Global Financial Crisis and the Future of Capitalism, Dec[1]. 15, 2008

8/14/2019 Global Financial Crisis and the Future of Capitalism, Dec[1]. 15, 2008

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The Gl oba lhe Gl oba lFi nanc ia l Cr isi si nanc ia l Cr isi sand t he Fu turend t he Fu tureof Capi ta lismf Capi ta lism

Wal den Bel loal den Bel loPresid ent, F DCresid ent, F DC

FD C-Bis ig- Akbay an Sym po siu m,D C-Bis ig- Akbay an Sym po siu m,UP , Quez on Cit y, Dec . 15, 20 08P , Quez on Cit y, Dec . 15, 20 08


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The Dyn amic s an dhe Dyn amic s an dCon sequen ces of th e Wallon sequen ces of th e Wall

Stree t Meltd own ortree t Meltd own or


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The last three monthsThe last three months

have witnessed globalhave witnessed global

capitalisms most turbulentcapitalisms most turbulentperiod since the 1930speriod since the 1930s


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I so happened to be in the US for part of it,I so happened to be in the US for part of it,so I had a ringside view of the collapse ofso I had a ringside view of the collapse ofWall Street(though I would trade thatWall Street(though I would trade that

anytime for a ringside view of Oscar de laanytime for a ringside view of Oscar de laHoyas collapse in the face of the PacquiaoHoyas collapse in the face of the Pacquiaojuggernaut).juggernaut).


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Turmoil onTurmoil on

Flying into New York to take up myFlying into New York to take up my

teaching assignment at the Stateteaching assignment at the State

University of New York in lateUniversity of New York in late

September, I had the same feeling ISeptember, I had the same feeling I

had when I arrived in Baghdad a fewhad when I arrived in Baghdad a few

days before the American invasion indays before the American invasion in2003 and in Beirut two years ago, at2003 and in Beirut two years ago, at

the height of the Israeli bombing ofthe height of the Israeli bombing of

that citythat of entering a warthat citythat of entering a war


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The immigration agent, uponThe immigration agent, upon

learning I taught political economy,learning I taught political economy,

commented, Well, I guess you folkscommented, Well, I guess you folks

will now be revising all thosewill now be revising all thosetextbooks. The bus drivertextbooks. The bus driver

welcomed passengers with thewelcomed passengers with the

words, New York is still here, ladieswords, New York is still here, ladiesand gentlemen, but Wall Street hasand gentlemen, but Wall Street has

disappeared, like the Twin Towers.disappeared, like the Twin Towers.


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Even the usually cheerful morningEven the usually cheerful morning

shows feel obligated to begin withshows feel obligated to begin with

the bad news, with one hostthe bad news, with one host

attributing the bleak events to theattributing the bleak events to thefatcats of Wall Street who turned intofatcats of Wall Street who turned into

pigs.pigs.

Hi folks, weveHi folks, wevegotgotTo let reality slipTo let reality slip

in occasionally.in occasionally.


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OktoberdammerungOktoberdammerung: Oct. 6-: Oct. 6-

10 Worst Week ever in Wall10 Worst Week ever in Wall

Street HistoryStreet History-$2.3 trillion dollars of investor wealth went up in smoke-$2.3 trillion dollars of investor wealth went up in smokeOct. 6-10 as the Dow Jones Industrial Average registered itsOct. 6-10 as the Dow Jones Industrial Average registered itsworst week ever, plunging 18 percent as investors panickedworst week ever, plunging 18 percent as investors panickedand kept on unloading stock despite various USand kept on unloading stock despite various USgovernment plans to bail out the banks.government plans to bail out the banks.

- The ghastly week came on the heels of the collapse of- The ghastly week came on the heels of the collapse ofone of the Streets most prominent investment banks,one of the Streets most prominent investment banks,Lehman Brothers, followed by the largest bank failure in USLehman Brothers, followed by the largest bank failure in UShistory, that of Washington Mutual, the countrys largesthistory, that of Washington Mutual, the countrys largestsavings and loan institution;savings and loan institution;

-the effective nationalization of Wall Street, with the Federal-the effective nationalization of Wall Street, with the FederalReserve and the Treasury Department making all the majorReserve and the Treasury Department making all the majorstrategic decisions in the financial sector and, with thestrategic decisions in the financial sector and, with therescue of the American International Group (AIG), therescue of the American International Group (AIG), theamazing fact that the US government now runs the worldsamazing fact that the US government now runs the worlds

biggest insurance company;biggest insurance company;


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At the end of that fateful week over $8.4 trillion inAt the end of that fateful week over $8.4 trillion intotal market capitalization had been wiped outtotal market capitalization had been wiped outsince October of 2007, with over a trillion of thissince October of 2007, with over a trillion of thisaccounted for by the unraveling of Wall Streetsaccounted for by the unraveling of Wall Streetsfinancial titans. The massive devaluation of USfinancial titans. The massive devaluation of US

financial institutions has continued since then.financial institutions has continued since then.One very famous candidate for collapse isOne very famous candidate for collapse isCitigroup. Two years ago, Citigroup was worthCitigroup. Two years ago, Citigroup was worth$244 billion. Now it is worth only $20 billion, and$244 billion. Now it is worth only $20 billion, andhas had to be bailed out by Washington.has had to be bailed out by Washington.

Banks also began to totter and near collapse inBanks also began to totter and near collapse inEurope as the American financial virus spread.Europe as the American financial virus spread.The whole financial system of Iceland has nowThe whole financial system of Iceland has nowcollapsed.collapsed.

The usual explanations no longer suffice.The usual explanations no longer suffice.

Extraordinary events demand extraordinaryExtraordinary events demand extraordinaryexplanations. But firstexplanations. But first


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Is the worst over?Is the worst over?

No, if anything is clear from the contradictory moves of theNo, if anything is clear from the contradictory moves of thelast few weeks--allowing Lehman Brothers to collapse whilelast few weeks--allowing Lehman Brothers to collapse whiletaking over AIG, engineering Bank of Americas takeover oftaking over AIG, engineering Bank of Americas takeover ofMerrill Lynch, saving Citigroup while refusing assistance toMerrill Lynch, saving Citigroup while refusing assistance tothe Big 3 carmakers, proposing to buy up the banks badthe Big 3 carmakers, proposing to buy up the banks badassets, then advocating their recapitalization or partialassets, then advocating their recapitalization or partial

nationalization--there is no coherent strategy to deal withnationalization--there is no coherent strategy to deal withthe crisis, just tactical responses, like the fire departmentsthe crisis, just tactical responses, like the fire departmentsresponse to a conflagration. (Some say this description isresponse to a conflagration. (Some say this description isan insult to the fire department.)an insult to the fire department.)

The moves of the US and European governments toThe moves of the US and European governments to

recapitalize the banking system amount to desperaterecapitalize the banking system amount to desperateefforts to shore up confidence in the system, to prevent theefforts to shore up confidence in the system, to prevent theerosion of trust in the banks and other financial institutionserosion of trust in the banks and other financial institutionsand prevent a massive bank run such as the one thatand prevent a massive bank run such as the one thattriggered the Great Depression of 1929.triggered the Great Depression of 1929.


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The financial crisis has now spread to Europe andThe financial crisis has now spread to Europe andAsia, and it is no longer something that onlyAsia, and it is no longer something that onlyaffects banks that hold subprime securities theyaffects banks that hold subprime securities theybought from US institutions. It is now a questionbought from US institutions. It is now a questionof fear overcoming trust. Banks dont want toof fear overcoming trust. Banks dont want to

lend to one another because they dont know wholend to one another because they dont know whoamong them is overexposed to toxic subprimeamong them is overexposed to toxic subprimesecurities or because they want to hold on cashsecurities or because they want to hold on cashand other secure assets to defend themselvesand other secure assets to defend themselvesfrom an unpredictable conflagration, andfrom an unpredictable conflagration, and

depositors have growing fears about whetherdepositors have growing fears about whethertheir money is safe in the bank, in spite of FDICtheir money is safe in the bank, in spite of FDIC(government) insurance. In this crisis, no bank,(government) insurance. In this crisis, no bank,even the seemingly most impregnable, is safeeven the seemingly most impregnable, is safefrom a run such as that which triggered the Greatfrom a run such as that which triggered the GreatDepression in 1929.Depression in 1929. In a run, no bank isIn a run, no bank is

solvent.solvent.


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Causes of the Meltdown:Causes of the Meltdown:

Greed?Greed? So what caused the collapseSo what caused the collapse

of global capitalisms nerveof global capitalisms nerve

center?center?

Was it Greed? Yes.Was it Greed? Yes.

This isThis iswhatwhatKlaus Schwab, the organizerKlaus Schwab, the organizerof the World Economic Forum, the yearlyof the World Economic Forum, the yearlyglobal elite jamboree in the Swiss Alps,global elite jamboree in the Swiss Alps,had in mind when he told his clientele inhad in mind when he told his clientele inDavos earlier this year:Davos earlier this year:

We have to a for the sins of the ast.We have to a for the sins of the ast.


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Wall Street OutsmartingWall Street Outsmarting

Itself?Itself?

Definitely. FinancialDefinitely. Financialspeculators outsmartedspeculators outsmartedthemselves by creating morethemselves by creating moreand more complex financialand more complex financialcontracts like derivatives thatcontracts like derivatives that

would securitize and makewould securitize and makemoney from all forms of risk.money from all forms of risk.Derivatives might be labeled,Derivatives might be labeled,following Derrida, asfollowing Derrida, as spectralspectralassetsassets---that is, they are-that is, they arecontracts that enablecontracts that enablegambling and making moneygambling and making money

from the risk associated withfrom the risk associated withan underlying assetthat is,an underlying assetthat is,on the price of that assetson the price of that assetsrising or falling---withoutrising or falling---withouttrading the asset itself.trading the asset itself.Derivatives, in short, allowDerivatives, in short, allowinvestors to gain from shareinvestors to gain from shareprice movements withoutprice movements withoutowning the underlying share.owning the underlying share.

Derrida and DerivativesDerrida and Derivatives

Derivatives include exotic futuresDerivatives include exotic futures

instruments such as creditinstruments such as creditdefaultdefault

swaps that enable betting onswaps that enable betting on

the odds that the banks ownthe odds that the banks own

corporate borrowers would notcorporate borrowers would notbebe

able to pay their debts! This isable to pay their debts! This isthethe


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Creative DestructionCreative Destruction

On December 17, 2005, whenOn December 17, 2005, when InternationalInternationalFinancing ReviewFinancing Review ((IFRIFR) announced its 2005) announced its 2005Annual Awards one of the securities industry'sAnnual Awards one of the securities industry'smost prestigious awards programsit had this tomost prestigious awards programsit had this to

say:say:

"[Lehman Brothers] not only maintained its"[Lehman Brothers] not only maintained itsoverall market presence, but also led the chargeoverall market presence, but also led the chargeinto the preferred space by ... developing newinto the preferred space by ... developing new

products and tailoring transactions to fitproducts and tailoring transactions to fitborrowers' needsborrowers' needsLehman Brothers is the most innovative in theLehman Brothers is the most innovative in the

preferred space, just doing things you won't seepreferred space, just doing things you won't seeelsewhereelsewhere."."


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WMDsWMDs

No comment.No comment. But Warren Buffett, the grandBut Warren Buffett, the grand

speculator who eliminated derivatives from hisspeculator who eliminated derivatives from hisinvestmentinvestment

fund long before the recent crisis, because he saidfund long before the recent crisis, because he said

hehecould not understand how they worked, calledcould not understand how they worked, calledderivativesderivatives

in 2003 financial weapons of mass destructionin 2003 financial weapons of mass destructiondevised bydevised by

madmen whom he recently defined as geeksmadmen whom he recently defined as geeksbearingbearing

formulas.formulas.


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The truth is that the top graduates of the USThe truth is that the top graduates of the US

business schools like Harvard and Stanford andbusiness schools like Harvard and Stanford and

Wharton brought us this crisis.Wharton brought us this crisis.

(A financial executive I interviewed in New York last(A financial executive I interviewed in New York last

month qualified this by saying that these operatorsmonth qualified this by saying that these operatorswerewere

not just rich white kids but many of thesenot just rich white kids but many of these

professionalsprofessionalswith Ivy League credentials were of Indian andwith Ivy League credentials were of Indian and

ChineseChinese

origin. Most are very good at math, like me, butorigin. Most are very good at math, like me, but

like me,like me,


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Lack of Regulation?Lack of Regulation?

Yeseveryone acknowledges by now that WallYeseveryone acknowledges by now that WallStreets capacity to innovate and turn out moreStreets capacity to innovate and turn out moreand more sophisticated financial instruments hadand more sophisticated financial instruments hadrun far ahead of governments regulatoryrun far ahead of governments regulatory

capability,capability, not because government was notnot because government was notcapable of regulating but because the dominantcapable of regulating but because the dominantneoliberal, laissez-faire attitude preventedneoliberal, laissez-faire attitude preventedgovernment from devising effective mechanismsgovernment from devising effective mechanismswith which to regulatewith which to regulate. The massive trading in. The massive trading in

derivatives helped precipitate this crisis, and thederivatives helped precipitate this crisis, and theman who did the most to prevent the regulationman who did the most to prevent the regulationof derivatives was Alan Greenspan, the formerof derivatives was Alan Greenspan, the formerchairman of the Federal Reserve Board, whochairman of the Federal Reserve Board, whobelieved that the derivatives market wouldbelieved that the derivatives market wouldregulate itself.regulate itself.


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The US Congress agreed with Greenspan andThe US Congress agreed with Greenspan andpassed a law excluding derivatives from beingpassed a law excluding derivatives from beingregulated by the Securities Exchange Commissionregulated by the Securities Exchange Commissionin 2000. Deregulation, it must be noted, was notin 2000. Deregulation, it must be noted, was not

just a Republican initiative. It was a bipartisanjust a Republican initiative. It was a bipartisan

campaign.campaign.Led by Wall Streeter Robert Rubin, BillLed by Wall Streeter Robert Rubin, BillClintons Treasury Secretary, the ClintonClintons Treasury Secretary, the Clintonadministration and Congressional Democratsadministration and Congressional Democratswere strong supporters of another law thatwere strong supporters of another law thathelped father the current crisis, the repeal of thehelped father the current crisis, the repeal of the

Glass-Steagall Act, which had preventedGlass-Steagall Act, which had preventedcommercial banks from also being investmentcommercial banks from also being investmentbanksbanks. Citigroup was a product of this. Citigroup was a product of thisderegulatory act.deregulatory act. Rubin is now one of President-Rubin is now one of President-Elect Obamas main economic advisers, whichElect Obamas main economic advisers, whichshould worry us all.should worry us all.


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What do you mean?What do you mean?

To elaborate on the arch-speculatorsTo elaborate on the arch-speculatorsinsight, what we are seeing is theinsight, what we are seeing is theintensification of one of the central crisesintensification of one of the central crisesor contradictions of global capitalismor contradictions of global capitalism

which is the crisis ofwhich is the crisis ofoverproductionoverproduction, also, alsoknown asknown as overaccumulationoveraccumulation ororovercapacityovercapacity..

This is the tendency for capitalism to buildThis is the tendency for capitalism to buildup tremendous productive capacity thatup tremendous productive capacity thatoutruns the populations capacity tooutruns the populations capacity toconsume owing to income inequalities thatconsume owing to income inequalities thatlimit popular purchasing power, thuslimit popular purchasing power, thuseroding profitability, in the context oferoding profitability, in the context of

heightened competition.heightened competition.

B t Wh t D O d tiBut What Does Overproduction


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But What Does OverproductionBut What Does Overproduction

Have to Do with the CurrentHave to Do with the Current

Financial Meltdown?Financial Meltdown?Plenty. But to understand the connections, we must goPlenty. But to understand the connections, we must goback in time to the so-called Golden Age of Contemporaryback in time to the so-called Golden Age of ContemporaryCapitalism, the period from 1945 to 1975.Capitalism, the period from 1945 to 1975.

This was a period of rapid growthThis was a period of rapid growthbothboth in the centerin the centereconomies and ineconomies and in thetheunderdevelopedunderdeveloped economieseconomiesone that was partlyone that was partly triggered by thetriggered by themassive reconstruction ofmassive reconstruction ofEurope and East Asia after theEurope and East Asia after the

devastation of the Second World War, anddevastation of the Second World War, andpartly by the new socio-economic arrangements thatpartly by the new socio-economic arrangements that

were institutionalized under the new Keynesian state.were institutionalized under the new Keynesian state.Key among the latter were strong state controlsKey among the latter were strong state controls

overover market activity, aggressive use of fiscalmarket activity, aggressive use of fiscaland monetaryand monetary policy to minimize inflation andpolicy to minimize inflation and

recession, and arecession, and a regime of relatively high wages toregime of relatively high wages tostimulate and maintainstimulate and maintain demand.demand.


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So what went wrong?So what went wrong?

But this period of high growth came to an end in the mid-But this period of high growth came to an end in the mid-seventies, when the center economies were seized byseventies, when the center economies were seized bystagflation, meaning the coexistence of low growth withstagflation, meaning the coexistence of low growth withhigh inflation, which was not supposed to happen underhigh inflation, which was not supposed to happen underneoclassical economics.neoclassical economics.

Stagflation, however, wasStagflation, however, wasbut a symptom of a deeperbut a symptom of a deeper

cause: the reconstruction ofcause: the reconstruction of

Germany and Japan and theGermany and Japan and the

rapid growth of industrializingrapid growth of industrializing

economies like Brazil, Taiwan,economies like Brazil, Taiwan,and South Korea added tremendousand South Korea added tremendous

new productive capacity and increasednew productive capacity and increased

global competition, while incomeglobal competition, while income

inequality within countries and betweeninequality within countries and between

countries limited the growth of purchasing power andcountries limited the growth of purchasing power anddemand, thus eroding profitability. This was aggravated bydemand, thus eroding profitability. This was aggravated by


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- The problem with this formula was that in redistributingThe problem with this formula was that in redistributingincome to the rich, you were gutting the incomes of theincome to the rich, you were gutting the incomes of thepoor and middle classes, thus restricting demand, while notpoor and middle classes, thus restricting demand, while notnecessarily inducing the rich to invest more in production.necessarily inducing the rich to invest more in production.In fact, it could be more profitable to invest in speculation.In fact, it could be more profitable to invest in speculation.

- In fact, neoliberal restructuring, which was generalized inIn fact, neoliberal restructuring, which was generalized inthe North and south during the eighties and nineties, had athe North and south during the eighties and nineties, had apoor record in terms of growth: global growth averaged 1.1poor record in terms of growth: global growth averaged 1.1per cent in the nineties and 1.4 in the eighties, whereas itper cent in the nineties and 1.4 in the eighties, whereas itaveraged 3.5 per cent in the 1960s and 2.4 per cent in theaveraged 3.5 per cent in the 1960s and 2.4 per cent in theseventies, when state interventionist policies wereseventies, when state interventionist policies were

dominant. Neoliberal restructuring could not shake offdominant. Neoliberal restructuring could not shake offstagnation.stagnation.


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How was globalization aHow was globalization a

response to the crisis?response to the crisis? The second escape routeThe second escape route

global capital took toglobal capital took tocounter stagnation wascounter stagnation wasextensive accumulationextensive accumulationor globalization, or theor globalization, or the

rapid integration of semi-rapid integration of semi-capitalist, non-capitalist, orcapitalist, non-capitalist, orpre-capitalist areas intopre-capitalist areas intothe global marketthe global marketeconomy. Rosaeconomy. RosaLuxemburg, the famousLuxemburg, the famous

German radical economist,German radical economist,saw this long ago in hersaw this long ago in herclassicclassic The AccumulationThe Accumulationof Capitalof Capital as necessary toas necessary toshore up the rate of profitshore up the rate of profitin the metropolitanin the metropolitan

economies.economies...


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Why did globalization notWhy did globalization not

surmount the crisis?surmount the crisis? The problem with this escape route fromThe problem with this escape route from

stagnation is that it exacerbates the problem ofstagnation is that it exacerbates the problem ofoverproduction because it adds to productiveoverproduction because it adds to productivecapacity. A tremendous amount ofcapacity. A tremendous amount of

manufacturing capacity has been added in Chinamanufacturing capacity has been added in Chinaover the last 25 years, and this has had aover the last 25 years, and this has had adepressing effect on prices and profits. Notdepressing effect on prices and profits. Notsurprisingly, by around 1997, the profits of USsurprisingly, by around 1997, the profits of UScorporations stopped growing. According to onecorporations stopped growing. According to one

calculation, the profit rate of the Fortune 500calculation, the profit rate of the Fortune 500went from 7.15 in 1960-69 to 5.30 in 1980-90 towent from 7.15 in 1960-69 to 5.30 in 1980-90 to2.29 in 1990-99 to 1.32 in 2000-2002.2.29 in 1990-99 to 1.32 in 2000-2002. By the endBy the endof the 1990s, with excess capacity in almostof the 1990s, with excess capacity in almostevery industry, the gap between productiveevery industry, the gap between productive

capacity and sales was the largest since thecapacity and sales was the largest since theGreat De ression.


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What about financialization?What about financialization?

Given the limited gains in countering the depressive impactGiven the limited gains in countering the depressive impactof overproduction via neoliberal restructuring andof overproduction via neoliberal restructuring andglobalization, the third escape route became very criticalglobalization, the third escape route became very criticalfor maintaining and raising profitability: financialization.for maintaining and raising profitability: financialization.

In the ivory tower of of neoclassical economics, the financialIn the ivory tower of of neoclassical economics, the financialsystem is the mechanism by which the savers or those withsystem is the mechanism by which the savers or those withsurplus funds are joined with the entrepreneurs who havesurplus funds are joined with the entrepreneurs who haveneed of their funds to invest in production. In the real worldneed of their funds to invest in production. In the real worldof late capitalism, with investment in industry andof late capitalism, with investment in industry andagriculture yielding low profits owing to overcapacity, largeagriculture yielding low profits owing to overcapacity, largeamounts of surplus funds are circulating and being investedamounts of surplus funds are circulating and being invested

and reinvested in the financial sectorthat is, the financialand reinvested in the financial sectorthat is, the financialsector is turning on itself.sector is turning on itself.


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Another indicator of the super-Another indicator of the super-

profitability of the financial sector isprofitability of the financial sector is

the fact that 40 per cent of the totalthe fact that 40 per cent of the total

profits of US financial andprofits of US financial andnonfinancial corporations isnonfinancial corporations is

accounted for by the financial sectoraccounted for by the financial sector

although it is responsible for only 5although it is responsible for only 5per cent of US gross domesticper cent of US gross domestic

product (and even that is likely to beproduct (and even that is likely to be

an overestimate).an overestimate).

What were the problems withWhat were the problems with


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What were the problems withWhat were the problems with

financialization as an escapefinancialization as an escape

route?route? The problem with investing in financial sector operations isThe problem with investing in financial sector operations is

that it is tantamount to squeezing value out of alreadythat it is tantamount to squeezing value out of alreadycreated value. It may create profit, yes, but it does notcreated value. It may create profit, yes, but it does notcreate new valueonly industry, agricultural, trade, andcreate new valueonly industry, agricultural, trade, and

services create new value. Because profit is not based onservices create new value. Because profit is not based onvalue that is created, investment operations become veryvalue that is created, investment operations become veryvolatile and prices of stocks, bonds, and other forms ofvolatile and prices of stocks, bonds, and other forms ofinvestment can depart very radically from their real valueinvestment can depart very radically from their real valuefor instance, the stock of Internet startups that keep onfor instance, the stock of Internet startups that keep onrising, driven mainly by upwardly spiraling financialrising, driven mainly by upwardly spiraling financialvaluations, that then crash.valuations, that then crash.

Profits then depend on taking advantage of upward priceProfits then depend on taking advantage of upward pricedepartures from the value of commodities, then sellingdepartures from the value of commodities, then sellingbefore reality enforces a correction, that is a crash backbefore reality enforces a correction, that is a crash backto real values. The radical rise of prices of an asset farto real values. The radical rise of prices of an asset farbeyond real values is what is called the formation of abeyond real values is what is called the formation of a

bubble.bubble.


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Why is financialization soWhy is financialization so

volatile?volatile? Profitability being dependent on speculative coups, it is notProfitability being dependent on speculative coups, it is not

surprising that the finance sector lurches from one bubblesurprising that the finance sector lurches from one bubbleto another, or from one speculative mania to another.to another, or from one speculative mania to another.

Because it is driven by speculative mania, finance drivenBecause it is driven by speculative mania, finance drivencapitalism has experienced about 100 financial crises sincecapitalism has experienced about 100 financial crises sincecapital markets were deregulated and liberalized in thecapital markets were deregulated and liberalized in the

1980s.1980s. Prior to the current Wall Street meltdown, the mostPrior to the current Wall Street meltdown, the most

explosive of these were the Mexican Financial Crisis ofexplosive of these were the Mexican Financial Crisis of1994-95, the Asian Financial Crisis of 1997-1998, the1994-95, the Asian Financial Crisis of 1997-1998, theRussian Financial Crisis of 1998, the Wall Street StockRussian Financial Crisis of 1998, the Wall Street StockMarket Collapse of 2001, and the Argentine FinancialMarket Collapse of 2001, and the Argentine Financial

Collapse of 2002.Collapse of 2002. Bill Clintons Treasury Secretary, Goldman Sachs operativeBill Clintons Treasury Secretary, Goldman Sachs operative

Robert Rubin, predicted five years ago that future financialRobert Rubin, predicted five years ago that future financialcrises are almost surely inevitable and could be even morecrises are almost surely inevitable and could be even moresevere.severe.


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How do bubbles form,How do bubbles form,

grow, and burst?grow, and burst?

Lets take the AsianLets take the Asian

financial crisis offinancial crisis of

1997 as a1997 as acasecase

study.study.


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The key ingredients of a speculative bubble were on displayThe key ingredients of a speculative bubble were on displayduring the Asian Financial Crisis of 1997-98:during the Asian Financial Crisis of 1997-98:

- Capital account and financial liberalization at the urging- Capital account and financial liberalization at the urgingof the IMF and the US Treasury Dept.of the IMF and the US Treasury Dept.

- Entry of foreign funds seeking quick and high returns,- Entry of foreign funds seeking quick and high returns,meaning they went to real estate and the stock marketmeaning they went to real estate and the stock market

- Overinvestment, leading to fall in stock and real estate- Overinvestment, leading to fall in stock and real estateprices, leading to panicky withdrawal of fundsin 1997,prices, leading to panicky withdrawal of fundsin 1997,$100 billion left the East Asian economies in a few weeks$100 billion left the East Asian economies in a few weeks

- Bailout of foreign speculators by the IMF- Bailout of foreign speculators by the IMF

- Collapse of the real economyrecession throughout East- Collapse of the real economyrecession throughout EastAsia in 1998Asia in 1998


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Self-regulationthe fruit of theSelf-regulationthe fruit of the

Asian Financial CrisisAsian Financial Crisis

Despite massive destabilization, efforts to imposeDespite massive destabilization, efforts to imposeboth national and global regulation of theboth national and global regulation of thefinancial system were opposed on ideologicalfinancial system were opposed on ideological

grounds. The rhetoric about creating a newgrounds. The rhetoric about creating a newglobal financial architecture degenerated intoglobal financial architecture degenerated intofinancial self regulation.financial self regulation.

Under the so-called Basel II process, all talk ofUnder the so-called Basel II process, all talk ofTobin taxes and capital controls was avoided inTobin taxes and capital controls was avoided infavor of self-regulation, and the Northernfavor of self-regulation, and the Northerngovernments vetoed even such weak financialgovernments vetoed even such weak financialmechanisms such as a Sovereign Debtmechanisms such as a Sovereign Debt

Restructuring Mechanism to provide someRestructuring Mechanism to provide some


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As early as 2002, progressive economistsAs early as 2002, progressive economists

were warning about the real estatewere warning about the real estate

bubble. However, as late as 2005, thenbubble. However, as late as 2005, then

Council of Economic Advisers ChairmanCouncil of Economic Advisers Chairmanand now Federal Reserve Board Chairmanand now Federal Reserve Board Chairman

Ben Bernanke attributed the rise in USBen Bernanke attributed the rise in US

housing prices to strong economichousing prices to strong economic

fundamentals instead of speculativefundamentals instead of speculativeactivity. Is it any wonder that he wasactivity. Is it any wonder that he was

caught completely off guard when thecaught completely off guard when the

Subprime Crisis broke in the summer ofSubprime Crisis broke in the summer of

2007?2007?


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And how did it grow?And how did it grow?

The dynamics of this bubble are described thusThe dynamics of this bubble are described thusby one key market player, George Soros:by one key market player, George Soros:Mortgage institutions encouraged mortgageMortgage institutions encouraged mortgageholders to refinance their mortgages andholders to refinance their mortgages and

withdraw their excess equity. They lowered theirwithdraw their excess equity. They lowered theirlending standards and introduced new products,lending standards and introduced new products,such as adjustable mortgages (ARMs), interestsuch as adjustable mortgages (ARMs), interestonly mortgages, and promotional teaser rates.only mortgages, and promotional teaser rates.All this encouraged speculation in residentialAll this encouraged speculation in residential

housing units. House prices started to rise inhousing units. House prices started to rise indouble digit rates. This served to reinforcedouble digit rates. This served to reinforcespeculation, and the rise in house prices madespeculation, and the rise in house prices madethe owners feel rich; the result was athe owners feel rich; the result was aconsumption boom that has sustained theconsumption boom that has sustained the

economy in recent years.economy in recent years.


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Lets translate this Wall Street jargon intoLets translate this Wall Street jargon intolay language: tlay language: the subprime mortgagehe subprime mortgagecrisis was not a case of supply outrunningcrisis was not a case of supply outrunningreal demand. Thereal demand. The demanddemand was largelywas largely

fabricated by speculative mania on thefabricated by speculative mania on thepart of developers and financiers thatpart of developers and financiers thatwanted to make great profits from theirwanted to make great profits from theiraccess to foreign moneyaccess to foreign moneymost of it Asianmost of it Asianand Chinese in origin--that flooded the USand Chinese in origin--that flooded the US

in the last decade, which went to proppingin the last decade, which went to proppingup middle class spending. Big ticketup middle class spending. Big ticketmortgages were aggressively sold tomortgages were aggressively sold tomillions who could not normally affordmillions who could not normally affordthem by offering lowthem by offering low teaserteaser interest ratesinterest ratesthat would later be readjusted to jack upthat would later be readjusted to jack up

But how could subprime mortgagesBut how could subprime mortgages


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p g gp g ggoing sour turn into such a biggoing sour turn into such a big

problem?problem?

Because these assets were then securitizedBecause these assets were then securitizedthat is converted into spectral commodities calledthat is converted into spectral commodities calledcollateralized debt obligations (CDOs) thatcollateralized debt obligations (CDOs) thatenabled speculation on the odds that theenabled speculation on the odds that the

mortgage would not be paid. Securitizationmortgage would not be paid. Securitizationmeans converting something into an asset thatmeans converting something into an asset thatcan be sold and bought in capital markets.can be sold and bought in capital markets.Mortgages used to be held by a specific bank forMortgages used to be held by a specific bank forthe full term of servicing the mortgage.the full term of servicing the mortgage.

Securitization allowed mortgages to beSecuritization allowed mortgages to beassembled or bundled together (sliced andassembled or bundled together (sliced anddiced) into many different types of loans anddiced) into many different types of loans andbonds. Such were the wonders of the newbonds. Such were the wonders of the newfinancial engineering.financial engineering.


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These securities were then traded byThese securities were then traded by

the mortgage originators workingthe mortgage originators working

with different layers of middlemenwith different layers of middlemen

who understated risk so as to offloadwho understated risk so as to offloadthem as quickly as possible to otherthem as quickly as possible to other

banks and institutional investors.banks and institutional investors.

These institutions in turn offloadedThese institutions in turn offloadedthese securities onto other banksthese securities onto other banks

and foreign financial institutions.and foreign financial institutions.


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The idea was to make a sale quickly, getThe idea was to make a sale quickly, get

your money upfront and make a tidyyour money upfront and make a tidy

profit, while foisting the risk on theprofit, while foisting the risk on the

suckers down the linethe hundreds ofsuckers down the linethe hundreds ofthousands of institutions and individualthousands of institutions and individual

investors that bought the mortgage-tiedinvestors that bought the mortgage-tied

securities. This was called spreading thesecurities. This was called spreading the

risk, and it was actually seen as a goodrisk, and it was actually seen as a goodthing because it lightened the balancething because it lightened the balance

sheet of financial institutions, enablingsheet of financial institutions, enabling

them to engage in other lending activities.them to engage in other lending activities.


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Games UpGames Up

When the interest rates were raisedWhen the interest rates were raised

on the subprime loans, adjustableon the subprime loans, adjustable

mortgage, and other innovativemortgage, and other innovative

housing loans, the game was up.housing loans, the game was up.There are about six million subprimeThere are about six million subprime

mortgages outstanding, 40% ofmortgages outstanding, 40% of

which will likely go into default in thewhich will likely go into default in thenext two years, Soros estimates.next two years, Soros estimates.


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and five million more defaults fromand five million more defaults fromadjustable rate mortgages and otheradjustable rate mortgages and otherflexible loans geared to snag the mostflexible loans geared to snag the mostreluctant potential homebuyer will occurreluctant potential homebuyer will occur

over the next several years.over the next several years. But securitiesBut securitieswhose value run into as much as twowhose value run into as much as twotrillion dollars have already been injected,trillion dollars have already been injected,like virus, into the global financial system.like virus, into the global financial system.Global capitalisms gigantic circulatoryGlobal capitalisms gigantic circulatory

system has been fatally infected. And, assystem has been fatally infected. And, aswith a plague, we dont know who andwith a plague, we dont know who andhow many are fatally infected until theyhow many are fatally infected until theykeel over because the whole financialkeel over because the whole financialsystem has become so non-transparentsystem has become so non-transparent

owing to lack of regulation.owing to lack of regulation.


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But how could Wall StreetBut how could Wall Street


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But how could Wall StreetBut how could Wall Street

titans collapse like a house oftitans collapse like a house of

cards?cards? For Lehman Brothers, Merrill Lynch, Fannie Mae, FreddieFor Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie

Mac, and Bear Stearns, the losses represented by theseMac, and Bear Stearns, the losses represented by thesetoxic securities simply overwhelmed their reserves andtoxic securities simply overwhelmed their reserves andbrought them down. And more are likely to fall once theirbrought them down. And more are likely to fall once theirbooks are corrected to reflect their actual holdings of thesebooks are corrected to reflect their actual holdings of theseassets.assets.

And many others will join them as other speculativeAnd many others will join them as other speculativeoperations such as credit cards and different varieties ofoperations such as credit cards and different varieties ofrisk insurance seize up. The American International Grouprisk insurance seize up. The American International Group(AIG) was felled by its massive exposure in the unregulated(AIG) was felled by its massive exposure in the unregulatedarea of credit default swaps, derivatives that make itarea of credit default swaps, derivatives that make it

possible for investors to bet on the possibility thatpossible for investors to bet on the possibility thatcompanies will default on repaying loans. According tocompanies will default on repaying loans. According toSoros, such bets on credit defaults now make up a $45Soros, such bets on credit defaults now make up a $45trillion market that is entirely unregulated. It amounts totrillion market that is entirely unregulated. It amounts tomore than five times the total of the US government bondmore than five times the total of the US government bondmarket. The mega-size of the assets that could go badmarket. The mega-size of the assets that could go badshould AIG collapse was what made Washington change itsshould AIG collapse was what made Washington change its

mind and salvage it after it let Lehman Brothers collapse.mind and salvage it after it let Lehman Brothers collapse.


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Whats going to happenWhats going to happen


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Whats going to happenWhats going to happen

now?now? We can safely say then that there will be moreWe can safely say then that there will be more

bankruptcies and government takeovers, withbankruptcies and government takeovers, withsome European and Asian banks and institutionssome European and Asian banks and institutions

joining their troubled US counterparts in beingjoining their troubled US counterparts in beingeither allowed to fail, propped or taken over byeither allowed to fail, propped or taken over bygovernment. We will also see government takinggovernment. We will also see government takingover non-financial corporations as the recessionover non-financial corporations as the recessionspreads, with the US automobile industry being aspreads, with the US automobile industry being a

prime candidate for takeover. Without a massiveprime candidate for takeover. Without a massive

bailout, GM, Ford, and Chrysler will go bankrupt.bailout, GM, Ford, and Chrysler will go bankrupt.However, Washington will probably give themHowever, Washington will probably give themmoney only if they yield significant managementmoney only if they yield significant managementcontrol to the government. In short, the processcontrol to the government. In short, the processof nationalization has just begun.of nationalization has just begun.


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In Asia, Europe, and elsewhere, a USIn Asia, Europe, and elsewhere, a USrecession will translate into a recession, ifrecession will translate into a recession, ifnot worse. Asia will definitely suffer, andnot worse. Asia will definitely suffer, andnot only because most countries arenot only because most countries are

greatly dependent on the US market forgreatly dependent on the US market fortheir exports. Chinas capacity totheir exports. Chinas capacity tocounteract the recessionary impact iscounteract the recessionary impact islimited since Chinas main foreign marketlimited since Chinas main foreign marketis the US and it imports raw materials andis the US and it imports raw materials and

intermediate goods that it uses for itsintermediate goods that it uses for itsexports to the US from Japan, Korea, andexports to the US from Japan, Korea, andSoutheast Asia. Globalization has madeSoutheast Asia. Globalization has madedecoupling impossible. The US, China,decoupling impossible. The US, China,and East Asia are like three prisonersand East Asia are like three prisoners

bound together in a chain-gang.bound together in a chain-gang.


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China Slows,China Slows,

World Feels theWorld Feels thePain,Pain,

Wall Street JournalWall Street Journal headlineheadline


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We are facing not only aWe are facing not only a

export slowdown but theexport slowdown but the

crisis of an economiccrisis of an economicparadigm: the export-paradigm: the export-

oriented globalizedoriented globalizedeconomy.economy.


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Miss Piggys not worried about thisMiss Piggys not worried about this

though, her mind being consumed bythough, her mind being consumed by

schemes to perpetuate her dynastyschemes to perpetuate her dynasty

in power.in power.


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In a nutshellIn a nutshell

The Wall Street meltdown is not only due to greed and toThe Wall Street meltdown is not only due to greed and tothe lack of government regulation of a hyperactive sector.the lack of government regulation of a hyperactive sector.The Wall Street collapse stems ultimately from the crisis ofThe Wall Street collapse stems ultimately from the crisis ofoverproduction that has plagued global capitalism since theoverproduction that has plagued global capitalism since themid-seventies.mid-seventies.

Financialization of investment activity has been one of theFinancialization of investment activity has been one of theescape routes from stagnation, the other two beingescape routes from stagnation, the other two beingneoliberal restructuring and globalization. With neoliberalneoliberal restructuring and globalization. With neoliberalrestructuring and globalization providing limited relief,restructuring and globalization providing limited relief,financialization became attractive as a mechanism to shorefinancialization became attractive as a mechanism to shoreup profitability. But financialization has proven to be aup profitability. But financialization has proven to be a

dangerous road, leading to speculative bubbles that lead todangerous road, leading to speculative bubbles that lead tothe temporary prosperity of a few but which ultimately endthe temporary prosperity of a few but which ultimately endup in corporate collapse and in recession in the realup in corporate collapse and in recession in the realeconomy.economy.


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The key questions in everyonesThe key questions in everyones

mind now are: How deep andmind now are: How deep and

long will this recession be? Willlong will this recession be? Will

this recession tip into athis recession tip into adepression? And of course, howdepression? And of course, how

do we get out of this mess?do we get out of this mess?


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Well, there is one thingWell, there is one thingthat we can be certainthat we can be certainof: that neoliberal free-of: that neoliberal free-market policies andmarket policies andglobalization, which gotglobalization, which gotus into this mess in theus into this mess in thefirst place, will notfirst place, will notprovide the answer. Inprovide the answer. Infact, the silver lining infact, the silver lining inall this is theall this is thediscrediting anddiscrediting and

delegitimizing of freedelegitimizing of freemarket ideology, themarket ideology, theglobalist paradigm, andglobalist paradigm, andivory tower neoclassicalivory tower neoclassicaleconomics, which waseconomics, which wasblind to theblind to the

developments in thedevelopments in thereal world.real world.

Adios companeros!Adios companeros!


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In short, we are seeingIn short, we are seeingthe break up of athe break up of ahegemonic power-hegemonic power-knowledge complex orknowledge complex ordiscourse that has haddiscourse that has haddevastatingdevastatingconsequences for usconsequences for usall. But nature abhorsall. But nature abhorsa vacuum, and thea vacuum, and the

question is: What willquestion is: What willtake the place oftake the place ofneoliberalism?neoliberalism?

Discourse. Akin yan.Discourse. Akin yan.

IIthought you were justthought you were just

going to borrow fromgoing to borrow from

that fool Derrida.that fool Derrida.


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The reaction of civil society groupsThe reaction of civil society groups

throughout the world to the crisis hasthroughout the world to the crisis has

been a volatile one where outragebeen a volatile one where outrage

and frustration are mixed with hope.and frustration are mixed with hope.Outrage at the greed of Wall Street,Outrage at the greed of Wall Street,

frustration at the fact that we hadfrustration at the fact that we had

been warning for so long about thebeen warning for so long about thedangers of globalization anddangers of globalization and

deregulation and this would not havederegulation and this would not have

happened had people listened to us.happened had people listened to us.


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There is also concern that avoiding theThere is also concern that avoiding therecession or depression will become anrecession or depression will become anexcuse for the US, European, and otherexcuse for the US, European, and otherdeveloped country governments todeveloped country governments to

postpone indefinitely the radicalpostpone indefinitely the radicaltransformation needed in their economictransformation needed in their economicsystems to drastically curtail greenhousesystems to drastically curtail greenhousegas emissions and ward off ecologicalgas emissions and ward off ecologicalcatastrophe within the decade. Unlesscatastrophe within the decade. Unless

greenhouse gas emissions are reduced bygreenhouse gas emissions are reduced by80-90 per cent of their 1990 levels by80-90 per cent of their 1990 levels by2050, the global mean temperature will2050, the global mean temperature willrise above the 2 degrees celsius limitrise above the 2 degrees celsius limitnecessary to prevent ecologicalnecessary to prevent ecological

catastrophe.catastrophe.


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But along with outrageBut along with outrage

and concern comes hopeand concern comes hope

that we are beingthat we are beingpresented with anpresented with an

opportunity to push for aopportunity to push for a

transformation of atransformation of adysfunctional globaldysfunctional global

economic systemeconomic system..


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Alternatives are now being proposed toAlternatives are now being proposed to

the unpopular bailout plans in Washingtonthe unpopular bailout plans in Washington

and Europe. At the recently concludedand Europe. At the recently concluded

Asia-Europe Peoples Forum (AEPF) inAsia-Europe Peoples Forum (AEPF) inBeijing, for instance, scores of participantsBeijing, for instance, scores of participants

drafted a transition program towards adrafted a transition program towards a

more comprehensive strategic program ofmore comprehensive strategic program of

radical transformation, one that wouldradical transformation, one that wouldaddress the threats that people face in theaddress the threats that people face in the

short term while pushing towards radicalshort term while pushing towards radical

transformation.transformation.


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Among the elements of the Beijing Declaration: A TransitionalAmong the elements of the Beijing Declaration: A TransitionalProgramProgram

towards Radical Socio-economic Transformation are:towards Radical Socio-economic Transformation are:

Introduce full-scale socialization of banks, not justIntroduce full-scale socialization of banks, not justnationalization of bad assets.nationalization of bad assets.

Institutionalize full transparency within the financial systemInstitutionalize full transparency within the financial systemthrough the opening of the books to the public, to bethrough the opening of the books to the public, to befacilitated by citizen and worker oversight bodies.facilitated by citizen and worker oversight bodies.

Introduce parliamentary and citizens oversight of theIntroduce parliamentary and citizens oversight of theexisting banking system.existing banking system.

Apply social and environmental criteria to all lending,Apply social and environmental criteria to all lending,including for business purposes.including for business purposes. Prioritize lending to meet social and environmental needs,Prioritize lending to meet social and environmental needs,

at minimum rates of interest.at minimum rates of interest.


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Safeguard migrant remittances to their familiesSafeguard migrant remittances to their familiesand introduce legislation to restrict charges andand introduce legislation to restrict charges andtaxes on transferstaxes on transfers

Overhaul central banks and make themOverhaul central banks and make them

autonomous but publicly accountable institutions.autonomous but publicly accountable institutions. Create people-based banking institutionsCreate people-based banking institutions Reintroduce stringent capital controls as well asReintroduce stringent capital controls as well as

currency transactions taxescurrency transactions taxes Cancel the debt of all developing countries toCancel the debt of all developing countries to

enable them to have resources to protect theirenable them to have resources to protect theirpopulations from the developing recession orpopulations from the developing recession ordepression.depression.


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What are some of the featuresWhat are some of the features


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of the deglobalized economyof the deglobalized economy

whose time has come?whose time has come? Move away from export-oriented production to productionMove away from export-oriented production to productionfor local and national marketsfor local and national markets

Principle of subsidiaritywhenever possible, encouragePrinciple of subsidiaritywhenever possible, encourageproduction to take place at the local level or, in the case ofproduction to take place at the local level or, in the case ofsome industries, at the national levelsome industries, at the national level

Equity of income and asset distribution is the key to localEquity of income and asset distribution is the key to localmarket-driven growth and sustainable developmentmarket-driven growth and sustainable development

Equity in distribution of income must be accompanied byEquity in distribution of income must be accompanied bymore democratic arrangements in management ofmore democratic arrangements in management ofproduction and creation of more diverse productionproduction and creation of more diverse productioncomplex consisting of private enterprises, cooperatives,complex consisting of private enterprises, cooperatives,

state enterprisesthe mixed economystate enterprisesthe mixed economy Central to equitable asset and income distribution is notCentral to equitable asset and income distribution is not

only class but genderonly class but gender Progressive taxation is the key to generating financialProgressive taxation is the key to generating financial

resources for development, not access to foreign capitalresources for development, not access to foreign capital


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And very important, move toward aAnd very important, move toward a

radical ecological transformation ofradical ecological transformation of

the economy, so that dependence onthe economy, so that dependence on

fossil fuels and other greenhousefossil fuels and other greenhousegas-emitting activities is eliminated.gas-emitting activities is eliminated.

Instead of growth, increase in theInstead of growth, increase in the

quality of life for all owing to a betterquality of life for all owing to a betterenvironment and equality of incomeenvironment and equality of income

distribution must be the centraldistribution must be the central

criterion of the economy.criterion of the economy.


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Civil society organizations, of course, know thatCivil society organizations, of course, know thatthese demands will not be granted merely bythese demands will not be granted merely bydemanding them from governments. But theydemanding them from governments. But theysee politics as being unfrozen by the recentsee politics as being unfrozen by the recentevents and are hopeful that people will becomeevents and are hopeful that people will becomemore and more susceptible to mobilizationmore and more susceptible to mobilizationaround radical programs as the crisis ofaround radical programs as the crisis oflegitimacy of neoliberalism, globalization, andlegitimacy of neoliberalism, globalization, andcapitalism deepens.capitalism deepens.

One important consideration for us in thisOne important consideration for us in thismeeting is that owing to their lower levels ofmeeting is that owing to their lower levels ofintegration into the global economy, the lessintegration into the global economy, the lessdeveloped countries might have a less difficultdeveloped countries might have a less difficulttime deglobalizing than the developedtime deglobalizing than the developed

economies.economies.


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Nevertheless, owing to theNevertheless, owing to thecentrality of the US in the globalcentrality of the US in the globaleconomy, its future directionseconomy, its future directionswill affect everyone, so thewill affect everyone, so the

question on everyones mind atquestion on everyones mind atthis point is:this point is:

Will he deliver?Will he deliver?


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Or maybe, the moreOr maybe, the more

appropriate question is:appropriate question is:what will he deliver?what will he deliver?

Obamas role models: FDR and Keynes: two menObamas role models: FDR and Keynes: two men

who saved capitalismwho saved capitalismfrom itselfObamasfrom itselfObamas

role models?role models?


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Many progressives sense that we areMany progressives sense that we areentering an era of great dangerentering an era of great dangermixed with great possibilities formixed with great possibilities for

progressive change. They realize thatprogressive change. They realize thatalternatives cannot be limited to aalternatives cannot be limited to areturn of Keynesianism. They realizereturn of Keynesianism. They realizethat unless they intervene now withthat unless they intervene now with

practical but attractive progressivepractical but attractive progressiveprograms, the crisis of neoliberalprograms, the crisis of neoliberalcapitalism might redound to thecapitalism might redound to thebenefit not of the left but thebenefit not of the left but the

o ulist fascist ri ht.o ulist fascist ri ht.


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Oh no, not again!Oh no, not again!


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At no other period have the words ofAt no other period have the words ofthe great Italian thinker Antoniothe great Italian thinker Antonio

Gramsci been more relevant thanGramsci been more relevant than

todaytoday


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Having said this, weHaving said this, weare in unchartedare in uncharted

territory, and we dontterritory, and we dontknow how this story isknow how this story is

going to endgoing to end


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Documents

Global Financial Crisis and the Future of Capitalism, Dec[1]. 15, 2008