The crisis has his origins in the "real" economy. Inequality is the ideological motor of neoliberfalism. German president Kohler described the financial markets as a monster. The metaphor has changed from market as rational subject to monster.
ECONOMIC CRISIS AND THE CRISIS OF NEOLIBERAL IDEOLOGY
By Vladimiro Guacche
[This article published in: Marxistische Blatter, Feb 15, 2009 is translated from the German on the World Wide Web, http://www.linksnet.de/de/artikel/24189]
“It is bitter but true, the world economy is in its worst phase since the great crisis of 1929.” When the editorial of a newspaper like the Frankfurter Allgemeinen hardly inclined to exaggeration ends with this sentence, the situation must be serious. It really is serious. The crisis strikes everything and everyone, the banks, industrial enterprises and states. The business papers have become war reports. In a single November 11, 2008 edition, the Financial Times reported about the “enormous losses” of Fannie Mae and AIG, thousands of destroyed jobs at Nortel and DHL, the nationalization of the Carnegie Investment Bank by the Swedish government, the drastic slowing-down of steel production in the Ukraine and the closing of many factories in China.
The extent of the crisis and its dramatic acceleration refutes all attempts to play down its significance and explain it with psychological or moral factors. As to minimizing, we recall an English property administrator was granted a guest commentary in the Financial Times on August 23, 2007, a few weeks before the outbreak of the crisis. He wrote: “History teaches this is just a bull market correction” and thereby confirmed the truth of the Hegelian dictum that history has never taught anyone anything. Psychologizing and moralizing explanations were and are widespread. On November 12, 2008, one could read in the Financial Times:
The crisis was caused by “human frailty”! A week later an article in the same newspaper rightly attacked the attempt to explain the crisis exclusively with “lax oversight authorities, inattentive rating agencies and greedy financial institutions.” Carelessness, inattentiveness and greed are clearly psychological “human-all-too-human” explanations. Who really believes the banks alone caused a crisis that already has inflicted trillion in losses?
Obviously the recourse to psychological explanations for the genesis of the crisis is in complete harmony with the neo-classical economics dominant today. This is also true for the assumption that a “massive loss of trust by investors and consumers” was the cause. Both are false. Strange to say, the chairman of the Federal Reserve, Bernanke, and the US Treasury secretary Paulson were the first victims of this superficial explanation emphasizing individual errors and carelessness. Their “case to case” intervention up to the bankruptcy of Lehman Brothers actually resulted from their stubborn idea of a crisis resulting from individual errors of some banks and their managers and their refusal to acknowledge that the problems were structural.
THE TRUE CAUSES OF THE CRISIS:
1. INEQUALITY
The scenario changed with the collapse of Lehman Brothers that could be called a “September 11 of the US financial system.” Panic spread on the international markets. The word “recession” appeared on the front pages of newspapers. People began speaking openly of an effect of the financial crisis on the “real economy.” This opinion is very popular and widespread even among leftists. It has the obvious advantage of splitting the opposition into wicked capitalists (financial actors) and good capitalists (industrial capitalists), into a “perverse” economy (finance) and a “sound” economy (the “real” economy). This interpretation may be comforting. Unfortunately it is wrong.
The crisis dynamic shows us things are different. The crisis has its origins in the “real” economy. The connection between the “real economy” and financial products is clear when we analyze the notorious sub-prime credits, which were the trigger of the crisis. One protagonist usually missing in official explanations is the increasing inequality.
On April 8, 2008 an important article appeared on the front page: “Return to the 1920s. Return to an unequal world.” The article began with these words: “The inequality between incomes in the United States has reached its highest point since the catastrophe year 1929.” It continued: “The most remarkable quality of the era of inequality and the free market that began in the 1980s is that there were few reactions to the stagnation of wages and salaries of simple people in many national economies of the developed world.” The numbers are impressive. Between 1979 and 2005, the pre-tax incomes of the poorest US families grew 1.3% annually and the middle class less than 1% while the richest 1 percent of the population increased 200 percent before taxes and 228 percent after taxes – per year! As a result, the incomes of the poorest fifth in 2005 amounted to ,300 annually after taxes, the middle fifth ,200 while the top one percent had over million.
In the years between 2002 and 2006, almost three-quarters of the growth of the total income benefited the top 1 percent of the American population. In 2005 according to the US Census Bureau, the inequality index of incomes reached its historical maximum. This was also true for Great Britain after Blair’s New Labor came to power in 1997. The income disparity has never been greater, according to data of the British government. The decline of the gross domestic product and the growth of the portion coming to profits is a tendency that strikes all countries of developed capitalism, as a study of the Bank of International Settlements made clear. In Italy, for example, the wage rate fell 8 percentage points from 1983 to 2005 while profits soared (from 23 to 31 percent of the GDP in this period).
Given these numbers, the astonishment of the Financial Times over the lack of reactions (and struggles) to this gigantic redistribution of wealth to the top is more than justified. However explanations are not lacking. Beside the relative strengths between the classes (brought out of balance by the competition of countries with very low labor costs), factors connected with the ideological triumph of capitalism doubtlessly played an important role. Neoliberalism/capitalism passed off its own horizon as the horizon of human history after the fall of the Berlin Wall and the implosion of command socialism in Eastern Europe. In the US, a factor of another kind was significant. The living standard of persons with medium- and low-incomes began to uncouple from the development of income. The real estate sector and sub-prime credits now come into play.
The expansive monetary policy pursued by the Fed and the policy of low interests encouraged the real estate crisis and simultaneously enabled families with low incomes to incur relatively favorable debts. The growth of real estate assets produced the feeling of growing wealth although the income in reality had not grown (something similar happened at the end of the 1990s with the stock market bubble of the “New Economy”). People could act again with credits and take out mortgages on houses to guarantee loans for consumption.
As Stiglitz wrote, “the real estate bubble stimulated consumption. Money was drawn out of the house at a “hectic rhythm as from a Bancomat while the savings accounts of families melted away.” Meanwhile the fruitful fantasy of big US credit institutions cooked up products for people without income, work or assets: the so-called “Ninja-credits” (“no income, no job, no assets”). These and other high-risk credits were the notorious sub-prime credits. These were really tranquilizers or financial drugs, which prevented the sinking incomes of the working US population (afflicted by falling profit rates) from ruining consumption. Thus the explosive growth of the indebtedness of American families (this indebtedness amounts to 93 percent of the GDP of the US) was a structural system necessity.
As we now know, the banks granted these credits and resold them – in packages with other credits of better quality. These credits packaged in expressly designed investment vehicles were offered to investors as debenture bonds with better ratings. This construction was perfect if one ignores a certain peculiarity that this whole house of cards did not collapse as long as the value of houses did not stop growing (as long as the purchased house rose in value and could be sold again with profit). Obviously this could not continue ad infinitum. In 2006 the US housing market began stagnating and ultimately collapsed. Even crafty bankers cannot have everything for themselves.
DEBTS DISGUISED AS LIQUIDITY
The rest of the story is well-known: the bursting of the bubble of the sub-prime credits caused the bankruptcy of hundreds of thousands of US families and struck the global financial system. Insolvent banks are forced to massive balance sheet corrections and the whole bond market is flooded by sell-offs. The assets requirements of banks prove inadequate for countering the risks. The banks do not give loans to each other any more because there is no trust in the solvency of their partners. The sudden fall of prices of stocks occurs repeatedly. Bailing out big banks in the US and Europe by the public authority became necessary.
So much for the chronicle. But why could the crisis of one product like sub-prime credits trigger a domino effect of this extent? The reason is very simple: The huge debt mountain was not only characteristic for American families. The financing lever was the basic characteristic of the functioning of the total system. The extreme use of this level was possible through low interests (in the US they were actually negative, below the inflation rate) and extremely permissive legislation (allowing investment vehicles outside balance sheets). One could actually take a credit with only of one’s own capital. This was a triumph of fictional capital.
The enormous liquidity on the markets was itself fictional; money lent by other actors was really involved. This is the reason why the whole construction design collapsed like a house of cards. To stuff the hole of the sub-prime credits, one had to open other holes. To pay one debt, one had to become indebted again. That was the history of these months. To paraphrase a well-known saying of Chairman Mao, imperialism has proven to be a paper-securities tiger. Liquidity, profits and profit margins were all fictional. When one began calculating the real capitalization of the banks, the debts and credits of business partners that cannot be collected any more, one noticed with horror that these were ridiculously low or negative.
3. STOCK MARKET SPECULATIONS AS “DOMESTIC CAPITAL EXPORT”
…All nations with the capitalist mode of production are… periodically seized by a swindle where they carry out moneymaking without mediation of the production process.” Henryk Grossmann described this phenomenon before the crisis of 1929. He saw stock market speculation as a kind of domestic capital export, parallel to “capital export abroad.” This rerouting or diversion of capital from goods production to speculative ventures is ultimately a consequence of the crisis of capital exploitation in the original sectors. A large number of productive enterprises realized profits this way in the last years. Multinationals like General Electric formed their own commercial branches for this kind of activity, in this case GE Capital. Even in the years before the crisis, General Electric made over 50 percent of its profits with this subsidiary. Therefore it is nonsense to speak of the “financial crisis” as different from something very independent, the “real economy” and its opposition.
IDEOLOGICAL CONSEQUENCES OF THE CRISIS
The more the crisis deepens and spreads; the anxiety of the establishment grows worldwide. That the system is on trial is increasingly clear. Today’s capitalism is accused. With its ideology, the present crisis inflicts terrible blows that pulverize and destroy the ideological successes of yesterday. Here are several examples:
1. INEQUALITY AS A PROBLEM
We witness the fall of one of the linchpins of the dominant ideology that sees the motor of the economic system in inequality. On one side, this could be an expression of the different merits and abilities of individuals in healthy competition with each other and on the other side a stimulus to improve to become more efficient and competitive, to increase one’s assets and climbing the social ladder. The opposite is true, as the most recent events tell us: inequality makes clear the structural injustice of the capitalist economic system, reveals its immanent laws and threatens crisis. Inequality triggers chain reactions that touch the nerve center of the financial world. What Marx observed is also true for the present crisis: “The ultimate cause of all real crises is always the poverty and limited consumption of the masses over against the driving force of capitalist production. Productive forces develop as though only the absolute consumption capacity of society were their only limit.
2. FROM STATE AS PROBLEM TO STATE AS SOLUTION
The main ideological fetish of the last twenty years has been the market. Ideologues convinced us the market was the author of everything good in our world while the state could only destroy this work. When the crisis came, the miracle occurred. Suddenly the “visible hand” of the state is not only desired but is practically implored by very unexpected voices. The Financial Times had no objection to the nationalization of the English bank Northern Rock facing bankruptcy or the Bank of England’s 50-billion pound support for the banks in government bonds exchanged for real estate credits.
After the chairman of the Federal Reserve, Bernanke, refinanced commercial banks that ran into problems and accepted 0 billion of sub-prime credits as a guarantee for their financing, he justified the bailout of Bear Stearns Bank by saying this really involved “bailing out the market”… But the surprises are unending – from financier George Soros who rants and raves against “market fundamentalism” to the former Italian minister Domenico Siniscalco (today with Morgan Stanley) praising the “pragmatic” and anti-ideological attitude of those who abandoned “the dogma that the market can solve all problems,” Paul Samuelson emphasizing “necessary budget discipline” to the editor of Republica, Ezio Mauro who sees the end of the “ideology of a universal market without a state and without a government.” The “converts to the interventionist state” – as the German sociologist Ulrich Beck calls them – cannot be counted any more.
When the Paulson plan to buy banks’ toxic assets was launched, the headline of the Financial Times gloated: “Global markets roar in approval,” beginning with the financial markets. A few days before, Paulson himself gave the signal to end the myth of the self-healing market when he refused to prevent the bankruptcy of Lehman Brothers with a solemn assurance: “The market must take care of the market.” All the stock exchanges responded in unison with a dramatic crash.
3. THE MARKET AS MONSTER: DEREGULATION ON TRIAL
The model of deregulating markets started by Reagan in the 1980s has fallen into an irreversible crisis. The President of Germany (and former director of the International Monetary Fund) Horst Kohler urgently warned of the gravity of this crisis: “The international financial markets have developed into a monster that must be put in its place or cut down to size.” What many knew can now be said openly and clearly: the “self-regulation” of the markets always means “lack of regulation.” In the Financial Times, the demand “let the market order things” has lost all credibility. Tommaso Padoa Schioppa now speaks of the “crisis of an ideological assumption of the economy, that the markets are always right and need no incursions.” He argues “the crisis originated from the inability of the market to make `just’ assessments day after day.” In short, the rationality of the market has simply gone to hell. It is no accident that the anthropomorphic metaphor of the market as a rational subject, one of the themes of the neoliberal ideology of the last years, has given way to the frightening monster-metaphor.
4. THE CRISIS OF THE LEGITIMACY OF THE MARKET
A legitimacy crisis of the market looms on the horizon parallel to the growing necessity of state interventions in the economy – parallels can be found in the time of the Great Depression. “The political legitimacy of the market economy” begins to sway. This legitimacy crisis is so serious the Financial Times devoted an editorial to the “Praise of Free Markets.” In a very anxious editorial, the Frankfurter Allgemeine newspaper admitted the sad fact that “the financial crisis shatters trust in the market economy.” It is not an accident that the comparison between the fall of the Berlin Wall and the fall of the walls of Wall Street is made ever more frequently. Anthony Giddens, one of the theoretical fathers of Tony Blair and New Labor, said, “we stand at the beginning of a new era, a little like 1989 and the fall of the Berlin Wall.” The Financial Times published a page on the exciting theme “Does the Free Market Corrupt Morals?” The answer of the interviewed “experts” was naturally negative but the page is doubtlessly a sign of the times. A reader’s letter with the bold title “Capitalism is not an unconditional dogma” published in the same paper is even more amazing.
5. CAPITALISM IS HIDDEN BEHIND THE “MARKET”
In reality, “market” means “capitalism.” When neoliberal ideologues speak of “market,” they do not mean first of all either the free exchange of goods or free competition. They mean property rights: the right to private ownership of the means of production. They mean capitalism. That is the translation of terms like “market society,” “free enterprise system,” “market economy system,” “market system” and above all “market economy.” We are not the only ones who recognize this. Years ago the president of a leading Italian bank spoke of the “dominant economic system – once called capitalism and today market system.”
What is the background for this redefinition of capitalism as market? This is explained very well in one of John Kenneth Galbraith’s last essays: “In his time,” Galbraith recalled, “Capitalism was the definition of the existing economic system that also included the reference to economic and political power. Trade capitalism, industrial capitalism and financial capitalism were distinguished.” Then the term “market system” was successfully naturalized in the US after the Second World War. The reference to the market as a kind alternative to capitalism is a cosmetic, meaningless and insipid reference invented to hide an uncomfortable reality… No one rules the market, neither individuals nor businesses. No form of economic hegemony is admitted. Marx and Engels seem to have never existed. There is only the impersonal market.”
6. ATTEMPTS AT DEFENSE
Ideological defenses of the market that assume problems are due to its deficiency are obviously not lacking now. That markets create problems is sometimes denied. So wrote an important European financier in a letter: “A jumble of transaction channels are described as `financial markets.’ Three-quarters of these channels are artificially segmented and completely inscrutable domains of a few mammoth oligopolistic banks that owe their position to the distortions of “too big to fail.” In short, it is almost “shameful” to describe these channels as “markets.” A variety of capitalism is said to have fallen into crisis, not capitalism. According to this approach, there are “market mechanisms” on one side and their “perversions” on the other side. There is the ideal of the “perfect competition market” and what hinders this ideal from the outside. Some readers will recognize this pattern. It was applied in Brezhnev’s Soviet Union. Seen this way, today’s apologists of “real capitalism” are not very innovative.
Another line of defense consists in the strange reversal of the use of the term market for euphemistic ends. For example, when Joseph Stiglitz emphasizes, “The fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism,” this is clearly an asymmetrical comparison (why doesn’t he speak of “capitalism”?). The market is set in a devalued context to bailout capitalism. In this way, capitalism is protected from its critics without being named. The French Prime Minister Fillon said what happens on the financial markets through the machinations of US “financiers” leads to a misguided (devoiement) capitalism. The market is abandoned here apart from the juxtaposition of “ideal” and “real” capitalism. The straw man is left to its fate to be exposed and “burnt” like the spy in a Le Carre novel.
CONCLUSION
The true relation between market and capitalism should be clarified. This is very important to counter neoliberal ideology and put in question its hegemony in the field of terms and strategic concepts. Most importantly, the term market must be freed from the ideological content wrongly ascribed to it. The market is a place, not a subject (neither a rational nor a monstrous subject), a place where something is exchanged (shares, information). Markets have always existed. By definition, every market needs rules to function. Therefore the opposition of state and market is absurd. The state actually sets the rules according to which the market functions. The functional rules imposed on the markets by the mode of production in which they operate and by existing class relations are crucial. The state’s identification of the more or less rigid rules involves the relations between the classes. For example, a deregulated labor market like the present market is the consequence of relative strengths of the last decades unfavorable for workers. In the strict sense, a “free market” does not exist (every market follows certain rules). The deregulation of the financial services carried out since the 1990s in the US and then in Europe corresponded to certain class interests. Deregulation was expedient for the current phase of the development of capital and agreed with its general need to be as free and mobile as possible.
This is real existing capitalism, whether you like it or not. And it has declared bankruptcy.
RELATED LINKS
www.capitalismhitsthefan.com
www.socialistproject.ca
“Ten Articles by Elmar Altvater”
http://labs.daylife.com/journalist/elmar_altvater
Original: Economic Crisis and the Crisis of Neoliberal Ideology