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 and stock speculation” and of “fictitious capital, interest-bearing paper” which “is enormously reduced in times of crisis, and with it the ability of its owners to borrow money on it on the market.” (Capital, Vol. III, p 493). If this sounds contemporaneous, so would the anxiety expressed by the British “Banks committee” – a predecessor of various expert committees and monetary authorities of our day – exactly 150 years ago regarding the fact that “extensive fictitious credits have been created” by means of discounting and rediscounting bills “in the London market upon the credit of the bank alone, without reference to quality of the bills otherwise.” (ibid, p 497, emphasis ours).
Junk securities, then, are no invention of our Wall Street-wallahs! In Marx we also find the following passages which, with a bit of updating as suggested in square brackets, may help us understand what happened in September-October 2008:
“Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.
“In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur – a tremendous rush for means of payment – when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange [add here the modern credit instruments– AS] into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsalable, or returns that can never more be realized again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, May 7, 2024 give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere …” (ibid, p 490, emphasis added).
Imperialism as Domination of Finance Capital
However, it was only with the advent of modern imperialism, a parasitic and decaying system marked by new features like all-round monopolisation, export of capital outweighing export of commodities, the rise of the financial oligarchy etc. that money capital metamorphosed into finance capital and attained a much more influential position:
“Imperialism, or the domination of finance capital, is that highest stage of capitalism in which the separation [“of money capital … from industrial or productive capital”] reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially ‘powerful’ states stand out among all the rest.”
“… [The] twentieth-century marks the turning point from the old capitalism to the new, from the domination of capital in general to the domination of finance capital.” (Lenin in Imperialism; emphasis added)
Now what is finance capital? Basically it is the coalescence of bank capital and industrial capital, said Lenin, and today perhaps we should include commercial capital as well. This coalescence, however, internalises a good amount of tensions and contradictions between the different sectors which maintain their special identities and interests. Modern banks, Lenin showed, concentrated the social power of money in their hands, and began to operate as “a single collective capitalist”, and so “subordinate to their will not only all commercial and industrial operations but even whole governments.” Also important in this context was the three-way “personal link-up” between industry, banks and the government.
Elaborating on the new stage, Lenin wrote:
“The development of capitalism has arrived at a stage when, although commodity production still ‘reigns’ and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the ‘geniuses’ of financial manipulation. At the basis of these manipulations and swindles lies socialised production, but the immense progress of mankind, which achieved this socialisation, goes to benefit… the speculators.”
This separation of money capital from productive capital and this supremacy continued to grow, with the result that today we see “a relatively independent financial superstructure … sitting on top of the world economy and most of its national units”. That is to say, there is now an “inverted relation between the financial and the real”, where “the financial expansion feeds not on a healthy real economy but on a stagnant one” (Paul Sweezy, “The Triumph Of Financial Capital”, Monthly Review, June 1994).
Explosion of Credit and Speculation Today
The relative weight of the financial sector in the globalised international economy thus increased steadily all through, but very disproportionately since the 1980s, facilitated by neoliberal deregulation and the information revolution. Of this, by far the largest and fastest growing component is made up of speculation and other reckless activities: derivatives trade, hedge fund activities, sub-prime loans (see glossary in Appendix II) and so on. According to the Bank of International Settlements, as of December 2007, the total value of derivatives trade stood at a staggering $516 trillion. This has grown from $100 trillion in 2002. Thus, this shadow economy is 10 times larger than global GDP ($50 trillion) and more than five times larger than the actual trading in shares in the world’s stock exchanges ($100 trillion).
Trade in derivatives and generally in stock and currencies involve the self-expansion of money capital. As Marx had pointed out, making money out of money without going through troublesome production processes has long been a cherished ideal of the bourgeoisie and in recent decades that ideal has been ‘brilliantly’ put into practice. This is where speculative activities differ essentially from the role played by finance capital, originally defined as “bank capital, i.e., capital in money form, which is … actually transformed into industrial capital” and is operated by “financial oligarchies” (Lenin in Imperialism, chapter III, “Finance Capital and the Financial Oligarchy”).
In the present context, speculation is trade in financial instruments with the goal of making fast bucks; or to be more precise, buying and selling of risks. Commercial banks, investment banks and insurance companies deal in both industrial financing and speculation – in real life the two categories are thus lumped together – but in terms of specific economic role performed they are very different. Traditional credit and production-oriented finance capital serves the real economy – agriculture, industries, services, where wealth is produced and people get jobs – whereas speculative capital produces no real wealth.
As we have seen, top bankers in the mid-19th century cautioned about “extensive fictitious credits” and Marx talked of “over-speculation”. John Maynard Keynes in the mid-1930s warned, “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” (The General Theory of Employment, Income and Money).
Despite the warnings, and whatever the social costs, speculation has been highly rewarded by the state and other institutions of the capitalist class. Because decaying capitalism or imperialism discovered in it one of the most – if not the most – lucrative escape routes from the crisis of overproduction/over-accumulation that resurfaced since 1970s. In 1997 the Nobel Memorial Prize in Economic Science was awarded to America’s Robert Merton and Myron Scholes, who had just developed a model for pricing “derivatives” such as stock options. This model or technique was expected to help speculate ‘scientifically’ and reap mega profits safely. It was a different story though, that the Long Term Capital Management – a hedge fund where Merton and Scholes were partners and which worked according to the prized technique – found itself on the verge of collapse within a year the prize was awarded, and was rescued by the New York Federal reserve.
Acting in the same spirit, financial authorities in the US ignored grave warnings from eminent economists and persistently declined to impose any regulation on hedge funds. Thus Alan Greenspan said in 2004:
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”
But as Warren E. Buffett observed five years ago, derivatives are “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Mass destruction indeed, as we now find, both in terms of capital values destroyed and the number of people financially ruined or affected across the world! As Martin Wolf of the Financial Times aptly observed, “The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007.”
In addition to bourgeois scholars including acting and former chief economists of IMF, some organic intellectuals of the financial oligarchy have also been warning about the debacle for quite some time past. Prominent among them is George Soros. “I have cried wolf three times” – he says (in a promo of his latest book The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means) and we must say he really did – “first with The Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998, and now [in his new book]. Only now did the wolf arrive.”
He explains why he is so worried:
“… [The] current crisis differs from the various financial crises that preceded it. …the explosion of the US housing bubble acted as the detonator for a much larger ‘super-bubble’ that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit – whether extended to consumers or speculators or banks – has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom….
“The relative safety and stability of the United States, compared to the countries at the periphery, allowed the United States to suck up the savings of the rest of the world and run a current account deficit that reached nearly 7 percent of GNP at its peak in the first quarter of 2006. …” This inevitably led to the crash, he notes. (The Crisis and What to Do About It, The New York Review of Books, December 4, 2008)
So the ace speculator castigates excessive deregulation and dependence on debts and deficits, correctly pointing his finger at what we had identified (see Liberation, December 2003, “Mighty Achilles and His Vulnerable Heel”) as the soft underbelly of US imperialism. However, he describes the surface froth all right, but fails to relate it to the underlying crosscurrents that work it up.
If we are to do that, we must turn to the author of Capital.
