A talk by Andrew Kliman, author of ‘Reclaiming Marx’s Capital’*
In the past few weeks, since we announced this talk, recognition has increased substantially that the United States, and now the world, are caught up in the most serious financial crisis since the Great Depression. Because Marxists are famous for “predicting five out of the last three recessions”, I need to point that the term crisis does not mean collapse, nor does it mean slump (recession, depression, downturn). While the US is probably in the midst of a recession, the downturn has been-thus far-a relatively mild one. For instance, payroll employment has fallen nine months in a row, but the total decline, 760,000, is well less than half of the decline that occurred during the first nine months of the last recession, in 2001, which itself was relatively mild.
In contrast to this, a crisis is a rupture or disruption in the network of relationships that keep the capitalist economy operating in the normal way. The present crisis is characterized above all by an acute crisis of confidence that loans will be repaid, which has in turn caused an acute crisis of liquidity-an official at the Boston Fed recently termed it a “liquidity lock”-the inability of businesses to get cash for their short-term, day-to-day needs. Some major credit markets have been essentially “frozen”; which means that lending has been dropping rapidly or even coming to a halt. But the business sector depends crucially on credit, not only to finance new investments, but just to get from today to tomorrow. General Electric, for instance, has to produce before it can sell, so in the meantime it regularly borrows heavily by issuing commercial paper in order to pay its suppliers and workers. If it doesn’t obtain credit, the workers don’t get paid and the suppliers can’t pay off the debts they owe, and so on. So the economy would be in danger of complete collapse if this situation were to persist for any length of time.
Now, many liberals and leftists have told us that the $700 billion-plus bailout was not needed, or that it is meant to provide windfall profits to the financial industry, or that the money could be spent differently, for instance to protect homeowners against foreclosure, or invest in infrastructure. But the crisis is much worse than they want you to think, and that’s because they’ve been focusing on the wrong issues. They’ve focused on the slump-which is not yet terribly severe and which can perhaps be dealt with in many different ways-and/or on the bank failures and bankruptcies in the financial sector.
The really acute, immediate crisis, however, the one that could lead to outright economic collapse, is the crisis of confidence that has caused the liquidity lock. These liberals and leftists have proposed no alternative policies to deal with this crisis, and that’s because, if one wants to save the capitalist system, there basically aren’t any alternatives that differ, except in the details, from what the Treasury and the Fed and foreign governments are now doing-namely making the liquidity flow, the cash flow, especially by the Fed stepping in to become the lender of last resort in the commercial paper market and by the Treasury twisting the arms of the banks to take the bailout money and then turn around and lend it out. There’s only one alternative to crisis of confidence and the liquidity lock that differs from this in more than details-a new, human, socio-economic system, socialism.
Figure 1. Risk Aversion (TED Spread)
3-mo. LIBOR (US $ rate) minus 3-mo. T-bill interest rate Source: bloomberg.com
I want to illustrate some of what I’ve been talking about above by looking at a couple of graphs. I haven’t found decent data on the decline in the volume of short-term lending, so I’m forced to try to illustrate the problem by looking at interest-rate figures. Figure 1 is the so-called TED Spread, the difference between the rate of interest that a bank can get by lending to another bank for 3 months (the 3-month LIBOR in terms of US dollars) and the rate of interest it can get by lending to the U.S. Treasury for 3 months. Lending to the Treasury is safer. So the difference between these rates, the TED Spread, is essentially a measure of the willingness or unwillingness to take on risk-the extra interest a bank demands before it will take on the extra risk of lending to another bank instead of lending to the U.S. government.
Through the 1st third of last month, the TED Spread was slightly more than 1 percentage point, which is already about double its usual level. But after the government had to take over Fannie Mae and Freddie Mac, and Lehman Bros. was allowed to collapse, and the government had to buy AIG, and so forth and so on … the spread rose and, after temporarily declining a bit, kept rising and rising, reaching over 4.5%, until last week, when the most recent of the bailout measures and other emergency measures were announced. As of today, as a result of the bailout and related measures, it had fallen back down, to below 3%.
Figure 2 is the interest rate on 4-week Treasury bills. Again, for financial institutions, lending to the U.S. government in this manner is safer than putting the money in the bank, because the bank might fail and, until very recently, big institutions’ deposits in the banks weren’t government-insured. And it’s safer than buying short-term commercial paper. So when they became afraid to lend to private entities, financial institutions became willing to obtain ridiculously little interest by lending to the U.S. government. The greater the fear of private-sector lending, the lower the interest rate they were willing to accept. And so the interest rate on 4-week T-bills has been, again and again, next to nothing for much of the past month. For instance, much of last week, it was 5 hundredths of 1 percent, meaning that, if you bought a $10,000 T-bill, 4 weeks later, you’d earn 42 cents interest. But this is what institutions have been willing to do with their cash, because they’ve been so afraid of the alternatives. (The latest figure, not shown above, is that the interest rate has risen to 0.42%, as the bailout and related measures begin to restore confidence.)
Now let’s consider some of what’s been coming from the left. In the Oct. 27, 2008 issue of The Nation (pp. 4-5), the historian Howard Zinn wrote,
“It is sad to see both major parties agree to spend $700 billion of taxpayer money to bail out huge financial institutions that are notable for two characteristics: incompetence and greed. … A simple and powerful alternative would be to take that huge sum of money, $700 billion, and give it directly to the people who need it. Let the government declare a moratorium on foreclosures and help homeowners pay off their mortgages. Create a federal jobs program to guarantee work to people who want and need jobs.”
This is all well and good, and these are measures worth fighting for to help working people as the slump in the economy worsens. But how do they address the crisis of confidence and the liquidity lock? Of course, one could say, “forget trying to restore confidence,” but that is basically to say, “forget trying to save capitalism,” and Zinn didn’t say that.
Barbara Ehrenreich, the well-known writer and erstwhile revolutionary socialist, at least faced the fact that what is on the line is the capitalist system itself, not just incompetent and greedy and huge financial institutions. She recently opined that there’s no alternative to capitalism “ready at hand,” so she hopes it survives the current crisis: “I’m hoping that capitalism survives this one, if only because there’s no alternative ready at hand. At the very least, we should get some regulation and serious oversight out of any bail-out deal ….” (Huffington Post, Oct. 1, 2008; www.huffingtonpost.com/barbara-ehrenreich/the-communist-manifesto-h_b_130934.html)
And then there’s the left-liberal economist Dean Baker, who was for the bailout before he was against it. On Sept. 20, he wrote,
“There is a real risk that the banking system will freeze up, preventing ordinary business transactions, like meeting payrolls. This would quickly lead to an economic disaster with mass layoffs and plunging output.
“The Fed and Treasury are right to take steps to avert this disaster. … there is an urgency to put a bailout program in place ….” (“Progressive conditions for a bailout,” p. 243. Real-world Economics Review, No. 47. www.paecon.net/PAEReview/issue47/Baker47.pdf)
In this statement, Baker characterizes the liquidity lock and its implications much in the manner that I characterized it earlier. But then, 9 days later, he reversed course:
“The bail-out is a big victory for those who want to redistribute income upward. It takes money from school teachers and cab drivers and gives it to incredibly rich Wall Street bankers. …
“This upward redistribution was done under the cover of crisis, just like the war in Iraq. But there is no serious crisis story. Yes the economy is in a recession that is getting worse, but the bail-out will not get us out of the recession, or even be much help in alleviating it.” (“Wall St held a gun to our heads,” www.guardian.co.uk/commentisfree/cifamerica/2008/sep/29/us.economy.wall.street)
Portraying the bailout as a program to make the rich richer, Baker says correctly that it won’t do much to alleviate or end the recession. But that doesn’t mean its purpose is to make the rich richer, either. What about the system’s need to getting the liquidity flowing again-which he was acutely aware of 9 days before?
Well, Baker says, the government can just take over the banks: ”In the event the banking system really did freeze up, then the Federal Reserve would step in and take over the major banks.” But the government must either take over the banks by buying them, which brings us back to a bailout costing hundreds of billions of dollars-or more, depending on how extensive the nationalization is. Or the government can take over the banks without compensation. That’s a lovely way of dealing with a lack of confidence on the capitalists’ part. And it’s a lovely way of getting credit flowing again. In order to lend, banks, even nationalized banks, need people and institutions to lend to them and/or invest in them. But I know that I wouldn’t want to lend to or invest in any institution that has shown a willingness to expropriate without compensation. Once again, of course, one can say, “forget trying to restore confidence and forget the sanctity of property rights”-in other words, “forget trying to save capitalism”-but Baker didn’t go there.
I want to turn now to the roots of this crisis. My view is basically that the crisis has its roots in the economic slump of the 1970s, from which the global economy never fully recovered-not in the way in which the destruction of capital in and through the Great Depression and World War II led to a post-war boom. Policymakers here and abroad have understandably been afraid of a repeat of the Great Depression. So they’ve continually taken measures to slow down and prevent the destruction of capital (a plummeting of the value of capital assets as well as physical destruction of capital).
But the destruction of capital is not only a consequence of an economic slump; it is also the mechanism leading to the next boom. For instance, if there’s a business that can generate $3 million in profit annually, but the value of the capital invested in the business is $100 million, the rate of profit is a measly 3%. But if the destruction of capital values enables a new owner to acquire the business for only $10 million instead of $100 million, the new owner’s rate of profit is a more-than-respectable 30%. That’s a tremendous spur to a new boom.
But such a massive destruction of capital as took place in the Depression and then in World War II hasn’t taken place, and so there’s been a partial recovery only, brought about largely through
(1) declining real wages for most workers and other austerity measures, as well as exporting the crisis into the 3rd world, and
(2) a mountain of debt-mortgage, consumer, government, corporate-to paper over the sluggishness and mitigate the effects of the declining real wages.
Because of this excessive run-up of debt, there have been persistent debt crises. These will continue until
(a) sufficient capital is destroyed to once again make investment truly profitable. (The present crisis may well end up being this moment.). Or
(b) there’s such a panic that lending stops and the economy crashes, ushering in chaos or fascism or warlordism or whatever, or
(c) capitalism is replaced by a new human, socialist society.
Bubbles are thus, according to the above, an inevitable result of efforts to “grow the economy,” by means of debt, faster than is warranted by the underlying flow of new value generated in production. The more sophisticated and widespread the credit markets, the greater is the degree to which “forced expansion” (Karl Marx, Capital, vol. 3, Chap. 30; p. 621 of Penguin ed.) can take place, but also the greater the degree of ultimate contraction when the law of value eventually makes its presence felt. So a bubble is kind of like a rubber band stretching and snapping back.
Figure 3 depicts what’s meant by a bubble. Imagine that demand for assets such as homes or stock shares increases, without a corresponding increase in new value being produced. This causes the prices of these assets to rise; and on paper, people’s and businesses’ wealth increases, so they now have the means to borrow more, and they may become “irrationally exuberant”; and all of this leads to a further increase in demand, and so forth and so on.
The debt-induced bubble that’s resulted in the present crisis is of course the housing sector bubble. Paradoxically, it came about because of the weakness of the U.S. economy. First stock prices plunged sharply as the “dot.com” stock market bubble burst. Then the economy went into recession in 2001, and it was weakened further by the 9/11 attacks later that year. In order to allay the fears of financial collapse that followed the attacks, the Fed lowered short-term interest rates. Even after the recession ended a couple of months later, employment kept falling, through the middle of 2003, so the Fed kept lowering short-term lending rates. For three full years, starting in October of 2002, the real (ie inflation-adjusted) federal funds rate was actually
negative (see figure 4). This allowed banks to borrow funds from other banks, lend them out, and then pay back less than they had borrowed once inflation was taken into account.
This “cheap money, easy credit” strategy created a new bubble. With stock prices having recently collapsed, this time the flood of money flowed at first largely into the housing market. Loan funds were so ready to hand that working class people whose applications for mortgage loans would normally have been rejected were now able to obtain them.
As Figure 4 shows, the trajectory of the mortgage borrowing to income ratio during the 2000-4 period is an almost perfect mirror image of the trajectory of the real federal funds rate. This is a clear indication of the close link between the explosion of mortgage borrowing and the easy credit conditions. And with new borrowing increasing so rapidly, the ratio of outstanding mortgage debt to after-tax income, which had risen only modestly during the 1990s, jumped from 71 percent in 2000 to 103 percent in 2005 (see figure 5).
The additional money flooding the housing market in turn caused home prices to skyrocket. Indeed, total mortgage debt and home prices (as measured by the Case-Shiller Home Price Index) rose at almost exactly the same rates between start of 2000 and the end of 2005-100 percent and 102 percent, respectively.
Those of us who attempt, following Marx, to understand capitalism’s economic crises as disturbances rooted in its system of production-value production-always face the problem that the market and production are not linked in a simple cause and effect manner. As a general rule, it is not the case that particular disturbance in the sphere of production causes an economic crisis. Instead, what occurs in the sphere of production conditions and sets limits to what occurs in the market. And it is indisputable that, in this sense, the US housing crisis has its roots in the system of production. The increases in home prices were far in excess of the flow of value from new production that alone could guarantee repayment of the mortgages in the long run. The new value created in production is ultimately the sole source of all income-including homeowners’ wages, salaries and other income-and therefore it is the sole basis upon which the repayment of mortgages ultimately rests.
But from 2000 to 2005, the rise in after-tax income was barely one third of the rise in home prices. This is precisely why the real-estate bubble proved to be a bubble. A rise in asset prices or expansion of credit is never excessive in itself. It is excessive only in relation to the underlying flow of value. Non-Marxist economists and financial analysts may use different language to describe these relationships, but they do not dispute them. Indeed, it is commonplace to assess whether homes are over or under-priced by looking at whether their prices are high or low in relation to the underlying flow of income.
Now, some players in the mortgage market did realise that something was amiss but nonetheless sought to quickly reap lush profits and then protect themselves before the day of reckoning arrived. But there was a good reason (or what seemed at the time to be a good reason) why others failed to perceive that the boom times were unsustainable: home prices in the US had never fallen on a national level, at least not since the Great Depression.
So it was “natural” to assume that home prices would keep rising. This assumption served to allay misgivings over the fact that a lot of money was being lent out to homeowners who were less than creditworthy, and in the form of risky subprime mortgages. Had home prices continued to go up, homeowners who had trouble making mortgage payments would have been able to get the additional funds they needed by borrowing against the increase in the value of their homes, and the crisis would have been averted.
Even if home prices had leveled off or fallen only slightly, there probably would have been no crisis. In the light of the historical record the bond-rating agencies assumed, as their worst case scenario, that home prices would dip by a few percent. It was because of this assumption that they gave high ratings to a huge amount of pooled and repackaged mortgage debt (mortgage backed securities) that included subprime mortgages and the like. Today these securities are called “toxic”-very few investors are willing to touch them. But if the bond-rating agencies had been right about the worst case scenario, the investors who thought that they were buying safe, investment grade securities would indeed have reaped a decent profit.
As we now know, however, the bond-raters were wrong, massively wrong, and thus there has been a massive mortgage market crisis. According to the latest Case-Shiller Index figures, between the peak in July 2006 and July of this year, US home prices fell by 19.5 percent. And because the mortgages were pooled and resold as mortgage-backed securities, the mortgage market crisis has spread throughout the financial system and become a generalized financial crisis.
I now want to say a bit about who or what is to blame. We’re hearing a lot about greed, but capitalists are always greedy. But we don’t always have massive crises. So what explains the fact that we have one now?
There’s also a lot of talk about lax regulation and insufficient regulation. I know of no better answer to this notion than the answer recently given by Joseph Stiglitz. In a Sept. 17 article, “How to prevent the next Wall Street crisis” (http://www.cnn.com/2008/POLITICS/ 09/17/stiglitz.crisis/), Stiglitz, a Nobel Laureate and former World Bank chief economist, proposed a six-point program chock-full of regulations and laws. But he then acknowledged: “These reforms will not guarantee that we will not have another crisis.” So why the title “How to prevent the next Wall Street crisis”?
Stiglitz went on explain why his proposed reforms are no guarantee: “The ingenuity of those in the financial markets is impressive. Eventually, they will figure out how to circumvent whatever regulations are imposed.” Yes. So why the 6-point program?
He then wrote, “But these reforms will make another crisis of this kind less likely, and, should it occur, make it less severe than it otherwise would be.” Hmm. If the financial markets will eventually circumvent whatever regulations are imposed, then why isn’t another crisis equally likely with these regulations as without them? And why won’t it be as severe with them as without them?
Finally, I want to say a few words about the significance of the various government interventions we’ve seen this year–the government’s forced dismantling of Bear Stearns, the nationalization of Freddie Mac, Fannie Mae, and AIG, and the bailout money that’s being used to partially nationalize the banking system. Some commentators portray this, as I noted earlier, as an effort to make the rich richer. Others depict it as some sort of progressive turn, an ideological shift away from the “free market.” I think both notions are seriously mistaken.
What we are witnessing is a new manifestation of state-capitalism. It isn’t the state-capitalism of the former USSR, characterized by central “planning” and the dominance of state property; it is state-capitalism in the sense in which Raya Dunayevskaya used the term to refer to a new global stage of capitalism, characterized by permanent state intervention, that arose in the 1930s with the New Deal and similar policy regimes (Marxism and Freedom, Humanity Books, 2000, pp. 258ff.). The purpose of the New Deal, just like the purpose of the latest government interventions, was to save the capitalist system from itself.
Because many liberal and left commentators choose to focus on the distributional implications of these interventions-who will the government rescue, rich investors and lenders or average homeowners facing foreclosure?-let me stress that I mean “save the capitalist system” in the literal sense. The purpose of these interventions is not to make the rich richer, or even to protect their wealth, but to save the system as such.
Consider the takeover of Bear Stearns. It was in serious trouble but there were other ways of dealing with its troubles than by the government forcing it to be sold to JP MorganChase. Had Bear Stearns been able to borrow from the Fed, it could have overcome the cash-flow problem it faced. But the Fed waited until the following day to announce that it would now lend to Wall Street firms. Or, if Bear Stearns had been allowed to file for bankruptcy, it could have continued to operate, and its owners’ shares of stock would not have been acquired at a fraction of their market value. Instead the Fed forced it to be sold off.
Thus the takeover was definitely not a way of bailing out Bear Stearns’ owners. Nor was the Fed out to enrich the owners of JP Morgan Chase. (The Fed selected it as the new owner of Bear Stearns’ assets because it was the only financial firm big enough to buy them.) Instead the Fed acted as it did in order to send a clear signal to the financial world that the US government would do whatever it could to prevent the failure of any institution that is “too big to fail”, because such a failure could ultimately bring the financial system crashing down.
And consider the government’s rescue of Fannie Mae and Freddie Mac. This came about because of a sharp decline in their share prices. But the government didn’t rescue them in order to prop up the price of their share prices. Their share prices continued to decline after the rescue plan was announced, precisely because the government’s motivation was not to bail out their shareholders. Indeed, the shareholders aren’t receiving any money from the government. Only those institutions and investors that lent to them are being compensated for their losses, and the government had been seriously considering not compensating some of these lenders (the holders of subordinated debt). Just as in the Bear Stearns case, the point of the intervention was to restore confidence in the financial system by assuring lenders that, if all else fails, the US government will be there to pay back the monies that are owed to them.
The new manifestation of state-capitalism we are witnessing is essentially non-ideological in character. Henry Paulson is certainly no champion of government regulation or nationalization. But at this moment of acute systemic crisis, ideological scruples simply have to be set aside. The be-all and end-all priority is to serve the interests of capitalism–capitalism itself, as distinct from capitalists. As Marx noted, “The capitalist functions only as personified capital …. [T]he rule of the capitalist over the worker is [actually] the rule of things [capital] over man, … of the product [capital] over the producer” (Results of the Immediate Process of Production,” in Penguin ed. of Capital, vol. 1, pp. 989-90, emphasis in original). The goal is the continued self-expansion of capital, of value that begets value to beget value, the accumulation of value for the sake of the accumulation of value-not for the sake of the consumption of the rich.
Of course, we are indeed witnessing a movement away from “free-market” capitalism, and back to more government control and even temporary ownership. But this is a pragmatic matter rather than an ideological one. There’s nothing inherently progressive about it. The government is simply doing what it must, whatever it must, to prevent a collapse of the system.
The recent state capitalist interventions are perhaps best described as the latest phase of what Marx called “the abolition of the capitalist mode of production within the capitalist mode of production itself”. There is nothing private about the system any more except the titles to property. As I’ve been stressing here, the government is not even intervening on behalf of private interests: it is intervening on behalf of the system itself. Such total alienation of an economic system from human interests of any sort is a clear sign that it needs to perish and make way for a higher social order.
The current economic crisis is bringing misery to tens of millions of working people. But it is also bringing us a new opportunity to get rid of a system that is continually rocked by such crises. The financial crisis has caused so much panic in the financial world that the fundamental instability of capitalism is being acknowledged openly on the front pages and the op-ed columns of leading newspapers. Great numbers of people are already searching for an explanation of what has gone wrong. Many of them may be ready to consider a whole different way of life, and many more will be ready to consider this as the recession in the real economy deepens. Revolutionary socialists need to be prepared, not just prepared to organize, but prepared with a clear understanding of how capitalism works, and why it cannot be made to work for the vast majority. And we need to get serious about working out how an alternative to capitalism-one that is not just a different form of capitalism-might be a real possibility.
* This talk is posted on the New SPACE website at http://new-space.mahost.org/crisis08talk. The talk draws in part on Andrew Kliman, “Trying to Save Capitalism from Itself” (April 25; available at marxisthumanismtoday.org/node/13 and at www.thehobgoblin.co.uk/2008_11_AK_Economy.htm) and Andrew Kliman, “A crisis for the centre of the system” (Aug. 23; published in International Socialism, No. 120, available at http://isj.org.uk)./
Addition, October 22: In discussion following this talk, questions were raised about how my discussion of capital destruction is related to Marx’s “law of the tendential fall in the rate of profit.” To address this, let me quote from pages 30-31 of my book Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency (Lexington Books, 2007):
“what Marx meant by the “tendency” of the rate of profit to fall was not an empirical trend, but what would occur in the absence of the various “counteracting influences,” such as the tendency of the rate of surplus-value to rise.”
“He singled out one of these counteracting influences, the recurrent devaluation of means of production, for special consideration. Like the tendential fall in the rate of profit itself, and the tendency of the rate of surplus-value to rise, the devaluation of means of production is a consequence of increasing productivity. Capitalists incur losses (including losses on financial investments) as a result of this devaluation; a portion of the capital value advanced in the past is wiped out. In this way (as well as by means of their tendency to cause the price of output to fall), increases in productivity tend eventually to produce economic crises. Yet since the advanced capital value is the denominator of the rate of profit, the annihilation of existing capital value acts to raise the rate of profit and thus helps to bring the economy out of the crisis (see Marx [Capital, vol. 3], chap. 15, esp. pp. 356-58, 362-63 [of the Penguin ed.]).”