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There is perhaps no period more difficult to judge than the recent past. Indeed, the complexity and unprecedented scale of recent convulsions in world financial markets make reflection on the fate of neo-liberalism in our ‘crisis moment’ all the more difficult. Though John Bellamy Foster and Fred Magdoff, the authors of The Great Financial Crisis, offer little consideration of the lifespan of neoliberal ideology, they offer a rather productive and illuminating integration of Marxist and Keynesian approaches to the study of postwar capitalism. Long-time writers for·Monthly Review, both are explicitly following the tradition of Baran and Sweezy who in the 1960s wrote·Monopoly Capital – shifting the emphasis of Marxist analysis of the economy from the competitive logics between firms to full recognition of the monopolistic practices of business elites. The essays organized in the book stretch from November 2006 to December 2008 and are meant to reflect Bellamy and Foster’s ongoing application of·Monopoly Capital’s “stagnation theory” to the study of economic developments unforeseen by the authors of that now largely forgotten Marxist tome.

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Reflections on The Great Financial Crisis: Causes and Consequences

John Bellamy Foster and Fred Magdoff

There is perhaps no period more difficult to judge than the recent past. Indeed, the complexity and unprecedented scale of recent convulsions in world financial markets make reflection on the fate of neo-liberalism in our ‘crisis moment’ all the more difficult. Though John Bellamy Foster and Fred Magdoff, the authors of The Great Financial Crisis, offer little consideration of the lifespan of neoliberal ideology, they offer a rather productive and illuminating integration of Marxist and Keynesian approaches to the study of postwar capitalism. Long-time writers for Monthly Review, both are explicitly following the tradition of Baran and Sweezy who in the 1960s wrote Monopoly Capital – shifting the emphasis of Marxist analysis of the economy from the competitive logics between firms to full recognition of the monopolistic practices of business elites. The essays organized in the book stretch from November 2006 to December 2008 and are meant to reflect Bellamy and Foster’s ongoing application of Monopoly Capital’s “stagnation theory” to the study of economic developments unforeseen by the authors of that now largely forgotten Marxist tome.

The Great Financial Crisis certainly could have benefitted from more fastidious editing; each essay tends to reconstruct the argument concerning the financialization of monopoly capital and affirm the validity of Baran and Sweezy’s approaches. If some of these sections had been replaced by encounters with the work of other contemporary Marxist economists like David Harvey or Robert Brenner, the book would have a much more in-depth presentation of the contradictions of global finance. Nevertheless, as an introductory text for understanding the structure and conjuncture of the financial crisis, it is a welcome change of emphasis from that of most economic analysts, who focus only on the banking and securities markets without any attending to the underlying problems of the “real economy.”


Forefathers of Stagnation Theory


In The General Theory of Employment, Interest and Money, Keynes outlined a basic contradiction in the accumulation process that would come to haunt mature capitalist economies after the postwar boom. For a capitalist enterprise to succeed it must convert some of its profits into investments in new productive capacity. However, under modern conditions dominated by large-scale manufacturing monopolies, the opportunities for profitable investment start to dry up. Investment becomes increasingly risky, as they tend to require larger volumes of money and uncertain expectations for profits that will only come many years into the future. Once the infrastructure and industrial factories of mature capitalist economies have been built, a tendency of “secular stagnation” abounds. This is not to say that reinvestment in the means of production would disappear, but these would be geared more toward replacement with more efficient plants and equipment and little increase in new net investment.

For Keynes, the development of modern finance was inseparable from this vanishing of investment opportunities. The stock market became a medium for investors to reduce their risks in production by holding paper claims to wealth of a more liquid and transferable quality. Although this allowed risk to be spread out through markets for industrial securities and credit, it opens up corporate investment to the potentially conflicting dynamic of two different pricing structures with different temporal conditions: the pricing of physical output v. the pricing of financial assets. While the latter involves short-term financial commitments, the former is long-term and ‘sunk’ in material things. The possibility of too drastic a de-coupling of assets from production comes to fruition in the bursting of speculative bubbles. Those who purchase assets have often borrowed money from banks that step in with a guarantee between depositors and debtors. Keynes saw this interposition of a “veil of money” between the real asset and the original owner of wealth as one of the definitive aspects of modern economies.

In the 1960s, the Keynesian/Marxist economist Hyman Minsky developed his “financial instability hypothesis,” which focused on advanced capitalism’s dependence on a constant cash flow through debt to fuel its expansion. As debts piled up and the instability of the system grew, a bursting of the bubble was inevitable. However, his point was more than just recognition of speculative frenzies at the peak of business cycle before the shakeout of less profitable investments. For Minsky, the modern economy became increasingly dependent on financial markets and, post festum, on the help of the lender of last resort: government controlled central banks. The challenge for macroeconomic policymakers then becomes one adjusting this lender of last resort function to a financial system of increasing scale and fragility.

Marxist economists in the 1960s like Paul Baran and Paul Sweezy began to argue that our epoch of monopoly capital, with its enormous productivity, generated enormous surpluses that were far too large to be absorbed by traditional channels of consumption and investment. Speculative finance became a desperately needed outlet for investment and took on more than the modest role as lubricator for the accumulation process. It became a secondary engine for growth after the primary engine of productive investment lagged behind. Obviously this dynamic of stagnation leading to financialization, which became an undeniable trend by the early 1970s, leads to an acceleration of the process of debt buildup. Whereas the level of debt as a percentage of GDP from 1960-80 remained near 100%, by 1985 it reached nearly 120% and by 2005 reached nearly 250%. This financial explosion as a long-term trend in the US and other advanced capitalist countries was symptomatic of underlying stagnation. Importantly, finance then could not simply be explained away as the parasitic practice of the rich who could instead re-channel their funds into factories and infrastructure. Rather financialization had to be viewed as a response to the contradictions in the accumulation process of firms with ‘sunken’ infrastructures.


Household Debt and the Crisis

One of the core contradictions of capitalism is that the accumulation process depends on the maintenance of class relations and keeping wages down while relying on the consumption of wage earners to support economic growth. During the last 30 years, real wages have been extremely sluggish (except for a short period in the late 90s). Yet, during this period consumption has continued to climb and from 1994 to 2004 it grew faster than national income levels. Many commentators have used this paradox as grounds to chastise what they consider to be the profligate ways of American consumers who spend beyond their means and unnecessarily tack on more consumer debt. However, this interpretation blames victims who try to maintain their standard of living in the context of wage-stagnation. The ratio of outstanding consumer debt to consumer disposable income has consistently risen since 1975, reaching 127% by 2005. Of course those within lower economic brackets have the greatest proportion of consumer debt.  Between 1995-2005 alone, the amount of debt taken out by households in the lowest fifth income bracket has increased by 19%.

Within this context a whole new style of credit debt was created. Borrowing in installment programs, at variable rates and downright predatory lending for payday loans and subprime mortgages have become generalized ways that working-class families have used to make ends meet. The number of companies specializing in buying and collecting debts grew from just 12 in 1996 to 500 by 2005.  Indeed, the most salient dynamic involved in the household debt bubble has been the rapid increase of home-secured borrowing. Homeowners increasingly withdrew debt from their homes to purchase consumables and pay off debt. In a matter of 3 months in 2005, the level of outstanding debt mortgage rose to $8.66 trillion – 69.4% of US GDP.


Bellamy Foster and Magdoff’s narrative of the housing bubble follows basic stage pattern of speculative bubbles depicted in Charles Kindelberger’s Manias, Panics and Crashes: A History of Financial Crises. A round of speculation begins with a ‘novel offering’ like some new technology or new market. The novel offer in this case was the securitization of mortgage loans from CDOs (collateralized debt obligations) to CMOs (collateralized mortgage obligations), all comprised of different “tranches” representing different levels of risk of default. The spreading out of differential risks (investment-grade rated along with those pretty much guaranteed to default) allowed for a vastly expanded market for mortgage lending supported by a vast network of banks providing commercial paper for short-term funds. Banks set up structured investment vehicles (SIVs) to finance the purchase of these CDOs, giving a modicum of insurance to asset-holders who made quarterly payments but found their assets to be declining.  In the event of devaluation, banks would be forced to make large payments back to them. This spread more risk throughout the banking system than they could keep track of – leaving many exposed to risks that they thought had been transferred elsewhere.

No speculative boom reaches such a cataclysmic depth unless credit is made available to help inflate the asset bubble. In this case, since the bursting of the dot.com bubble, the US and many countries maintained historically low interest rates and changed reserve requirements for banks (for example, repeal of the Glass-Steagall Act). Cheap credit financing not only enabled traders to participate in SIVs but also expanded the number of mortgage borrowers while housing prices rose at a feverish pace. Thus, homebuyers subject to thirty years of stagnant wages were easily fooled by initially low mortgage payments and the seemingly steady rise of the price of their homes. Once these loans for home at vastly inflated prices were bundled together they would be quickly sold off to others. Just to understand the scale of this swarm of activity in the brokerage and mortgage industries it is worth quoting one of their figures: “The amount of subprime mortgages issued and imbedded in Mortgage Backed Securities shot up from $56 billion in 2000 to $508 billion at the peak of 2005.” The ease of credit access created something of a “Ponzi” dynamic which determined the price of financial assets not by any income streams or consistent payment of home loans, but by the assumption that people would continue to invest in the asset bubble.

When the Fed raised interest rates in 2006, housing prices received an eye-opening reversal – especially in California. Real estate speculators and homebuyers who had counted on double-digit increases of home prices and then reselling them before their adjustable rate mortgages (ARMs) could be reset experienced a reversal as the market cooled down. The real panic came in June 2007 when two hedge funds run by Bear Sterns went belly-up and lost about $10 billion – forcing banks across the US, Europe and Asia to admit that they had little idea how exposed they were to so-called toxic assets. This uncertainty, spreading through the commercial paper market and SIVs, moved across the globe and struck the British mortgage lender Northern Rock next in September of that year. Also that month, Lehman Brothers was allowed to fail. The speculative cycle, now definitively reaching the “panic stage,” forced the Fed to pump liquidity back into the system and avert a complete cessation of lending – reducing the federal funds rate from 4.75 in September to 3 percent in January of 2008. The federal government also provided the first of many stimulus packages, this one clocking in at $150 billion.

Once the panic was irrefutable, financial authorities in the US and G-7 countries announced plans to purchase ownership of their respective major national banks – often avoiding the word “nationalization.” In the transition period between the Bush and Obama presidencies, the US government guaranteed $1.5 trillion in debt issued by banks and provided the more than $700 billion TARP (Troubled Asset Relief Program) stimulus package. The scale of these bailouts and partial nationalizations prompted the New York Times in October 2008 to state: “In theory, the funds committed for everything from the bailouts of Fannie Mae and Freddie Mac and those of Wall Street firm Bear Stearns and the insurer AIG, to the financial rescue package approved by Congress, to providing guarantees to backstop selected financial markets (such as commercial paper) is a very big number indeed: an estimated $5.1 trillion.”

Despite the unprecedented scale of government intervention in financial markets across the globe, governments, especially in the US and UK, are running out of monetary tools by which to avoid the hoarding of cash and the end of inter-bank lending. With interest rates so low to begin with and now nearly at 0%, policymakers find themselves in a “liquidity trap” in which the normal tool of insuring flows of liquidity becomes impossible. Moreover, given the uncertainty in the system, those who receive stimulus dollars are not willing to expand or employ new workers, let alone lend money to insolvent banks and corporations.

Within this context, there has been a distinctive lack of strategic thinking amongst political elites in the advanced capitalist countries.  In the face of a long, protracted era of stagnation, governments have pursued a mixture of monetarist policy (like “quantitative easing”) and austerity programs to avoid bulging deficits.  Yet, simply pouring money at the top of the system will hardly counter the long-term trends that brought us here, especially in a liquidity trap.  Seemingly content to watch their economies sputter along the path of the “slow recovery,” policy-makers have offered little to show that they understand the extent of these economic problems.   New approaches to the works of Marx, Keynes, and Minsky are indispensable to understanding what goes on beneath the speculations of the flashing stock market ticker.



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