Thanks to Renegade Economist at :http://www.youtube.com/user/RenegadeEconomist
Thursday, April 9, 2009
Michael Hudson on the Housing Market
Wednesday, April 8, 2009
This is not a credit crisis - it is a debt crisis by Dirk Bezemer
Economic Viewpoint
This is not a credit crisis - it is a debt crisis*
Dirk J Bezemer
ABSTRACT
Using an analogy with ancient Babylonia as its leading motive, this Viewpoint argues that the credit crisis is a symptom of an underlying problem. Fuelled by government policies, unprecedented debt levels were run up in industrialized countries over the last quarter century. Present policies of financial sector bailouts maintain economic structures diametrically opposed to what Classical liberals such as JS Mill envisaged as a free market economy.
What Babylonians Knew
When he took office as leader of the most powerful nation on earth, his first act was to legislate a debt workout for the beleagured economy. Under his predecessors, the public financial system had produced a bad debt problem that now threatened to crush the economy. Many of his citizens had to pledge their incomes in debt servicing and financial fees. Others lost their homes and land as foreclosures were rampant. His people were looking to him for change and for relief.
No, this is not about Obama. The year was 1792 BC, the nation was ancient Babylonia and the leader was king Hammurabi. The workout was in fact a plain debt cancelation, or ‘Clean Slate’ - a social mechanism that allowed ancient civilizations to prevent their financial sectors from ruining the real economy and family livelihoods.
Recent archaeological finds of shubati clay tablets (ancient ledgers) indicate that Babylonia developed an extensive public financial sector. Its administrators had mastered the mathematics of exponentiation and applied compound interest rules. They used a precursor to modern double-entry bookkeeping and grasped its fundamental tenet that for every asset there is a liability, and for every credit a debit.
Their economic thinkers realized that financial sector expansion would bring exponential debt growth, inevitably beyond the economy’s ability to pay. Their system of financial regulation was for rulers to periodically declare a Clean Slate. This applied to debt denominated in barley (the household staple)which families owed to the temple-state public financial system. Households had typically run up such debts as liabilities for crop-sharing rents and water fees. In contrast, commercial debts held by traders and denominated in silver were not forgiven.
Ancient Babylonians recognized the difference between the consequences of commercial risk taking which traders could carry, and the consequences of financial liabilities created by public sector policy, which threatened households’ livelihoods (see Wray, 2002; Hudson & Van de Mieroop, 2002; Hudson &Wunsch, 2004).
You could be forgiven for mistaking the US (or the UK, for that matter) for a debt-ridden Babylonia on the eve of a Clean Slate. Though 3,801 years apart, the similarities are striking.
But at least the Babylonians had learnt how to deal with debt before it crushed them. At the moment, we haven’t. It is the elephant in the room that no one talks about.
Credit Boom, Debt Growth
From the mid-1980s, most industrialized economies implemented financial policies that stimulated a credit boom without debt management provisions. As any Babylonian economist could have predicted, the debt overhead imposed on their real sectors has since grown unchecked and exponentially.
Stimulated by public policies of generous credit facilities and artificially low interest rates, banks moved away from their traditional role of deposit takers and credit providers to households and business, and engaged in merchant banking and securities trading. In creating and trading in financial innovations such as the now-infamous credit default swaps and similar instruments, they created serial bubbles in dotcom stocks, real estate, and currency trade.
All this happened not only with the tacit approval of government, but with its active support via monetary policy. Now that the grapes turn sour, this support continues in the form of bank bailouts at the costs of real sector employment, profit, jobs and even homes - a perversion of the Clean Slate philosophy. Our real problem is not that credit flows have dried up. It is that we have not even started to recognise what was central to Babylonian financial management.
Debt is the problem, lack of credit is a symptom. The size of the debt had grown out of control well before the credit crisis broke. Total liabilities from the US real economy to its financial sector amounted to only 1.5 times its GDP in 1980, but the multiple rose to 2 (1985), 3 (1996), 4 (2003) and then 4.7 (2007) 3 (BEA, 2009).
Growing ‘investment’ in financial assets came at the price of diverting finance from investment in US manufacturing structures from 5.5% of its GDP in the 1970s, down to 4% (1980s), 3% (1990s) and then below 2% (2000s). It also diminished demand for real output as US households in 2007 paid over a fifth of their after-tax, disposable income to the financial sector in debt servicing and financial fees. The US had become an economy trying to drive with the brakes on.
Self-propelled debt growth can be understood in terms of externality effects described in modern microeconomic models, where one agent’s actions change the costs and benefits of others’ choices. As prices are set at the margin, trade in a fraction 1/n of the market at a price increment p sends up total market valuation (and thereby collateral values) by np, so stimulating more lending in the entire market.
Other externalities operated through herding behaviour and falling costs of credit during the recent boom. And with compound interest, each loan requires additional debt creation for loan servicing. So in a number of ways, loans beget loans and without regulation, debt growth is self-propelled. With active government encouragement, it is a swelling tide. We tried to ride that wave for two decades, but it is now time to build a dike. The flood is such that no one will keep dry feet. But at least the real economy of households and businesses should be saved from drowning. In line with sound free market principles, those who build up the risks must now bear the brunt.
The current debt burden was obscured for a time by the illusion of wealth during the long asset price boom-turned-bubble of the last quarter century. Thanks to rising prices of real estate and its derivative instruments, US households’ ‘net worth’ increased from 4.7 times disposable household income in the 1980s and 1990s to a multiple of 5.9 in 2000 and 6.1 in 2007. The inevitable end to the asset price rally came with the turnaround in the US real estate market in the summer of 2006. Sudden net negative equity impaired households’ ability to keep borrowing against asset values to keep paying for a growing debt. Bank lending came to a standstill, but not debt repayment.
The Misplaced Sanctity of Debt
And yet it is unwise to try and pay off this debt, and so to favour banks as creditors over households and firms, their debtors. This policy relies on the image of banks as passively supplying loans demanded by the public, who must therefore now face the consequences of its choices.
This image stands in stark contrast to reality. The debt was run up recklessly in a lending spree where commercial banks and Central Banks (foremost, the Federal Reserve and the Bank of England) worked together to keep credit flowing. There is no moral imperative for debtors in the real economy to shoulder the bulk of the costs now that the boom has turned into crisis. Neither is that feasible. The debt represents a burden far beyond what the real economy can pay off, even if it keeps trying (as it now does) for decades to come. The current attempt is futile and harmful. It drains resources away from real demand and investment and absorbs any government package intended to stimulate the real economy. This is worse than driving with the brakes on - it is like trying to start up with the brakes on. It cannot be done.
What is true for the US is true for the global economic system. Outstanding derivatives have reportedly reached USD 1.14 quadrillion worldwide (BIS 2009). But policymakers do not seem to realize what was plain to your proverbial Babylonian economist. The credit crisis is the symptom, the debt is the cause. Without a debt workout, recovery is beyond the horizon no matter how many bank bailouts. Present policies of financial sector support are the inverse of a Clean Slate – they artificially maintain debt claims by keeping so many creditors in business to pursue their debtors. For all our economic sophistication, ancient Babylonians would be stunned by our lack of perception.
Classical Liberalism’s View of Rentier Incomes
Rescheduling the debt (which will be inevitable anyway) will one way or another hurt those living on debt servicing income - banks and financial institutions. Today’s economists shy away from this as they are trained to think of the financial sector in toto as indispensable to the real economy. Classical liberalism had a very different view. Its vision of a free market included freedom from the burden of rentier income (as, for instance, enjoyed by land owners).
Liberalism’s intellectual giant John Stuart Mill made an important distinction between capital used productively and capital kept idle by government taxation and by rentier claims. Payment for such privileged asset ownership, Mill (1848) wrote, “is not one of the expenses of production; and the necessity of making the payment out of capital makes it requisite that there should be a greater capital ... than is naturally necessary, or than is needed …in a different system. This extra capital, though intended by its owners for production, is in reality employed unproductively.”
Banks today operate under a state-given privilege to create and trade financial assets. If managed well, these assets help the real economy to save, to invest, to smooth consumption and to diversify risk. But just like the landed gentry in Mill’s days, the financial sector has the power to inflate asset prices, reaping windfall gains which simultaneously raise the costs of production to the real economy, smothering its progress.
When this dynamic is set in motion, the financial sector expands and the real sector (where most jobs and profit are generated) stagnates, as has happened in the US and UK since the 1980s. This is the conflict of interest that public policy must address. But monetary policy and the public debate have neglected this dimension since the 1980s. The constructive role of finance in economic growth was widely publicized during the credit boom in textbook lore, academic research and business journalism. Its potential for draining the real economy of liquidity - the lifeblood of economic transacting - in a boom-gone-bust has only recently become painfully clear.
But it is age old. Mill (1844) already warned that “the inclination to borrow has no fixed or necessary limit”… and that a banker responding to this by ”issuing paper which is inconvertible, levies a tax on every person who has money in his hands or due to him. He so appropriates to himself a portion of the capital of other people, and a portion of their revenue.”
Mill the moral philosopher is also clear that he considers this an “iniquity”. His problem with taxes was that it ”… limits unnecessarily the industry of the country: a portion of the fund destined by its owners for production being diverted from its purpose, and kept in a constant state of advance…" (Mill, 1848).
Today, a fifth of the disposable income that Americans could spent in support of the productive economy is kept “in a constant state of advance” to the financial sector, with active government support. This implicit tax is the iniquity to be redressed.
A Bankrupt Merchant Bank is not the End of the World
The drain of liquidity from the real economy to the financial sector must be decreased for a recovery to start. The important point is that it is, in Mill’s words, not “naturally necessary”. We can do without much of those financial claims, and the firms that live off them. Really, we can.
This comes as a shock to economists, policy makers and the public who have been told for decades that the financial sector is to be nurtured, and now to be saved.
But this view ignored the productive and unproductive roles that the financial sector can play, a distinction central to classical liberal economics and social policy. Slimming in the financial sector would improve rather than impair its ability to serve the real economy. Not all that long ago, the US economy did well with a financial sector only a third of its present size. Do we really need all of the other two thirds today, claims and all?
So let market forces work to effect a solution to the debt problem that underlies the credit crisis. This, after all, is what bankruptcy is for. It is a legally acknowledged and orderly debt workout mechanism and the natural consequence of commercial overexposure.
A shrinking of the financial sector - its most speculative part, preferably – by allowing bankruptcies would proportionally force it to relinquish its stifling debt claim on the real economy. As soon as a debt workout is put in place, recovery can start - but not earlier. Learn from Babylonia.
Dr Dirk J Bezemer is a Fellow at the Research School of the Economic and Business Department, University of Groningen in the Netherlands. His research is in comparative economic systems. Contact: d.j.bezemer@rug.nl
* I thank Michael Hudson for helpful comments on an earlier version of this paper and Arno Daastoel for help with locating data.
BEA (2009) Data from the Bureau of Economic Analysis at http://www.bea.gov. Accessed
March 2009
BIS (2009) Data from the Bank for International Settlements at http://www.bis.org.
Accessed Marc h 2009
Hudson, M and M vd Mieroop, eds. (2002) Debt and Economic Renewal in the Ancient Near East. Baltimore: CDL Press
Hudson, M and C Wunsch, eds. (2004) Creating Economic Order: Record-Keeping,
Standardizations, and the Development of Accounting in the Ancient Near East. Baltimore:CDL Press
Mill, JS (1844), Essays On Some Unsettled Questions of Political Economy, Essay IV: OnProfits, and Interest. At http://www.econlib.org/library/Mill/mlUQP.html
Mill, JS (1848), The Principles Of Political Economy: With Some Of Their Applications
To Social Philosophy, Book I, Chapter 4: Of Capital. At http://www.econlib.org/library/Mill/mlP4.html#Bk.I,Ch.IV
Wray (2004) (ed.) Credit and Sate Theories of Money: the Contributions of Michael Innes
Cheltenham UK: Edward Elgar
SOURCE: Gang of 8
David Harvey - Exploring the logic of capital
Interview: David Harvey - Exploring the logic of capital
Interview by Joseph Choonara, April 2009
Joseph Choonara spoke to acclaimed Marxist theoretician David Harvey about capitalism's current crisis and his online reading group of Karl Marx's Capital which shows the revival of interest in this work.
Some commentators view the current crisis as arising from problems in finance that then impinged on the wider economy; others see it as a result of issues that arose in production and then led to financial problems. How do you view it?
It's a false dichotomy that's being posed. There is a more dialectical relationship between what you might call the "real" and "financial" sides of the economy. There is no question that there has been an underlying problem of what I would call "over-accumulation" for a considerable time now. And in part the movement into investing in asset values rather than production is a consequence of that. But as the search for new forms of asset value developed you also saw financial innovation that created the possibility of investment in hedge funds and those sorts of things.
There was a long-term process in which the rich looked for reasonably high rates of return and began to invest in a whole series of Ponzi schemes - but without Bernard Madoff at the top. In the property market, stock market, art market and derivatives markets, the more people that invest, the more prices go up, which leads to even more people investing. All of those markets have a Ponzi character to them. So there is a financial aspect to the crisis but unless you ask why the most affluent were taking that path you miss out on the real problem.
You mention a crisis of over-accumulation. Can you explain that concept?
Capitalists always produce a surplus product. A healthy capitalism has to grow at 3 percent per year; the problem is to find where you can achieve that 3 percent growth. There are various blockages. For instance, if capital is confronting labour problems, then it is hard for it to find an outlet and over-accumulation occurs. If it faces problems in the market, the same issue arises. Over-accumulation is any situation in which the surplus that capitalists have available to them cannot find an outlet, whether through labour constraints, market constraints, resource constraints, technology constraints or whatever.
In this context you have talked about mechanisms such as a "spatial fix" in which surplus capital is shifted abroad rather than accumulated at home. Would you see the growth of the financial system as another type of "fix"?
If you move towards a spatial fix you need a sophisticated financial system to achieve it. To the degree that a spatial fix was being sought after the 1970s, capitalism required a set of international financial institutions that would facilitate the flow of funds to China, India, Mexico or wherever. So the new financial architecture that emerged from the 1970s onwards was, in part, to facilitate ease of capital movement around the world.
But then the financialisation that occurred became an end in itself. You start to find new markets emerging in the 1990s in currency derivatives, interest rate swaps, etc. They grew from almost nothing in 1990 to about three times the output of the global economy in 2006.
The explosion of credit that accompanied this also helped capitalists to hold down wages.
There were many aspects to the crisis of the late 1960s and early 1970s but one fundamental aspect was the power of labour, and breaking the power of labour became terribly important. This was partly done by migration policies, by outsourcing and offshoring, and also by the political attacks by Ronald Reagan, Margaret Thatcher and others. By 1985 the power of labour had effectively been broken.
Ever since the 1970s we've been in a situation of what I'd call wage repression in which real wages didn't really rise at all. But that led to problems in the market. If you restrict wages you have a problem with aggregate demand. One way that problem was solved was by giving working people credit cards and allowing them to go into debt. Household debt in the US has tripled in the last 20 years or so.
Again a key role was played by financial institutions. The best example I can think of is financial institutions lending money to builders and developers to construct housing, say around San Diego, then facing the problem of who is going to buy this stuff. The financial institutions then lend to working class people so they can buy the houses. After a while there aren't enough "respectable" working class people to lend to, so they start to lend to those with very low credit ratings, which led to the emergence of subprime over the past five or six years.
The financial institutions have been operating on both sides - the production and the consumption of housing. They brought the whole of the population into a serious state of indebtedness. Now at some point or other, if indebtedness rises to a level that is no longer consistent with income, the thing is going to break down. That's what we're seeing right now.
The bubbles in asset values also concealed some of the problems.
When asset values are rising everybody thinks they are better off. A person who bought a house in 2000 for maybe $300,000 saw its price rise to maybe $500,000 four years later. If they cashed out they were $200,000 richer. Everyone starts to be in that position, not just corporations. So, yes, it conceals what the nature of the problem is. If there is enough collective expectation that the housing market is going to go up forever, you get the kind of asset bubble that goes on and on - until now.
Personally I was expecting a crash in the housing market in 2003. It didn't happen. I kept thinking to myself, am I crazy? It didn't happen in 2004 and I thought, am I even crazier? By 2005 things were getting ridiculous. In the end even I started to believe we were in a different world and that I'd been wrong. Then in 2006 things started crumbling and I realised I'd been right.
When I last interviewed you for Socialist Review in February 2006 you said, "I'm nervous about the possibility of a major financial crisis breaking out in the US." Just how major do you think the current crisis is?
I was nervous about the US situation at the time I brought out A Brief History of Neoliberalism in 2006 and when I brought out The New Imperialism book in 2003. Back then I said that if the US was any other country it would be visited by the IMF. I think one of the things we have to realise is that if there had been a crisis in 2003, it would not have been as serious as the current one. The crisis will now have to take care of the past six years of profligacy.
Also if you compare it to the regional crises that happened before, such as the South East Asian crisis of 1997-98, there was always the US market to sell things to. But today where on earth is your market going to be?
We are in for a very difficult period. I can't see us coming out of this for a number of years. But when I say "us" I think there will be a difference in regional impacts. I guess that while East and South East Asia are in a lot of trouble right now, because of the collapse in export-driven industrialisation due to the contraction of the US market, they are likely to be able to stimulate their domestic markets and come out of this with less violence than, say, the US.
The US is going to have to bear the brunt of this crisis, and of course people there are not used to it. If you lived in Argentina you'd be saying, "Not again!"
You have argued that, while the global role of the US is likely to be diminished, rivals such as China cannot currently take its place.
I don't think China has any interest in supplanting the US as the global hegemonic power. It has a great interest in propping up the US. There is a complicated relationship between the US and China. The US relies very heavily on Chinese investment in the bonds issued by the US treasury. But the move by the US Federal Reserve to put a trillion dollars or so into this market in late March immediately saw the dollar falling.
I worry about what the Chinese will do in the face of a rapidly falling dollar. The US dollar has stayed remarkably stable; in fact it's gained against other currencies in the past six months or so. But that may be reversed. It's a delicate situation.
The Chinese are in a better situation than the US. Their banking system is not disrupted in the same way and they have more room for manoeuvre in terms of their surpluses. If they start to coordinate with Japan and South Korea, and if the Taiwanese throw in their lot with China economically, you're likely to see the emergence of an East Asian collaborative zone. I'd not be surprised to see an East Asian regional bank along the lines of what is being proposed in Latin America.
Regionalisation is one process that we may see, which would leave the US as one powerful region alongside many others and without the power it has exercised over the global economy.
But the problem now is that China is sitting on trillions in dollar-denominated assets.
Yes. They are between a rock and a hard place. If they let the dollar decline they lose money. If they continue to invest in it they may lose even more in the long run. There's considerable debate inside China. When they set up sovereign wealth funds, which invested in, say, the Blackstone Group, and lost money, there was a lot of internal criticism.
If there is a run on the US dollar, which is something I think everybody fears and nobody wants to talk about, then the consequences will be catastrophic. Regional configurations such as East Asia will have no option but to go it alone and the same will apply to Europe and Latin America. It will mean competition between regional blocs, the sort of thing that happened in the 1920s and 1930s with very unhealthy results.
Does the increasingly global nature of production make collapse into protectionism less likely than in the 1930s?
It makes it less likely at certain levels of production but in the face of a crisis you get very rapid reconfigurations. Consider how fast the de-industrialisation of Britain occurred in the late 1970s and early 1980s. The reconfiguration of production relations took place in the space of about ten years. Just because production systems and commodity chains are stretched over multiple spaces it doesn't mean they can't be cut up. You could have China cutting off outside suppliers and adopting an import-substitutionalist policy, which I suspect is going to emerge as a respectable way to deal with the current crisis.
So don't anticipate that just because everything is now more globally connected we can't disconnect it. However, having said that, there are vested interests involved. So there will be a political struggle over this.
On your website davidharvey.org you've been running an online reading group of Karl Marx's Capital. Are you surprised by the massive interest this has generated?
Yes, astonished! It seems to have come out just at the right moment. I get emails from people saying, "I always wanted to read this book and finally I have got through it," which is gratifying. I have tried to lay out something people can understand and work from, and then develop their own political ideas around.
It is important in approaching Capital to have some grasp of the overall dynamics of the system, and not just undertake a close reading of the first volume. How can this be achieved?
People really need to read a lot of Marx - volumes two and three, Theories of Surplus Value, the Grundrisse and so on. But I try to say, in the final lecture I think, that there are things that Marx misses. The nature of his project was the critique of classical political economy as much as it was an analysis of the dynamics of capitalism.
For instance, Marx did not want to deal with the question of interest. But at various points, even in volume one of Capital, the question of interest and credit becomes central - for instance in the discussion of the centralisation of capital and in the chapter on money. There is an issue here of the role of what I call the "state-finance nexus". In the Communist Manifesto, Marx and Engels argue for the centralisation of the means of credit in the hands of the state. In the section on primitive accumulation in Capital, Marx talks about the rise of the bankocracy, the rise of state finance and the national debt as crucial moments.
If you really want a good analysis of capitalism, you have to put the question of the state and finance almost up front, whereas Marx puts it at the back - you have to get to volume three of Capital. It can be misleading to concentrate on production rather than, say, the mobilisation of money-capital. There are limits to how far you can take the volume one analysis if you want to understand how capital accumulates and how it circulates.
In your book Limits to Capital you sought to develop a more coherent picture from Marx's fragmentary writings on interest, credit, etc. You seem to imply that more work in this area is needed.
A lot of people have been working on finance capital over the past ten or 15 years and there's now an extensive literature on this. It is valuable work. But one of the problems I have is that it tends to isolate the financial system from the overall dynamics of capitalism - as in the dichotomy implied in your first question.
What routes are there out of the current crisis?
How we come out of the crisis depends fundamentally on the balance of class power. I don't yet see the emergence of a coherent class opposition to the way, for example, that the British or US governments are trying to get out of the crisis.
We are beginning to get a populist outrage, which could produce something equivalent to political movements that have emerged in Latin America. I'm hoping that a coherent movement will start to crystallise which will say, "We don't want to go out of this crisis only to enter an even deeper one in five years time," and which will demand a radical transformation of the system.
The powers that be are trying to come out of the crisis without changing the fundamental dynamics of class power, but there's a widespread sense that these have to change. It's amazing to see the popular discontent here with Barack Obama's economic team. For many of us, the people he selected were appalling. Fascinatingly, many people in the country would probably agree with us.
SOURCE:
http://www.socialistreview.org.uk/
Interview by Joseph Choonara, April 2009
Joseph Choonara spoke to acclaimed Marxist theoretician David Harvey about capitalism's current crisis and his online reading group of Karl Marx's Capital which shows the revival of interest in this work.
Some commentators view the current crisis as arising from problems in finance that then impinged on the wider economy; others see it as a result of issues that arose in production and then led to financial problems. How do you view it?
It's a false dichotomy that's being posed. There is a more dialectical relationship between what you might call the "real" and "financial" sides of the economy. There is no question that there has been an underlying problem of what I would call "over-accumulation" for a considerable time now. And in part the movement into investing in asset values rather than production is a consequence of that. But as the search for new forms of asset value developed you also saw financial innovation that created the possibility of investment in hedge funds and those sorts of things.
There was a long-term process in which the rich looked for reasonably high rates of return and began to invest in a whole series of Ponzi schemes - but without Bernard Madoff at the top. In the property market, stock market, art market and derivatives markets, the more people that invest, the more prices go up, which leads to even more people investing. All of those markets have a Ponzi character to them. So there is a financial aspect to the crisis but unless you ask why the most affluent were taking that path you miss out on the real problem.
You mention a crisis of over-accumulation. Can you explain that concept?
Capitalists always produce a surplus product. A healthy capitalism has to grow at 3 percent per year; the problem is to find where you can achieve that 3 percent growth. There are various blockages. For instance, if capital is confronting labour problems, then it is hard for it to find an outlet and over-accumulation occurs. If it faces problems in the market, the same issue arises. Over-accumulation is any situation in which the surplus that capitalists have available to them cannot find an outlet, whether through labour constraints, market constraints, resource constraints, technology constraints or whatever.
In this context you have talked about mechanisms such as a "spatial fix" in which surplus capital is shifted abroad rather than accumulated at home. Would you see the growth of the financial system as another type of "fix"?
If you move towards a spatial fix you need a sophisticated financial system to achieve it. To the degree that a spatial fix was being sought after the 1970s, capitalism required a set of international financial institutions that would facilitate the flow of funds to China, India, Mexico or wherever. So the new financial architecture that emerged from the 1970s onwards was, in part, to facilitate ease of capital movement around the world.
But then the financialisation that occurred became an end in itself. You start to find new markets emerging in the 1990s in currency derivatives, interest rate swaps, etc. They grew from almost nothing in 1990 to about three times the output of the global economy in 2006.
The explosion of credit that accompanied this also helped capitalists to hold down wages.
There were many aspects to the crisis of the late 1960s and early 1970s but one fundamental aspect was the power of labour, and breaking the power of labour became terribly important. This was partly done by migration policies, by outsourcing and offshoring, and also by the political attacks by Ronald Reagan, Margaret Thatcher and others. By 1985 the power of labour had effectively been broken.
Ever since the 1970s we've been in a situation of what I'd call wage repression in which real wages didn't really rise at all. But that led to problems in the market. If you restrict wages you have a problem with aggregate demand. One way that problem was solved was by giving working people credit cards and allowing them to go into debt. Household debt in the US has tripled in the last 20 years or so.
Again a key role was played by financial institutions. The best example I can think of is financial institutions lending money to builders and developers to construct housing, say around San Diego, then facing the problem of who is going to buy this stuff. The financial institutions then lend to working class people so they can buy the houses. After a while there aren't enough "respectable" working class people to lend to, so they start to lend to those with very low credit ratings, which led to the emergence of subprime over the past five or six years.
The financial institutions have been operating on both sides - the production and the consumption of housing. They brought the whole of the population into a serious state of indebtedness. Now at some point or other, if indebtedness rises to a level that is no longer consistent with income, the thing is going to break down. That's what we're seeing right now.
The bubbles in asset values also concealed some of the problems.
When asset values are rising everybody thinks they are better off. A person who bought a house in 2000 for maybe $300,000 saw its price rise to maybe $500,000 four years later. If they cashed out they were $200,000 richer. Everyone starts to be in that position, not just corporations. So, yes, it conceals what the nature of the problem is. If there is enough collective expectation that the housing market is going to go up forever, you get the kind of asset bubble that goes on and on - until now.
Personally I was expecting a crash in the housing market in 2003. It didn't happen. I kept thinking to myself, am I crazy? It didn't happen in 2004 and I thought, am I even crazier? By 2005 things were getting ridiculous. In the end even I started to believe we were in a different world and that I'd been wrong. Then in 2006 things started crumbling and I realised I'd been right.
When I last interviewed you for Socialist Review in February 2006 you said, "I'm nervous about the possibility of a major financial crisis breaking out in the US." Just how major do you think the current crisis is?
I was nervous about the US situation at the time I brought out A Brief History of Neoliberalism in 2006 and when I brought out The New Imperialism book in 2003. Back then I said that if the US was any other country it would be visited by the IMF. I think one of the things we have to realise is that if there had been a crisis in 2003, it would not have been as serious as the current one. The crisis will now have to take care of the past six years of profligacy.
Also if you compare it to the regional crises that happened before, such as the South East Asian crisis of 1997-98, there was always the US market to sell things to. But today where on earth is your market going to be?
We are in for a very difficult period. I can't see us coming out of this for a number of years. But when I say "us" I think there will be a difference in regional impacts. I guess that while East and South East Asia are in a lot of trouble right now, because of the collapse in export-driven industrialisation due to the contraction of the US market, they are likely to be able to stimulate their domestic markets and come out of this with less violence than, say, the US.
The US is going to have to bear the brunt of this crisis, and of course people there are not used to it. If you lived in Argentina you'd be saying, "Not again!"
You have argued that, while the global role of the US is likely to be diminished, rivals such as China cannot currently take its place.
I don't think China has any interest in supplanting the US as the global hegemonic power. It has a great interest in propping up the US. There is a complicated relationship between the US and China. The US relies very heavily on Chinese investment in the bonds issued by the US treasury. But the move by the US Federal Reserve to put a trillion dollars or so into this market in late March immediately saw the dollar falling.
I worry about what the Chinese will do in the face of a rapidly falling dollar. The US dollar has stayed remarkably stable; in fact it's gained against other currencies in the past six months or so. But that may be reversed. It's a delicate situation.
The Chinese are in a better situation than the US. Their banking system is not disrupted in the same way and they have more room for manoeuvre in terms of their surpluses. If they start to coordinate with Japan and South Korea, and if the Taiwanese throw in their lot with China economically, you're likely to see the emergence of an East Asian collaborative zone. I'd not be surprised to see an East Asian regional bank along the lines of what is being proposed in Latin America.
Regionalisation is one process that we may see, which would leave the US as one powerful region alongside many others and without the power it has exercised over the global economy.
But the problem now is that China is sitting on trillions in dollar-denominated assets.
Yes. They are between a rock and a hard place. If they let the dollar decline they lose money. If they continue to invest in it they may lose even more in the long run. There's considerable debate inside China. When they set up sovereign wealth funds, which invested in, say, the Blackstone Group, and lost money, there was a lot of internal criticism.
If there is a run on the US dollar, which is something I think everybody fears and nobody wants to talk about, then the consequences will be catastrophic. Regional configurations such as East Asia will have no option but to go it alone and the same will apply to Europe and Latin America. It will mean competition between regional blocs, the sort of thing that happened in the 1920s and 1930s with very unhealthy results.
Does the increasingly global nature of production make collapse into protectionism less likely than in the 1930s?
It makes it less likely at certain levels of production but in the face of a crisis you get very rapid reconfigurations. Consider how fast the de-industrialisation of Britain occurred in the late 1970s and early 1980s. The reconfiguration of production relations took place in the space of about ten years. Just because production systems and commodity chains are stretched over multiple spaces it doesn't mean they can't be cut up. You could have China cutting off outside suppliers and adopting an import-substitutionalist policy, which I suspect is going to emerge as a respectable way to deal with the current crisis.
So don't anticipate that just because everything is now more globally connected we can't disconnect it. However, having said that, there are vested interests involved. So there will be a political struggle over this.
On your website davidharvey.org you've been running an online reading group of Karl Marx's Capital. Are you surprised by the massive interest this has generated?
Yes, astonished! It seems to have come out just at the right moment. I get emails from people saying, "I always wanted to read this book and finally I have got through it," which is gratifying. I have tried to lay out something people can understand and work from, and then develop their own political ideas around.
It is important in approaching Capital to have some grasp of the overall dynamics of the system, and not just undertake a close reading of the first volume. How can this be achieved?
People really need to read a lot of Marx - volumes two and three, Theories of Surplus Value, the Grundrisse and so on. But I try to say, in the final lecture I think, that there are things that Marx misses. The nature of his project was the critique of classical political economy as much as it was an analysis of the dynamics of capitalism.
For instance, Marx did not want to deal with the question of interest. But at various points, even in volume one of Capital, the question of interest and credit becomes central - for instance in the discussion of the centralisation of capital and in the chapter on money. There is an issue here of the role of what I call the "state-finance nexus". In the Communist Manifesto, Marx and Engels argue for the centralisation of the means of credit in the hands of the state. In the section on primitive accumulation in Capital, Marx talks about the rise of the bankocracy, the rise of state finance and the national debt as crucial moments.
If you really want a good analysis of capitalism, you have to put the question of the state and finance almost up front, whereas Marx puts it at the back - you have to get to volume three of Capital. It can be misleading to concentrate on production rather than, say, the mobilisation of money-capital. There are limits to how far you can take the volume one analysis if you want to understand how capital accumulates and how it circulates.
In your book Limits to Capital you sought to develop a more coherent picture from Marx's fragmentary writings on interest, credit, etc. You seem to imply that more work in this area is needed.
A lot of people have been working on finance capital over the past ten or 15 years and there's now an extensive literature on this. It is valuable work. But one of the problems I have is that it tends to isolate the financial system from the overall dynamics of capitalism - as in the dichotomy implied in your first question.
What routes are there out of the current crisis?
How we come out of the crisis depends fundamentally on the balance of class power. I don't yet see the emergence of a coherent class opposition to the way, for example, that the British or US governments are trying to get out of the crisis.
We are beginning to get a populist outrage, which could produce something equivalent to political movements that have emerged in Latin America. I'm hoping that a coherent movement will start to crystallise which will say, "We don't want to go out of this crisis only to enter an even deeper one in five years time," and which will demand a radical transformation of the system.
The powers that be are trying to come out of the crisis without changing the fundamental dynamics of class power, but there's a widespread sense that these have to change. It's amazing to see the popular discontent here with Barack Obama's economic team. For many of us, the people he selected were appalling. Fascinatingly, many people in the country would probably agree with us.
SOURCE:
http://www.socialistreview.org.uk/
Sunday, April 5, 2009
Saturday, April 4, 2009
Friday, April 3, 2009
Aid Money Could Favor Donors’ Economies
Despite touting the financial pledges as aid for developing economies at G20, the new money could actually be funneled back into the donor economies. The Washington Post reports a $250 billion G20 line of credit to increase liquidity will mostly go to the US, Europe and Japan. The US alone could draw upon as much as $42.5 billion
Source: Democracy Now
Source: Democracy Now
Wednesday, April 1, 2009
OECD: Global Economy in Worst Recession Since 1930s
A new report from the Organization for Economic Cooperation says the global economy is in a worse decline than previously thought. The OECD says world trade will drop 13 percent this year. Chief economist Klaus Schmidt-Hebbel called the current crisis the worst recession since the Great Depression.
Klaus Schmidt-Hebbel: “The world economy is in the midst of its deepest, most synchronized recession in our lifetimes, certainly since the 1930s, I would say, caused by a global financial crisis and deepened by a collapse of world trade.”
Klaus Schmidt-Hebbel: “The world economy is in the midst of its deepest, most synchronized recession in our lifetimes, certainly since the 1930s, I would say, caused by a global financial crisis and deepened by a collapse of world trade.”
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