Capital in Crisis

Capital in Crisis

Capital in Crisis : Causes, Implications and Proletarian Response Crises are endemic to capitalism, but each particular crisis has its distinctive features and implications. The present one has its roots in the economic slump of 1970s. To counter stagnation in the ‘real’ or productive economy, big capital, particularly in the US relied on financialisation, generating one growth bubble after another. But bubbles inevitably burst, bringing the fundamental economic problems back to the surface. New and bigger bubbles lead to still greater financial crises and worsening conditions of production, in what has now become a vicious cycle. The book in your hand shows exactly how this happened in the present case and adds a backgrounder on the dot-com bubble burst a few years ago and the Great Depression of 1930s. To help you arrive at your own judgement, a chronology of major economic events during the last two years and a glossary of relevant technical terms have been appended. You can also read how the Federal Reserve chairman under President Roosevelt — the real architect of the New Deal — analysed the causes of the Great Depression and what George Soros has to say on the recent “financial meltdown”. And of course, the whole discussion is constructed on Marx’s essential observations on capitalist crisis. If you really wish to go deep into the causes and consequences of the unfolding crisis,...

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Collapse of the Colossus

“For many a decade past, the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that, by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. …In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism… And why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. … And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.” — The Communist Manifesto (1848) “The contradictions inherent in the movement of capitalist society impress themselves upon the practical bourgeois most strikingly in the changes of the periodic cycle, through which modern industry runs, and whose...

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World Recession despite Bailouts

A total meltdown has been prevented – well, for now. But thanks to highly efficient networking by IT-enabled services and thorough integration of financial markets, the contagion spread at electronic speed all across the planet and soon affected the real economy too. Financial institutions, in the US and Europe in particular, still have no idea of what they are sitting on. That is to say, they do not have any estimate of the reliability of their assets base, which include unknown but large quantities of toxic securities. This has led to a reluctance of banks to lend to each other and to private individuals or firms. Liquidity in the real economy has thus dried up leading to a slowdown, which is further aggravated by declining consumption on the part of US citizens shaken by foreclosures and end of credit-dependent spending spree. And thanks again to successful globalisation, (in the sense of capital’s success in the “conquest of new markets and… more thorough exploitation of the old ones”) this time around there is no country like the erstwhile Soviet Union to escape from the grip of...

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Understanding the Credit System

Today it is no longer a story of a mere “credit lock” or problems in the “new” or “FIRE” sectors; the rot has already reached the roots of old economy. Still, since the epicentre of the tremor and its aftershocks lies in the financial sector and given the supreme importance of this commanding sector, our investigation into the causes of the crisis should begin from here. Evolution of the Credit System At one time the role of credit – of dealers in credit or financiers – was basically to “grease the wheels” of industry and commerce which turned out real goods, infrastructure and services. But gradually their role expanded. In Capital, particularly in “Book III” which discusses “The Process of Capitalist Production As a Whole”, Marx dwells at length on a vast range of subjects like the role of credit, relation between money capital and real capital, fictitious capital and speculation and so on, which are directly relevant to the topic before us. “… [A] large portion of this money-capital”, Marx says, “is always necessarily purely fictitious, that is, a title to value – just as paper money.” [Capital Volume III, p 509] He speaks of “a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance...

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Beneath the Surface Froth: Marx on Crisis

Before we proceed, however, we should recall that Karl Marx had to take leave of the international proletariat before he could systematically work up a comprehensive theory of capitalist crisis. Capital Volumes II and III, Theories of Surplus Value and Grundrisse were not made ready for publication in his lifetime; nor could he take up his plans for investigating various other facets of capitalist economy and polity. Naturally there is a wide array of differing interpretations of Marx’s theory, with Luxembourg for example differing with Lenin, and Ernest Mandel arguing against Paul Sweezy and others. Available space does not permit us to review the rich and continuing debate among these schools; we can only present here in barest outline what we believe to be the basic Marxian approach towards understanding capitalist crises. The Ultimate Reason Take a look at the quotation from the Communist Manifesto with which this pamphlet begins. Marx and Engels talk of an “epidemic of overproduction”. This is overproduction of commodities relative to effective demand: more is produced than can be sold. Thanks to inadequate purchasing power of the masses, a big chunk of commodities remain unsalable and drag their owners (producers/traders) down to ruin. This characteristic feature of capitalism led Marx to remark, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive...

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Overaccumulation and the Current Crisis

Do the theoretical expositions in Capital tally with the actual working of capitalism today? Behind the familiar crisis symptoms – we learned in our brief dialogue with Marx – lurks a complex interplay of myriad forces, the most important being the tendency of the average rate of profit to fall with rising organic composition of capital and increasingly skewed distribution of income and wealth. There is no dearth of data supporting this: data showing, for example, falling profit rates and stagnant/declining wage levels vis-à-vis corporate profit explosion in recent decades. Marx also shows that capital’s frantic endeavour to overcome inherent constraints like mass poverty and inadequate demand leads to artificial credit-induced expansion. But this false prosperity built on debt always bounces back in the shape of sudden contraction or crisis, much like a rubber band getting stretched and snapping back. This phenomenon, witnessed much more vividly today than in Marx’s time, is called a bubble – something that is empty and without substance; a hollow growth that is transient by definition. Bubbles in other words result from efforts to “grow the economy” by means of debt, faster than is warranted by the underlying flow of new values generated in production and get deflated sooner rather than later. Such was basically what happened in the “roaring twenties” that ended with the Wall Street crash of October 1929. But the more...

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Long Term Implications and Proletarian Response

The most important message from the unprecedented financial catastrophe and its aftermath is that global capitalism’s strategic response to the crisis of 1970s has failed. That was a three-pronged strategy comprising deregulation/neoliberalism or market fundamentalism, globalisation and financialisation. Since these have been the three pillars on which post-1970s capitalism stood – and, in a certain sense, and in certain parts of the world, flourished – the extensive damage they have suffered have left the whole imposing edifice tottering. Survival Strategies at Stake After a so-called golden age of capitalism (roughly a quarter century after World War II), the crisis of overproduction struck back with a vengeance. Old remedies like relying on the military-industrial complex and the war economy were proving to be inadequate or counter-productive. As a study released by the Centre for Economic and Policy Research, Washington, in May 2007 showed, after an initial demand stimulus, the effect of increased military spending turns negative by about the sixth year. With the US economy burdened with growing ‘defence’ spending for decades on end, by 1990 the value of the weapons, equipment, and factories devoted to the Department of Defence was 83% of the value of all plants and the equipment in American manufacturing. A clear case of military industries crowding out civilian industries, this led to severe economic weaknesses. There was no question of abandoning military Keynesianism, of course....

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Timeline of Trouble

2007 February–March: Subprime market in trouble with several subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale. March 6: Ben Bernanke, quoting Alan Greenspan, warns that the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, were a source of “systemic risk” and suggest legislation to head off a possible crisis April 18: Freddie Mac fined $3.8 million by the Federal Election Commission as a result of illegal campaign contributions, much of it to members of the United States House Committee on Financial Services which oversees Freddie Mac. June 20: Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds that were involved in securities backed by subprime loans. July 19: Dow Jones Industrial Average closes above 14,000 for the first time in its history. August 6:American Home Mortgage Investment Corporation (AHMI) files Chapter 11 bankruptcy. August 9: French investment bank BNP Paribas suspends three investment funds that invested in subprime mortgage debt. This would be followed by many credit-loss and write-down announcements by banks, mortgage lenders and other institutional investors. The European Central Bank pumps 95 billion euros into the European banking market. August 10: Central banks coordinate efforts to increase liquidity for first time since the aftermath of the September 11, 2001 terrorist attacks. The United States Federal Reserve (Fed) injects a combined 43 billion USD, the European Central Bank...

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Glossary

Orange County On December 6 1994, Orange County, a prosperous district in California, declared bankruptcy after suffering losses of around $1.6 billion from a wrong-way bet on interest rates in one of its principal investment pools. Robert Citron, the hitherto widely respected Orange County treasurer who controlled the $7.5 billion pool, had invested the pools funds in a leveraged portfolio of mainly interest-linked securities at great risk. This was the largest financial failure of a local government in US history. Subprime Lending This involves financial institutions providing credit to borrowers deemed “subprime” i.e., those who have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with paltry incomes or a recorded bankruptcy, or those with limited debt experience. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards. Foreclosure Foreclosure is the legal proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a mortgagor’s equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. Securitization Securitization is the process of creating a more or less standard investment instrument by pooling assets to back the instrument. Financial institutions take an illiquid asset, or group of assets, and through financial engineering,...

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Looking Back

In many ways the current crisis constitutes the second — and higher — stage of the one that appeared with the “dot-com bubble burst”. And it is not without reason that it is being compared to the GD of 1930s. To better understand the present, let us therefore take a short and a rather long look back. The Dot-Com Bubble Burst Also known as “I.T. / New Economy bubble”, the “dot-com bubble” was a speculative bubble covering roughly 1995–2000, during which stock markets in Western nations saw their value increase rapidly thanks to growth in the new Internet sector and related fields. The period was marked by the founding of a group of new Internet-based companies commonly referred to as dot-coms. They relied on harnessing network effects by operating at a sustained net loss to build market share or “mind share”. These companies expected that they could build enough brand awareness to charge profitable rates for their services later. The motto “get big fast” reflected this strategy. During the loss period the companies relied on venture capital and especially initial public offerings of stock to pay their expenses. The novelty of these stocks, combined with the difficulty of valuing the companies, sent many stocks to dizzying heights and made the initial controllers of the company wildly rich on paper. Historically, the dot-com boom can be seen as similar to...

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