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An
apocalyptic mood has seized the highest levels of global
capital as the global financial system continues to
implode. This implosion is but the latest financial crisis
to wrack global capitalism. Financial crises are
inevitable since capitalist growth has increasingly been
driven by speculative bubbles such as the housing bubble
in the United States. The increasingly uncontrolled
financial gyrations stem from the increasing divergence
between an expansive financial economy and a stagnant real
economy. This “disconnect” stems from the persistent
stagnationist trends in the real economy owing to
overproduction or overcapacity. The search for
profitability is capitalism’s driving force, and,
increasingly, significant profits can only be obtained
from financial speculation rather than investment in
industry. This is, however, a volatile and unstable
process since the divergence between momentary financial
indicators like stock and real-estate prices and real
values can proceed only up to a point before reality bites
back and enforces a “correction.” The bursting of the US
housing bubble is one such correction, and it is leading
not only to a recession in the US but to a global
recession owing to the unprecedented level of integration
fostered by corporate-led globalization. It will not be
easy to restore dynamism by fostering another speculative
bubble, for instance, by resorting to “Military
Keynesianism.”
SAN FRANCISCO—Skyrocketing
oil prices, a
falling
dollar, and collapsing financial markets are the key
ingredients in an
economic
brew that could end up in more than just an ordinary
recession. The
falling
dollar and
rising oil
prices have been rattling the global economy
for
sometime, but it
is the
dramatic implosion of
financial
markets that is driving the financial
elite to
panic.
Capitalist
apocalypse?
And panic
there is. Even as it characterized Federal Reserve Board
chairman Ben Bernanke’s deep cuts amounting to 1.25
points off the prime rate in late January as a sign of
panic, the Economist admitted that “there is no doubt that
this is a frightening moment.” The losses stemming from
bad securities tied up with defaulted mortgage loans by
“subprime” borrowers are now estimated to be in the range
of about $400 billion, but, as the Financial Times
warned, “the big question is what else is out there” at a
time that the global financial system “is wide open to a
catastrophic failure.” What is “out there” is suggested
by the fact that it has only been in the last few weeks
that a series of Swiss, Japanese and Korean banks have
owned up to billions of subprime-related losses. The
globalization of finance was, from the beginning, the
cutting edge of the globalization process, and it was
always an illusion to think that the subprime crisis could
be confined to US financial institutions, as some analysts
had thought.
Some key
movers and shakers sounded less panicky than resigned to
some sort of apocalypse. At the global elite’s annual
weeklong party at Davos in late January, George Soros
sounded positively necrological, declaring to one and all
that the world was witnessing “the end of an era.” World
Economic Forum host Klaus Schwab spoke of capitalism
getting its just desserts, saying, “We have to pay for the
sins of the past.” “It’s not that the pendulum is now
swinging back to Marxist socialism,” he told the press,
“but people are asking themselves, ‘What are the
boundaries of the capitalist system?’ They think the
market may not always be the best mechanism for providing
solutions.”
Ruined
reputations and policy failures
 While
some appear to have
lost their
nerve, others have seen the financial collapse diminish
their stature.
As
chairman of President Bush’s Council of Economic Advisers
in 2005, Bernanke attributed the rise in US housing prices
to “strong economic fundamentals” instead of speculative
activity, so is it any wonder, ask critics, why, as Fed
chairman, he failed to anticipate the housing market’s
collapse stemming from the subprime-mortgage crisis? His
predecessor, Alan Greenspan, however, has suffered a
bigger hit, moving from iconic status to villain of the
piece in the eyes of some. They blame the bubble on his
aggressively cutting the prime rate to get the
US
out of recession in 2003 and restraining it at low levels
for over a year. Others say he ignored warnings about
aggressive and unscrupulous mortgage originators enticing
“subprime” borrowers with mortgage deals they could never
afford.
The
scrutiny of Greenspan’s record and the failure of
Bernanke’s rate cuts so far to reignite bank lending have
raised serious doubts about the effectiveness of monetary
policy in warding off a recession that is now seen as all
but inevitable. Nor will fiscal policy or putting money
into the hands of consumers do the trick, according to
some weighty voices. The $156-billion stimulus package
recently approved by the White House and Congress consists
largely of tax rebates, and most of these, according to
New York Times columnist Paul Krugman, will go to those
who don’t really need it. The tendency will thus be to
save rather than spend the rebates in a period of
uncertainty, defeating their purpose of stimulating the
economy. The specter that now haunts the US economy is
Japan’s experience of virtually zero growth per annum and
deflation in the ’90s and early part of this decade,
despite a string of stimulus packages after Tokyo’s great
housing bubble deflated in the late 1980s.
*Dr. Walden Bello(above) is
president of the Freedom from Debt Coalition and senior
analyst at Focus on the Global South.
The
inevitable bubble
Even as
the finger-pointing is in progress, many analysts remind
us that, if anything, the housing crisis should have been
expected all along. The only question was when it would
break. As progressive economist Dean Baker of the Center
for Economic Policy Research noted in an analysis several
years ago, “Like the stock bubble, the housing bubble will
burst. Eventually, it must. When it does, the economy
will be thrown into severe recession, and tens of millions
of homeowners, who never imagined that house prices could
fall, likely will face serious hardship.”
The
subprime-mortgage crisis was not a case of supply
outrunning real demand. The “demand” was largely
fabricated by speculative mania on the part of developers
and financiers who wanted to make great profits from their
access to foreign money that flooded the US in the last
decade. Big-ticket mortgages were aggressively sold to
millions who could not normally afford them by offering
low “teaser” interest rates that would later be readjusted
to jack up payments from the new homeowners. These assets
were then “securitized”with other assets into complex
derivative products called “collateralized debt
obligations [CDOs]” by the mortgage originators working
with different layers of middlemen who understated risk so
as to offload them as quickly as possible to other banks
and institutional investors. The shooting up of interest
rates triggered a wave of defaults and many of the
big-name banks and investors—including Merrill Lynch,
Citigroup and Wells Fargo—found themselves with billions
of dollars worth of bad assets that had been given the
green light by their risk-assessment systems.
The
failure of self-regulation
The
housing bubble is but the latest of some 100 financial
crises that have swiftly followed one another ever since
Depression-era capital controls began being lifted at the
onset of the neoliberal era in the early 1980s. The calls
now coming from some quarters for curbs on speculative
capital have an air of déjà vu to many observers. After
the Asian Financial Crisis of 1997, in particular, there
was a strong clamor for capital controls, for a “new
global financial architecture.” The more radical of these
called for currency transactions taxes such as the famed
Tobin Tax that would slow down capital movements or for
the creation of some kind of global financial authority
that would, among other things, regulate relations between
northern creditors and indebted developing countries.
Global
finance capital, however, resisted any return to state
regulation. Nothing came of the proposals for Tobin
taxes. Even a relatively weak “sovereign debt
restructuring mechanism” akin to the US Chapter Eleven to
provide some maneuvering room to developing countries
undergoing debt repayment problems was killed by the banks
despite its being proposed by Ann Krueger, the
conservative American deputy managing director of the
International Monetary Fund (IMF). Instead, finance
capital promoted what came to be known as the Basel II
process, described by political economist Robert Wade as
steps toward global economic standardization that
“maximize [global financial firms’] freedom of
geographical and sectoral maneuver while setting
collective constraints on their competitive strategies.”
The emphasis was on private sector self-surveillance and
self-policing aiming at greater transparency of financial
operations and new standards for capital. Despite the
fact that it was Northern finance capital that triggered
the Asian crisis, the Basel process focused on making
developing country financial institutions and processes
transparent and standardized along the lines of what Wade
calls the “Anglo-American” financial model.
While
there were calls for regulation of the proliferation of
many of the new, sophisticated financial instruments such
as derivatives being placed on the market by developed
country financial institutions, these got nowhere.
Assessment and regulation of derivatives were to be left
to market players who had access to sophisticated
quantitative “risk assessment” models that were being
developed.
Focused on
disciplining developing countries, the Basel II process
accomplished so little in the way of self-regulation of
global financial from the North that even Wall Streeter
Robert Rubin, former Secretary of State under President
Clinton, warned in 2003 that “future financial crises are
almost surely inevitable and could be even more severe.”
As for
risk assessment of derivatives such as the CDOs and
“structured investment vehicles” (SIVs)—the cutting edge
of what the Financial Times has described as “the vastly
increased complexity of hyperfinance”—the process
collapsed almost completely, with the most sophisticated
quantitative risk models left in the dust as risk was
priced according to one rule by the sellers of
securities: underestimate the real risk and pass it on to
the suckers down the line. In the end, it was difficult
to distinguish what was fraudulent, what was poor
judgment, what was plain foolish and what was out of
anybody’s control. As one report on the conclusions of a
recent meeting of the Group of Seven’s (G7) Financial
Stability Forum put it:
There is
plenty of blame to go around for the financial chaos: The
US subprime-mortgage market was marked by poor
underwriting standards and “some fraudulent practices.”
Investors didn’t carry out sufficient due diligence when
they bought mortgage-backed securities. Banks and other
firms managed their financial risks poorly and failed to
disclose to the public the dangers on and off their
balance sheets. Credit-rating companies did an inadequate
job of evaluating the risk of complex securities. And the
financial institutions compensated their employees in ways
that encouraged excessive risk-taking and insufficient
regard to long-term risks.
The
specter of overproduction
It is not
surprising that the G7 report sounded very much like the
postmortems of the Asian financial crisis and the dot-com
bubble. One financial corporation chief writing in the
Financial Times captured the basic problem running through
these speculative manias, perhaps unwittingly, when he
claimed that “there has been an increasing disconnection
between the real and financial economies in the past few
years. The real economy has grown…but nothing like that
of the financial economy, which grew even more
rapidly—until it imploded.” What his statement does not
tell us is that the disconnect between the real and the
financial is not accidental, that the financial economy
expanded precisely to make up for the stagnation of the
real economy.
This
growing gap between the financial and the real cannot be
comprehensively understood without referring to the crisis
of overaccumulation that overtook the center economies in
the late ’70s and ’80s, a phenomenon that is also referred
to as overproduction or overcapacity.
The golden
period of postwar growth globally that skirted major
crises for nearly 25 years was due to the massive creation
of effective demand via rising wages for labor in the
North, the reconstruction of
Europe and
Japan, and the import-substituting industrialization in
Latin America and other parts of the South. This was done principally via
state intervention in the economy. This dynamic period
came to a close in the mid-seventies, with stagnation
setting in, owing to global productive capacity outrunning
global demand, which was constrained by continuing deep
inequalities in income distribution. According to the
calculations of Angus Maddison, the premier expert on
historical statistical trends, the annual rate of growth
of global gross domestic product (GDP) fell from 4.9
percent in what is now regarded as the golden age of the
post-World War II Bretton Woods system, 1950-73, to 3
percent in 1973-89, a drop of 39 percent. These figures
reflected the wrenching combination of stagnation and
inflation in the North, the crisis of import-substitution
industrialization in the South, and erosion of profit
margins all around.
In the
’80s and ’90s global capital blazed three escape routes
from the specter of stagnation. One was neoliberal
restructuring, which included redistribution of income
toward the top via tax cuts for the rich, deregulation and
an assault on organized labor. Neoliberalism took the form
of Thatcherism and Reaganism in the developed North and
World Bank and IMF-imposed structural adjustment in the
global South.
Another
was corporate-driven globalization, or “extensive
accumulation,” which opened up markets in the developing
world and moved capital from high-wage to low-wage
areas. As Rosa Luxemburg long ago pointed out in her
classic “The Accumulation of Capital”, capital needs to
constantly integrate precapitalist societies to the
capitalist system to shore up the fall in the rate of
profit. In the last two decades, the most spectacular
case of incorporating a precapitalist society into the
global capitalist system was China, which became both the
world’s second-biggest exporter and the primary
destination of foreign investment. This was, however, a
double-edged sword for capitalism, as we shall later see.
A third
was the process we are mainly concerned with here:
“intensive accumulation” or “financialization,” that is,
the channeling of investment toward financial speculation,
where much greater returns were to be derived than in
industry, where profits were largely stagnant. Finance
capital forced the elimination of capital controls, the
result being the rapid globalization of speculative
capital to take advantage of differentials in interest and
foreign-exchange rates in different capital markets. These
volatile movements, the result of capital’s liberation
from the fetters of the postwar Bretton Woods financial
system, was one source of instability. Another was the
proliferation of novel sophisticated speculative
instruments like derivatives that escaped monitoring and
regulation. Instability derived ultimately from the fact
that speculative finance boiled down to an effort to
squeeze more “value” out of already created value instead
of creating new value since the latter option was
precluded by the problem of overproduction in the real
economy.
The
disconnect between the real economy and the virtual
economy of finance was evident in dot-com bubble of the
1990s. With profits in the real economy stagnating, the
smart money flocked to the financial sector. The workings
of this virtual economy were exemplified by the rapid rise
in the stock values of Internet firms which, like
Amazon.com, still had to turn a profit. The dot-com
phenomenon probably extended the boom of the 1990s by
about two years. “Never before in US history,” Robert
Brenner wrote, “had the stock market played such a direct
and decisive role in financing nonfinancial corporations,
thereby powering the growth of capital expenditures and in
this way the real economy. Never before had a US economic
expansion become so dependent upon the stock market’s
ascent.” But the divergence between momentary financial
indicators like stock prices and real values could only
proceed to a point before reality bit back and enforced a
“correction.” And the correction came savagely in the
dot-com collapse of 2002, in the form of the wiping out of
$7 trillion in investor wealth.
A long
recession was avoided, but it was only by encouraging
another bubble, the housing bubble, and here, as noted
earlier, Greenspan played a key role by cutting the prime
rate to a 45-year low of 1 percent in June 2003, holding
it there for a year, then raising it only gradually, in
quarter-percentage increments. As Dean Baker put it, “an
unprecedented run-up in the stock market propelled the US
economy in the late ’90s and now an unprecedented run-up
in house prices is propelling the current recovery.”
The result
was that real-estate prices rose by 50 percent in real
terms, with the run-ups, according to Baker, being close
to 80 percent in the key bubble areas of the West Coast,
the East Coast, North of Washington, D.C., and Florida.
How big was the bubble created? It is estimated by Baker
that the run-up in house prices “created more than $5
trillion in real-estate wealth compared to a scenario
where prices follow their normal trend growth path. The
wealth effect from house prices is conventionally
estimated at five cents to the dollar, which means that
annual consumption is approximately $250 billion [2
percent of GDP] higher than it would be in the absence of
the housing bubble.”
The
China factor
The
housing bubble fueled
US
growth, which was exceptional, given the stagnation that
has gripped most of the global economy in the last few
years. During this period, the global economy has been
marked by underinvestment and persistent tendencies toward
stagnation in most key economic regions apart from the US,
China, India and a few other places. Weak growth has
marked most other regions, notably Japan, which was locked
until very recently into a 1-percent GDP growth rate, and
Europe, which grew annually by 1.45 percent in the last
few years.
With
stagnation in most other areas, the US has pulled in some
70 percent of all global capital flows. A great deal of
this has come from China. Indeed, what marks this current
bubble period is the role of China as a source not only of
goods for the
US
market but also capital for speculation. The relationship
between the US and Chinese economies is what I have
characterized elsewhere as “chain-gang economics”: On the
one hand, China’s economic growth has increasingly
depended on the ability of American consumers to continue
their debt-financed spending spree to absorb much of the
output of China’s production. On the other hand, this
relationship depends on a massive financial reality: the
dependence of US consumption on China’s lending the US
Treasury and private-sector dollars from the reserves it
accumulated from its yawning trade surplus with the
US—some $1 trillion so far, according to some estimates.
Indeed, a great deal of the tremendous sums China—and
other Asian countries—lent to American institutions went
to finance middle-class spending on housing and other
goods and services, prolonging the US’ fragile economic
growth but only by raising consumer indebtedness to
dangerous, record heights.
The
China-US coupling has had massive consequences for the
global economy. One has to do with the addition of massive
new productive capacity by American and other foreign
investors moving to China. This has aggravated the
persistent problem of overcapacity and overproduction.
One indicator of persistent stagnation in the real economy
is the aggregate annual global growth rate, which averaged
1.4 percent in the 1980s and 1.1 percent in the 1990s,
compared with 3.5 percent in the 1960s and 2.4 percent in
the 1970s. Moving to China to take advantage of low wages
may shore up profit rates in the short term but, as it
adds to overcapacity in a world where a rise in global
purchasing power is limited owing to growing inequalities,
it erodes profits in the long term. And indeed, the profit
rate of the largest 500 US transnational corporations fell
drastically from +4.9 percent in the 1954-59, to +2.04 in
1960-69, to -5.30 in 1989-89, -2.64 in 1990-92, and -1.92
in 2000-2002. Behind these figures, notes Philip O’Hara,
was the specter of overproduction: “Oversupply of
commodities and inadequate demand are the principal
corporate anomalies inhibiting performance in the global
economy.”
The
succession of speculative manias in the US have had the
function of absorbing investment that did not find
profitable returns in the real economy and thus not only
artificially propping up the US economy but also “holding
up the world economy,” as one IMF document put it. Thus,
with the bursting of the housing bubble and the seizing up
of credit in almost the whole financial sector, the threat
of a global downturn is very real.
Decoupling
of chain-gang economics?
In this
regard, talk about a process of “decoupling” of regional
economies, especially the Asian economic region, from the
United States has been without substance. True, most of
the other economies in East and Southeast Asia have been
pulled along by the Chinese locomotive. In the case of
Japan, for instance, a decade-long stagnation was broken
in 2003 by the country’s first sustained recovery, fueled
by exports to slake China’s thirst for capital and
technology-intensive goods; exports shot up by a record 44
percent, or $60 billion. Indeed, China became the main
destination for Asia’s exports, accounting for 31 percent,
while
Japan’s
share dropped from 20 percent to 10 percent. As one
account pointed out, “In country-by-country profiles,
China is now the overwhelming driver of export growth in
Taiwan
and the Philippines, and the majority buyer of products
from
Japan,
South Korea, Malaysia and Australia.”
However,
as research by Jayati Ghosh and C.P. Chandrasekahr has
underlined, China is indeed importing intermediate goods
and parts from these countries but only to put them
together mainly for export as finished goods to the US and
Europe, not for its domestic market. Thus, “if demand for
Chinese exports from the US and the EU slows down, as will
be likely with a US recession, this will not only affect
Chinese manufacturing production, but also Chinese demand
for imports from these Asian developing countries.”
Perhaps the more accurate image is that of a chain gang
linking not only China and the United States, but a host
of other satellite economies whose fates are all tied up
with the now-deflating balloon of debt-financed
middle-class spending in the US.
New
bubbles to the rescue?
One must
not, however, overestimate the resiliency of capitalism.
Many are now asking: After the collapse of the dot-com
boom and the housing boom, is there a third line of
defense against stagnation owing to overcapacity? One
theory is that the government might use military spending
to pull the US out of the jaws of recession. Indeed, the
military economy did play a role in bringing the US out of
the 2002 recession, with defense spending in 2003
accounting for 14 percent of GDP growth while representing
only 4 percent of the GDP of the US. According to
estimates cited by Chalmers Johnson, defense-related
expenditures will exceed $1 trillion for the first time in
history in 2008.
Stimulus
could also come from the related “disaster capitalism
complex” so well studied by Naomi Klein—that “full-fledged
new economy in homeland security, privatized war and
disaster reconstruction tasked with nothing less than
building and running a privatized security state both at
home and abroad.” Klein says that, in fact, “the economic
stimulus of this sweeping initiative proved enough to pick
up the slack where globalization and the dot-com booms had
left off. Just as the Internet had launched the dot-com
bubble, 9/11 launched the disaster capitalism bubble.”
This subsidiary bubble to the real-estate bubble appears
to have been relatively unharmed so far by the collapse of
the latter.
It is not
easy to track the sums circulating in the disaster
capitalism complex, but one indication is that InVision, a
General Electric affiliate, producing high-tech
bomb-detection devices used in airports and other public
spaces, received an astounding $15 billion in Homeland
Security contracts between 2001 and 2006.
Whether or
not “military Keynesianism” and the disaster-capitalism
complex can in fact play the role played by financial
bubbles is open to question. For to feed them, at least
during the Republican administrations, has meant reducing
social expenditures, resulting in their positive
employment effects being overwhelmed fairly quickly by
reductions in effective demand. A study by Dean Baker
cited by Johnson found that after an initial demand
stimulus, by about the sixth year, the effect of increased
military spending turns negative. After 10 years of
increased defense spending, there would be 464,000 fewer
jobs than in a scenario of lower defense spending.
But even
more important as a limit to military Keynesianism and
disaster capitalism is that the military engagements to
which they are bound to lead are likely to create
quagmires such as Iraq and Afghanistan that could trigger
a backlash both abroad and at home. This would eventually
erode the legitimacy of these enterprises, reduce their
access to tax dollars, and erode their viability as
sources of economic expansion in a contracting economy.
Yes,
global capitalism may be resilient, but it looks like its
options are increasingly limited. The forces making for
the long-term stagnation of the global capitalist economy
are now too heavy to be easily shaken off by the economic
equivalent of mouth-to-mouth resuscitation. |
