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by Lucas Zeise
Saturday, Aug. 15, 2009 at 10:36 AM
Investments of the state in the infrastructure, in educational- and social services, are urgently necessary. One positive aspect of the crisis is that the financial sector has begun to shrivel. The shriveling of the financial sector must be accompanied and controlled by the state.
WAYS OUT OF THE CRISIS
By Lucas Zeise
[This article published in: Marxistische Blatter 2/9/2009 is translated from the German on the World Wide Web, http://www.linksnet.de/de/artikel/24166.]
Is this the crisis of capitalism? It does not look that way. The active counter-acting forces of capital are absent. Is this merely a crisis of capitalism, one of its countless crises? We face a systemic crisis of capitalism, more than one of its ever-recurring cyclical crises in the ups and downs of the economy, the swelling and dying away of the reserve industrial army (of the very usual unemployment). In other words, the growth- or accumulation model practiced up to the outbreak of the crisis cannot lead us forward any more. This model has had its day, it seems.
Still this model will not fade away by itself or be automatically replaced by a more radiant capitalism model. Like all of those unpleasant qualities that damage human life in very concrete material ways, this crisis adds unemployment and poverty to the ordinary plague of an uncertain future. Ways out of the crisis must be sought and found. To this end, a brief sketch is first offered on how the world economy fell into its current precarious situation.
The neoliberal model of capitalism arose out of a crisis of capitalism, similar to today’s crisis, in the late 70s of the 20th century. The previous economic-political model was marked by Keynesianism and was oriented in a partial satisfaction of the working class. State funds were used to strengthen national capital accumulation. Some described the greater work productivity gained with long assembly lines in mammoth industrial firms as “Fordism.” This previous growth model ended because of a mixture of inner contradictions (rising inflation, falling dollar) and outer resistance (relatively strong socialist camp, Vietnam’s victory, increasing raw material prices). On the official political plane, the governments of Thatcher (in Britain from 1979 to 90) and Reagan (in the US from 1980 to 88) marked the beginning of neoliberalism. The Federal Reserve head Paul Volcker appointed by the democrat Jimmy Carter in 1979 introduced the phase of neoliberalism with a radically restrictive high-interest policy. Today the old Volcker is a close economic advisor of the new US president Barack Obama.
Four striking characteristics distinguish the neoliberal capitalist economic model:
It aims at increasing capital profits more radically and directly than the previous model. To this end, unions are systematically weakened. The state applies pressure on wages. From a Marxist perspective, raising the net profit rate is attempted with all means.
National protection for the goods trade is systematically dismantled to favor stronger capital and speed up monopolization.
Transnational corporations build production facilities first in industrial countries and after 1989/90 in countries of the 2nd and 3rd world in the framework of globalization. Workers and natural resources are bought cheaply so the fruits of higher productivity completely benefit the capital side.
Lastly, a fast-growing financial sector arises in the center of the neoliberal model. This financial sector is the result of unequal income distribution since growing profits come to a few in investments outside the production sphere. Conversely, speculation in the financial sector raises capital profits.
UNEQUAL INCOME DISTRIBUTION
The financial sector has grown much more intensely than the rest of the economy on account of increasingly unequal income distribution. In its turn, this sector is an instrument of this redistribution from bottom to top. The instruments and institutions of the financial sector help concentrate the profits branched off from the work of many into the caskets of a few. The high profits realized in the financial sector lead to capital seeking investments flowing mainly into the financial sector while investments in the real economy remain meager. This is one reason why economic growth was low in the phase of neoliberalism. A more important reason is the tendency of stagnating or generally weak demand. All highly developed capitalist countries have to wrestle with this problem. This problem also has a simple cause, the increasingly unequal distribution of income. The demand of households does not grow since the income growth of lower wage groups in society is trifling – thanks to the systematic destruction of the power of unions. Since demand for consumer goods stagnates, the neoliberal economy chronically heads into an under-consumption or over-production crisis. These terms coming from Karl Marx describe how produced goods cannot be sold at the end, contrary to what the middle class (and neoliberal) economics tells us. The market is not cleared off. Too much is produced relative to the paltry demand. Too little is consumed relative to the supply of goods.
In feverish speculative phases, this tendency of the neoliberal economic model to stagnation and under-consumption is ignored. The wealth in the hands of speculators exploding with rising prices rubs off on the rest of society. The increasingly rich speculators demand more luxury goods. They build houses and palaces and furnish them. The solvent demand for Porsches, real estate and flights in business- or first-class soars. The real economy is also stimulated. When the speculation bubble bursts, this demand drastically shrivels.
Insane speculation always circles around a good or group of goods. The state debts of Latin American and other developing countries were the objects of the great speculation waves in the phase of neoliberalism toward the end of the 1970s. This bubble burst in 1982 when Mexico became insolvent. The following period is regarded today as the lost decade for Latin America.
Speculation in Japanese stocks and real estate reached its peak at the end of the 1980s. This bubble burst at the turn of the year 1989/90. The Japanese economy that had grown enormously and was the object for this speculation wave fell into a stagnation phase that was only interrupted from time to time by recessions. Up to today Japan has not recovered.
In 1997 speculation collapsed on the booming economies of the Asian tiger states (South Korea, Taiwan, Hong Kong, Singapore, Thailand and Indonesia). The economic consequences of this financial crisis mainly affected these countries. They suffered serious recessions. One late consequence was the Russian crisis. In its train, the hedge fund LTCM crashed that was directed by two Nobel Prize winners for economics and had to be bailed out by the US Federal Reserve.
The last speculation crisis struck the international stock exchange, especially Internet- and telecommunication stocks. The rise in prices of these stocks up to the spring of 2000 was very spectacular. The following crash lasted two years. As a consequence, investments drastically declined. In Germany, the recession- and stagnation period continued until 2005. That was the longest stagnation period after World War II.
The object of the current financial crisis is the US economy. Speculation occurred with the mortgage credits of average Americans. US households whose wage incomes stagnated like their colleagues in other countries financed a growing share of their ongoing consumption with growing indebtedness. Thanks to the powerful demand, the growth in the US was constantly higher than in Europe or Japan. Since households have a weight of 70 percent in the US economy and the US is still the largest economy of the earth by far with 30 percent of the world social product, the demand revived by indebtedness acted as an effective motor of the world economy. Up-and-coming China established itself with an export industry geared for rapid growth. Other export countries like Japan and Germany provided most of the investments all over the world but were also indirectly dependent on the constantly increasing demand for consumer goods in the US. Summarized concisely, speculation made possible the indebtedness of the US and counteracted the tendency of economic stagnation arising out of the under-consumption of the broad masses in societies marked by growing inequality. When the financial crisis erupted, international capital stopped financing the consumption of US households. US consumption stopped growing. Because of slackening demand, the US economy fell into recession at the end of 2007. It took nine months until the weak demand was also reflected in the orders to the German export economy. This was inevitable. The US (and several other countries like Britain) had ultimately kept the world economy going with their import demand,
The resulting worldwide economic crisis is the typical under-consumption crisis where effective demand is lacking. Wage-earning consumers do not shop because they lack money. Businesses do not invest because sales chances are meager. Banks do not give any credit because they worry about repayment in light of gloomy business prospects and because they expect even more holes in their balance sheets from their old speculative engagements.
CLASSICAL LIQUIDITY TRAPS
This is the classical situation where speculators and investors seek cash where previously abundant credit is no longer granted and received. John Maynard Keynes described this as a “liquidity trap.” It is a trap because the Federal Reserve can lower the interest as much as it wants. This does not help any more when demand is lacking. In this classical situation, the state should intervene. Unlike businesses and households, the state alone can act in the midst of the crisis when business prospects are depressing. The state can undertake spending, make investments, stimulate demand and become indebted.
Since we face a worldwide economic crisis with falling global demand, a whole series of states will have to venture economic programs, not only one country. States like the US or Britain that promoted and fueled demand with increasing indebtedness in the boom should now act more reserved. Others like Japan, China and Germany whose economic policy was oriented at advancing their export economies and keeping their domestic markets small and miserable through a restrictive monetary-, social- and fiscal policy should generously expand their state indebtedness and effective demand. They could reduce their export surpluses or, expressed differently, stimulate the world market a little on the demand side. Japan, Germany and China are the largest economies of the earth after the US. All three countries post enormous export surpluses. The profits accumulated in these countries were the essential drivers for the financial boom. A tilt in the economic policy of these three countries promoting their domestic markets would probably soften and shorten the great recession all over the globe.
Unfortunately almost the exact opposite of the envisioned division of labor has actually occurred. Only China with the announcement of a gigantic economic program of more than 0 billion has shown an intention to carry out the tilt from the one-sided export industry to strengthening its own domestic market. Otherwise just the US and Britain will get the economy back in shape from the demand side with state funds. In the vague announcements of the Obama government, an economic program of a trillion dollars over two years is outlined. In Britain, the government already resolved lowering the sales tax by 2.5 points. In these two countries, the governments try to stimulate demand with all their vigor. In these countries, the financial crisis focuses people on the necessary restrictions of consumption. Industrial- and trade-capital concentrate on their own domestic market as a sales area so the old times are brought about again with the old means.
The opposite happens in Germany. Here up to the establishment of the bank screen, state economic action was taboo. A little economic package was presented that could not be an economic program on account of the taboo. At the CDU-party day in Stuttgart, chancellor Merkel chose the Schwabian housewife as a model of economic policy because the housewife knows one can not spend more in the long run than one receives. Minister of finance Peer Steinbruck censured the British government for its law dealings with money. Appealing to basic housewife and merchant virtues is very popular. The government of the Great Coalition does well in the polls. The law dealing with tax funds in the bailout and attempts to pep up German banks seems forgotten. The reason for the German government’s refusal to use state funds to stimulate demand was that it ran counter to the ingrained tried and tested strategy of German capital in the narrow sense. Strengthening consumer demand would benefit foreign suppliers on the German market. If this strengthening would occur through improved income of the broad masses, the situation of workers and employees would improve on the labor market. The pressure on wages so successful for German capital would be reduced. For this reason, Keynesian prescriptions of containing crisis are scorned in Germany.
AVERSION TO STATE DEBTS
Up to the left and the Marxist left, there is a basic rejection of Keynesian crisis containment by raising state debts. Both the higher state debt and the higher demand on commodity markets brought about by state spending keep up the profit mongering that had come to a standstill. Disparaged as blatantly scandalous, state debt is an essential source of the profit of the financial sector. This statement is just as trivial as the statement that banks generally make profit with the money of other capitalists and wage earners with their assets and their debts. State economic programs only prevail insofar as money comes from higher taxation of the income and assets of the truly rich. In the crisis, both the assets and income from these assets shrivel. This is ultimately the core of every exploitation crisis. Legislation and implementation of radical income and assets and tax reforms will increase state revenues in two years.
The left and/or unions try to keep capitalism going. Capitalism’s vitality is crucial. Mitigating the current over-production and under-consumption crisis is imperative so a sharp recession does not become a deep long-lasting depression. One should not be surprised that tax cuts for the rich and subsidies of all kinds for powerful corporations are resolved and carried out by concrete governments in the name of Keynesian economic stimulation. There are also bad economic programs. Still the general demand for the state strengthening demand is not wrong. Demands and measures to strengthen the real incomes of wage earners, unemployed and pensioners are reasonable. Pension increases, higher rates for Hartz IV recipients, higher wage contracts in the Public Service, lowering the sales tax and issuing consumer vouchers are sensible. In the short term, these measures will have a positive effect on consumer demand. They work to combat the basic evil, the glaring inequality of incomes. Investments of the state in the infrastructure, educational- and social services are urgently necessary. These measures can also be counted among the classical measures that could support effective demand through the roundabout way of public contracts or hiring more personnel in the Federal government, states and communities.
CONTROL OF THE FINANCIAL SECTOR
One positive aspect of the crisis is that the financial sector has begun to shrivel. 2 trillion dollars (1.4 trillion euro) has already been destroyed in capital accumulated in banks and assets according to different rough estimates. An unknown number of hedge funds and private equity funds have abandoned their businesses and given back the collected money to their rich clientele. This is probably only the beginning of a long lasting shriveling process. The enormous sums that governments and central banks have pumped into the banking system counteract this process. They hope to preserve the banks from insolvency and bankruptcy and enable them to grant credits. Bailing out important relevant banks is a sensible goal of politics. The bankruptcy of a large bank would have disastrous consequences for payment transactions and for the survival of all other financial institutions at least in one currency zone. However the gigantic sums now spent are not necessary. The second goal also cannot be reached with the enormous transfers. Even balanced sound banks only give credits very cautiously because a wave of bankruptcy is imminent in the whole economy according to general opinion.
The shriveling of the financial sector must be accompanied and controlled by the state. Since awarding credits has come to a standstill, state guaranteed credits are vital. This means two things: a kind of state investment planning (where the state decides who receives credit guarantees and who does not) and a strengthening of public savings banks and non-profit cooperative banks that regulate awarding credits in a small volume area as in the past. Public regional banks must shut down their fraud departments if they have not already done this. They will survive if they succeed in taking over big credit businesses from the big private banks that should be savings banks. The takeover of private banks and/or insurances by the state may be necessary. But without control possibilities, taking over assets by the public authority is a step without great importance.
On the other hand, control over the largest public financial authority, the central bank, is crucial… The German Central Bank is concretely responsible for monitoring banks in Germany. It has observed this responsibility very one-sidedly in the interest of the profit maximization of banks. An effective control of the financial sector will not succeed without removing the independence of the German Central Bank and the European Central Bank (including the corresponding EU-agreements).
By its nature, the control of the financial sector by state authorities would not be very hard. In principle, it is not any different than business oversight. What is still lacking is political will. Two principles are important. The first stresses an effective watertight limitation on credit. The old national credit system law and national capital holding regulations according to which a bank may not award more than 12 ½ times its own capital in credits must be established. This must be true for guaranteed credits and for securities. Any exceptions for businesses off the balance sheets cannot be allowed. Institutions similar to banks like hedge funds must also be subject to this rule.
Secondly, the freedom of capital transactions must be restricted. This touches a salient point in the accumulation regime of neoliberalism. It took a long while for this freedom of capital to prevail. Without restricting this freedom through national (or international) institutions, the speculation excesses of the financial sector cannot be avoided. The necessary limitation of awarding credit would not be possible. The argument around this question may be severe. The freedom of capital transactions in the Europe of the EU ultimately has the status of the highest constitutional principle. Making this question into the central issue of the elections for the EU parliament is therefore crucial.
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