The global banking crisis – ten years on

August 9, 2017 at 8:25 am (banks, capitalism, capitalist crisis, economics, history, Marxism)

Ten years ago, the worst global financial crisis financial crisis since the 1930’s began. Major companies went bankrupt, people lost their homes on both side of the Atlantic, and the banks that were too big to fail, did fail – only to be rescued with taxpayers’ money.

Governments and their financial regulators were completely wrong-footed and found themselves lacking the regulatory framework to mitigate the crisis and to prevent it from spreading.

Martin Thomas surveys the path, the causes and the sequels of the crisis.

The story started in finance. In June 2005 mortgage interest rates in the USA started rising sharply. They levelled off and declined after July 2006, but in the meantime house prices had reversed their giddy rise of previous years. House prices would continue to fall until January 2012, when they would be on average 33% down on their May 2006 peak. From mid-2006 the proportion of deliquent mortgagees (those with payments seriously overdue) rose, and it would keep rising until early 2010.

By late 2015 around six million households would have their homes foreclosed (CoreLogic 2015). Unlike, for example, the UK house-price crash of 1989-92 (in which about 188,000 homes were repossessed), the US mortgage crash fed into a financial, industrial, and international crash. It revealed that “the bond bubble [had been] by no means limited to mortgages. It was ubiquitous”. Building on the mortgage bubble, “risk spreads were irrationally small”, i.e. small extra revenues had been needed to attract buyers to risky securities, and so once financiers realised those securities were risky, their prices were likely to drop sharply. (Blinder 2013, p.45-6, 90-1).

On 9 August 2007, a French bank, BNP, told holders of stakes in three of its investment funds that they could not have their money back. The bank held mortgage-backed securities — bits of paper which entitled holders to a slice of the income from payments on mortgages made in the USA — and now, as one financier put it, those “securities… simply [could]n’t be priced because there [was] no trading in them. There [were] no bids for them. Asset-backed securities, mortgage loans, especially subprime loans, [did]n’t have any buyers” (Bloomberg 2007). The freezing of credit flows between banks escalated.

On 14 September 2007 queues of people fearing collapse and wanting to get their money out formed at the branches of a British bank, Northern Rock; the British government nationalised the bank in February 2008.

On 14 March 2008 the US investment bank Bear Stearns collapsed; the US government helped J P Morgan to take it over. On 15 September 2008 the USA’s fourth largest investment bank, Lehman Brothers, collapsed, and was not bailed out. The collapse triggered panic in financial markets. Many countries, including the USA under the avowedly free-market presidency of George W Bush, nationalised or did public bail-outs of big banks. Central banks, notably the USA’s Federal Reserve and the Bank of England, cut the interest rates at which they lend money to commercial banks to record lows and, in effect, printed larger amounts of cash in order to stop the total stock of money (cash plus bank accounts) shrinking.

US industry and services had started receding already, before the Lehman crash. In the USA, the mass of corporate profits had been rising tidily since late 2000, but it fell from 2006 quarter 3 (reaching bottom quite soon, in 2008 Q4, and then recovering slowly). US private non-residential fixed investment peaked in 2007 Q4, and had declined 20% by its low point, 2009 Q4. US industrial production fell from November 2007 by 17% to a low point in June 2009; US real GDP, from 2007 Q4 to 2009 Q2; US consumer spending, from November 2007 to June 2009. Industrial slump came a bit later in other countries, but quite soon. UK industrial production, which had been stagnant, fell sharply from April 2008 by 13% to a low point in August 2009; after recovering a little it would fall again from January 2011 to October 2012.

German industrial production fell slowly from January 2008 and more rapidly from September 2008, and would be 25% down by a low point in April 2009. China’s industrial production (excluding construction) did not fall, but its official annualised rate of growth decreased from 18% in 2007 Q2 to 6% in 2008 Q4, and has decreased again since 2009 Q4, despite the Chinese government organising a vast construction and investment boom to offset the decline in China’s export markets. India’s GDP fell in only one quarter, 2009 Q1, but was stagnant throughout 2008. Brazilian economist Ruy Quadros reported in November 2008: “The global financial crisis.. [has] hit a Brazilian economy in its most prosperous moment in 30 years… The exposure of large firms to hedge operations and the foreign credit crunch have led major Brazilian banks to initially paralyse consumer and corporate credit lines, a movement which has been partially circumvented after the intervention of the Central Bank… The jump in the price of the US dollar and the choking of export credit rapidly taught policy-makers and the press that there is no possible shield which would be able to protect a very internationalised economy from a global crisis” (Quadros 2008).

Brazil’s GDP fell from 2008 Q3 to 2009 Q1. World trade fell by almost 20% in the nine months from April 2008 to January 2009, and continued falling until June 2009; world industrial production fell about 13% in the eleven months from April 2008 (Almunia 2010). 2009 became the only year since World War 2 in which slump was so generalised that total world output declined. FROM BANKS TO GOVERNMENTS The next wave of disorder hit governments. Some small countries depended heavily on credit supplied to households and businesses through foreign-owned banks. Other governments were caught in a spiral of death with their commercial banks.

The governments depended on the banks to buy their government IOUs (bonds); the banks depended on the governments to make the bonds they held solid enough to count as assets to borrow on. Iceland, Hungary, and Latvia sought IMF or IMF-EU rescues in September-October 2008, October 2008, and February 2009. From early 2010 a series of eurozone governments would face debt crises. In capitalist economies, not every financial crisis snowballs into an economy-wide crisis. The October 1987 crash of many stock markets round the world — bigger than the more famous New York stock market crash of October 1929 — caused no great slump in industry or services. The US “Savings and Loans” crisis at the end of the 1980s, in which about a quarter of the USA’s “savings and loans” companies (savings banks specialising in mortgage loans) collapsed, was accompanied only by a small industrial recession in the USA. The difference in 2007-8 was not that industry and services were already well into a downturn, and the financial disarray pushed them further down the slope. There was no garish boom underway in 2006, but profits and even investment were mostly buoyant by recent standards, and the level of debt held by non-financial businesses was modest in relation to their incomes. The difference was just that the financial crash in 2007-8 was much bigger and more far-reaching.

Finance had grown hugely in proportion to industry and services over the three or four decades before 2007-8. Financial assets now total three times as much as non-financial assets, and ten times as much as a year’s global output (Bain 2012). Finance had also grown hugely in its global interconnectedness (and speed of transactions). Paradoxically, it had both become more of a world of its own, and more connected to non-financial capital. Giant multinationals increasingly organise production on a world scale. “Value chains administered in various ways by transnational corporations now account for 80 per cent of the $20 trillion in [world] trade each year”, according to UNCTAD (February 2013).

These corporations borrow money in one currency, make investments in another, buy supplies in yet others, and get revenues in others again. They do those things in a capitalist world where, even before 2007-8, financial uncertainty was great. They need to juggle collections of diverse financial assets, to hold reserves for crises, and to buy insurance where they can against unexpected movements of relative prices of financial assets. From those needs, rooted in global production, come the rise of finance, and the increasing financialisation of non-financial corporations. On top of the necessities of trade and production has been built a vast superstructure of intra-financial dealing.

Banks and other financial firms do many more transactions with each other than with non-financial corporations. Redistributing funds for non-financial corporations to invest in equipment and buildings is in fact a small part of their operation; most of those funds for productive investment come from corporations’ retained profits. Each firm wanted a balanced mix of safer assets with (so that they could maximise gains) riskier high-yielding financial assets, with, it hoped, diverse and little-correlated risks. Paradoxically, the desire for safer assets generated an explosion of invention of allegedly-safe assets, many of which proved not so safe after all. “In January 2008”, according to Lloyd Blankfein of Goldman Sachs, “there were 12 triple A-rated companies in the world [i.e. whose debt was rated triple-A-safe]. At the same time, there were 64,000 structured finance instruments [bits of paper giving title to combinations of revenue streams] rated triple A” (Blankfein, 2009). As early as 2007, another Goldman Sachs official exclaimed that “we were seeing things that were 25 standard-deviation moves, several days in a row” (Financial Times, 13.08.07).

If the risks were as calculated, and financial assets labelled safe were safe, then such outlandish shifts would be unlikely to occur even once in the whole life of the universe, let alone days in a row. The risks were calculated not as they really were partly because the financiers didn’t know, and partly because a halfway-plausible calculation of relatively low risk was profitable. Rather than being limited to a particular segment of finance dealing with mortgages in the USA, the US mortgage crash spread into a global financial crash because the mortgage revenues had been packaged into millions of securities (bits of paper giving title to revenues) which had been traded across the world. What had been accredited as safe was now risky. What was thought uncorrelated, proved to be correlated. What else was risky, and how risky, no-one knew. Back in October 2007 Federal Reserve chair Ben Bernanke had said, about much of the paper circulating in the financial markets: “I would like to know what those damn things are worth” (Bernanke 2007).

Financiers didn’t know, either, but if they could still find someone willing to pay a price for “those damn things”, then they could make money by dealing in them. Two years later, in November 2009, Bernanke said: “I’d still like to know what the stuff is worth”.

In between times, financiers had frozen, no longer willing to buy, or lend on the strength of, paper whose worth they didn’t know. By 2005 over 50% of US non-financial corporations’ total assets were financial assets, and those assets were matched by soaring financial liabilities. The proportion was 28% in 1982; had risen steadily over the next two decades; and is back over 50% now, after dipping below that figure as financial assets lost value in the financial crisis. They were “financialised” enough that a financial crash was a crash for them, too. The financial crisis also affected their markets, as consumers lost credit. Consumer spending fell sharply from November 2007, though it then partially recovered for a few months in early 2008 before plummeting. The fall in consumer spending started some six months before the sharp rise in unemployment, which it would double by late 2009. The car industry went down especially hard. General Motors and Chrysler went bankrupt, and were restructured with government aid; Ford only narrowly escaped bankruptcy. “Realising that GM was running out of cash, Fritz Henderson, then the chief financial officer, sought to raise $3 billion through a sale of bonds or shares. When it became clear after the collapse of Lehman Brothers in September that there was no chance of success, he attempted to sell some non-core assets. That too failed” (The Economist, 4.6.09).

Sales in the USA of US-made cars had halved between November 2007 and January 2009, and then didn’t get back up to their November 2007 level until January 2013. It was harder for buyers to get credit, and moreover they were deterred by rapidly-rising fuel prices. World oil prices more than doubled between June 2007 and June 2008. This rise was attributed to increased demand for oil from China and India, but since it was followed by an even quicker fall in oil prices in the second half of 2008, speculation must have been a big factor.

The spiralling competitive rush for profit in the financial sector, which stimulated each competitor to outdo the others in ingenious or just fraudulent speculations and financial inventions, had crashed as such spirals in capitalism habitually crash; and it had brought down industry and services with it. Once the slump got going in 2008, it snowballed. Unemployment and lay-offs reduced consumer demand, which in turn reduced output further. Firms shut down. Investment plans were cancelled or postponed. Debts were called in. Finally, the cost-cutting reached a point where the surviving firms could sell off inventories and begin to raise output again. The decline in industrial production in the USA was bigger than in 1973-5, and the global simultaneity of the slump was greater than ever before. After mid-1929, US industrial production fell for three years straight before it turned round. In 2008-9, as in 1973-5, decline levelled off more quickly, after about 18 months. Or quicker in some countries: Japan levelled off in January 2009, after industrial production started falling sharply in January 2008; Germany in April 2009, after a similar start. Brazil, India, and China all recovered faster. Capital owed this levelling-off to government intervention. Governments nationalised or bailed out banks. Governments nudged central banks into lowering the interest rates at which they would lend to commercial banks and into (effectively) printing more money. Governments pumped up public spending and cut taxes to offset the slump. They did that on top of the “automatic stabilisers” by which governments with large social programs pump extra demand into the economy in recessions because spending on items like unemployed benefit rises and tax revenues shrink.

The first G20 summit, convened in the heat of the crisis in November 2008, included as the most specific commitment in its declaration: “within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports”. The governments largely stuck to that. They avoided the spiral of competing protectionist measures. They applied the lessons about offsetting slumps taught by monetarists (pump up the money supply) and by Keynesians (pump up government budget deficits). Yet the bottoming-out of the crash in 2009 was not followed by a smart revival. World trade has grown only slowly since 2011. UK and eurozone industrial production declined in 2011-2. US recovery has been more consistent but slow. Even newer industrial powers like China, India, and Brazil, at first reputed to have lost little in the crisis, were suffering by 2015. GDP in Brazil fell from early 2014; industrial production and investment in India stagnated from early 2012 to early 2014; China’s industrial growth has become markedly slower than before 2008. From June 2015 China suffered a stock market crash. As of early 2016, Chinese manufacturing production is falling.

The main capitalist governments turned sharply to cuts policies in summer 2010, at around the same time that the government debt crises in eurozone countries exploded. In May 2010, Greece; in December 2010, Ireland; in May 2011, Portugal; and in May 2013, Cyprus, became unable to get fresh loans in the global financial markets to meet their debt repayments, and went for “bail-outs” from the European Central Bank, the EU, and the IMF. The “bail-out” loans in fact served to pay off the international banks who held debt from those countries, so that the countries ended up still in debt, but to the international capitalist public agencies. In return for this double-edged service, the countries’ governments were required to chop social spending, privatise, and introduce “structural reforms” in labour markets to curb workers’ rights. In all the affected countries, the governments first entering the “bail-outs” fell, and sometimes their replacements fell too. But all their governments, including those formed by parties which had previously criticised “bail-out” terms, ended up enforcing those terms. Even the Syriza government elected in Greece in January 2015 did that. In summer 2011 Spain and Italy came near having to apply for similar “bail-outs”. Those governments became able to function again by borrowing on global markets only after the European Central Bank, in July 2012, announced that it was willing to buy up bonds of eurozone governments and would do “whatever it takes to preserve the euro”.

Nevertheless, they had to carry out cuts similar to those imposed on the governments in “bail-out” programs and, like them, suffered economic depression. As early as summer 2009, Germany adopted a balanced-budget amendment to its constitution (though with provision for it to be flouted in emergency). In March 2012 the eurozone formally adopted a Fiscal Stability Treaty requiring its member states to run almost-balanced budgets. The Obama administration in the USA shifted to social cuts not so clearly through ideological decision, but rather as an outcome of its battles with the Republicans in Congress in summer 2011 over increasing the USA’s ceiling, set by law, on federal debt; but it shifted. State governments had been making cuts long before that, despite the federal government’s Keynesian stimulus policy. The Toronto G20 summit in June 2010 said, in terms unusually precise for international summit declarations: “Advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016”. Its recommendations for future economic growth prioritised “labour market reforms… wage bargaining systems to support employment… strengthening competition in the service sector… further reducing the barriers to foreign competition… enhancing foreign investment opportunities”.

Thus, the chief capitalist governments, only months after the initial economic crash had levelled off, set aside the “Keynesian” deficit-budget policies which they had so recently used. They continued the unusual (though straight-down-the-line monetarist) monetary policies: low official interest rates, printing extra money, and “quantitative easing” (buying up financial paper from banks and thus supplying them with extra cash: detailed analysis has found that this policy increases economic inequality: Montecino and Epstein, 2015).

The governments shelved the criticisms of pre-2007 economic-policy orthodoxy which had flourished in 2008-9. And they did that with broad consensus at the top of capitalist politics, despite criticism from middle-of-the-road economists. The Social Democrats in Germany governed in coalition with Angela Merkel from 2005 to 2009 and again from 2013. Francois Hollande in France spoke of higher taxes on the rich and similar policies in his 2012 presidential election campaign, but then went for social cuts. In Britain, Gordon Brown, as Labour prime minister, denied that the crisis called for social cuts until September 2009, and then stressed that the cuts should be small and delayed. Ed Balls, who would be Labour shadow chancellor from October 2010 to May 2015, made a speech on 27 August 2010 arguing for a “classic Keynesian response” and no cuts until renewed growth was “fully secured”. Then, when his 2010 argument against the Tory government’s economic policy was confirmed in practice, Balls moved to supporting the Tory cuts and pay freezes with only small reservations.

The exception among major capitalist governments is the Abe administration in Japan, which from December 2012 declared a program of tax cuts, increases in money supply from the central bank, and public spending, designed to restore modest price inflation and growth. Japan has run budget deficits of about 8% of GDP since then, and in fact since 2009. Profits in Japan have increased somewhat, while they have remained low in the eurozone; but GDP has grown only modestly, and in November 2015 industrial production was no higher than in June 2011.

Analysis of the reasons for the shift by capitalist governments back to cuts, marketising, and privatising takes us into an examination of the underlying patterns of world capitalism, and thus into theorising about the crisis. The official explanation for this shift to budget balancing was summarised by British Chancellor George Osborne in his Mansion House speech of 16 June 2010: “What business will invest with confidence if they fear ever higher deficits will lead to ever higher taxes? What family will spend with confidence if they fear ever higher debts mean ever higher interest rates? That is why we have moved at a brisk pace in the six weeks since the general election”. He strengthened his argument by citing Greece as a scarecrow. “We see now with countries like Greece that what began as a crisis of liquidity and then solvency in banking systems, has been succeeded by market fears about the solvency of some of the governments that stand behind them. I do not want that question ever to be asked of Britain…”

Obviously Britain was nowhere near Greece’s plight. Osborne’s gist was this: cuts could be expansionary because of their good effect on business confidence. The cuts would increase the confidence of capitalists that in this country they could be sure not to have to deal with tax rises or debt crises. Osborne, and those who thought like him, were evidently ready to be patient about when the regained confidence would produce growth, for they stuck to their cuts plans when, in the eurozone and in Britain, the short-term results were stagnation. The core idea was stated more briefly by German Chancellor Angela Merkel at the end of 2011, as she was steering the eurozone towards the Fiscal Stability Treaty. The priority, she said, was to “show that Europe is a ‘safe place to invest’.” (Financial Times, 5.2.11). Here we have the principle of capitalist government in the era of vastly mobile global capital and fast-mutating global production chains. As New Labour’s ex-CBI minister Digby Jones put it, the job of a government is to fashion its country as a “product” attractive to the global wealthy seeking sites for their operations (Guardian, 8.2.08). Academics sum it up in such terms as: “The prevailing view of the role of government is more facilitative than interventionist” (Dunning and Lundan, 2008, p.399). Or: “The role of… governments today is to establish the infrastructure that will attract the factors of production. Only by doing so will their economy receive the investments that are central to economic development” (Simerly, 2000). Or: “Neoliberalism rationalised the transfer of state capacity to allocate resources inter-temporally (the balance between investment and consumption) and inter-sectorally (the distribution of investment, employment and output) towards an increasingly internationally integrated (and US-led) financial sector” (Saad-Filho and Johnston, 2005, p.4).

To build or nurture an integrated industrial base within the country, which was central in previous eras, is no longer central. Growth, in and of itself, and in measurable short terms, is not central either. The new doctrine is not classic laissez faire. The government must develop infrastructure and education, manage social peace, keep regulation light and social overheads low, create new investment openings by privatisation, maintain its currency as a reliable, easily-traded token in global markets, and ensure that its government bonds figure in markets as reliable and easily-traded. There is more than one way it can do that, and there is scope for pushing the government a different way from its first choice. The government may choose to sell its country as a “premium product”, with better education and skills and infrastructure, and charge a slightly higher “price” (tax on the rich and business) in return for greater public amenities. Indeed, it may be forced to do that by democratic mobilisation. But the resilient, consensus-commanding, hard-core principle is: run things so as to make the country an attractive site for global capital. Global capitalists were willing to see drastic “Keynesian” measures in 2008-9 when otherwise, as US president George W Bush put it in September 2008, “this sucker could go down”.

They were especially willing since many of them were direct beneficiaries of the “Keynesian” measures, and the others could see that if their weaker brothers and sisters collapsed dramatically, then there would be no markets for them. But once the immediate crash was over, they wanted to return to the neoliberal norms. Another element was summed up by Rahm Emanuel, president Obama’s chief of staff. “You never want a serious crisis to go to waste,” he told a Wall Street Journal conference of corporate bosses (WSJ, 21.11.08). The crisis provided an opportunity to rush through long-desired erosions of workers’ rights, privatisations, marketisations. In 2008 critics of neoliberalism had been confident, and its defenders evasive. Asked about his famous “efficient markets hypothesis”, Eugene Fama replied that “it did quite well in this episode”. Then, asked what had caused the recession if markets were so efficient, he replied: “That’s where economics has always broken down. We don’t know what causes recessions… We’ve never known… Economics is not very good at explaining swings in economic activity” (New Yorker, 13.1.10).

Robert Lucas, another of the most celebrated neoliberal economists, airily declared that it was impossible for economics to forecast “sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September” (The Economist, 6.8.09).

The tight bonding in today’s global capitalism between uncontrolled global markets, intricate and mutating global production chains, and government priorities,and the concentrated power of high finance as a strategic lobby, explains why so soon neoliberalism was more strident than ever. In the same article, Lucas wrote approvingly that governments had “drawn on the ideas and research of Keynes from the 1930s” to deal with the crash in 2008. Our picture of bourgeois economic thinking around the crisis is skewed if we think that neoliberalism and Keynesianism are polar opposites. Many neoliberal economists acknowledge Keynes; many describe themselves as “new Keynesians”. Despite the panicked Labour Party leader Jim Callaghan telling the Labour Party conference in 1976: “We used to think that you could spend your way out of a recession… I tell you in all candour that that option no longer exists”, most neoliberal economists think that deficit spending is mandatory for governments in acute crises like 2008. What they reject are elements latched on to Keynes’s economics in the 1960s: the social welfare philosophy (imprinted on orthodox bourgeois thinking by the strength of the labour movement) and the idea (born of bourgeois overconfidence after a period of fairly smooth expansion) that deficit spending could be “fine-tuned” so as to eliminate crises.

Reason, analysis of the 1930s, and comparison of the stagnant eurozone and its drastic budget-balancing with the slacker regime and greater growth in the USA indicates that the turn to budget-balancing has played a big part in the depression since 2010. We also need to look deeper into the anatomy of capitalism, of crises, of depressions, and of today’s capitalism.

Some Marxist analysts argue that the rate of profit has been on a downward trend since the 1970s or earlier, and that the crisis of 2008 came fundamentally from that trend, or from the breakdown of untenable temporary fixes which stalled the trend for a while. Others argue that the rate of profit recovered, on the whole, despite setbacks and slumps, from 1982 through to the 2000. It created a more dynamic capitalism, but one where “chaotic regulation” (as Michel Husson puts it) is inbuilt, i.e. not just a failure of governments’ policy, to be corrected by more adroit policy. Some see it as more or less mandatory for Marxists to explain crises, or depressions, by declining profit rates: to do otherwise is not just (they believe) empirically wrong, but theoretically un-Marxist. I will argue here for the approach via “chaotic regulation”. The balance of evidence and debate indicates that profits did recover after about 1982, that the 2008 crash was not set off by declining profit rates, and, indeed, that declining profit rates are not usually or generally the driver of crisis. Crises are endemic to capitalism. They are sudden imbalances between different economic flows which, rather being quickly corrected by adjustments in supply, demand, or price, escalate, creating a spiral of imbalances and blockages and thus general economic decline. Crises, therefore, cannot be read off from “snapshot” ratios in the capitalist economy, whether between profits and capital-stock (as in some falling-rate-of-profit theories of crisis) or between wage-bill and total product (as in some “underconsumption” theories of crisis). They develop from imbalances in time.

As Marx put it: “There would be no overproduction, if demand and supply corresponded to each other, if the capital were distributed in such proportions in all spheres of production, that the production of one article involved the consumption of the other, and thus its own consumption… Since, however, capitalist production can allow itself free rein only in certain spheres, under certain conditions, there could be no capitalist production at all if it had to develop simultaneously and evenly in all spheres. Because absolute over-production takes place in certain spheres, relative over-production occurs also in the spheres where there has been no over-production… “If production were proportionate, there would be no over-production. The same could be said if demand and supply corresponded to each other, or if all spheres provided equal opportunities for capitalist production and its expansion… over-production takes place because all these pious wishes are not fulfilled. Or, in even more abstract form: There would be no over-production in one place, if overproduction took place to the same extent everywhere… “[Bourgeois denial of the possibility of general overproduction] rests on abstracting from money and from the fact that we are not concerned with the exchange of products, but with the circulation of commodities, an essential part of which is the separation of purchase and sale… In world market crises, all the contradictions of bourgeois production erupt collectively; in particular crises (particular in their content and in extent) the eruptions are only sporadical, isolated and one-sided. Over-production is specifically conditioned by the general law of the production of capital: to produce to the limit set by the productive forces, that is to say, to exploit the maximum amount of labour with the given amount of capital, without any consideration for the actual limits of the market or the needs backed by the ability to pay…” (Marx, 1969 p.532, 534-5).

In good times capital, by its very nature, tends to self-expand out of proportion to the market. In those good times capitalists race to compete to invest first in new fields. From the race follows a flood of potential output from the new investments, and a hesitation to invest more since capacity and costs (interest, wages) are now relatively high. The race falters. Debt, which has soared in the upturn, now bites. Some capitalists who have stretched their credit cannot meet the payments they have already committed themselves to.

The race goes into sharp reverse: capitalists scrabble for cash, restrict credit, postpone investments, lay off workers, shut down operations, in a snowballing process, until eventually the cost-cutting from crisis reaches the point where the stronger capitalists, who have survived the crash, can expand again and start a new cycle. As well as these cyclical crises, there are also longer periods in which the cyclical upturns are weaker, and the cyclical downturns sharper; others, in which the cyclical upturns are stronger, and the downturns milder. In terms of this general scheme, the unusual feature of the 2008 crisis is that there was no giddy surge of productive investment and associated debt, not even in particular sectors, leading up to the crisis. US total non-residential real fixed investment had risen from 2003 Q1 (after its slump following the 2001 dot com crisis) to 2008 Q1 before falling 20% to 2009 Q4, but at a historically modest 6% p.a. US non-financial corporate business’s investment in industrial equipment rose until 2007 Q3 (after which it fell 28% to 2010 Q1), but again modestly. Real gross private domestic fixed investment in nonresidential structures rose faster, at 13% p.a., from 2005 Q4 to 2007 Q4, before slowing down and then falling, from 2008 Q2 to 2010 Q1, by 34%; but non-financial corporations’ debt burden had recently been, if anything, declining, at least up to 2006 Q3. As James Crotty notes, “Marx’s criticisms of schools of thought that see all crises as imposed by ‘irresponsible’ financial activity on an otherwise crisis-free capitalism have been frequently misinterpreted as an argument that the financial system is an unimportant aspect of his crisis theory” (Crotty, 1985).

The expansion of finance is endemic to capital. Marx explained some of the dynamic in Capital volume 2. As capitalist production becomes more layered and concatenated, and as circulation speeds up, capitalist firms more and more need cash-in-hand to see them through and evade delays. On the basis of those needs in production, inevitably, a vast secondary market develops, in which financiers trade the bits of paper which represent the firms’ pledges of revenues in return for cash advanced. A capitalist crisis is not a quiet thing, like a low rate of profit or a slow rate of growth: it is a sudden convulsion. Capitalists rush to get cash, but can’t get it; credit dries up; some capitalists can’t even make the payments due on past credit transactions. All that is financial. Normal, “respectable”, “productive” capitalism organically and usually generates “abnormal”, “irresponsible”, swindle-packed finance. In Marx’s terms, capitalist production organically drives beyond its own inbuilt limits and hence into crises; but it is “banking and credit [which] become the most potent means” of doing so, and “the most effective vehicles of crises and swindle”.

To say this is not to say that capitalism can be made healthy by regulation of finance. Closely regulated finance can limit slumps, that’s true. At the limit, it can produce something like the Khrushchev-Brezhnev USSR, where all credit was nominally under the control of the central government, and the result was a stop-go lurching between sneaky bit-by-bit expansion of credit beyond central government wishes, followed by exasperated reinings-in, which gave the economy slow growth and a varying but constantly disproportionate number of unproductive half-finished projects.

Even in western Europe and the USA, as governments intervened more, the 1930s produced continued depression rather than new financial crashes. The sharp downturn of May 1937 in the USA was triggered by Federal Reserve restrictions on credit and US government cuts in spending and increases in taxes, rather than by a financial-sector crash. (Romer 2009). That does not mean that capitalism would be stable and prosperous if only it had better financial regulation. In the first place, to get from here to that tight regulation would require a great raising of economic barriers between countries, and a consequent great depression. In second place, if and when the system got there, it would only be to a stumbling shuffle.

Debates about the dynamics of capitalist crisis are sometimes posed in terms of “Marx versus Minsky”. The writings of the maverick Keynesian economist Hyman Minsky are, indeed, slight compared to Marx’s. There is nothing there about how economic life comes to be shaped by the drive for profit, how the relation between workers and capitalists develops, how the technology and organisation of production is shaped, or indeed about the dynamics of how capitalism becomes inherently “financialised”.

There is, however, a discussion of how the capitalist financial system can become the vehicle of crisis, more rounded discussion than was possible for Marx, and with empirical reference to a much more “financialised” capitalism than Marx could know. There is nothing un-Marxist about seeing 2008 as a “Minsky moment”.

Minsky came from a Menshevik émigré family background. As a school student in the late 1930s he was a member of the American Socialist Party youth group, where he probably came across Trotskyists. He studied with Oskar Lange, Henry Simons, Frank Knight, and Josef Schumpeter, and became an economics lecturer at the University of California, Berkeley, from 1957 to 1965. He supported the 1964-5 Free Speech Movement at Berkeley, a big starting-point for late-1960s student radicalism; or, at least, he was one of only two lecturers who tried to intervene to stop a mass arrest of the protesting students (Columbia Daily Spectator, 18 December 1964). He was active in the left-liberal Americans for Democratic Action. In 1965 he moved from Berkeley to a smaller, quieter university, and remained in a quiet academic world until his death in 1996.

According to one biographer, he moved because he decided to focus on academic research rather than political activism. His economic writings were convoluted and opaque. Despite his family background, and although he referred to Marx as a great pioneer comparable to Darwin or Einstein, he saw Marxism as preaching a “sterile theorising” that “within a capitalist economy nothing useful could be done to counteract depressions”.

His writings suggest he never studied Marx seriously. He rejected “complete socialism” by equating it to Stalinism. He favoured “a humane, decentralised socialism”, “an economy in which leading sectors are socialised, communal consumption satisfies a large proportion of private needs… taxation of income and wealth is designed to decrease inequality”. He saw the British Labour Party as conservative relative to that programme (Minsky, 1975, p.6-7, 145, 164, 156). His writings give no indication that he saw his version of socialism as connected to working-class struggle. Minsky argued “an analysis of investment under conditions of uncertainty and with capitalist financial usages is the core of… theory”. “There are really two systems of prices in a capitalist economy — one for current output and the other for capital assets”, which are bought and sold not for use but for their capacity to yield future revenues. The evolution of the asset-price level is decisively shaped by uncertainty. “Uncertainty” here means what Keynes called “irreducible uncertainty”, and others call “Knightian uncertainty”.

The outcome of rolling dice is uncertain, but we know the probability of a six: 1/6. Whether the euro will survive another decade is uncertain in the more radical sense that we cannot even confidently calculate a probability. In capitalist booms the indefiniteness of uncertainty, and the capacity of banks to create new money in response to investors’ demands, works to expand debt faster than the future revenues-from-assets which must cover it. The price level of revenue-yielding assets rises faster than the current-goods price level. In their market “a rise in the relative prices of some set of financial instruments or capital assets may very well increase the quantity demanded”. An “euphoric economy” develops. “

Stability is destabilising”, and even more so if there is a “socialisation of risks”, i.e. adventurous capitalists know that public authorities are likely to bail them out if things go bad. “The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy”. An increasing number of “Ponzi units” develops — businesses which rely on being able to sell assets at high prices, not just on near-future assured revenues, to meet their bills (Minsky, 2008). Eventually interest rates rise. The boom continues for a while, but some previously non-Ponzi units are now Ponzi, because debt-service payments are bigger, and Ponzi units have to sell more and more assets. The price level for revenue-yielding assets drops. Ponzi units go bust. Interest rates rise further. Credit contracts. Capitalists rush for liquidity. There is a “Minsky moment”. A crash.

If the economy has a fast-rising current-goods price level (i.e. high inflation), and the central bank and the government respond judiciously, then liquidity recovers quite fast. There will be a reasonably rapid general recovery, but at a low level of growth (stagflation). If the current-goods price level is not fast-rising, then the slump will worsen further, through deflation of financial-asset prices, before it mends. Minsky’s argument, I submit, is an extension of an idea sketched by Marx in an unfinished form. Marx never wrote an even provisionally “finished” theory of crisis. In his most sustained discussion of crises, in his 1861-3 drafts for Capital, he argued that: “The real crisis can only be educed from the real movement of capitalist production, competition, and credit”. He insisted that crises must be analysed in the interaction between production and circulation — on the money side as well as the commodity side, and on the financial-assets side as well as the current-output side — and not in production alone (Marx, 1969, p.512, 507, 513, etc.).

He saw crises being generated by booms in a pattern similar to Minsky’s. Thus in the run-up to the crisis of 1846: “The enticingly high profits had led to far more extensive operations than justified by the available liquid resources. Yet there was credit — easy to obtain and cheap… All inland quotations [share prices] were higher than ever before. Why then allow this splendid opportunity to escape? Why not go in for all one was worth?” “Banking and credit… become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle”. “The credit system appears as the main lever of over-production and over-speculation in commerce… the reproduction process, which is elastic by nature, is here forced to its extreme limits… The credit system accelerates the material development of the productive forces and the establishment of the world-market… At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production” (Marx, 1977 p.407, 607, 441).

According to Robert Brenner the “golden age” of European, US, and Japanese capitalism, between the Korean war boom and the early 1970s, was based on a “highly dynamic, but ultimately highly unstable, symbiosis”. “Both the German and Japanese economies prospered to no small degree by virtue of their ability to dynamise rapidly progressing regional economic blocs in Europe and East Asia by supplying them with increasingly high-powered capital goods. Still, it was the ability of German and Japanese manufacturers to wrest ever greater shares of the world market from US (and UK) producers that ultimately made possible their post-war economic ‘miracles’. Again, however, this capacity to seize market share could only come into play because of the willingness of the US government to tolerate not only the broad opening of the US economy to overseas penetration, but even a certain decline in US manufacturing competitiveness in the interests of US military and political hegemony, international economic stability, and the rapid expansion overseas of US multinational corporations and banks” (Brenner, 1998).

All that was possible only because the US economy, hugely dominant in the capitalist world market of 1945, faltered so little. Its growth was slower than the other advanced capitalist countries (except the UK), it was wobbly before the Korean war boom of the early 1950s, and it suffered a downturn in 1957-8 sharper than other advanced capitalist countries had in the 1950s and 60s. Yet it grew fairly fast and steadily, without a downturn equivalent to those of 1974-5, 1980-2, 1908, or 1893-4, let alone the 1930s or after 2008. There were high rates of profit in the US at the end of World War Two, resulting from the compression of wages in the 1930s slump and in wartime.

But World War One was followed in the US by a boom which ended in the crash of 1929. Why was it not the same after World War Two? The slump-dampening, demand-sustaining role of high military spending, and higher state spending generally, was a relative stabiliser. The international framework was also important. After 1945 the US capitalist class, trying to learn from the experiences of 1917-29, deliberately set about reconstructing Europe, and the framework of international trade, on different lines. Instead of the crippling reparations payments demanded from Germany after World War One, there was the Marshall Plan. And there was the Bretton Woods system of gradually-freer international trade, based on a dollar guaranteed against gold. The gradual freeing of trade between the big capitalist powers had a dynamising effect on those economies. Although the US was losing markets (relatively) to German, Japanese (etc.) capital, it still dominated. Its exports rose. Almost every year until 1976, the US ran a trade surplus, and every year until 1966, a large one. When markets in the US slumped, US corporations could find other markets overseas.

They were also cushioned by a steadily-rising flow of income from their expanding assets overseas. The dollar’s role as world money allowed the US to send overseas, in military spending, aid to client governments, and investments, much larger sums that warranted by its trade surplus. As early as 1962, according to the Federal Reserve’s estimates, over 40% of US-dollar notes and coins were held outside the USA: it’s now probably over 70% (Judson 2012). Finance was still “repressed” by capitalist governments, and mostly boxed in to national frameworks; but, effectively, the USA supplied credit to the world market by printing dollars. It held the ring for a dynamising but ultimately destabilising revival of autonomous and globally-traded finance. Until it was troubled by its huge spending abroad on the Vietnam war in the late 1960s, the US government did not have to worry about its balance of payments. It was not condemned to “stop-go” like British governments. At the watershed of the late 1960s and early 70s, the conditions broke down for the “highly dynamic symbiosis” of unevenly-developing segments of the advanced capitalist world. Although politically and strategically the US remained hegemonic, its industrial advantage had been whittled back. The combined effects of that fact, of the economic drain of the Vietnam war, and of the steadily-accumulating mass of “Eurodollars” at large (both actual dollar notes, and dollar-denominated bank deposits), broke the Bretton Woods framework. The dollar was devalued. Exchange rates floated free. Despite considerable pressures for protectionism, the big capitalist governments maintained fairly free trade. “Globalist”, internationalised, interests, growing over the decades, had achieved dominance in the various ruling classes. This would be demonstrated most spectacularly under the Thatcher government in Britain in the early 1980s, when one-quarter of all manufacturing employment was trashed through an economic policy whose main pay-back was the scope it gave to big UK-based firms to buy assets overseas (which they did at an enormous rate).

The US now needed to bother about its balance of payments and the level of the dollar, which dived alarmingly in the late 1970s. Its balance of trade went into deficit. In the new regime of floating exchange rates the multinational corporations whose power had expanded in the great upswing wanted freedom to move funds from one country to another at will. Otherwise they would risk huge losses on funds held in the “wrong” form in the “wrong” country at the “wrong” time. Exchange controls were scrapped, and global financial markets expanded dizzily. Increasing “financialisation” and a more febrile regime, giving capitalist corporations fewer assurances about steadily-expanding markets and a stable share in those markets, changed the strategies of productive capital. “In the name of ‘creating shareholder value’, the [1980s and 90s] witnessed a marked shift in the strategic orientation of top corporate managers in the allocation of corporate resources and returns away from ‘retain and reinvest’ and towards ‘downsize and distribute’. Under the new regime, top managers downsize the corporations they control, with a particular emphasis on cutting the size of the labour forces they employ, in an attempt to increase the return on equity”. (Lazonick & O’Sullivan, 2000, Mason, 2015).

Many Marxists write of the “failure” of Keynesian policies in the 1970s. However, to argue that the Keynesian “fine-tuning” briefly fashionable in the 1960s was an illusion, or that Keynesian policies (the state acting to sustain effective demand in the economy) cannot ensure an indefinite smooth capitalist upswing is one thing. It is another to contend that they can play no role in dampening recessions, not even in the big capitalist national economies of the 1950s and 60s, more protected than today from external destabilising pressures.

Marx, discussing the 1846-7 crisis in Britain in Capital volume 3, identified a government measure, the suspension of the 1844 Bank Act, as the turning-point to capitalist recovery. He argued that the crash had been “carried more or less to extremes by mistaken legislation”. He did not argue that capitalist crises were more-or-less automatic processes, immune to being made deeper by inept capitalist government policies or shallower by more astute policies. Keynesian policies did not fail — from the point of view of their capitalist promoters — in the 1970s. They engineered a remarkably rapid recovery from the 1974-5 slump, and sufficient revival to avert a further radicalisation of the workers’ movements — all at a cost, of course, but did the bourgeoisie have any way of doing those things without cost? Their success prepared the conditions for capitalist governments to shift to the aggressive “opening-up-to-world-competition” policies of the 1980s and 90s. The relatively stabilising effect for capitalism of large state expenditures remains. In 2008-9, too, the “Keynesian moment” of crisis management was effective. It could not stop the 2008 crash, or stop the recovery from 2009 being slow and erratic; it could brake the crash before it fell as far as in the early 1930s. Finance, which in the great upswing had been the handmaiden of industry, stepped forward in the 1970s, and more in the 1980s. Where the reserves of the world’s central banks (excluding gold) had risen by a modest 3.4% a year between 1950 and 1969, they surged by 21% a year between 1970 and 1979. For non-financial corporations in the US, in the 1960s, net interest accounted for less than a tenth of the amount of profits from production; by the 1980s and 90s, for 30 or 40% as much as profits directly from production. A much bigger proportion of total profits appears as the profits of financial rather than non-financial enterprises. Many of us had thought US hegemony was already declining, and set to decline further, by the late 1960s.

In fact, at least until now, US hegemony has continued, pivoted now on its central role in global financial markets. Despite the 2008 crash hitting the USA first, it generated a rush of wealth not out of US Treasury paper and dollars, but into them, as the safest and most liquid forms available. It is not the case that the new rise of finance directly depresses output by diverting capital from production to speculation. Financial speculators cannot work just by swindling each other. A doubling, or trebling, of “fictitious capital” swirling round the financial markets does not mean a diminution of the capital invested in production. Holding cash to make good promised revenues from financial assets takes precedence over productive expansion. Business investment has increased much less than profits; corporations have paid out much more in dividends and share buybacks (and pay-outs to top bosses); the luxury consumption-goods sector has exploded since the 1980s. 50% of consumer goods and services in the USA are now bought by the top 10%. “Patrimonial” wealth is resurgent, as Thomas Piketty’s book on Capital in the 21st Century has shown.

The new surge of financialisation enables financial capitalists to develop a “second exploitation”, drawing surplus-value directly from workers’ budgets through debt charges, and recalling Marx’s comment in the Communist Manifesto: ”No sooner is the exploitation of the labourer by the manufacturer, so far, at an end, that he receives his wages in cash, than he is set upon by the other portions of the bourgeoisie, the landlord, the shopkeeper, the pawnbroker, etc.”

It is often said that the expansion of household debt also kept consumer demand buoyant. It is a fact that a lot of the hectic activity in the mortgage market in the USA from about 1997 to 2006 was people “using their houses as ATMs”, remortgaging in order to cash in on rising house prices and then spending the cash. Yet other households yielded lower consumer demand because so much of their income was siphoned off in debt payments. J W Mason finds: “The rise in [household] debt [in the USA] in the 1980s is explained by a rise in non-demand expenditures [i.e. expenditures which do not generate consumer demand]. Specifically, it is entirely due to the rise in interest payments, which doubled from 3-4 percent of household income in the 1950s and 1960s to over 8 percent in the late 1980s. Interest payments continued around this level up to the Great Recession, falling somewhat only in the past few years” (Mason 2014).

Bank of England research for the UK found that “increases in debt did not provide significant support to consumption” between 1992 and 2007 (Bunn and Rostum 2014). The new structure is also unstable, and maybe not so much because of its particularities as because of its generalities — because it represents the nearest yet to “a pure capitalism” (in Michel Husson’s term). It no longer has the quirky but for-a-period-helpful imbalances, or the inherited but loosening repression of finance, of the upswing of the 1950s and 60s. The world market, more and more important for individual capitalists, is increasingly synchronised. The world market has only the flimsiest of stabilisers in the IMF and the World Bank and coordinated action through the G8 – even assuming those bodies do not act to accentuate slumps, as the IMF is widely reckoned to have done in Asia in 1997-8. A movement from protectionism and “financial repression” to free trade and fast global flows of finance tends to dynamise a capitalist world; the free-trade regime, once arrived at, tends to destabilise it.

“It is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that [the wealth-owner] functions as a capitalist, that is, as capital personified and endowed with consciousness and a will. Use-values must therefore never be looked upon as the real aim of the capitalist; neither must the profit on any single transaction. The restless never-ending process of profit-making alone is what he aims at” (Marx, Capital volume 1 chapter 4).

In capitalism, a crisis is when that “boundless greed after riches” is interrupted — when capitalists can no longer expand profit-making; when expansion would fail to produce profits, not only on single transactions or groups of transactions, but for a period; or when expansion is impossible because they cannot meet the payments due on past expansions. It is all about profit. But it is not about profit-rates dropping below some set level, or about gradual falls in the rate of profit. Crises are not signalled by prior sharp falls in the rate of profit, either. Usually crises set off sharp falls in the rate of profit, rather than vice versa. What is a “low” rate of profit? Just as there is no mathematical rule stating some minimum share for workers in national income below which “underconsumption” will ruin capitalism, so also there is no mathematical rule setting a minimum rate (20%? 10%? 5%? what?) below which crisis breaks out. If the rate of profit gradually sinks, then, all else equal, capitalists’ expectations of profit, and the rate of return they demand before making new investments, will also sink, so that demand remains buoyant. A falling rate of profit can be — and Marx argues that it generally will be — accompanied by an increased mass of profit, so the falling rate of profit still yields increasing riches to the capitalist magnates. “And thus the river of capital rolls on… or its accumulation does, not in proportion to the rate of profit, but in proportion to the impetus it already possesses” (Marx 1977 p.245).

Even if a “tendency of the rate of profit to fall”, as traditionally understood by Marxists, operates most straightforwardly, it will not explain crises. Or maybe the tendency operates strongly in booms, so the rate of profit falls relatively fast in booms until its fall precipitates a crisis? In the slump, the counter-tendencies take over and the rate of profit is restored in the downturn, only to pave the way for a new boom? If that were the case, then in the business cycle profit rates would generally be highest at the very start of the recovery, then decline at increasing speed as the expansion proceeds. It is not so. Profit rates sometimes level off or drop slightly in the very last stages of the expansion, before the crisis, but during most of the expansion they rise. “Business always appears almost excessively sound right on the eve of a crash… Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place” (Marx, 1977 p.484).

Wages have been squeezed since the early 1980s, more tightly in the USA than elsewhere, but in all the old industrial countries. Unions have generally been weakened, and “flexibility” has been imposed on capitalist terms. Only one month before the BNP announcement of August 2007 which signalled that a global crisis in high finance was brewing, researchers at the Bank of International Settlements reported: “Profits growth has been strong in many developed economies in recent years, and the profit share — the share of factor income going to capital — has been high compared with historical experience. This paper shows that, rather than being a recent phenomenon, profit shares have trended upwards since about the mid 1980s in most developed economies for which comparable data are available” (Ellis and Smith, 2007).

IT equipment prices have been cut by technical change, and that cheapens equipment incorporating IT, as most complex equipment does these days. Industrial equipment has generally become more compact. Industrial buildings are usually more compact, too. Even in China, where there are many giant factories like the Foxconn campus in Shenzhen, “smaller plants are replacing the vertically integrated behemoths that defined Chinese manufacturing in the early 2000s” (Australian Financial Review, 16.4.15). All in all, the “cheapening of constant capital” has probably proceeded apace. Statistics for the USA suggest that, too. Thus the increase in profit rates shown by official statistics in the run-up to 2007 looks plausible. It may even be underestimated, since corporations may have become more adept at squirrelling away profits into tax havens, and they have surely paid out to bosses in ultra-salaries and bonuses more which was really a chunk of profits but appears in accounts as part of their wage bill.

Many Marxist analysts agree that profit rates have generally risen since early 1982 (Husson 2010). There is scope for argument, because the definition of profit rates is slippery. Should we include the profits of financial businesses along with those of non-financial businesses? I would say yes, since those financial businesses are also part of capital. A much increased proportion of total profit has ended up in their hands; that is an important shift within capital, but not the same as a decline in the profit rate. Should we include the profits of “unincorporated” business in the USA as well as corporate? Yes, if we can get reliable figures. A not-negligible portion of surplus value probably goes to consultants and such. Should we count only profits on operations in the USA, or global profits? (US economic statistics are better than other countries’, so much of the debate centres on US statistics). Global, because otherwise our results are likely to be skewed by transfer-pricing and tax-avoidance tactics. Should we measure capital stock by replacement cost or by historical cost? By replacement cost, so as to get a measure of capital’s self-expansion as an ongoing process. Otherwise reduced inflation automatically reduces measured profit rates. Historical-cost calculation seems right if we reckon capitalist enterprise as a one-off operation. In fact it is ongoing.

Suppose one capitalist spends £1 million on equipment, gets £.1.6 million in revenues net of current costs over the life of the equipment, and then folds because equivalent equipment now costs £2 million. Another (in another time) spends £1 million, gets £1.4 million in net revenues over the equipment’s lifetime, but then can continue on double the scale with two lots of equipment equivalent to the first costing £0.5 million each and keep £0.4 million for mansions, watches, yachts, etc. On historical-cost calculations the first capitalist is successfully profitable, and the second has failed. A replacement-cost calculation tracks capitalist self-expansion more accurately. Should we measure percentage profits as a ratio to corporations’ total assets, or only to capital used in production? To capital used in production. Non-financial corporations have become “financialised”. They hold more financial assets (and financial liabilities). They cannot show a rate of profit on those financial assets similar to the rate on capital used in production: only capital used in production directly commands surplus value, and what we want to measure is its capacity to do so. If we take those definitions, then profit rates were generally rising (though with serious dips at times) over the quarter-century 1982 to 2007. In any case, and this is important, the consensus of the bourgeoisie was that profit rates were rising. The mechanisms which might be set in train by the bourgeoisie panicking over plunging profit rates were not being set off around 2007.

In summary: the “neo-liberal” capitalist regime since the 1980s emerged organically from the basic drives of capitalism and from the previous regime, but is inherently febrile. It generates a financial superstructure which is inherently febrile and crisis-prone, but organically and multifariously connected with the world of production.

The capitalist politicians who once shouted loudest in favour of “free markets” accepted hugely expanded state intervention in the economy. The government of George W Bush carried out the biggest nationalisations in history. Even before that, the notion of “free markets” was misleading. For a long time now, the giant enterprises which dominated the economy had, to a great extent, been “socialised” — organised on a vast, society-wide basis, with huge numbers of people working collectively and cooperatively, but under the control and in the interests of the capitalists, and dependent for their operation on public infrastructure. The state intervention made a fundamental case for socialism — that the social economy, privately owned, needs to be socially owned and controlled.

But it was “socialism for the rich”. The governments intervened, and effectively, to socialise the economy’s losses, so as better to continue to privatise its gains. The nationalised or part-nationalised banks did not stop paying their bosses huge salaries or repossessing the homes and ruining the lives of working-class people. The governments explicitly wanted the nationalised or part-nationalised banks to operate on a private-profit basis and to be re-privatised as soon as possible. Since 2010 the governments have returned to undiluted versions of the neo-liberal course set since the 1980s: social cuts, marketisation, privatisation, stripping of labour-market protections. The accompanying monetary policies (ultra-low interest rates, pumping-up of the monetary base, “quantitative easing”) are different from those pursued before 2008, but in line with orthodox economy theory, and not incompatible with neo-liberalism.

Even the conservative Financial Times columnist Martin Wolf was moved by the 2008 fiasco to write: “Banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff [meaning their top bosses, not the ordinary workers]. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with” (Financial Times, 2.7.12).

Banks have faced more critical scrutiny. Thus the series of scandals spilling since 2008: about mis-selling of mortgage-backed securities, of payment insurance, of credit schemes, etc.; about abetting tax avoidance; about rigging interest and currency-exchange rates. And thus voluminous new regulations and legislation, like the USA’s 2319-page Dodd-Frank Act of July 2010. But the new legislation and regulations change nothing decisive. Partly this is because financial capitalists remain a concentrated and powerful lobby. “The financial industry… is back on its feet now, punching its weight — or above — and showing precious little gratitude to the government that saved it… The industry has proved to be a formidable foe of financial reform…” (Blinder, 2013, p.454).

As of late 2015, 36% of the rules required in order to put the Dodd-Frank Act into effect had not yet been decided, and of the other 64% many had been softened by bankers’ lobbying. Republicans want to repeal Dodd-Frank altogether. Part of the reason, also, must be that new regulation which could not just divert high finance’s “vehicles of crises and swindle” onto different tracks, but also decisively brake them, would have to be much more drastic. To get from here to there would require a new crisis, and one probably condemning world capitalism to a long period which migh have more muffled crises but would also generally be one of depression. The banks’ bourgeois critics know that not even their most drastic ideas — breaking up big banks into smaller, separating commercial banking from investment banking, etc. — would make a decisive difference. Thus they are ill-prepared to counter the banks’ resistance. The system’s immediate recovery from the deep slump of 2009 was relatively quick. It has been followed by, not a rebound, but only faltering growth, and much slower growth of world trade than before 2008. Frantic competitive cost-cutting, gross uncertainty of long-term markets, governments’ focus on making their countries “safe to invest in”, corporations’ focus on distributing profits and on remaining nimble-footed in a chaotic world by pumping up liquidity, all point that way. Banks and corporations are keeping huge cash reserves. The trend for corporations to hold relatively bigger cash reserves dates back to the early 1980s, in the USA anyway, but has increased since the crash. (Bates 2006, Graham 2015, Mason 2015).

Productive investment is sluggish. Financial assets are tickets to portions of future surplus-value. The 2008 crash was a warning that the expectations embodied in financial-asset prices then were false. Central banks and governments intervened to limit the crash in financial-asset prices. That intervention, to “stick”, must provide some back-up for the claims on future surplus-value signalled by the financial-asset prices. In the capitalist long-term, that means boosting real output. In the short and medium term, it can mean something different or even contrary: governments squeezing the population through taxes and social cuts, and corporations anxiously holding on to cash or near-cash, in order to be sure of keeping up payments. I can see no absolute block to a recovery to the growth rates at least of the period before 2007. However, it is not happening now, and the plagues of the current “chaotic regulation” (Husson, 2009) are unlikely to be cured soon. A new crash may well intervene before conditions can be assembled for a larger recovery.

The USA remained hegemonic in the world capitalist economy after the loss in the 1960s of its industrial dominance, the collapse in 1971 of the Bretton Woods structure set up after World War Two to organise the hegemony, and the turmoil of the 1970s. “The United States’ structural power has, on balance, increased” (Strange, 1987). The surge since 1989-91 of the global reach of organisations like the WTO, the IMF, and the G7, in which the USA is pivotal, confirms Strange’s view. The USA still has the biggest markets; US corporations lead in high technology; and “America has the ability to control the supply and availability of credit denominated in dollars, and thus to exert predominant influence for good or ill over the creation of credit in the world’s monetary system” (Strange, 1987. See also Panitch and Gindin, 2013).

The fiasco of the USA’s 2003 invasion of Iraq has surely weakened the military and diplomatic hegemony of the USA. The events of 2008, and the big losses sustained in the crash, were apt to weaken New York’s position as the centre of global finance. The IMF’s resources (about $380 billion in late 2015) were revealed to be too small to “bail out” governments hit by the crisis. Sovereign wealth funds like the UAE’s ($800 billion), China’s ($750 billion), and Saudi Arabia’s ($700 billion), are bigger. In 2014 China was able to launch the New Development Bank and the Asian Infrastructure Investment Bank, each with capital of $100 billion, both bypassing the USA. Yet so far US hegemony continues. Foreign holdings of US securities increased from $10,000 billion in June 2008 to $16,500 billion in June 2014. The billions of cash US dollars held abroad have increased, too. “When global financial markets get nervous, US Treasuries remain the ultimate safe haven” (Blinder, p.395).

It will be a long time before gradual processes can decisively subvert US hegemony, and 2008 showed that crises in US hegemony can actually end up reinforcing it. Any sudden sell-off of dollars or US Treasury securities will be countered not just by the US government, but by other governments and wealth-holders with large holdings of dollars and Treasuries. Yet that is not an absolute. The vast volume of holdings, and the vast size of the constant inflow of capital that the USA needs to balance its trade deficit on goods and services of over $500 billion a year, puts it within the range of possibilities that a sell-off could gather such momentum that some holders of US securities and cash, resisting the sell-off, would be overwhelmed, and others would opt for reducing their losses by trying to be among the first out of the door. Such an event would exceed the crash of 2008 in impact. It would collapse credit across the world.

The 2008 crash and its sequels have stimulated left-wing reactions. Most notable have been the democratic and secular impulses in the Arab Spring of 2011; the rise of Syriza in Greece and Podemos in Spain; the Corbyn surge in Britain. So far, however, the temper and tone of that left-wing revival remains soft. It comes after a long period of capitalist triumphalism which has weighed down on the left, making “official” left parties conformist, and even activist left groupings unconfident. The leftish Tamarod movement in Egypt, which brought down Morsi’s Muslim Brotherhood regime in 2013, was unable to resist, or even form a cohesive opposition to, the subsequent organisation of a military-dominated authoritarian regime by Abdel Fattah el-Sisi. Syriza had already before its January 2015 election victory reduced its program to a list of alleviations to be won through negotiating with the European Union, and when the EU leaders stood stubborn, it capitulated.

Podemos, having made big gains in Spain’s December 2015 elections, proposes a list of priorities for a new government which includes nothing definitely anti-capitalist: adapting buildings for energy efficiency standards; banning ministers, MPs and their assistants from company boards in sectors which they have dealt with as politicians; an easing of VAT and social security burdens on small business; and a guaranteed minimum income of €600 a month. In Britain, the new Shadow Chancellor, John McDonnell, tries to placate the media by claiming that the difference between him and the Labour Party’s previous milder-austerity policy is just one of speed: “Look, on domestic politics, there is virtually nothing between us, absolutely nothing, other than that some want to go faster than others” (McDonnell, 2015). Much of the avowedly-revolutionary activist left, most of the time, limits itself to advocating more militant tactics in pursuit of minimalist and defensive aims (“stop cuts”). Support for mainstream consensus parties has been eroded by the crisis and depression. So far, the bigger gains have gone to nationalist, sectarian, or “identity politics” groupings, mostly more or less right wing. The advance of political Islamism after the Arab Spring, especially with Daesh in Syria and Iraq; the BJP victory in India; the results of the European elections of May 2014; and the successive right-wing mobilisations in the USA (Tea Party, the Trump campaign) show that. In Europe, the right gained most in the richer countries, less hard-hit by the economic crisis, and left-wing or leftish parties gained most in the poorer and harder-hit countries.

Many discontented people, looking for a grand narrative and hearing only a weak message from the left, are receptive to a scapegoating story from the right which appeals to basic feelings of identity and territory. The right proposes to blame and exclude worse-off, insecure people who have no entrenched power. To soured and demoralised people, that sounds like an easier way of “doing something” than battle against global capital. The far-right groupings offer less social demagogy than their equivalents of the 1930s. They promise not to solve social ills, or even to challenge global neo-liberal policies, but only to penalise immigrants or infidels. Noise about restoring national or religious identity and culture, about “taking back America” or “restoring the caliphate”, suggests that at least in that direction “something will be done”. A fascist seizure of power, as in the 1930s, would mean the crushing of the labour movement and the suppression of free speech and debate. That is not just round the corner.

None of the far-right parties, except on a small scale Golden Dawn in Greece and maybe Jobbik in Hungary, has the militant street-fighting base that the fascists of the 1920s and 30s had. The more electoralist far-right parties might well, if they enter coalition governments, gravitate towards mainstream conservatism on economic policy, and distinguish themselves mainly by even more brutal anti-migrant policies. Yet the possibility remains of those right-wing mobilisations pushing through such things as the exit of Britain from the European Union, and possibly, in another crash, a spiral of protectionist measures to re-raise economic barriers between countries. The task of revolutionary socialists is to seek to instill, in dialogue with the new left-wing movements, ideas which will make the left a real and formidable alternative.

As Leon Trotsky wrote in the 1930s: “The socialist programme of expropriation, i.e., of political overthrow of the bourgeoisie and liquidation of its economic domination, should in no case… hinder us from advancing, when the occasion warrants, the demand for the expropriation of several key branches of industry vital for national existence or of the most parasitic group of the bourgeoisie… The difference between these demands and the muddleheaded reformist slogan… lies in the following: (1) we reject indemnification; (2) we warn the masses against demagogues of the People’s Front who, giving lip service to nationalisation, remain in reality agents of capital; (3) we call upon the masses to rely only upon their own revolutionary strength; (4) we link up the question of expropriation with that of seizure of power by the workers and farmers… Only the expropriation of the private banks and the concentration of the entire credit system in the hands of the state will provide the latter with the necessary actual, i.e., material resources — and not merely paper and bureaucratic resources —for economic planning”.

Public ownership of all the big banks and high finance, without compensation for the big shareholders. Sack the bank bosses. Reorganise high finance as a public banking, mortgage, and pension service, under democratic and workers’ control. Organise the allocation of credit, under democratic control, to safeguard jobs and homes, and to expand public services. Reach out to organise international solidarity; campaign to open borders and level up workers’ rights and conditions internationally. Help the working class make itself an independent force in politics. Organise for a workers’ government.


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1 Comment

  1. David Walsh said,

    A long piece that I will read when I have time. Can I suggest that at some point we look at the arguments for Kondratiev / Schumpeter / Hall ‘Long Waves” driven by emerging technologies and their impact on the finance industries ?

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