Marx's theory of crisis

This is, without doubt, the best short exposition of Marx's theory of crisis that I have ever heard. It is brilliant, and congratulations to Cliff Bowman of Cranfield University for being so succinct.

What does the rapid uptake of mobile money transfer in Kenya really mean for financial inclusion?

An excellent analysis of mobile money transfer that pours cold water on the way that it is perceived by the global development institutions:

What does the rapid uptake of mobile money transfer in Kenya really mean for financial inclusion?

the case for an alternative economic strategy

Jayoti Ghosh is one of the best heterodox development economists working today. Here is her recent prescription for equitably fixing the global economy.

false economy: why the cuts are the wrong solution

An excellent illustration of how to challenge the perverse deflationary logic that now governs economic policy making in the developed capitalist countries.

the rage of the ignorant

Transiting through Dulles Airport in Washington, DC on my return from Dakar on Sunday, I was struck by the titles of the mass-market books on US politics in the bookstore. The shelves were full of books fulminating against US President Barack Obama; the rage was so palpably strong I could almost taste it.

That rage appears to be reflected in the results of the US mid-term elections on Tuesday. The media has been proclaiming the Republican triumph as the most dramatic mid-term swing since the 1930s, although the fact that only 37 per cent of the eligible electorate actually voted makes this result far less dramatic than the media would like. The mid-terms represent the rage of the white, socially conservative, Christian fundamentalist right, commonly called the Tea Party, which clearly represents a minority of the US electorate.

It seems to me that the rage of the Tea Party movement is the rage of the ignorant. While supporters of the Tea Party movement claim that they are interested in limited government and reduced regulation (although they love Federal entitlement programs that proffer largesse to their core constituency, such as Medicare) they seem to forget that in late 2008 US capitalism was in the midst of its worst crisis since the 1930s. Obama did not cause the crisis, which originated in the financial market de-regulation engineered by Alan Greenspan under Bill Clinton following Clinton's rightward tack after the 1994 mid-term elections. De-regulation was designed to address the dramatic rise in US social and economic inequality, and was predicated upon the type of policies the Tea Party supports, most notably the liberalization of US financial markets. True to his neoconservative ways, George Bush recognized that the crisis of US finance capital was turning into a crisis of US capitalism, which he and Hank Paulson therefore attempted to shore up by a massive injection of government spending designed to stabilize the US economy: at a cost of US$700 billion the Troubled Asset Relief Programme was enacted by Bush, in the face of Congressional hostility, a hostility that was only overcome in the wake of a stock market panic and a huge sell-off of equities as US financial markets plunged.

TARP was barely underway when Obama entered the White House, but to the 'right Keynesians' that populated his economic team following his inauguration, it was clear that TARP was, on its own, inadequate to sustain the resurgence of US capitalism. More was needed, especially as banks, fearful for their existence under the weight of so-called 'ninja' mortgages, has stopped lending. The Obama administration therefore enacted a second fiscal stimulus, the Recovery Act, worth some US$787 billion, within a month of his inauguration. The Recovery Act cut taxes, raised government spending and transferred money to cash-strapped states.

The Tea Party movement may not like government, but US finance capital knows that most of the 7800 banks in the US still exist because of the various liquidity interventions engineered by the Federal Reserve, along with guarantees, loans and outright bail-outs engineered by the US state. Obama did not take the banks into public ownership, as some were advising him to do. Drastic bank reform was off the table as the Federal Reserve embarked on a round of 'quantitative easing' to flood markets with cheap money designed to complement the Recovery Act. Instead, the Treasury designed 'stress tests' to increase the capital reserves of banks, with the result that US banks are now better capitalized –and financially healthier – than at any time in recent decades.

The companies that relied on those banks would have gone down if the financial system had collapsed. Instead, with cheap money, low interest rates, and rising unemployment not only have the companies, for the most part, remained in business, but profits after taxes in the US during the worst crisis in decades have actually increased by one-third. Consider the case of General Motors and Chrysler. The Obama administration brought GM in temporary public ownership under stringent conditions that allowed the company to rewrite its labour contracts, fire its ineffectual management, and quickly close its less efficient lines and activities. Placing GM in short order into such a favourable corporate environment allowed the company to quickly repay its government loans and rapidly return to profitability.

Strong profitability across the US corporate sector has produced a predictable result: equity prices in stock markets have boomed. From March 2009, some 7 weeks after Obama's inauguration, equity prices have nearly doubled. Booming profits and equity prices were not translated by the Obama administration into a tax grab: in the second quarter of 2010 total corporate taxes in the US were, at about US$442 billion, almost the same as during the peak of the credit boom in 2007, prior to the crisis; the US corporate sector is paying a lower share of its income in tax.

Of course, part of the discontent that the Tea Party has played to is high unemployment. Yet increased unemployment has been pivotal to the success of the US corporate sector since the depths of the crisis were breached. Unemployment disciplines the labour force and in so doing sustains the corporate profits that have restored the vigour of US capital. Indeed, according to the Congressional Budget Office, a non-partisan body, far more would have been out of work without the stimulus and quantitative easing.

Claims that Obama is the first US president not to believe in the US Constitution, that Obama is committed to fundamentally rewriting the relationship between the US state and civil society, and that Obama is a socialist thus seem to brazenly ignore what Barack Obama has done since he became President. In the face of a crisis of US capitalism, under the advice of his 'right Keynesian' economic team Obama's actions have robustly restored the reign of capital – and particularly finance capital – in the US. Indeed, the new round of quantitative easing announced on the day of the US mid-terms is great for finance capital – it is good for equities, for bonds, as well as real assets, while at the same time cheap money will depress the US dollar, stimulate exports, and stimulate corporate profits in circumstances where labour has been fiercely disciplined by increased economic insecurity. The US has gone back to the future, facilitating the continued rise of the plutocrats that increasingly shape the operation of the US political economy, and in so doing directly shape the process of global development.

of markets and men

As some readers of this weblog are aware, I believe that one of the ways that we can understand the prevailing social and economic system under which we live is to consistently read the voice of the social and economic system under which we live. Which is why I have read London's Financial Times for more than 25 years. To read it is to educate yourself, day in and day out, about the realities of our planet.

Yet despite reading the paper for such a long time, it is only in the past 3 months that I have started reading the columns of the FT's investments editor, John Authers. I am very sorry that it took me so long--for Authers' columns are an exemplary explanation of the intracies of contemporary global capitalism. Today's paper in this regard does not disappoint. In talking about the impact of bad weather on investing, this is what Authers has to say:

'The world's markets are driven by a few small tribes of investors working for large institutions, who tend to live close to each other in a few well-defined population centers. This propogates groupthink'.

If only all analysis of contemporary global capitalism was so lucid!

don't expect much in London

On Thursday this week the 25 leaders of the G20 grouped of developed capitalist and developing capitalist countries meet in London, in what is being billed as the most important global economic crisis for 75 years. They are supposed to come together and come up with a mutually-agreed plan to tackle the global economic crisis that continues to gather in fury, despite what some dewy-eyed optimists might say, as well as putting in place the preconditions to ensure that the current crisis is never repeated. Don't count on it. The one-day meeting will issue a communique that is all sweetness and light, to be sure, but don't expect the problems facing the world economy to be solved on Thursday.

A critical reason why this meeting cannot solve the problems facing global capitalism, other than the absurdly short period of time that the leaders are willing to devote to the problems at hand, is that the key leaders of the most important developed capitalist countries do not agree about what has caused the crisis. There is a fundamental division between the Anglo-Saxon economies--the US, Canada and the UK--and the 'social market' economies--notably France and Germany--about why this crisis has emerged. Don't get me wrong: all 5 countries agree that the crisis has been propelled by the excessive risk-taking of US finance capital. Where they differ is in their understanding of why this propellant has assumed the destructive force that it has.

The US and British position is one that is probably most widely trotted out by the English-dominated global financial media. For Barack Obama and Gordon Brown the key problem facing the global economy has been the seizing up of the financial markets as a consequence of a 'flight to safety' engendered by the collapsing value of 'toxic assets' such as 'collateralized debt obligations'. The answer, then, is to pump money back into the system in order to get banks in particular but also non-bank financial institutions to start to lend money and advance credit again. Public sector deficits--like those created by Barak Obama's US$787 billion stimulus bill--and looser monetary policy--like the Bank of England's adoption of 'quantitative easing' to put more money into the economy, and thus ease the availability of money, and hence of lending--are the way to kick-start a financial sector that is right now unwilling to take chances to start taking chances again, lend, and get the US and world economy moving again.

The French and the Germans have a very different view. For Angela Merkel and the French policy-making elite, the problem is not too little money; it was the fact that there was too much money sloshing around the global financial system. For the French and the Germans, the response of the US Federal Reserve, under the then Chairmanship of Alan Greenspan, to the last 2 significant global events in finance--the 1997 Asian crisis and the financial impact of the terrorist attacks of 9/11--was to loosen up the availability of money in order to keep the financial markets working. This loosening encouraged excessive risk-taking on the part of global finance capital, in pursuit of profit-driven growth that was by definition unsustainable. In this view, the chickens were bound to come home to roost, and they have, with a vengence.

It's going to be hard for Angela Merkel and Barack Obama to reach agreement when they don't even agree as to what caused the problems in the first place. But here's the rub: they're both wrong. Both the Anglo-Saxons and the social market economies fail to grasp the essential characteristics of the crisis of global finance capital: finance capital has become steadily and increasingly divorced from the 'real' productive economy that produces the goods and services that people need. Moreover, in becoming divorced, global finance capital has contributed to the crisis in global manufacturing: a crisis that is well-documented to be threatening the Detroit car industry, to be sure, but which is the result of widespread, deeper, structural and systemic problems. The branch of global productive capital that makes the goods and services that people actually need has yet to find a convincing way out of the productivity and profitability-driven crisis that was unmasked in the 1970s. Finance capital, which was supposed to help sustain profits in the productive economy, has not helped; in many cases, realizing there was not enough money to be made by the 'Masters of the Universe' in the productive economy they have invented new and more esoteric ways of trying to make paper profits on the back of an inability to produce anything of worth to anybody in need. The global economic crisis has been driven by finance capital becoming increasingly divorced from the reality facing the productive economy, and the only way of dealing with the long-term issues created by the crisis and maintaining capitalism as a viable mode of social and economic organization will be to re-connect finance to industry--there is a need to shorten up and tighten the chain between credit and creditor.

The Anglo-Saxon economies want the developed capitalist and developing capitalist countries to do more, in terms of spending, to try and address the crisis. The social market economies want greater regulation of global finance. Both answers only go part of the way to addressing the problems of the global economy; more spending, yes, but redistributive spending that puts money in the pockets of people that actually spend, who tend to be those in the lower 60 per cent of the income distribution. Greater regulation, of course; finance capital cannot be allowed to run rampant. But together they are not enough, given the failure of finance to address the core needs of industry under modern global capitalism.

The communique that is issued on Thursay will praise existing efforts at fiscal stimulus, without committing anyone to more; it will highlight the need to increase financial regulation in the medium-term, which is not the here and now; it will stress the need to clean up bank balance sheets, without making any commitments to nationalization, which at this stage is probably inevitable for some key global institutions; it will lambast protectionism, even though in the months following the last G20 meeting 17 of the 20 countries increased protectionism; and it will give the International Monetary Fund more money, but more money for reasonably well-off developed capitalist countries rather than the developing capitalist countries whose people are, literally, dying as a result of the crisis. None of the core problems facing the G20 will be, in the end, comprehensively addressed. The crisis will continue: for it is a global crisis rooted in the disconnection between finance and production, and in the massive increase in global inequality that such a disconnect has fostered over the last 20 years.

global economic crisis and the case for nationalization

March 1 2009 was an awful day on financial markets around the world. The economic crisis that erupted into the public eye on September 15 2008, and which fundamentally transformed the dominant approach to governing neoliberal capitalism in the developed capitalist countries, is deepening. Let there be no doubt: things will get worse, because this crisis has been a long time coming. Over the course of this decade the developed capitalist economies allowed current account deficits to build up, in large part because they imported consumer goods from China to a far greater degree than they were exporting to the rest of the world. Normally, such a deficit would have put pressure on currencies: but with the Chinese accumulating foreign exchange reserves, this safety valve did not work. China thus sustained global imbalances.

At the same time the developed capitalist economies let investment outpace the savings needed to pay for the investment; in the US in particular, savings rates are dismal. Notwithstanding the creation of ‘innovative’ financial products designed to attract savings (such as sub-prime mortgages) but which instead turned into ‘financial weapons of mass destruction’, to borrow Warren Buffet’s phrase, investment was financed by attracting inflows of capital into the US from the oil producers, China and other developed capitalist economies. Such inflows were never sustainable in the long term without major adjustments in the US economy. Moreover, that investment that did take place was often channelled into unproductive residential construction rather than productive capacity expansion. Similar patterns were witnessed elsewhere: the UK, Ireland and Spain come to mind. The developed capitalist economies did not enhance the productivity of capital but rather allowed financial accounting profits to boom.

Concurrently, governments in the developed capitalist economies, most notably the US under George Bush, introduced government spending and taxation policies that reinforced the consumer-led boom that they were creating. By not considering the relationship between spending and taxes, governments produced a slide into budgetary deficits that will only be corrected through, at some point, a severe structural adjustment.

Capping all this was business. Finance capital was neither regulated nor supervised, allowing credit and house-price booms, booms that morphed into bubbles that were sustained by flows of Chinese money into the US dollar and into US Treasury bills. Companies became even more led by the short-term dictates of senior managers that had to show ever-increasing profits and dividends to major shareholders. In order to do this, increasingly private capital started engaging in financial activities of questionable morality. They did this because the ethics of business during the decade deteriorated behind the mask of ‘corporate social responsibility’, encouraging corruption on a scale that, in the Madoff affair, is historically unparalleled. This is the world that we have allowed to be created in the early years of the 21st century.

The inauguration of Barack Obama and the introduction of his economic recovery plans have not stopped the rot, as witnessed by yesterday’s chaos on global financial markets. In the last few weeks the deepening crisis of the American and British financial sectors in particular has led to widespread speculation that in both the US and the UK there is going to have to be some kind of nationalization of it. Nationalization is needed because certain banks, particularly in the US and the UK but also in other parts of Europe are all but insolvent, having too little capital and too many bad debts. They will go under unless taken over by the government, and, in the eyes of many, they cannot be allowed to go under, because the web of finance capital is so tightly interwoven into the interstices of our society that their failure might threaten the very viability of capitalism as a mode of organizing social and economic life. In a very real sense, banks such as Citigroup are ‘too big to fail’.

Of course, nationalization has already, to a degree, happened, if we define nationalization as the systemic transfer of the ownership of assets from the private to the public sector: the UK government owns 95 per cent of the Royal Bank of Scotland, all of Northern Rock, and in the US the government already controls 36 per cent of Citigroup, with probably more to come. Around the world major financial institutions now rely on large amounts of taxpayer money. Increasingly, government is needed to save capitalism from itself.

In the US in particular nationalization is viewed with dismay by many as a harbinger of ‘socialism’. Despite the fact that Alan Greenspan, the former Chairman of the US Federal Reserve, whose belief in the self-regulating power of the market set the tone for the excesses of the decade, now believes that nationalization may be necessary, and despite the fact that some Republicans in the US Congress believe nationalization is needed, there is still reluctance to bite the bullet. Ben Bernanke, Greenspan’s successor as Chairman of the Fed, has been at pains to claim that nationalization is not on the cards: but he has defined nationalization as governments seizing banks and starting to directly run them. This is definitely not on the table: if nationalization occurs, it will see governments around the world stepping in to temporarily take over financial institutions in order to clean up their balance sheets and make them viable once more, before eventually privatizing them. Social democratic Sweden of the 1990s is the model for the policy-makers advocating this kind of intervention, for this is exactly what Sweden did.

In the developed capitalist economies there is a fundamental belief that private capital does a better job of allocating financial and physical resources than governments using state-owned enterprises to pursue a set of economic objectives. This is the reason that private ownership in developed capitalist economies is preferred to public ownership--nationalization--by the government. However, the supposed benefits of having private capital dominating business decision making in developed capitalist economies are not what they seem. I can think of 4 supposed benefits from having private capital dominate the business affairs of the developed capitalist economies:
1. Private firms have to respond to market demand for their goods and services, which means that firms must respond to the preferences of consumers. Government companies, subsidized by the state, do not have to respond to consumers. Allowing consumers to express choice fosters competition between private firms and in so doing increases efficiency, leading to the creation of more goods and services for everyone than would be the case if state-owned enterprises dominated the developed capitalist economies.
However: the efficiency of capital has nothing to do with the ownership of capital. Efficiency, which should be sought, requires competition; many private sector companies operate in oligopolistic markets with only a few rivals, with whom they often collude implicitly and explicitly. When this happens, private capital does not have to respond to the needs of consumers any more than monopolistic state-owned enterprises have to respond to the needs of consumers. In this instance, it is the lack of competition that precludes efficiency improvements, not ownership.
2. Private capital cuts government interference in the economy.
However: private capital has to be heavily regulated, in order to prevent oligopolistic abuses of corporate power, and such regulations represent government intervention in the day-to-day running of capital. Indeed, the history of the decade is that regulation has to be substantially enhanced if the abuses of the past few years are not going to be repeated. Private capital and state-owned enterprises are both subject to government regulation.
3. Private capital has to raise investment capital on financial markets, and to do this they must secure the confidence of financial markets that they are well run and effective in the markets in which they operate. State-owned firms, on the other hand, can raise money from governments and do not have to demonstrate to disciplinary financial markets that they are well run.
However: investment capital from financial markets for private capital may not be available to firms seeking to make long-term investments because of the short-run profit-obsessed time horizon of the financial markets. The lure of quick returns for the financial markets got us into this mess; it also guides how they allocate money to private capital.
Which means that: financial markets cannot be relied upon to make good decisions about the investment needs of private capital.
Moreover: in many instances private capital does not turn to financial markets to raise investment capital; instead, they reinvest their profits. This source of finance is available regardless of the character of corporate ownership.
Finally: in some countries the only reason state-owned enterprises cannot not raise investment capital in financial markets is because of government regulations which prevent them from doing so. This need not be the case, in which financial markets can still discipline the activities of state-owned enterprises. Suggestions by some that state-owned enterprises, by competing for investment capital with private capital, ‘crowd out’ investment, have been demonstrated to not be true.
4. While private capital does not require government resources, state-owned enterprises do. State-owned enterprises therefore increase government spending, weakening monetary policy and forcing central banks to set higher interest rates in order to sustain monetary policy.
However: if private capital does not invest in expanding productive capacity, as was the case during this decade, growth will eventually deteriorate because of a lack of corporate investment, with implications for jobs, equity and social justice.

It is clear to me that the case in favour of the private ownership of capital is not what it is made out to be. There is a strong case that can be made that the financial system as a whole should be treated as a public utility, in which the distribution of investment capital would be done on the basis of democratically-established criteria. This would of necessity involve controls on the international movement of capital and controls over the pattern and pace of investment within a country. As Leo Panitch and Sam Gindin have recently noted, ‘the point of making finance into a public utility is to transform the uses to which it is now put.’

dead economists for new times

It really is quite remarkable who the financial and political elite have turned to in order to understand the ongoing crisis. Two economists stand out: John Maynard Keynes and Karl Marx.

As my good friend Ardeshir Sepehri of the University of Manitoba pointed out, in order to understand the times, one would do very well to read Chapter 12 of Keynes' General Theory of Employment, Interest and Money, written in 1936. Indeed, as Keynes wrote in 1933, in the absence of state intervention to save capitalism from its tendency towards crisis, one could expect

'the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict'.

The U.S. government, and in particular Treasury Secretary Hank Paulson, along with the U.K. Prime Minister, Gordon Brown, have rediscovered the virtues of Keynesianism after being strongly involved in the deregulation that got the world into this mess in the first place.

French President Nicolas Sarkozy has been doing slightly different reading, stating that 'we need to found a new capitalism, based on values that put finance at the service of companies and citizens'. He reached this conclusion apparently reading Das Kapital volume 1, which some people spotted him reading last week.

Marx understood the mysteries of finance, writing

'To the possessor of money capital, the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of moneymaking. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production'.

We have been so seized! I suspect that these two political economists will be read a bit more carefully in the next few months than they have been in the last few decades. At stake: the need to end the de-politicization of money, which has been underway for 60 years, and which has allowed, in an ever increasing way, for government and finance to become increasingly separated. Although this de-politicization took place in the name of Keynes, he would never have subscribed to it; and, of course, Marx would only have seen it as the logical outcome of an increasingly irrational economic system.

is neoliberalism finished?

Readers of this weblog will know that the global financial crisis of the past 3 weeks has, in my view, fundamentally changed the landscape of global capitalism. A world that was effectively born on 4 November 1980, with the election of Ronald Reagan as U.S. President (I was in San Francisco at the time) has ended, and a period of untrammelled global neoliberalism will have to change if global finance capital is to survive.

How much has the world changed? Consider this. In the United Kingdom, where, of course, London is the second most important financial center in the world, the Royal Bank of Scotland, one of Britain's most important financial institutions, will soon be 57 per cent owned by the British state. It is also expected that the British state will own up to 40 per cent of the newly merged (and so far unnamed) Lloyds-TSB-Halifx Bank of Scotland combination, which is also one of the largest and most important British financial institutions. The British state already owns Northern Rock and Bradford and Bingley, specialist mortgage lenders that overreached their market niche and paid the price. In other words: the British state, which was one global center of the de-regulating neoliberal project, now is steering some of the most important components of British finance capital. Consider also another paragon of neoliberalism (indeed, as a consequence of the Wassenaar Accord, possibly the earlist adopter of neoliberalism in the North: the Netherlands' state owns the Dutch rump of ABN-AMRO and Fortis Nederland, two of the three biggest banks in the Netherlands. Again: the Dutch state is steering the most important components of Dutch finance capital. Examples of this degree of state intervention in finance capital abound in the North: in Germany, in Belgium, in Denmark, in Ireland, in Italy, in Iceland and, in all places, in Switzerland. The most significant intervention, of course, is the one that I have saved for last: the U.S. state owns 79.9 per cent of AIG, which at one time was the largest insurance company in the U.S., and as a consequence of the policy moves made by the U.S. Treasury on Monday will soon own significant shares in nine major U.S. financial institutions, including Bank of America (with which one-half of all U.S. households does some kind of banking), Citigroup, Wells Fargo, Morgan Stanley, Goldman Sachs (former firm of the U.S. Treasury Secretary), J.P. Morgan and Merrill Lynch. This is a consequence of their agreement to take part in both the Treasury’s ‘voluntary’ capital purchase programme--which was nothing of the sort, which U.S. finance given no choice by the state--and the Federal Deposit Insurance Corporation’s guarantee programme of senior bank debt and assorted deposit liabilities.

The world has changed; the state has acted to save capitalism, just as it did in the 1930s, and where this will lead is very difficult to know.

regime change for global finance capital

My undergraduate students commonly seem to think that the world doesn't change very much. Yet last week, between 14 September and 18 September, the world changed in quite dramatic ways. The era of free market fundamentalism, ushered in globally with the election of Ronald Reagan on 4 November 1980 and the continuing tenure of then-US Federal Reserve Chairman Paul Volcker at the time, has, without doubt, come to an end. It was, as Mohamed El-Erian, chief executive of the bond fund manager Pimco, said in the Financial Times, 'regime change'. Nouriel Roubini of New York University put it this way in The Globe and Mail: 'this financial crisis signals the beginning of the decline of the American empire'. To adapt the words of Gil Scott Heron to fit the times, the revolution was televised on MSNBC; but many people missed it.

The origins of the events last week have been well-rehearsed in previous entries on this weblog. The US financial crisis has multiple origins, but two dates stand out. Eight years ago Alan Greenspan, the former Chairman of the US Federal Reserve, argued that over-the-counter (OTC) derivatives, the contracts between banks, insurance companies and other non-bank financial firms, should not be subject to US government regulation. As a consequence, OTC derivatives have not been subject to oversight by the Commodities Futures Trading Commission. A year later, in 2001, the same Alan Greenspan started cutting US interest rates in the wake of the September 11 attacks. Greenspan's role in these two events, in that they laid the groundwork for the creation of a huge speculative financial bubble amongst global finance capital searching for profits and households searching for livelihood security, has meant that the man who was once the hero of global finance capital is now a man whose reputation stands, at long last, in tatters.

As US interest rates went lower, US mortgage providers started to look for new markets for their products: and the principal market turned out to be cheap mortgages that could be offered under the low-interest rate regime to people that, for various reasons, could never before in their life have thought about owning a home. The result: too many Americans started buying homes (and, through re-mortgaging, other big purchases like cars) with loans that they could not afford. These mortgage providers then 'bundled' these mortgages together, and sold them to investment banks, who started to repackage the mortgages into a set of increasingly arcane products that could be sold to investors such as non-bank financial institutions looking for 'safe' products with a better rate of return than that offered by 'conventional' investment products such as US government bonds.

In doing this, the investment banks started entering into a world in which they had little experience. Moreover, in order to continue doing this business, investment banks and other non-bank financial companies (like American Insurance Group [AIG]), who do not have deposits that they can tap into as an inexpensive source of money, depended upon continually securing short-term loans from other financial institutions, which they would secure by using the assets that they held--the 'bundled' mortgages. Investment banks and non-bank financial institutions were thus borrowing against assets that were ultimately held by less-creditworthy consumers. In essence, the investment banks and the non-bank financial companies that bought their products were counting on home prices continuing to rise, and thus that the holders of the mortgages being able to meet their debt obligations; the financial alchemy behind the crisis sees finance capital shuffling risk like a juggler keeping balls in the air, while all the while not really understanding the complex products--and obligations--that they were peddling. Indeed, as John Gapper writes in the Financial Times, it was as if finance capital had become addicted to complexity.

The house of cards started to collapse last year, when American mortgage holders who had been paying sub-prime interest rates suddenly found out that, as a consequence of the terms and conditions of their mortgage, their interest rates ratcheted up, and they were now paying far, far more in repayments than that for which they had budgeted. They couldn't afford it; and a wave of foreclosures followed. US house prices of course started to tumble; and the investment banks and non-bank financial companies were left holding bundled complex financialmort products predicated upon bundled mortgages that no one wanted to buy. These are the 'toxic assets' that people talk about now: bad loans rooted in the decision of US mortgage providers to provide home loans for consumers that were not adequately solvent, with such loans being then converted into bonds and other securities and being traded in a way that, in effect, spread their poison throughout the financial system. As a result, finance capital increasingly had trouble securing the short-term loans that they needed to stay afloat; and thus, for many companies, a crisis of liquidity opened up, as they became unable to borrow to meet their day-to-day needs. This was the background to last week's events, a process that had been unfolding slowly for more than a year.

One irony of recent events was that the American financial system's liquidity crisis took place in a world awash with money. The excess savings of China and other Asian countries, as well as that of the petro-economies, means that globally their is lots of money sloshing about (it is very fortunate for the US that China is not prepared to sell its holdings of US government Treasury bills and bonds; were such to happen, the crisis would be infinitely worse, becoming, no doubt, one of global capitalism). However, increasingly, US investment banks and non-bank financial institutions had a difficult time accessing that money as the awareness of their toxic assets grew. Growing legions of sovereign wealth funds, who at first seemed the most likely corporate partners to solve the crisis, balked when confronted with the true extent of what was going on; hence, the Korea Development Bank walked away from Lehmann Brothers, sealing its fate. In this way, overleveraged US finance generated the foundations of an economic panic amongst global finance capital.

Last week was one of high drama. After the rescue of Fannie Mae and Freddie Mac the previous week, the US government ended up guaranteeing almost half the mortgages in the US. However, the fun really started on Sunday, when Lehmann Brothers (founded 1850) collapsed and Merrill Lynch (founded 1915) was forced to welcome being bought out by Bank of America at a fraction of the stock market value that it had been worth just weeks before. AIG then required a stringent loan of US$85 billion (with the effect that the US government owns one of the largest insurers in the world). Financial markets started to panic. On Wednesday, the 'flight to safety' was so severe that the interest rate on one-month US Treasury bills turned negative, meaning that finance capital would rather lose money holding a safe asset than invest in financial markets awash with unforeseen toxic assets. The yield on three month Treasury bills that day was 0.02 %, the lowest rate since 1941, before the entry of the US into World War Two. Global finance capital was running for cover.

On Thursday and Friday, the US Treasury had no choice: with the financial system threatening to seize up, the world's central banks pumped US$180 billion into global money markets, the US government pledged US$50 billion to guarantee money-market mutual funds, US Treasury Secretary Hank Paulson unveiled a plan to mop up toxic assets with government money, and in both the US and London the short-selling of stocks is halted. In effect, the US government has socialized the US financial system, to deal with toxic assets whose worth has been estimated to be anywhere between US$500 billion and US$1 trillion. Of course, many of these assets will be sold at a fraction of the value; nonetheless, the cost of this socialization of US finance will run into the billions of dollars. The US government acted to save American finance capital.

Perhaps of all varieties of economists a Marxist economist would understand the causes of the crisis best. US finance capital has become increasingly divorced from the real economy where goods and services are produced. As such, it is increasingly having to slice and dice ever smaller amounts of the surplus value that is produced in the real economy and then redistributed from the productive economy into the financial sector. As it has to slice and dice, it was finding ever-more esoteric ways of trying to make money on top of an asset base that was not fundamentally changing. It was, in effect, a massive Ponzi scheme, and was bound to come crashing down.

Many things are going to change for global finance capital as a consequence of the past week. No doubt other financial institutions may fail. Investment banking is, as a business, finished, and global finance will start to shift back towards using assets based in the real economy as the basis of its activity. Thus, the market for credit derivatives is also finished, for now, and if it is revived, it will be very, very different. There is also little doubt that for the next little while the ability of consumers and firms to access credit will be heavily constrained; the US government has seen its public debt increase substantially with the socialization of US finance, which suggests that increases in US interest rates will be forthcoming, with implications for economic growth in the US economy, because it is so heavily reliant on debt, and for the rest of the world, because it is so heavily reliant on the US economy.

However, the most critical outcome of this past week is that the era of free market fundamentalism, in which is was believed that the system would work best if left to its own devices, has drawn inexorably to a close in the home of capitalism, the US. If the US government believes the only way to save finance capital is to nationalize assets on a scale greater than that witnessed in Russia under Vladimir Putin, then the era of free market capitalism is finished.

We should not be surprised. This past week has highlighted the fact that in deregulated financial markets market-based outcomes are not necessarily the best for society. If they were, there would have been no need for the socialization of US finance. Those who participate in markets are often motivated by private and professional greed, and will try and do what they can get away with, even if regulatory laws are in place. The financial bubble is a clear demonstration of this greed: financiers chased their astronomical bonus payments, and households jumped at the chance to buy something valuable--their homes--that they never thought they could afford because the mortgage providers told them they could afford it. As Adam Smith said, 'people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public'. Today, Smith might put it thus: markets cannot be trusted to work in the public interest, because they are a function of the legal and social environment within which they are created, and that environment may encourage actions that are detrimental to the public good in the pursuit of private profit. That has happened, recklessly, in the US over the past 5 years. The truth of Smith's insights have once again been revealed this past week.

the US mortgage crisis and international development

Previous posts to this weblog have discussed the relationship between the US sub-prime credit crunch, and hence the ongoing US cyclical recession, and developing countries--most specifically, my post of 6 September 2007. That this link continues to bite was highlighted today in the Lex column of the Financial Times, which noted that US Treasury data now indicates that Chinese investors now own US$376 billion of the long-term debts of Fannie Mae and Freddie Mac, which, in its guise as a government-sponsored enterprise, is the principal US mortgage lender. As Lex drily notes--and as I all but suggested last September--the People's Bank of China is now a lender of last resort to a reeling US Treasury and Federal Reserve.

How this works was nicely illustrated by a graphic in the Financial Times this week, which is at the head of this post. US mortgages are sold by lenders to potential American homeowners. The lenders sell the debts on, to large US banks or, more commonly, Fannie Mae and Freddie Mac. All three institutions bundle their mortgage debts together into mortgage-backed securities, which are sold to credit market investors--pension funds, university endowments, as well as the large global financial institutions. This is where China comes in: for they have become either a substantial component of the credit market itself; or Chinese sovereign wealth funds, which are state-backed investment funds seeking ways of earning decent returns for the masses of foreign exchange that Chinese companies and the Chinese state have been amassing, have been buying parts of the large global financial market institutions that are heavily involved in the buying of mortgage-backed securities. In either instance, then, Chinese money is propping up the US financial system, and through that, the global economy, allowing it to adjust much more slowly to the changing realities in oil and commodities that it faces.

It is ironic indeed that global finance capital has come to rely upon developing countries for their salvation, ahead of the capitalist states that support their international operations. Ironic, but now new: we have been here before, but in a different guise, during the debt crisis.

the sub-prime financial crisis

Summer has come to an end, and, in the aftermath of Labour Day, we can start to look forward to the autumn. Over the course of the summer, the global economic event that will most be remembered has been the sub-prime financial crisis in the US. It is an event that will continue to reverberate for some time; and yet it is not well understood. Moreover, the relationship of the sub-prime financial crisis to globalization and international development is all but absent in most commentary. Yet the relationship is key; in order to understand the sub-prime financial crisis, you have to understand its international (development) dimensions.

First, though, it is important to be clear about what the crisis in global financial markets is all about. The answer is simple: people in the US are borrowing too much. Many of the people that have been borrowing have been those that previously would not have passed a credit check--they were 'risky'. The US mortgage industry constructed a set of complex financial instruments to 'tap' this segment, and thus created a new financial market--the sub-prime mortgage. Sub-prime is a nice way of saying that the US financial system started making what Barbara Enhrenreich has called NINJA loans--'no income, no jobs or assets'. Why did people take these loans? The answer is simple: the US financial sector offered them the loans. This was not a silly choice on the part of poor households. Those who had nothing were given the chance to get a loan to buy a house, the price of which has been going through the roof, and which therefore offered the poor their first real chance of benefiting from the financial speculation that they see all around them. It was a wholly rational choice. Remember, in any financial crisis that is driven by people borrowing too much, their are two culprits: those that do the borrowing; and those that do the lending, that is to say, in this case, US finance capital. How did the crisis get out of hand? Intermediaries between borrowers and lenders encouraged both to undertake speculative investments, so that they could rake in their commissions.

Why did the crisis break? Simple. You are given a mortgage at a low ('sub-prime') interest rate for a year. You take it, hoping that you will be able to pay your mortgage once the temporary low interest rate is removed. However, when the interest rate rises, and you don't have the cash, you start to have problems meeting your interest payments. One in 7 US homeowners with sub-prime mortgages failed to keep up their payments during the second quarter of 2007 and 619000 mortgagees face repossession. Multiply this more than a million times--some 6 million US households, or 2.5 million people, are in risk of mortgage default when their interest rates are reset in the next 18 months, sitting on debts of US$1,000 billion--and all of a sudden there is a US debt crisis. The onset of the debt crisis frightens the banks, who immediately want to sell the claims they can make on the mortgages provided by specialist lenders, and who thus provided the foundation on which the sub-prime mortgage market was built. In the debt crisis, then, there is, by the financial institutions, a 'flight to quality': that is, they want to sell risky high return assets and buy safer, lower return assets.

Why then has the sub-prime financial crisis gone global? How did 'contagion' take place? The answer is that the sub-prime financial crisis is the mere tip of the iceberg--the global financial crisis runs far, far deeper. In order to understand the global dynamics of the sub-prime crisis, it is important to ask: how has it been the case that US households have been able to incur such massive debts? In the world of global finance, someone, somewhere has to be providing the money that temporarily allows people and countries to spend more than they have. Where, then, is this money coming from?

There is, globally, a glut of savings. In Asia in particular, but also in parts of Latin America,
peasant farmers, urban workers, street vendors and sex workers, amongst others, are saving large proportions of their incomes, because they have no security for the future . These savings have flowed, through financial intermediaries like banks, insurance companies and the like, from China, Brazil, India and other countries to the US, as non-Americans buy US assets at an historically unparalleled rate. In other words, capital from around the world has been flowing into the US, financing the purchase of assets that allows US banks and other financial intermediaries to lend on to groups within the US that are also spending more than they earn. Pay-day loans, rent-to-buy furniture, easy credit cards with exorbitant interest rates--US financial capital has been increasingly seeking to lend money to those who could least afford to pay the interest because money has been flowing into them from the developing world. They have done this is in the knowledge that the US government will not allow the US financial system to fail should poor borrowers default: it will, if necessary, bail out financial capital threatened with default. Thus, when Long Term Credit Management threatened default, Wall Street made sure it was bailed out; and this would happen again. Thus, no one does not expect that the US Federal Reserve, the US central bank, will not to cut interest rates, because this will shore up over-extended US finance capital. A rate cut is inevitable, will lower the cost of borrowing and lending, and thus benefit overstretched US finance capital.

Global financial crises are always about excessive credit being made available to borrowers, followed by a speculative splurge, falling prices, default and hysteria. This one is no different. Nonetheless, it is important to be precise and clear about the details of this crisis. Poor farmers and dispossessed workers save; their savings flow to the US; this helps US finance extend credit to poor people who cannot pay; they are unable to pay; and the Federal Reserve steps in to ensure the viability of global finance, US banks, and the US economy. The fact is, though, that poor US households need jobs, not credit, in order to be able to buy; that peasant farmers and dispossessed workers in developing countries need security that their savings, unfortunately, do not secure; and that global finance capital needs to be disciplined, so that its excesses, which are so recurrent, do not continue.

Shanghai surprise

Yesterday the Shanghai stock exchange dropped 9 per cent in a single day, apparently setting off a worldwide round of selling as panicked investors sought safe instruments. Wall Street had its biggest fall since September 11, the TSE had its worst day in a year, and several 'emerging' exchanges, in Brazil, Turkey and Russia suffered big drops.

The Shanghai surprise clearly shows the herd mentality of global finance. Shanghai is an exchange which is largely domestic, with limited global participation. The drop was a demonstration of how the market is increasingly dictating policy: there were rumours that the government was going to place restrictions on some of the practices around the buying, selling and taxing of transactions, and in order to prevent this, the market collectively dropped, demonstrating who is in charge of policy (the fact that many big investors are Party people is not unimportant here). In any event, the drop in Shanghai was almost exactly the same as the previous day's rise--so the net effect was profits for some, with limited losses for others.

Why then did this largely domestic event spread? The answer lies in the vulnerability of the world economy. The US is dangerously imbalanced, both externally, in terms of its current account deficit and economic exposure to political events in oil producers, and internally, in terms of its budgetary deficit and the share of profits in total income. This vulnerability is what worries global finance capital. The possibility of a recession in the US has already been raised by Alan Greenspan, and global markets still respect him. A recession in the US will hurt the slow recovery in the European Union, and particularly Germany and France, and this has the possibility of spreading to other EU members. In short, the world economy, dominated as it is by finance capital, is vulnerable, because, simply put, the economy is not leading the market, and has not been for a long time indeed. Market finance is leading, but its fictitious character means that the global economy is being led by shadows and light. In shadows and light, the possibility of a bumpy ride for the real economy is strong. This year should be an interesting one as finance and productive capital struggle to exert dominance over the global economy and global development.

microfinance and international development

The Cato Institute, a right-of-center US think tank with close ties to certain members of the Bush Administration, has made an intervention in thinking about microfinance. Microfinance, as members of the international development community know, is the provision of very small loans to people with usually little or no credit history, so that they can tide themselves over during shortfalls in cash flow or, hopefully, invest in productive micro-entrepreneurial activity. Loans are often made to individual women, but women have to be members of a group, that acts as a discipline to enforce repayment of the loan. Repayment rates are impressive, and returns on equity have increasingly start to attract transnational finance capital--companies such as Citigroup. The titular founder of the global microfinance movement, Dr Mohammed Yunnus, the creator of the Grameen Bank in Bangladesh, won this year's Nobel Peace Prize. Dr Yunnus believes that access to finance is a fundamental human right. Microfinance has been, for a long time, seen as a 'magic bullet' in international development, capable of energizing growth with equity across the poor countries of the world.

It might be surprising, then, to learn that the Cato Institute has a very low opinion of microfinance. What was even more surprising to me, though, was the extent to which I agreed with many of the criticisms of the Cato Institute. The Institute argues that most people are not entrepreneurs, and so the idea that microfinance can be used to build viable micro-enterprises is unlikely. Cato also notes that microfinance has played a very small role in the creation of actual businesses in the South, as it is often used for smoothing cash flow problems rather than investing in productive activity. It stresses the heavy subsidies paid out to support microfinance, which sustain the supposedly good returns on equity. Finally, Cato argues that growth should come first, and then credit, with growth funding profits that can be reinvested back into enterprises.

Where Cato misses some of the story is the relationship between microfinance, poverty elimination and the development of capitalism in contemporary poor countries. Most microfinance does not reach the poorest; rather, it reaches the so-called 'near-poor' who are more creditworthy than the poor. These people are often rural, and in a transition from a subsistence mode of life towards a far more market-oriented, coercively competitive existence. In other words, microfinance can allow people that are being to accumulate some assets, to improve their standard of living, to further accumulate. This is not a poverty-elimination strategy, though, because the bulk of the resources do not reach the poorest of the poor. In this sense, then, microfinance is, in effect, no different than the state-led financial revolution in the poor countries of the South in the 1960s--a means of building capitalism, not eliminating poverty.

Cato is therefore wrong that growth needs to come first. As microfinance can support accumulation, it can support growth. The problem, in this as in so many areas of international development, is one of distribution. Poor people don't have the means to access the finance they need. They rely on moneylenders, who are often their patrons, or on more traditional localized means of allocating finance, such as rotating savings and credit associations. These resources are indeed used to smooth cash shortfalls. Poor people do want to invest; but to invest, they need assets that they do not have--land, tools, animals, access to work. Distribution is the key to engendering growth that has the capacity to eliminate poverty. Growth is very, very important, but on its on, growth, the building of markets, the creation of trade and exchange, is a way of building inequality-generating processes. Some magic bullet.