Revolution#127, April 20, 2008
The Subprime and Credit Crisis
FINANCIAL MELTDOWN AND THE MADNESS OF IMPERIALISM
The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse.”
—David Wessel, economics editor, Wall Street Journal, March 27, 2008
“Be greedy when others are fearful.”
—Warren Buffet, leading investment capitalist, quoted by The Economist, April 5, 2008
[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 money-making. 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.”
—Karl Marx, Capital, Volume II, “The Circuit of Money Capital”
The U.S. economy is experiencing the most wrenching financial turmoil since the Great Depression of the 1930s. Global markets have been reeling—as massive loans have turned bad, speculative bubbles have popped, and giant financial institutions have tottered.
Financial turbulence originating in the U.S. has slowly expanded and worsened. There is now a global credit crisis. Banks and financial institutions are weighed down by huge losses caused by “non-performing loans.” Lending channels are choked up, as lenders are being called to pay back their loans, to clean up their balance sheets, and fearful that they are “throwing good money after bad” and won’t be paid back. There is real danger of a breakdown of the financial system. The new president of the International Monetary Fund has stated that the current turmoil poses the greatest financial crisis since the 1930s.1
The U.S. has been at the center of what is now a global financial storm. Bear Stearns, one of the largest and oldest investment banks in the U.S., collapsed in mid-March. The Federal Reserve Bank—which regulates and lubricates the U.S. banking system, and which also plays a special role in the world capitalist economy—has stepped in on an unprecedented scale.
The Federal Reserve took responsibility for $30 billion of basically worthless assets held by Bear Stearns. This paved the way for another financial titan, JP Morgan Chase, to take over the firm. In addition, the Federal Reserve has injected huge amounts of funds into the financial system to ward off additional bank failures and to restore international confidence in the U.S. economy…and to prevent the financial crisis from becoming a total financial breakdown.
Fortune magazine in its April 14 issue analyzes the stakes this way:
“The fear—a justifiable one—is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they’re called, can drag down counterparties all over the globe. And if the counterparties fail, it could down the counterparties’ counterparties, and so on.”2
PART I. A FIRST CUT: UNFOLDING OF THE CRISIS
The financial tornado gathered force in the spring of 2007, starting in the housing sector. The housing boom of the last few years was a boom in mortgage finance. Lenders, and these were not neighborhood finance companies or street-corner usurers but big corporate financial giants, were seeking to make big profits from their ability to tap into foreign capital flooding into the U.S. over the last decade. The Federal Reserve accommodated and encouraged this by keeping interest rates low.
A. Subprime Lending
Enter the world of subprime lending. Subprime loans are loans made to borrowers who would not qualify for a prime mortgage—because they might have “bad credit histories,” etc. And these loans were aggressively marketed, pushed on people through all kinds of deceitful means, with Black and Latino households disproportionately targeted and victimized (see Revolution, “Subprime Mortgage Crisis,” April 13, 2008).
The originators of these subprime loans, along with various financial middle-men, then “securitized” these loans. This means they combined these loans into larger groups of loans, turned them into complex financial products, and then sold them on financial markets. They sought to maximize fees and to “transfer risk” by quickly selling off these loans to other banks and institutional investors (like mutual and pension funds, university endowments, etc.).
But as housing prices turned down and as interest rates went up, homeowners (or those who thought they were homeowners) found themselves strapped with adjustable mortgages requiring larger payments. And many could not afford payments. This triggered a wave of defaults. Investors and institutions that had purchased these mortgage securities (loans that had been grouped into bonds returning interest) found themselves with billions of dollars of near worthless assets. The financial insurers of these loans, yet another layer of “financial middle-men,” could not cover the risks and damage.
B. Global Financial Shocks
In the summer of 2007, fears of big financial losses caused stock market indexes around the world to plummet, including those in the rapidly growing regions of the Third World.
A financial contagion was taking hold.
Over a trillion dollars of funds from around the globe—with much of this from Asia and oil-exporting countries—were invested in the U.S. subprime market. The collapse in the value of mortgage and credit instruments originating in the U.S. weakened the financial balance sheets of banks and other overseas holders of these investments and set off tremors. For instance, in Great Britain, there was a run on the Northern Rock bank; a German bank required a bailout; and a leading French bank was hit hard.
At the same time, financial institutions in the U.S. and elsewhere holding securities of crumbling or dubious value sought to strengthen their overall financial positions. They not only had to “write down,” that is, greatly reduce the value of the bad (“nonperforming”) loans they held. They also had to sell off “healthier” holdings in other parts of the world (investments unrelated to the subprime activities) in order to meet immediate financial commitments. And these sell-offs have had their own destabilizing global repercussions. This was especially the case last year in the stock markets of the Third World.
C. New Dangers and New Risks
By March 2008, the prices of stock of the big Wall Street players involved in this investment activity, firms like Goldman Sachs and Merrill Lynch, had fallen by some 40 percent. And since the onset of the credit crisis, financial institutions in the U.S. have “written down” more than $230 billion in mortgage loans and other assets.3
The Federal Reserve has moved to head off financial panic and to stimulate growth. But these moves have aroused new fears in the still unsettled world financial markets. Why?
There are concerns about the Federal Reserve’s and U.S. Treasury’s ability to absorb what might amount to be hundreds of billions of dollars in bad investments. There are concerns about the ability of the Federal Reserve to pump huge amounts of funds into the U.S. financial system to keep it afloat. There are concerns that short-term and ad hoc efforts to slash interest rates and bail out financial firms may stoke inflation and further weaken the dollar.
This dimension of the crisis, the fragility of the dollar, looms large. It has everything to do with empire. The international role of the dollar—as the world’s leading currency for settling transactions, clearing debts, and holding foreign exchange reserves—is a linchpin of U.S. global supremacy. It is also a linchpin of the whole current global economic order.
But the dollar has been battered in international currency markets. In the last few months, it has sunk to new lows against the euro (the currency used in most of Western Europe), against the Japanese yen, and against the Swiss franc.
Now the dollar has declined considerably in value relative to other major currencies since 2000. But this has been cushioned, managed, and kept functional by the ability of the U.S. economy to attract huge amounts of foreign exchange and foreign capital into financial markets, especially to finance U.S. Treasury debt.
And one of the “disaster scenarios” most worrisome to U.S. imperialist policy makers is the danger of a global run on the dollar: private investors and central banks of other countries unloading their dollar holdings for stronger currencies.
D. A Reflection: Transparency and Anarchy
In early April, on the eve of a gathering of the world’s finance ministers and treasury officials, the International Monetary Fund issued a report on the financial damage caused by the collapse of the housing and credit markets. It warned that financial institutions worldwide might face losses approaching $1 trillion over the next two years.4 This calculation is far above what had been previously estimated. And according to some financial analysts, even this is a gross understatement.
The free market is extolled by bourgeois ideologues for its “transparency.” This is the idea that markets, prices, and interest rates convey all necessary information: about supply, efficiency, choice, and reward.
But one of the distinguishing features of this crisis is the incredible and pervasive lack of knowledge among lenders, borrowers, traders, and insurers about the quality and backing of what they borrow from others…and even of what they lend to others! Things are obscured, covered up, and very opaque.
* There is the anarchy of capitalism, as giant agglomerations of capital battle others for market share and profits, and pursue competitive strategies that have unforeseen effects on the larger system.
* There is the emergence of a newer banking system operating parallel to the older commercial banks. These are the so-called hedge funds, private equity firms, and investment banks. They move huge amounts of capital in and out of financial markets to take advantage of momentary and slight changes in bond prices, interest rates, and currency exchange rates. They borrow against assets that have a shadow existence, far removed from the actual production of value. They have led in creating new financial instruments, in which all kinds of loans of varying risk are bundled together into interest-yielding bonds and the like. And this newer banking system operates in a more unregulated environment than do the commercial banks.
* This is a highly competitive, turbo-charged financial world, where huge blocks of capital seek quick gains at the expense of others. In this setting, speculation, fraud, and deception become part of survival strategies. One example of this in the unfolding of the financial crisis: financial agencies that rate the risk of things like mortgage-backed securities earn higher fees for providing favorable ratings on these new “financial products.” So they lied and deceived investors about real risk. This led to mis-pricing and to baseless expectations of return on investments.
E. A Reflection: A House…Is Not Always a House
As we descend from the skyscrapers of finance to ground level, the human toll comes into clearer view. At the start of 2008, nearly 1.3 million homes in the U.S were in some phase of foreclosure. That works out to more than one in every 100 U.S. households. According to Moody’s Economy.com : “not since the Depression has a larger share of Americans owed more on their homes than they are worth.”5
Think about it. Something as basic and essential as shelter is commodified. A house becomes an investment; its purchase underwritten by tradable financial instruments; and the lure of homeownership then engulfed by the devastating trade winds of the market. And what happens? People’s savings are wiped out. Their creditworthiness is damaged if not destroyed. And many face the prospect of homelessness.
The problem is not that people don’t need houses. Nor is it that society doesn’t have the resources or knowledge to build houses. The problem is that capital stands as a barrier to meeting human need.
PART II: A SECOND CUT:
DEEPER CAUSES AND IMPLICATIONS
Where all this financial turmoil might lead cannot be predicted. A gigantic, speculative credit bubble has burst. Problems in U.S. lending markets and the U.S. banking system have brought on an economic slowdown in the U.S. This in turn is triggering a global slowdown. Consumer goods exporters of Asia that have relied heavily on trade with the U.S. are especially vulnerable. And so too are countries in Eastern Europe that have borrowed heavily to finance growth.
Here is one tiny snapshot of the fallout and pain from the financial crisis. The U.S. housing slump has led to the loss of some 100,000 construction jobs, many that had been filled by undocumented immigrants. That has dramatically slowed the growth of money sent back home by these workers. After nearly quadrupling to $24 billion in 2006 from $6.6 billion in 2000, these earnings sent home grew only 3 percent in 2007, the slowest rate of growth in 20 years.6 Families in Mexico have come to depend on these remittances for food and clothing and other basic essentials.
The buildup and collapse of this latest speculative bubble, and intensifying financial fragility that could lead to massive breakdown, are in fact outward expressions of deeper processes and transformations at work in the world capitalist economy.
We need to take a step back.
A. Globalization and Financialization
For the last 15 years, world capitalist expansion has pivoted on a particular international dynamic and structure. This has involved heightened financialization and parasitism in the advanced capitalist countries —with the United States at the epicenter of this process; and the fuller integration of low-cost, export-producing countries of the Third World into the world capitalist market —with China at the epicenter of this process.
The turning point in this process was the collapse of the social-imperialist Soviet Union in 1990-91. With the implosion of the Soviet bloc, the main geopolitical obstacle to U.S. imperialist freedom of action was removed. At the same time, and very much in connection with this, imperialist globalization accelerated. (This is analyzed in considerable depth in Notes on Political Economy: Our Analysis of the 1980s, Issues of Methodology, and the Current World Situation, 2000, RCP Publications.)
Over the last 15 years, a globally integrated cheap-labor manufacturing economy, with huge labor reserves from China, India, and other parts of the Third World, along with labor from the former Soviet bloc, has been forged. The globalization of production has had enormous effects on world accumulation: raising profitability for imperialist capital, acting to compress wages, and lowering inflationary pressures. The integration of cheap-labor manufacturing into world production is now so deep that in the U.S., fully half of imports (mostly consumer goods) come from the Third World.
A revealing statistic: a University of California study looked into who gains when an iPod manufactured by national firms in China is sold in America for $299. Only $4 stays in China with the firms that assemble the devices, while $160 goes to American companies that design, transport, and retail iPods.7
When we speak of capitalist accumulation, we are referring to the competitive production of surplus value (the source of profit) based on the exploitation of wage labor; and the investment and reinvestment of profit on an expanding, cost-cheapening, and technologically more productive basis.
When we speak of “financialization,” we are referring to three particular features of the larger structure of capitalist accumulation in this period of imperialist globalization: a) the growing political and economic power of the financial layers of the capitalist class; b) the vast expansion of financial activities and of financial services, like organizing and financing corporate takeovers, insuring investments against risk, creating new financial instruments, etc.—activities in which profit-making involves the siphoning, centralization, and reinvestment of surplus value through financial channels; and c) the increasing separation of finance from production.
This process of financialization has gone the furthest in the United States, and it is a major factor in U.S. imperialism’s ability to preserve and extend its dominance in international financial markets.8
Financialization is also a means through which wealth, and effective control over productive forces, is centralized by the imperialist countries—even as production has grown more geographically dispersed and increasingly carried out within subcontractural networks in the Third World.
Financialization involves efforts to squeeze out more “value” from already created value. One measure of this is that in 2006, the daily volume of trading in foreign exchange markets and in derivatives (financial instruments) added up to $11.4 trillion—which almost equals the annual value of global merchandise exports that year. In terms of the shifts in the structure of the U.S. economy, the financial sector’s share of total corporate profits has risen from 8 percent in 1950 to 31 percent last year.9
B. Financialization and Production
As far removed as finance may be from processes of production, and as elaborate and multi-layered as its operations have become, finance cannot break free of the sphere of production. Even as it objectively seeks to do so—and even as the disjuncture between the two spheres (production and finance) grows—it is the underlying conditions and profitability of production that set the overall conditions for the accumulation of capital.
Imperialism is a worldwide system of production and exchange. It is the structure of social production—it is the global production of surplus value based on exploitation of people—that is at the foundation of this whole system. And in relation to the production of surplus value, “financialization” is both parasitic and functional. It is parasitic in the sense that financialization drains value from production.
But financialization is functional to the workings of global capitalism in the sense that it facilitates the gathering of money capital into ever-larger agglomerations of capital and finds new profit-yielding channels in which to rapidly invest it…and just as quickly to withdraw it! Global capital faces all kinds of financial uncertainties and risks on its competitive global playing field as it moves through different channels, or circuits, of production. And the “risk-management” techniques provided by the global financial system are actually vital to the accumulation of capital, to the success of “risk-taking,” in the turbo-charged globalized economy.10 That’s why, for example, money jumps into Thai real estate markets one day, and pulls out and goes into ethanol production in Brazil the next… and then back to mortgage securities.
And there is something else: the inflows and outflows of short-term and speculative capital also act as a perverse means of imposing discipline on and restructuring capitals—a major manufacturing firm can be starved of credit or threatened with a leveraged buyout. And this kind of “financial discipline” has been imposed on whole countries in the Third World—aided, abetted, and orchestrated by the U.S.-dominated International Monetary Fund.
All this is part of the reason that financial instability is a constant feature of capitalism in its more globalized and financialized forms of existence.
Financialization and the globalization of production have been tightly bound up with each other. It can be put this way: there is a relationship between sweatshop labor in Guangdong province in China, the recycling of China’s export earnings into the U.S. Treasury and U.S. financial markets, and the credit-financed expansion in the U.S. of the last decade. Or, to put it more graphically, there is a link between the agony of superexploited labor in the bowels of the new industrial zones of the Third World, the feverish search for high and quick returns at the top of the financial pyramids, and the chaos of the housing markets with people losing their homes in the U.S.
This is an extreme concentration of the nature of world capitalism. This world is highly bound together by production, trade, and finance. The requirements of life (consumer goods) and the requirements of production (machines and raw materials, etc.) are socially produced, that is, they involve the collective and interconnected efforts of wage-laborers in factories, warehouses, and so forth. But this wealth, the technology and means of producing it, and knowledge itself—all this is privately controlled and deployed by a small capitalist class.
C. Barriers, Contradictions, and Shifting Tectonic Plates
What we are witnessing now is that a particular dynamic of growth, marked by intensified financialization, is generating new contradictions and new barriers to sustained accumulation.
The level of debt to economic output in the U.S. is at an all-time high. The financing of the trade and government deficits of U.S. imperialism (that is, providing credit for purchases of imports and having investors buy Treasury debt) depends on a steady and growing inflow of capital from abroad. But the weakening of the dollar and the emergence of competitor currencies, like the euro, increasingly threatens these mechanisms. And very crucial to this has been the process where dollars earned by countries like China through trade with the U.S., are then recycled back into the U.S. economy through purchase of Treasury bonds and other investments.
In the U.S., the financial sector is seriously strained and is a flashpoint of heightened global financial instability, if not breakdown, leading to a major economic slump.
Here we come to a basic point of this analysis: A financial crisis has broken out because of the severe imbalances built up between the financial system—and its expectations of future profits—and the accumulation of capital, that is, the structures and actual production of profit based on exploitation of wage-labor.
The imperialist state is intervening to head off further damage and to discipline and restructure the financial system. But the very complexity of the “financial packages” created during the speculative boom—with their bundled-up loans and long strings of finance—are producing new challenges for policy-makers. As one Yale economist put it, perhaps unintentionally echoing a phrase from Marx: “like the sorcerer’s apprentice, we have created things we do not understand and cannot easily control.”11
This explosive uncertainty is developing against a larger international canvas. Major shifts are taking place in the world capitalist economy. The European market recently eclipsed the U.S. market in size. China’s growing demand for raw materials to fuel its export economy is making it a new player in the scramble for resources and control over them. And China’s increasing importance as a supplier of capital to the U.S. is giving it new leverage. Russia is reemerging as a world imperialist player, owing in part to its vast energy reserves and rising oil and gas prices.
At the same time, and at this very moment of financial crisis, U.S. imperialism’s freedom of maneuver is severely hobbled—and this includes its ability to stimulate the economy through fiscal and monetary policy. The United States has never run such large current account deficits and no single country’s deficit has ever bulked as large relative to the global economy.
D. The Military Fix
Which brings us to one of the “dirty little secrets” of the financial crisis: the military needs and the military costs of empire…and “greater empire.”
There is a brute fact of imperialist accumulation. The whole imperialist system rests on the domination of vast swaths of the globe through savage force, with the U.S. military colossus playing a special role. The U.S. military helps “create the conditions” for U.S. domination, pro-U.S. client regimes in the Third World, and conditions for investment by U.S. corporations.
In the Bush era, U.S. imperialism has been attempting to parlay its military might into a new world order. This involves a restructuring of global political and production relations that will enable it to resolve or mitigate some of the problems and tensions it faces—and to lock in its global supremacy over rivals and potential rivals for decades to come.
The U.S. share of world production has declined to about 20 percent, down from 30 percent forty years ago. But U.S. imperialism is compensating for this by pressing its military advantage as sole imperialist “superpower” (since the collapse of the Soviet Union).
In a recent study, Chalmers Johnson has calculated that defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. Leaving out the wars in Iraq and Afghanistan, defense spending has doubled since the mid-1990s.12
Militarization is also embedded in the U.S. economy. It is a key structural component of growth, scientific research, and technological prowess of U.S. imperialism. And because of its sheer size, it also plays a role in the attempts of the U.S. imperialist state to “manage” and stimulate the economy.
But the recent wave of militarization has put enormous financial strains on U.S. imperialism. It has produced huge deficits that cannot be sustained without the inflow of capital into the U.S. And the wars for “greater empire” are incurring astronomically greater costs than military and government planners had anticipated. Not least because of the setbacks and difficulties U.S. imperialism has encountered in Iraq and Afghanistan.
This is a sharp contradiction for U.S. imperialism—because in many ways it is staking the future of empire on these wars; but these wars have become more costly to wage. And it is the height of hypocrisy for Democrats to now blame the Iraq war for financial crisis—as they consistently voted for war-spending authorizations, to the tune of $500 billion.
PART III: CONCLUSION
This is a financial crisis of historic proportions. And like many other events in the world, this crisis points to the fundamental irrationality and cruelty of the system. It also shows the vulnerability of imperialism to sharp turns that could open up new possibilities for revolutionary advance.
But things unfold in complex, unpredictable, and historically conditioned ways. And as serious and potentially destabilizing as this crisis may become, it is also possible that U.S. imperialism could turn this crisis to its advantage.
We live in an age of “endless war” and environmental devastation. We live in an ever-more globalized capitalist system that thrives on the toil and agony of the great bulk of humanity but that cannot escape the anarchy that lies at its very foundations.
There is necessity and freedom for the imperialists. And so too for the people.
1. Quoted in Steven R. Weisman, “Financial Regulators Suggest Tighter Controls,” The New York Times, April 12, 2008. [back]
2. Allan Sloan, “On the Brink of Disaster,” Fortune, April 14, 2008, p. 82. A useful discussion of derivatives, hedge funds, and the like is found in “The Predators’ Ball Resumes: Financial Mania and Systemic Risk,” Interview with Damon Silvers, Multinational Monitor, May-June 2007. [back]
3. S. Tully, “What’s Wrong With Wall St. and How to Fix It,” Fortune, April 14, 2008, p. 72; Reed Abelson and Louise Story, “G.E. Earnings Drop, Raising Broader Fears,” The New York Times, April 12, 2008. [back]
4. Sean Farrell, “Financial turmoil could cost $1trn, warns IMF as global growth comes under threat,” Independent.co.uk, 9 April 2008. [back]
5. Data from RealityTrac.com, January 29, 2008; Moody’s Economy.com, February 21, 2008. [back]
6. The New York Times, January 24, 2008. [back]
7. Cited in Charlemagne, “Winners and losers,” The Economist, March 1, 2008, p. 56. [back]
8. Among informative studies of financialization, neoliberalism, and dollar hegemony are David Harvey, A Brief History of Neoliberalism (London: Oxford, 2005); Andrew Glyn, Capitalism Unleashed (London: Oxford, 2006); Kevin Phillips, American Theocracy (New York: Viking, 2006); Ramaa Vasudevan, “Finance, Imperialism, and the Hegemony of the Dollar,” Monthly Review, April 2008; and C.P. Chandrasekhar, “Continuity or Change? Finance Capital in Developing Countries a Decade after the Asian Crisis,” Economic and Political Weekly, December 15, 2007. [back]
9. See Chandrasekhar, “Continuity or Change,” pp. 37-38; The New York Times, December 11, 2007. [back]
10. On financialization as a means to contain financial disorder and to impose neoliberal discipline, see Christopher Rude, “The Role of Financial Discipline in Imperial Strategy,” in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (London: Merlin Press, 2004). [back]
11. David Dapice, “Bad Spell on Wall Street,” Policyinnovations.org, January 24, 2008. [back]
12. Chalmers Johnson, “Why the US has really gone broke,” mondediplo.com (English edition), February 5, 2008. [back]
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