to pieces. Cloaked armies of “Luddites” appeared at factory gates in the day to demand better wages, better working conditions, and the right to produce higher-quality fabric. The weavers had not always been guerilla fighters. For 300 years they had passed down their craft from generation to generation of skilled artisans, weaving fine silk and stockings in the comfort of their own home. But now there was a machine that could do all that. It was called the power-loom.

But why would a worker break a machine? A machine is supposed to make work easier and make life better. To understand the violence of the Luddite rebellion we need to remember that when a worker uses a machine he/she enters into social relations with people. Work is always a social process entailing some sort of social cooperation. (In a capitalist society we can’t understand this social dimension without understanding the relations of private property which define it.) A machine conceals a social relation. Lift the veil and we see that the machine is an expression of the relationship between capitalist and laborer.

Throughout human history the social relations which we labor under have changed, from the primitive hunter-gatherer, to feudal societies, to modern industrial capitalism. We call these different organizations of social labor the “relations of production.” Different relations of production are characterized by different types ownership, different divisions of labor and different organizations of work.

Throughout human history the relations between people and the tools and machines they use has also evolved. From stone axes and knives to the automated loom to the personal computer the technical “forces of production” have undergone numerous revolutions.

These two aspects of work- the forces and relations of production- form the inner dynamic of human history. We might make some obvious observations about the two: Modern capitalist social relations couldn’t survive if we were constrained to the use of stonge-age tools. Conversely, the internet wouldn’t find much fertile ground for use within the social relations of 16th century European feudalism. We might use these obvious observations to make a more interesting observation: that the forces and relations of production co-evolve over time. This means that changes in one can have a profound effect on the other and that the inability of one to change can constrain the ability of the other to change.

By examining the coevolution of the forces and relations of production we can illuminate much about our history and our future.

So back to our question: why did the mysterious General Ludd and his followers steal through the English countryside under cover of darkness smashing the machines which were intended to make their work easier? To answer this question, let’s take a closer look at the machine in question.

The power loom did something that no loom before had done. It replaced the hands of the weaver with a mechanical hand that moved faster and more efficiently than the the most skilled of weavers. (figures?) The power loom didn’t just happen by accident. It appeared at a distinctive time in history when capitalists were introducing automated machines into production to replace the hand of the worker. Thus behind the machine, lay a social relation: a social relation between capitalists and workers.

By replacing the hand of the worker with the cold steel of a machine the skilled craftsman, the master weaver, was transformed into an unskilled machine-tender, an appendage of the machine. Unskilled workers could be paid lower wages. The pace of work could be dictated by the speed of the machine, not the pace of the human. Thus work could be sped up and intensified. Because less labor went into the product the prices of products fell making it impossible for independent craftsmen to compete with the new machines. In short, the replacement of the human hand with the automated tool meant a huge revolution in the social relations of 19th century Europe as the system of skilled craftwork was transformed into the large scale capitalist industry with its shopfloors of roaring machinery and the unskilled proletariat that tended these machines. The Luddite attack on the powerloom was a last-ditch defense of a dying labor process, a labor process quickly being replaced by modern industrial forces and relations of production.

And the Luddites weren’t the only barrier to the emergence of large-scale capitalist industry. The 19th century was filled with social conflict between capital and labor as workers resisted the impositions of the industrial labor process. The deskilling of work, the disciplining of the labor force and the acclamation of the population to the labor process continued into the 20th century inspiring innovators like Frederick Taylor and Henry Ford to lend their efforts to the problem. These were the major social problems of the times. The need for state regulation of labor conflict was a major factor in the emergence of the modern capitalist state. But of all the political and social attempts to regulate this conflict it may have been the machines themselves that did the most to discipline humans beings to modern capitalism.

But it would be a mistake to say that all of these changes were brought on by machines themselves, as if machine evolution was dragging human history along with it, kicking and screaming. Machines were introduced into production because they gave capitalists power in their conflict with workers. If you can be replaced by a machine you are much less likely to form a union or go on strike. If you are an unskilled machine-tender you can’t bargain for high wages like a skilled craft worker. Before the large-scale Industry of the 1800’s lay a tumultuous 200 year history in which capitalism ate away at the institutions of feudal property, creating the conditions for a modern labor force. The Manufacturing period which preceded the 1800’s still retained some held-over characteristics from the feudal period: There was still a lot of semi-skilled handicraft work, machines were used in a piece-meal fashion, and the size of the workforce was still relatively small.

But as more machines were introduced into the Manufacturing system, that system of production became less and less able to handle the demands of the machine. The powerloom, for instance meant that suddenly a factory could produce a lot more output than before. But this required increased input of raw materials. The sudden increase in demand for raw materials meant that those industries that produced raw materials were also under pressure to automate production. Increased output also meant finding new markets for goods. This required revolutions in transportation and communication: canals, railroads, and eventually automobiles and airplanes…

Automated production eventually meant the linking of all the machines in one workplace together to form one massive mechanical monster. This meant finding a regular, controllable motive power like the steam engine or, later, electricity to power production. Such a motive force became the regulator of the speed of production- the entire factory, its machines and human appendages, fell into rhythm with the rhythm of the steam engine. Once electricity became the prime moving force of production this meant revolutions in the system by which power was transmitted to production: power lines, power grids, etc. By the dawn of the 20th century the entire globe was linked up in interlocking power grids all coordinating the speed of production with a single motive power. Human life changed too, our movements falling into rhythm with the gentle hum of the power grid.

The demand for machines which would all be linked together in one big factory, powered by a uniform motive power, required both a huge increase in machine production and a uniformity of production that the semi-skilled workers of the manufacturing system couldn’t provide. It wasn’t until these workers were replaced by a less-skilled automated production system- the production of machines by machines themselves- that the Industrial Revolution could truly revolutionize European society.

The Luddite movement ended with violent repression and the hanging of its leaders. It seems that the defense of private property was more important to the emerging social order than human life. We see a curious relationship here. The technology that was to make life easier for humans becomes the source of the most violent, anti-human behavior. The social conflict that required the evolution of the machine in the first place is altered by the machine itself. But the conflict between labor and capital isn’t resolved, it’s merely transposed to another level: the social conflict of modern, industrial capitalism. The question then becomes, in this coevolution of the forces and relations of production, of machines and people, is there ever a point in which the technical basis of society can no longer support the class antagonisms of capitalism, in which the tremendous productivity and abundance made possible by technology can no longer function within the distorted social relations of private property?

Why should you care about the coevolution of the forces and relations of production in the 19th century?

Because these are the laws of motion of human history, laws we can see operating right now. We are living in the midst of a similar revolution in productive forces.

If the automated tools of the 19th century replaced the human hand what does a computer replace? The modern computer is the descendent of the Turing Machine. A Turing Machine, put simply, is a machine that can follow changing instructions. Feed in one set of instructions and the machine does one thing. Feed in another set of instructions and the machine does something else. Defined this way, a human being is also a turing machine. Tell Jim to lift pig iron and Jim lifts pig iron. Tell Jim to answer phones and Jim answers phones. With the advent of the Turing Machine it became possible to make a single machine which could do almost anything: a laptop that can check email and edit video, an iphone that can record music and get directions to the airport. One of the things about human beings that had made them so distinct from machines in the 19th century- their ability to follow instructions- had been eliminated.

There is a central contradiction in the replacing of humans with machines. Machines can produce commodities but they can’t create value. So while capitalists replace humans with machines in the search for more short-term profit, in the long run less value is being produced. The prices of commodities fall as less labor goes into them. If the turing machine can follow any set of instructions, the only labor that needs to go into the production process is the creation of these instructions themselves. The production of instructions, or information, then becomes the source of value. [Because the machine can do any task, the information we feed to machines becomes the most important aspect of production.]

Enter the information age- an age where the production and ownership of knowledge is the central thing around which all production revolves. If the speed of life in the industrial age was dictated by the pace of the steam engine or electricity, the speed of life today is dictated by the speed of information transfer. This speed of information transfer has increased rapidly in the last few decades to the point where huge amounts of information can now be sent across the globe with the click of a button. We are only beginning to see the tremendous revolutions in social relations that will be created by this evolution in the forces of production.

The race to improve the speed of information transfer to machines has led to revolutions in all sorts of industries like micro-processing, data storage, personal electronics, and the information infrastructure (cable, wireless, DSL, ethernet, etc.). It’s also causing the destruction of many older industries, industries which derived their profits from their exclusive ownership of the “means of duplication” like the record industry or print media. Recording a phonograph and pressing it used to require a great deal of capital. A record company’s profits relied not just on their ownership of the masters of a record but also on the fact that they had a monopoly over the ability to make more copies of that record. Now a musician can record their own album in their kitchen and distribute it online relatively cheaply. A fan can duplicate that recording a thousand times over with the click of a button. An entire generation of music listeners is now growing up with the expectation that they should be able to listen to any music they want at any time for free. Is this not proof of Marx’s argument that when human labor is removed from a task, the social value of that task falls to zero?

The newspaper industry is facing the same problem. Nobody wants to pay for the duplication of print media when they can get it for free online. Of course recording an album or writing a news article still requires labor from musicians and reporters. This is the information part of the commodity. But the crisis in the newspaper and record industry reveals an interesting aspect of information as a commodity: Information can only be bought and sold as a commodity if the seller has a monopoly over the right of duplication. When printing a newspaper required an expensive printing press and a complicated labor process it was a given that a newspaper was a commodity. But now that the duplication of news can happen at the click of a button that monopoly over duplication has disappeared.

For the newspaper industry the only solution so far has been to give news away for free online and rely on advertising for revenue. Meanwhile the recording industry has resorted to extravagant lawsuits against internet “piracy” and increasingly exploitative recording contracts with musicians called “360 deals” which demand a cut of all a bands revenue from merchandise sales to ticket sales.

If the monopoly on duplication is the only thing that makes information a commodity we are left wondering what is the true nature of information when this monopoly disappears. It seems increasingly obvious that information has an inherently social dimension. Where social knowledge leaves off and one person’s private contribution to social knowledge starts seems an increasingly arbitrary distinction defined by a narrow legal definition of intellectual property (a definition based in old-fashioned notions of commodity duplication.)

It’s not just that newspapermen and record industry executives are old-fashioned, or aren’t savvy enough with computers. It’s that the basic parameters of production and profit, the social relations, are changing as the forces of production evolve. As many times as they sue Napster or PirateBay the reality is that Napster and PirateBay represent the inherent nature of the new technology and the emergence of a new type of social relation that suggests a collective ownership of information. From wikipedia, to the blogosphere, to Linux, to the open-source software, new models of production and distribution are being experimented with on a collective level never before seen. But what kind of society is emerging? Clearly there are all sorts of problems with the way knowledge is created on the internet and there is a great deal of room for capitalism to expand into the internet for its own purposes of commodification and control. And outside of the internet there is still a great deal of real production that is done by human labor. What do the emerging models of information transfer of the internet-age have to offer the real-world labor process?

Industrial capitalism emerged from the manufacturing system of the early 1800’s spurred on by revolutions in the forces of production. But in order to come into its own as a new system of social relations it had to revolutionize the existing social relations. Today we can see the new forces of production overthrowing the established economic order. But what sort of society will emerge from this is yet to be seen.

Marx saw that despite of all the misery and exploitation of the Industrial Revolution that there were great socializing processes at work. The working class was being stripped of its antiquated, local superstitions. In being reduced to an unskilled, proletarian appendage to the machine, all workers were equalized, sharing the same social solidarity and common material interests. The labor process was becoming increasingly collective even as it became more degrading. Capital on the other hand was encountering greater and greater crisis and causing more and more people to question whether it could survive for much longer without destroying itself. But the great revolution that Marx had hoped for didn’t happen. It seemed that capitalism was not done learning how to displace crisis and finding new avenues of growth. And it seems revolutionary theory wasn’t ready to live up to the potential Marx saw in a post-capitalist society.

We have a lot of work to do in our time. These tectonic shifts in the forces and relations of production have coincided with global economic crisis and environmental crisis. At such times the future is uncertain. Anything can happen. If the left is to seize the initiative in the 21st century it has much theoretical work to do examining the trajectory of these new forces and relations of production and discerning what sort of possibilities they present for radical breaks from the present order.

Recommended reading:
Das Kapital, Karl Marx, the chapters on manufacturing and large scale industry
Cutting Edge, Technology, Information Capitalism and Social Revolution; ed. Jim Davis. This is a great collection of essays about the information age and value theory.
“Digitalization and the Monadization of Power”, a lecture by Dylan Suzanne: http://www.archive.org/details/suzannemainelecture2 . I am curious to acquaint myself more with Suzanne’s work. This is a good lecture.
Soderberg, Johnathan. “Copyleft vs. Copyright; A Marxist Critique.” First Monday volume 7, number 3 (March 2002) URL: http://firstmonday.org/issues/issue7_3/soderberg/index.html This is an early work of Soderberg’s which eventually turned into his book Hacking Capitalism which I haven’t read yet because it’s way too expensive. If anyone has access to a digital version please let me know.

music by a great Trio from the West Coast called “Beep”. Check them out at myspace.com/beeptrio

Tuesday, May 19, 2009

Japan's economy in record plunge

Japan's exports have been hit by a collapse in demand

Japan's economy has seen its worst ever quarterly performance, with GDP shrinking 4% in the first three months of 2009.

The contraction is the fourth in succession, following a 3.8% drop in October to December.

But economists are predicting modest growth in the coming months after a small rise in production in March.

The world's second biggest economy, which depends heavily on exports, has been hit hard by the global downturn.

The BBC's Roland Buerk in Tokyo says people around the world are buying fewer of the cars and electronic gadgets that Japan is renowned for.

The latest contraction is the biggest since records began in 1955.

It comes at an annualised rate of 15.2%, compared with a 6.1% fall in the US over the same period.

Saturday, May 16, 2009

Russian economy contracts sharply

The falling price of oil and gas has hit Russia's economy

Russia's economy contracted sharply in the first three months of the year, hit by the global slowdown, Federal State Statistics figures show.

Economic output for the period to the end of March fell 23.2% compared with the previous quarter. On a year-on-year basis, output dropped 9.5%.

Russia's economy had been growing thanks to high oil prices, which peaked at around $147 a barrel last summer.

But since then, the price of oil, a key export, has fallen by more than half.

The latest figures for the first three months of the year confirm estimates released last month by the government.

Industrial output has slowed in the wake of the global economic slowdown, and investors have withdrawn significantly from Russia.

Friday, May 15, 2009

Hong Kong's economy shrank by 7.8% in the first three months of this year

Hong Kong's exports slumped in the first three months of 2009

Hong Kong's economy shrank by 7.8% in the first three months of this year compared with a year earlier as exports plunged during the global downturn.

This represents the economy's worst performance since the Asian financial crisis more than ten years ago.

The territory's government now forecasts GDP to contract by between 5.5%-6.5% this year, compared with its earlier prediction of a 2%-3% drop.

Recovery depends on the global economy, analysts said.

'Severe crisis'

"I anticipate that Hong Kong's economic performance in the second quarter will remain difficult," the territory's financial secretary John Tsang said.

Hong Kong's exports slumped by 22% during the quarter and economic recovery depends on how quickly the global economy picks up, analysts said.

"The figure is worse than expected. It tells you how a severe global financial crisis can affect a healthy, small and open economy," said Dong Tao at Credit Suisse.

"Will Hong Kong see a further deterioration? It is not up to Hong Kong, it is up to the rest of the world, especially the US, China and the financial markets."

Thursday, May 14, 2009

Why Marxist Economists Dismiss Marx’s Law of the Tendential Fall in the Rate of Profit

Why Marxist Economists Dismiss Marx’s Law of the Tendential Fall in the Rate of Profit by Andrew Kliman, Author of Reclaiming Marx’s “Capital“: A refutation of the myth of inconsistency

As I noted in a post last month, some prominent Marxist economists—including Fred Moseley and Gérard Duménil—have recently asserted that the rate of profit in the U.S. has recovered from the fall it underwent through 1982. Therefore, they contend, Marx’s law of the tendential fall in the rate of profit is of little value, if any, when trying to explain the roots of the current economic crisis. Instead, they attribute the crisis to financial-sector phenomena­—which they portray as largely unrelated to and separable from movements in profitability.

Indeed, Moseley and Duménil both contend not only that the rate of profit has recovered, but also that the recovery is “almost complete.” Earlier this year, Moseley (2009, pp. 300-01) wrote: “the rate of profit is now approaching the previous peaks achieved in the 1960s … The last several years especially, since the recession of 2001, has seen a very strong recovery of profits …. I conclude that there has been a very substantial and probably almost complete recovery of the rate of profit in the U.S.”

Estimates by Gérard Duménil and Dominique Lévy (2005) indicate that the rate of profit of the overall business sector in the U.S. has not recovered so substantially. Yet with regard to the corporate sector, their view echoes Moseley’s; as of 1997, the rate of profit of the “Corporate sector … recovered to its level of the late 1950s. … Considering the evolution of the profit rate since World War II, the recovery of the profit rate appears nearly complete within the entire Corporate sector” (Duménil and Lévy 2005, p. 9, p. 11, emphases omitted).

But why do Moseley and Duménil say this? One reason, as I noted in my post of last month, is that when they discuss the tendency of the rate of profit, they’re discussing the tendency of the physical “rate of profit,” which isn’t a rate of profit in any real sense.

Yet there’s another reason as well: both of them fail to distinguish between cyclical variations in profitability and longer-term (secular) trends in profitability. It is obvious that, in order to ascertain the trend, one needs to set aside or control for cyclical effects. Otherwise, one might take a completely trendless data series (such as the sine wave depicted see Figure 1) and conclude that it exhibits a rising trend simply by cherry-picking a trough point (A) and comparing it to later peak point (B). Or one might say with equal validity (i.e., none) that the series exhibits a falling trend, simply by cherry-picking a peak point (B) and comparing it to a later trough point (C).

Figure 1.

But this is exactly what Moseley and Duménil-Lévy do. Let’s look at how they discuss the estimates of the rate of profit that they’ve computed:
When he asserts that the rate of profit has almost completely recovered from its prior fall, Moseley is comparing his rate of profit during the trough or near-trough years from the mid-1970s through the early 1980s with the rate during the peak period of 2004-2007 or 2005-2007—even though it is clear to him that an unsustainable asset-price bubble was underway during the latter period (Moseley 2009, esp. section 5). Had he compared the troughs in his data, Moseley would have reported a rise in the rate of profit from 10% in 1980 to 14% in 2001, rather than the rise of twice that amount (to 17%-19%) that induced him to refer to an “almost complete recovery” of the rate of profit. And he would have reported no recovery in trough rates of profit from 1987 through 2001, the most recent trough year.

Similarly, Duménil and Lévy (2005) chose to analyze movements in profitability only through 1997. They made this choice, for reasons they do not explain, even though their paper actually presents data through 2000, and even though a few more years of data, including data for the trough year of 2001, were available when they published their paper. But 1997 was a peak profit-rate year. Thus when they state that the corporate sector’s rate of profit fell sharply through 1982 and then underwent a “recovery [… that] appears nearly complete,” Duménil and Lévy are comparing a trough to a peak.

Why do Moseley and Duménil- Lévy choose to cherry-pick their data in this manner? I do not know. I can only speculate that they “see” the increases in profitability, but not the subsequent declines, as significant, and that this stems from a “pre-analytical vision” of Capital Resurgent (Duménil and Lévy 2004), in which a neoliberal, free-market counter-revolution gave rise to a new, sustainable boom on the backs of the working class. This vision has helped many on the Left find an “objective basis” for both the hopelessness and feelings of impotence they have experienced and for the resignation to the status quo, or mildly reformist alternatives to it, that they have taken to advocating. The data themselves do not tell such a clear-cut story.


Duménil, Gérard and Dominique Lévy, 2005, “The Profit Rate: Where and How Much Did it Fall? Did It Recover? (USA 1948-1997).” Available at http://www.jourdan.ens.fr/levy/dle2002f.pdf .
Moseley, Fred, 2009, “The US Economic Crisis: Causes and Solutions,” Marxism 21, Vol. 6, No. 1, pp. 296-316.

Visit the source : http://www.marxist-humanist-initiative.org/,

Wednesday, May 13, 2009

The Bank of England says that the UK economic recovery is likely to be slow and protracted.

The Bank of England says that the UK economic recovery is likely to be slow and protracted.

The Bank has cut its growth forecast over the next two years and raised its estimate for inflation since February.

It appears to be gloomier than the government, which has forecast a decline in GDP of about 3.5% this year.

The Bank is also more pessimistic about how quickly growth will recover to normal levels, but says there is more uncertainty than usual in its forecast.

"The prospects for economic growth remain unusually uncertain, reflecting the exceptional economic and financial factors affecting the outlook," the Bank said in its latest quarterly inflation report.

The Bank has not provided a single forecast for economic growth, but its central projection appears to be for a decline of about 3.9% this year and growth of about 1% in 2010.

There are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained

Jonathan Loynes, an economist at Capital Economics, said that Bank of England had injected "a sensible element of caution amidst recent excited talk of the green shoots of recovery".

"This appears at least partly to reflect a gloomier view on the outlook for bank lending," he said.

The bank's gloomy outlook hurt sterling, which fell to $1.5180 against the dollar from $1.5315 before the report was released.

'Healing time'

Bank of England Governor Mervyn King said that the economy would take time to heal.

"There are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained, " Mr King said.

"But in the light of the state of balance sheets particularly in the financial sector, the committee judges that the risks are weighted towards a relatively slow and protracted recovery."

Mr King said he saw some reasons for optimism and the pace of economic decline had moderated.

He also said that government plans to stimulate the economy and the weak pound would help.

But he was also cautious and said problems in the banking sector had not yet been fully resolved.

The Bank forecast that inflation should fall to around 0.5% by the end of this year before picking up to around 1.2% in two years' time - below the Bank's target rate of 2%.

Quantitative easing

Mr King said that said it was too early to ascertain whether the Bank's new policy of quantitative easing was successful but said he had not been disappointed by its effects.

With interest rates as low as they can go, the Bank has been pumping money into the banking system through quantitative easing to stimulate the economy.
The process involves the Bank effectively printing money to buy government and corporate bonds.

"It will take 6-9 months I think before we see more evidence," Mr King said.

Analysts said the inflation report indicated that the Bank's interest rates would likely remain at 0.5% until well into 2010.

"We certainly suspect that while latest data and survey evidence have been markedly improved and even hint that the economy could be close to stabilising, significant relapses remain highly likely," said Howard Archer, economist at Global Insight

BBC News

Tuesday, May 12, 2009

Michael Hudson on Economic Rent - or proving the Old Man Right

Thanks to Renegade Economist for this video http://www.youtube.com/user/RenegadeEconomist

I cannot watch this video without thinking of Henry George and his solution to the ills of capitalism the single tax on land rental income.

What is interesting is that Henry George's ideas always seem to surface in a crisis of capitalism and of course Hong Kong capitalism is a classic version of Henry George's ideas in practice, the Hong Kong government generates more than 35% of its revenue from land taxes, and keeps its other tax rates low.

There is nothing inherently socialist in Henry George's ideas just like with John Maynard Keynes utilising the capitalist State to preserve capitalism has nothing to do with socialism.

"Last Ditch" that was that perceptive old man Karl Marx's remark after reading Henry George's Progress and Poverty and just maybe the resurrection of Georgeism by Renegade Economist and Michael Hudson at this moment in global capitalism's systemic crisis may prove the old man right.

Nickglais 13/5/2009

Monday, May 11, 2009

Extract from Money and Crisis by Sergio Bologna -Marx as Correspondent of the New York Daily Tribune, 1856-57

This article was written in 1973. It was a key article in developing the theoretical base of the newly emerging politics of working-class autonomy.

The Crédit Mobilier, as we know, was established as an explicit move on the part of the regime to counter the dominant influence of the big private banks and the Orleanist nobility. We read in Gille that the statutes of the new Crédit Mobilier had raised considerable apprehension in ministry circles - in the Finance, Commerce and Public Works ministries especially. There were fears of the the kind of privileges being accorded to the founders, and doubts were expressed over the fact that the bank was allowed to issue shares up to five times the amount of its capital; and there was already a sense of the kind of speculative activities that it might engage in.

Behind this division of opinion lay two different conceptions of economic policy, which more or less corresponded to the present-day opposition in capitalist countries between treasury ministries and central banks. According to Péreire it was the shortage of liquidity that brought about the collapse of Louis Philippe's finances. But this view was not shared by other powerful interests. The Minister of Internal Affairs, replying on 24 October 1852 to notes from the other ministers, underlined the need for a credit institution to relaunch investment, and added: "At a time when industrial shares are multiplying and circulation is becoming more sustained, in which share prices are bound to fluctuate, this company can regularise and sustain their rate, preventing in this case those crises which are so prolific and disastrous."

But the most impressive document was the note which the greatest of the private bankers, James de Rothschild, sent to Napoleon on the very day government authorisation was given to the Crédit (15 November 1852). In his view, the future directors of the Crédit "would throw into circulation, with the backing and authorisation of the government, a considerable quantity of credit bonds dependent on changeable and uncertain guarantees." If the issue of shares were also taken into account, the result would be a flood of paper money "which at times of crisis will drag public wealth to the edge of an abyss". There should be no illusion that the basic capital and portfolio of stocks would be maintained to cover its liabilities: this would mean a severe blow in times of crisis and pure speculation in times of prosperity. Deprived of deposits or reserves, the Crédit would "either go to ruin or will take recourse to the dangerous expedient of imposing confidence by forced currency measures, which never remove disasters but only lessen their effects". Moreover, "a prey to their own caprices and interests, the irresponsible directors of this bank will come to control all the enterprises... manipulating share values, exalting one firm, humiliating another, they will impose their own conditions on all. Because of the number of shares in their possession they will be able to dictate laws over the market, laws without control or competition...

The bank will penetrate the managing boards of railways, mines and canals, appointing its own agents, and controlling these bodies with people of its choosing. It will bring into its hands and under its authority the greater part of public wealth. More than a danger, this would be a calamity, eliminating all competition, destroying all individual powers... The prosperity of the country will be made to depend on the will, ability, inexperience or interests of a small number of men who will be involved in their investment stock only indirectly, and will not have to carry the burden of responsibility for the mistakes they commit." But the greatest dangers, he concluded, were those which threatened the public finances, the regime itself. In issuing Treasury bonds the state would find itself up against a single competitor in the market, the Crédit: state loans would be faced by a single buyer. This would aggravate the effects of crisis still further. And there was always the chance that the Crédit would fall into the hands of those hostile to the regime.

The lucidity and foresight of this judgement is remarkable and was borne out by subsequent events. It is also strikingly similar to Marx's own views in the NYDT articles. Marx may well have been aware of Rothschild's public campaign against the Péreire brothers in the international press at the time when he was writing his own articles.

The epic character of the conflict between Rothschild and the Péreires has left its traces on all later historiography. From Sée to Dupont-Ferrier, the contrast between the old and new type of bank has become a common theme among historians. Landes was the first to put forward a different interpretation: he argued that the thesis of a conscious conflict between two banking systems was inexact and that their functions were complementary (private merchant banks dealing with short-term commercial credit, the joint-stock investment bank with long-term fixed capital loans). It is true that in the first board of directors of the Crédit we find key protagonists of the old school of banking. Rothschild himself associated in common ventures with the Péreires after the 1857 crisis.

Nevertheless, it was the associationist ideology of the Péreires that forced the pace, that obliged the old banks to undertake new ventures that otherwise they would not have dared embark on, and to experiment with new techniques. In a sense their ideology gave them more power and influence than their capital. Even Landes has to admit that they were the real protagonists of the banking revolution of the mid-century.

At the first board meeting of the Crédit, Isaac Péreire spoke of "putting into circulation a new agent, a new promissory money which will become the bearer of its everyday interest and which will allow the smallest of savings and the largest of capitals to bear fruit." In other words, to fill the vacuum next to ordinary bank notes, to create a "valore omnium" with an interest accruing on a day by day basis, and with rent coming out of simple circulation - these were the ambitious plans of the two Péreire brothers, whose powers of imagination and inventiveness went well beyond their actual possibilities of realisation.

Their "valore omnium" was never to be convertible, though some of the bonds of the Crédit, while remaining shares, did circulate as portable money or bank notes. The Crédit shares represented, rather, a utopian symbol of the average rate of interest, of the tendential law of capitalism. "In general, when we become involved in a particular sector of industry, we want to promote its development, not by means of competition, but by association and fusion, by the more economical use of resources, not by their opposition and mutual destruction," Péreire told the Board in 1855.

What we have here is not a utopia, but a concrete practice which gave a decisive direction to the process of capitalist concentration and which thus expressed a tendential law of capitalism. Even the devotees of the old-style banking were obliged to adapt to the moving times: in 1857 the syndicate which later gave rise to the Société Générale was formed to counteract the Crédit, under the patronage of Rothschild.

The new sectors of high organic composition, with heavy industry in pride of place, made a process of fusion and concentration indispensable. In this context the expansive capacity of the bank, its ability to extend its operations beyond French frontiers, especially to newly developing countries that were poor in resources (Italy for example), depended on the principle of association. Another idée force of the Péreires was the creation of a world capital market, a single unified monetary zone: "One of the most important results we should aim for is the possibility of creating credit shares, the interest on which would be met in all the major markets of Europe on the basis of fixed rates to be established between the currencies of all the states." The ultimate aim was an international super-money which could substitute for banknotes, commercial notes and letters of credit. "It is not gold but the force of association that is the real financial power of France in the world," was another of Péreire's maxims. This monetary objective, to replace money with credit money, showed an anticipation of capitalist tendencies which is remarkable. It represented a measured response of capital to the working-class challenge of 1848, a mature theorisation of a fully socialised capital based on the world market.

That the Bonapartist regime had to carry out this leap, and thereby disappoint the hopes of its theoretical originators, is not surprising. At the end of 1855, the government prohibited the Crédit Mobilier from launching a long-term loan by the issue of bonded notes. On 9 March 1856 a decree prohibited the issue of all new shares to the public. The activities of the Crédit were paralysed and the way was open for Rothschild's counter-attack. On 21 July 1856, the Péreires wrote to the Emperor of their bitter predicament: "The jealousies that unbridled competition have aroused against us and against the Crédit Mobilier have paralysed everything... There is a concerted campaign of attacks, lies and calumnies, not only against the Crédit Mobilier but against all the enterprises that it has promoted since its foundation."

We do not know Bonaparte's reply, but the fact that the regime conceded openings to the Rothschilds and to British capital (especially in new railway concessions) certainly does not suggest any attempt to curtail the structural transformation the Péreires had theorised and promoted. It was more a matter of running it in a way that could involve the whole financial world and the top banks, in other words all sections of the capitalist class, in a common enterprise extending beyond personal rivalries. The fruits of this were soon to become apparent: the period up to 1866 saw one of the most sustained cycles of development in particular key sectors, prior to the depression which led to the collapse of the Empire, the war of 1870 and the Commune.

But quite apart from their anticipatory role, the Péreires and the Crédit were in line with one of the key choices of the regime from the very start: that regarding monopolies. On this question there were endless battles and polemics against the imperial record, its interventionism in the economy, and its suffocation of free enterprise: this was to be the favoured ground of the radical bourgeois tradition which was to last so long in France. From this viewpoint, the relation between the new investment banks and the regime was more specific than a mere convergence or a simple acceleration of objective tendencies of capitalism. The oligarchic and monopolistic tendencies towards concentration, separation of ownership and control etc, were given an irreversible push. State power and economic power became closely linked: they were identified as such by the working class, so that the question of the relation between the class movement and insurrection became more immediate and direct. The final verdict on the Crédit was to be given by Marx in Capital Volume Three:

"If the credit system appears as the principal lever of overproduction and excessive speculation in commerce, this is simply because the reproduction process, which is elastic by nature, is now forced to its utmost limit; and this is because a great part of the social capital is applied by those who are not its owners, and who therefore proceed quite unlike owners who, when they function themselves, anxiously weigh the limits of their private capital. This only goes to show how the valorisation of capital founded on the antithetical character of capitalist production permits actual free development only up to a certain point, which is constantly broken through by the credit system. The credit system hence accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction - crises - and with these the elements of dissolution of the old mode of production.

"The credit system has a dual character immanent in it: on the one hand it develops the motive of capitalist production, enrichment by the exploitation of others' labour, into the purest and most colossal system of gambling and swindling, and restricts ever more the already small number of the exploiters of social wealth; on the other however it constitutes the form of transition towards a new mode of production. It is this dual character that gives the principal spokesmen for credit, from Law through to Isaac Péreire, their nicely mixed character of swindler and prophet." (Capital Vol. III, pp 572-3)

On 26 September 1856, Marx wrote to Engels: "This time, by the by, the thing has assumed European dimensions such as have never been seen before, and I don't suppose we'll be able to spend much longer here merely as spectators. The very fact that I've at last got round to setting up house again and sending for my books seems to me to prove that the 'mobilisation' of our persons is at hand" .

The "two-man party" (as they were described by Engels's biographer, Mayer) was preparing to move into action. Marx's attention in this letter is focussed on the price of money, the market in precious metals and their reciprocal relation. "What do you think of the aspect of the money market? There is no doubt that the increases in the discount rate on the Continent are partly associated with the appreciation of silver against gold due to the Californian and Australian gold and hence bullion dealers everywhere where gold and silver are the legal STANDARD are withdrawing the latter from the banks. But whatever the reason for the increases in the discount rate, these are at least precipitating the downfall of the vast speculative transactions and, more specifically, of the grand pawningshop at Paris. I don't believe that the great monetary crisis will outlast the winter of 1857."

The important development in the course of the later articles for the NYDT is the focus on the European ramifications of the fact that Paris was operating as a centre of speculation, and especially the effect on Britain. Marx takes up a favourite theme of his - the illusion whereby the English capitalist class considered themselves to be outside the "unsound" speculation on the Continent. John Bull is a dreamer if that's what he thinks, because he forgets that a good part of his capital - of English capital - is invested in Parisian commercial circles. The difference, if anything, is this: whereas the French speculation takes the refined forms of Saint-Simonianism, the English variety returns to the primitive form of fraud.

Marx now widens the field of his vision. It is no longer the French aspect of speculation that occupies the stage, but its relationship to the rest of the capitalist world; the object of inquiry becomes the internal nerve-system and the interconnections of the world market. In the view of the "two-man party", the prospects become increasingly optimistic: it is not only that the Bonapartist link is about to break, but that the whole chain of the European post-1848 restoration is shaking under the impact of the crisis. In his next letter, Engels enthusiastically adopts an apocalyptic view of events: "This time there'll be a dies irae such as has never been seen before: the whole of Europe's industry in ruins, all markets over-stocked (already nothing more is being shipped to India), all the propertied classes in the soup, complete bankruptcy of the bourgeoisie, war and profligacy to the nth degree. I, too, believe that it will all come to pass in 1857, and when I heard that you were again buying furniture, I promptly declared the thing to be a dead certainty and offered to take bets on it

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Saturday, May 9, 2009

Fictitious Capital and Credit Schemes by Michael Egoavil

The founders of the Generale Societe du Crédit Mobiliér, the brothers Isaac and Emile Pereire

The following is a talk given by Michael Egoavil at the Left Forum 2009 panel “Marx’s ‘Capital’ and the Economic Crisis”. Michael can be reached at michaelegoavil@gmail.com.

Today I’m going to be discussing Marx’s theory of fictitious capital and its relation to real capital accumulation. Along the way I’m going to focus on Marx’s seldom-read analysis of a French bank known as the Credit Mobilier, in which this theory played a fundamental role. I’ll conclude with some thoughts on how this relates to socialist politics today.

In the third volume of Capital, Marx discusses what he calls “fictitious capital” – what we know as “securities.” Essentially these are titles to streams of income, which are treated as commodities and bought and sold on financial markets. There are significant differences between types of securities. Some represent corporate debts, as with bonds, some represent consumer debts, as with mortgage backed securities, and others represent capital investments, as with shares of stock. But the common aspect of all these different securities is that they all give their owners a right to a stream of income, hopefully leaving them with more money than they started off with. The security owner therefore looks upon his security as capital.

While securities might seem like capital, there is a key difference. Unlike an investment in real capital, by which I mean, means of production and labor-power, an investment in a security is just the purchase of a legal title. The legal title gives its owner a claim on a stream of income, but doesn’t itself produce any income. The income is produced elsewhere.

Furthermore, this legal title can be resold on a secondary market. So for example, a shareholder might sell his share to a third party. When he does this, no money passes through the hands of the enterprise that originally issued the share of stock. The same thing can be done with a bond or a mortgage-backed security. No new loan or capital investment is made by these subsequent transactions; there is only a transfer of a claim on income to a new person. But because others are willing to pay for these claims on streams of income, they continue to circulate on the market long after their issuers have actually received their capital or their loans.

Marx has three reasons for calling securities “fictitious capital”.

The first reason is specific to shares of stock. With the creation of shares of stock, it appears as if capital has doubled; as if capital is not only the real capital that firms possess, but also the property titles created to represent that capital. So for Marx, shares of stock are fictitious capital because while they merely represent real capital, they also seem to multiply that capital.

The second reason Marx calls securities “fictitious capital” is that their value can fluctuate in ways that are entirely independent of the real capital that they represent. A change in interest rates, a rise or fall in profits, the inability of a borrower to repay debt – all of these things lead to a change in the market-value of fictitious capital without at all effecting the value of a firm’s real capital – the cash the firm has on hand, its machinery, buildings, and so forth. The value of all those things can remain constant while the value of a firm’s stocks and bonds rise or fall.

And lastly, a security may never have represented any capital at all. Take the case of residential mortgage-backed securities. The income that accrues to their holder is derived from the repayment of a home loan. The home was not capital for the homebuyer – he did not create surplus-value with it. It was just a dwelling. So the initial sum of money advanced was never used as capital at all, although the holder of the security views it as his “capital”.

The ideology of the St. Simonians

Now I’m going to turn for a moment to Marx’s writing on one of the world’s first investment banks, the Credit Mobilier. In 19th century France there was a school of socialism based on the thought of Henri de Saint-Simon. St. Simon had a utopian, almost religious view of credit and the way in which it could be used to create socialism. His chief complaint about capitalism was its blind and accidental distribution of the means of production. Essentially he was getting at what Marxists refer to as the “anarchy of the market,” or the fact that production in capitalism does not occur in accordance with a plan. For St. Simon, this lead to inequality and economic crises.

St. Simon’s solution to these problems was to direct investments and distribute means of production in accordance with a plan. For the St. Simonians, the body that would actually distribute the means of production would be what they called a “general system of banks.” Essentially this would be a top-down organization of banks, functioning both as government and as economic planner, owning the means of production and distributing them in the interest of all (or at least what it thought was the interest of all). To this end it would direct credit to industry. It would keep interest rates low, increasing the profits of the industrial capitalists and promoting industrial development. The bankers would react quickly to changes in demand, allocating capital where it was needed and removing capital from industries in which there was an oversupply. Economic crises would be eliminated through bureaucratic oversight.

The Crédit Mobiliér

The founders of the Generale Societe du Crédit Mobiliér, the brothers Isaac and Emile Pereire, were at one time prominent members of this movement. They had already left it by the time they founded the Mobilier in 1852, but they still retained much of its ideology, especially with regard to credit.

And it is basically with St. Simonian goals in mind, and with Napoleon Bonaparte’s approval, that they created this joint-stock bank. The bank’s name, which translates to the General Society of Mobile Credit, was derived from the notion that it would “mobilize” society’s savings, or “floating capital.” These idle savings were called “floating capital” because they were not tied up (or “fixed”) in any specific enterprise, and therefore could be invested at short notice. At that time in France, the banking and credit systems were relatively underdeveloped. There were large savings, but they were not deposited in banks that could then loan the money where it was needed. The savings were simply hoarded, making credit scarce and interest rates high. So at the same time as there were large amounts of idle savings, capitalists complained of a lack of money with which to fund their investments. The Pereire’s wanted to remedy this situation by directing this “floating capital” into the Mobilier and then advancing it to industry at low rates of interest, using the Mobilier as a conduit between French savers and French industrialists. To do this, the Mobilier would issue stocks and bonds, as well as accept deposits, and then use this borrowed money to buy up the stocks and bonds of industrial enterprises. French savings would thus be “mobilized,” lifting France out of its industrial backwardness.

By purchasing all of French industry’s outstanding stocks and bonds the bank hoped to become the main creditor and proprietor of all of French industry. In place of all the old securities issued by industrial enterprises, the Mobilier would issue its own bonds. There would be no more securities held by the public except those issued by the Mobilier itself. All of the old capitalists would therefore become mere rentiers, receiving the interest payments from the money they loaned to the Mobilier, which would now be France’s sole industrial capitalist.

Marx on the Mobilier

Marx wrote a series of articles on the Mobilier for the New York Tribune
in 1856. He argued that because the Mobilier was only allowed to become involved with other joint-stock companies, its influence would hasten the development of new joint-stock companies. He wrote that these companies further developed what he called “the productive powers of association.” They pool together the capital of many individual capitalists, or “associate” them, and place it into the hands of the Board of Directors. This centralization creates the possibility of giant new productions that are beyond the means of individual capitalists.

Furthermore, the Mobilier was an implicitly state-supported bank – while not owned by the government, it was generally assumed that the government would support it if necessary, something like the case of the government-sponsored enterprises today. Marx even predicted that Napoleon would eventually have to nationalize the bank to prevent its collapse. He therefore argued that this centralization of industry into the hands of the Mobilier was simultaneously the centralization of industry into the hands of Bonaparte.

It is worth contrasting Marx’s attitude toward the prospect of nationalization with a view common on the left today. Marx’s view was very common-sense: he was hostile to Bonaparte, so he was hostile to the prospect of nationalization. As the French state was a bourgeois state, its reasons for nationalization would have nothing to do with socialism. In fact, Marx argued that Bonaparte’s reason for nationalizing the credit system would be “to save property from the dangers of Socialism!”

On the other hand, much of the left goes in a very different direction. While you’re hard pressed to find supporters of the American state on the left, it’s not at all uncommon to find supporters of the American state nationalizing industry. And while it’s rarely imagined that the state-controlled army and police serve the working class’ interest, there is a common belief that a state-owned banking system would.

But I digress.

As it so happens, the Mobilier’s goal of seizing upon all of French industry never came to fruition. Napoleon never gave the bank the authorization to issue large sums of long-term bonds, and so the bank never obtained enough money to buy up the bulk of French industry. But it nevertheless did play a major role in the French economy, promoting the development of French industry and credit.

In his articles on the Mobilier, Marx used his theory of fictitious capital to explain its economic role. Key to Marx’s analysis is his claim that the bank would not actually “mobilize” France’s floating capital, but would do the opposite, fixing it. His reason for saying this is inherent in his understanding of fictitious capital.

As we’ve seen, the way in which the Mobilier would promote industrial development was through investment in joint-stock companies involved with heavy industry. The Mobilier would buy up stocks and bonds of industrial enterprises, especially railway companies. But because money was invested in industry through the medium of securities, or fictitious capital, there was an illusion that the capital thus invested was “mobile,” or to use the modern terminology, “liquid.” The individual investor can always transform his share of stock into a sum of money – all he has to do is sell it. But Marx pointed out that this has nothing to do with the “mobilization” of society’s real capital. Money invested in heavy industry is fixed. This money only returns as the fixed capital wears out, as it depreciates. This process can take years. The fact that the investor can sell the bonds or shares of stock that represent that fixed capital does nothing to change this fact. The sum of money given to the seller of a share of stock does not come from the capital that the share represents but rather from someone else’s floating capital – from another saver. All that is mobile is the property title, the share of stock. Therefore, the so-called “liquidity” of capital investment arising from the development of joint-stock companies means nothing more than that a large part of society’s floating capital is pressed into the stock exchange.

For Marx, this stock exchange was inherently speculative. Because a share’s price fluctuates completely independently of the real capital it represents, a shareholder has no inherent interest in his company’s real capital. He is primarily concerned with his shares’ price. In the Mobilier’s case, the directors created new enterprises purely with the intent of speculating on the price of the new shares issued. Real capital investment was thus subordinate to securities speculation.

Altogether, then, the role of the Mobilier was to sink all of French society’s floating capital into heavy industry, for the purpose of speculating on the stock prices of the new companies created.

Marx therefore writes:

“[The Crédít Mobilier's] tendency is to fix capital, not to mobilize
it. What it mobilizes is only the titles of property…The whole mystery of the Crédit Mobilier is to allure capital into industrial enterprises, where it is sunk, in order to speculate on the sale of the shares created to represent that capital.” (133)

For Marx, this sinking of French society’s floating capital in order to speculate on the stock market played a fundamental role in the French economic crisis that began in 1856. The savings of small agricultural producers were increasingly transferred to the Mobilier, which pressed this money into the stock and bond markets. This removed capital from agriculture, causing a decline in agricultural productivity. This was exacerbated by bad seasons, causing a spike in the price of agricultural products, and raw material shortages in certain spheres of production. This entire process therefore resulted in disproportions between industries and an overexpansion of fixed capital.

So for Marx, while the development of joint-stock companies did serve to increase overall investment insofar as it associated many individual capitalists, it did not serve to allocate capital in a more flexible or mobile way. It in fact it served to misallocate capital, and to turn real capital investment into nothing more than an accidental byproduct of stock market speculation.

Fictitious Capital today

The way in which the credit system and the development of securities (or fictitious capital) tends to misallocate capital is fundamental to understanding the most recent collapse. The development of fictitious capital based on housing loans – the infamous mortgage-backed securities and collateralized debt obligations – these were promoted as a means of making society’s investment in housing more liquid. Banks would be more willing to extend credit to homebuyers, keeping credit cheap, because they wouldn’t have to worry about the long-term prospects of their loans – they could just sell them off to other enterprises. These enterprises would then pool the mortgages together and issue securities on their basis. Other institutions would buy these mortgage-backed securities and create new securities on their basis – the so-called Collateralized Debt Obligations (or CDOs). Other institutions would sometimes buy these CDOs and create CDO2s, or CDOs based on CDOs. And occasionally the process would go even further, giving rise to CDO3s, or CDOs based on CDOs based on CDOs. And here we see what Marx meant when he said in the third volume of Capital that:

“With the development of interest-bearing capital and the credit system, all capital seems to be duplicated, and at some points triplicated, by the various ways in which the same capital, or even the same claim, appears in various hands in different guises.” (601)

“… everything in this credit system… is transformed into a mere phantom of the mind.” (603)

And we also see why he referred to interest-bearing capital as “the mother of every insane form.”

All of this “duplication” and “triplication” certainly made the position of the mortgage lenders more “mobile” and “liquid.” The mortgage lenders were able to continually extend loans and then sell them off to other enterprises, giving them money with which to extend more loans once again. Combined with a housing price bubble, this greatly increased the allocation, and as it turns out, misallocation of capital to the housing industry. Huge numbers of houses were built, the prices of all sorts of fictitious capital soared, and the savings of not only the capitalists, but also the workers, were pressed into the speculative bubble. Today, after the collapse of this bubble, it is obvious that much of this “fictitious capital” was a claim on wealth which never existed and never was to be created. Mortgage-backed securities have been severely devalued, many of the riskier CDOs are literally worthless, and stock prices have fallen by nearly half, while the real capital invested in home construction still sits there in the form of unsold homes clogging the housing market and preventing a recovery in housing prices. The nature of the tremendous “mobilization” of capital in the last several decades can now be seen in its full glory.

The “New-Fangled Schemes of Public Credit”

And lastly I’d like to focus on an idea that has become rather common on the left today, even amongst Marxists, that we need to demand that the US government nationalize the banking system and create new banks run as “public utilities.” The case of the Credit Mobilier provides a lot of insight into this issue.

We should not assume that there is anything inherently socialistic about the nationalization of industry. As Marx pointed, this nationalization may very well represent an attempt to save capitalism. This is what is on the agenda today. While the US government is currently shying away from nationalization, there is no doubt that if it does
end up nationalizing major banks this will be nothing more than attempt to save the capitalist system as a whole. It will not represent a creeping socialism. The enterprises will simply be cleaned up and resold. At most it will represent an infringement on the rights of individual share and bondholders, but only to the extent necessary to keep the financial system as a whole from collapsing. Whether or not you support this, there can be no doubt that this has nothing to do with socialism.

As regards the idea that the state should start new banks which lend directly to industry – this is also a misguided goal. There is nothing about a government-backed bank which makes it less inclined toward speculative pursuits than private enterprises. The history of government-backed banks shows this. The Credit Mobilier, as well as Fannie Mae and Freddie Mac, were started with the support of the state to promote certain goals which weren’t being accomplished by the free market – whether industrial development or homeownership. The way in which this was done, in both cases, was to increase the liquidity of the lenders by promoting securitization – or in other words, the creation of fictitious capital. This is the way in which interest rates are kept low and there is an abundance of credit for social purposes. But in both cases we see that the markets in fictitious capital are inherently speculative, and that government-backed enterprises act similarly to private enterprises, contenting themselves with participating in the bubble until its inevitable collapse.

This is why the supposedly socialist demand for a re-creation of the credit system is misguided. It completely ignores the inherently speculative nature of fictitious capital, and the fact that fictitious capital arises naturally on the basis of the credit system. It imagines that we can have a credit system without speculation and crises. It commits the same error as the St. Simonians, which Marx said “deluded itself with the dream that all the antagonism of classes must disappear before the creation of universal wealth by some new-fangled scheme of public credit” (15). The present crisis is only the most recent demonstration that this dream is in fact a nightmare.

Visit the source : http://www.marxist-humanist-initiative.org/,

Friday, May 8, 2009

Vivek Chibber on Capitalism and the State

Vivek Chibber, Professor of Sociology at New York University, presented this lecture, "Capitalism and the State", as part of a Brecht Forum program at the New York Marxist School

Ten of America's largest 19 banks need a combined $74.6bn (£50bn) of extra funds to boost their cash reserves.

Ten of America's largest 19 banks need a combined $74.6bn (£50bn) of extra funds to boost their cash reserves.

That is the main finding of the so-called "stress tests" to see if the banks have sufficient capital to cope should the recession worsen.

Bank of America is the most at risk, needing an additional $33.9bn.

"Our hope with today's actions is that banks are going to be able to get back to the business of banking," said US Treasury Secretary Timothy Geithner.

The results should go some way to lift the cloud of uncertainty that has engulfed the US banking sector by providing assurance that the sector would have the capital to handle further losses.

Other banks that need more money include Wells Fargo, which is said to require $13.7bn, and GMAC, the financial arm of General Motors, which needs $11.5bn.

Citigroup requires an additional $5.5bn of funds, and Morgan Stanley has been told to find $1.8bn.

Some of the banks have already indicated how they intend to raise the money they need by private means such as asset sales, rather than having to secure any additional government loans.

'No surprises'

The 19 banks that were tested by Treasury Department and Federal Reserve officials account for two-thirds of the total assets of the US banking system, and more than half of the total amount of credit in the US economy.


Bank of America - $33.9bn
Wells Fargo - $13.7bn
GMAC - $11.5bn
Citigroup - $5.5bn
Morgan Stanley - $1.8bn
Regions Financial - $2.5bn
SunTrust Banks - $2.2bn
KeyCorp - $1.8bn
Fifth Third Bancorp - $1.1bn
PNC Financial Services - $600m

The banks that require extra capital have been given until 8 June to finalise their plans to do so, and get them approved by regulators.

Mr Geithner said earlier on Thursday that no US bank being screened by regulators was at risk of insolvency, comments echoed by Federal Reserve Chairman Ben Bernanke.

The treasury secretary said he believed that while the majority of the banks would be able to raise any additional money they need from private sources, if they were unable to do so the government may have to provide them with more taxpayer money.

Analysts broadly welcomed the results of the stress tests.

"It seems to be that the leaks were very accurate, so there doesn't seem to be any major surprises," said Eric Kuby of North Star Investment Management.

"The fears of nationalisation or of failure have more or less disappeared."

Asset sale

The other five banks that have been told they require additional capital are Regions Financial ($2.5bn), SunTrust Banks ($2.2bn), KeyCorp ($1.8bn), Fifth Third Bancorp ($1.1bn), and PNC Financial Services ($600m).

The stress tests have been successful as a PR exercise. Whether they will actually make the weak banks any stronger is debatable

Greg Wood, BBC North America business correspondent

Have the tests passed the test?

Those that do not require extra funds are Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, MetLife, American Express, State Street, BB&T, US Bancorp and Capital One Financial.

Some of the banks that need extra funds have been quick to announce how they intend to do so.

Bank of America said it would raise the $33.9bn it needs through the sale of assets and other measures, while Citigroup, Morgan Stanley and Wells Fargo are to issue or exchange shares.

Citigroup chief executive Vikram Pandit said his bank's actions would "give it the financial strength to weather an adverse stress scenario".


Some commentators have questioned whether the tests have been strict enough.


They measured the health of the 19 banks in question
The aim was to find out which might require more cash reserves in the event of the economic outlook worsening
Professor Nouriel Roubini and Professor Matthew Richardson of New York University said that the doomsday scenario that the banks' books have been subjected to is actually no worse than the current economic situation.

And as such, they said "the stress test results will not be credibly interpreted as a sign of of bank health".

Others say that the tests do not take account of the banks' varying business models.


Thursday, May 7, 2009

Brendan M Cooney interviews Andrew Kliman

Andrew Kliman, author of "Reclaiming Marx's Capital", speaks about the Marxist theory of capitalist crisis. This interview was filmed on April 19th, 2009. Kliman speaks about Marx's theory of crisis- the Falling Rate of Profit- and critiques some of the other theories of crisis that are floating around out there. He also comments on the state of academic Marxism, the public reception of his research on the transformation problem, and envisioning alternatives to capitalism.

For more on Kliman's recent empirical research on the Falling Rate of Profit see:

Tuesday, May 5, 2009

The Disgraceful History of Modern Economics


Basic supply and demand theory would indicate that those economic theories which have utility to others would be provided by economists. This entails that in a system with inequalities of wealth, effective demand is skewed in favour of the wealthy.

Therefore, wage slavery-apologetics the main motor behind the unscientific nature and unrealistic assumptions" of modern economic theory, and many of the irrelevant mathematical models which attempt to legitimize it, particularly by ignoring power disparities in the market and workplace, while concentrating upon the 'subjective' evaluations of individuals who are abstracted away from real economic activity (i.e. production) so the source of profits and power, namely exploitation of labor interest and rent can be ignored in favor of exchanges in the market and concepts such as abstinence or waiting by the capitalist, the productivity of capital, 'time-preference,' entrepreneurialism and so forth.