[R-G] The Current Crisis: A Socialist Perspective

[Anthony Fenton]

~~~~~~~~~~~~~~~(((( T h e B u l l e t ))))~~~~~~~~~~~~~~~
A Socialist Project e-bulletin ... No. 142 ... September 30, 2008
___________________________________________________

The Current Crisis:  A Socialist Perspective
Leo Panitch and Sam Gindin

'They say they won't intervene. But they will.' This is how Robert  
Rubin, Bill Clinton's Treasury Secretary, responded to Paul O'Neill,  
the first Treasury Secretary under George W. Bush, who openly  
criticized his predecessor's interventions in the face of what Rubin  
called 'the messy reality of global financial crises'. The current  
dramatic conjuncture of financial crisis and state intervention has  
proven Rubin more correct than he could have imagined. But it also  
demonstrates why those, whether from the right or the left, who have  
only understood the era of neoliberalism ideologically – i.e. in terms  
of a hegemonic ideological determination to free markets from states –  
have had such a weak handle on discerning what really has been going  
on over the past quarter century. Clinging to this type of  
understanding will also get in the way of the thinking necessary to  
advance a socialist strategy in the wake of this crisis.

Markets, States and American Empire
The fundamental relationship between capitalist states and financial  
markets cannot be understood in terms of how much or little regulation  
the former puts upon the latter. It needs to be understood in terms of  
the guarantee the state provides to property, above all in the form of  
the promise not to default on its bonds - which are themselves the  
foundation of financial markets' role in capital accumulation. But not  
all states are equally able, or trusted as willing (especially since  
the Russian Revolution), to honour this guarantee. The American state  
emerged in the 20th century as an entirely new kind of imperial state  
precisely because it took utmost responsibility for honouring this  
guarantee itself, while promoting a world order of independent nation  
states which the new empire would expect to behave as capitalist  
states. Since World War Two, the American state has been not just the  
dominant state in the capitalist world but the state responsible for  
overseeing the expansion of capitalism to its current global  
dimensions and for organizing the management of its economic  
contradictions. It has done this not through the displacement but  
through the penetration and integration of other states. This included  
their internationalization in the sense of their cooperation in taking  
responsibility for global accumulation within their borders and their  
cooperation in setting the international rules for trade and investment.

It was the credibility of the American state's guarantee to property  
which ensured that, even amidst the Great Depression and business  
hostility to the New Deal's union and welfare reforms, private funds  
were readily available as loans to all the new public agencies created  
in that era. This was also why whatever liquid foreign funds that  
could escape the capital controls of other states in that decade made  
their way to New York, and so much of the world's gold filled the  
vaults of Fort Knox. And it is this which helps explain why it fell to  
the American state to take responsibility for making international  
capitalism viable again after 1945, with the fixed exchange rate for  
its dollar established at Bretton Woods providing the sole global  
currency intermediary for gold. When it proved by the 1960s that those  
who held US dollar would have to suffer a devaluation of their funds  
through inflation, the fiction of a continuing gold standard was  
abandoned. The world's financial system was now explicitly based on  
the dollar as American-made 'fiat money', backed by an iron clad  
guarantee against default of US Treasury bonds which were now treated  
as 'good as gold'. Today's global financial order has been founded on  
this; and this is why US Treasury bonds are the fundamental basis from  
which calculations of value of all forms of financial instruments begin.

To be sure, the end of fixed exchange rates and a dollar nominally  
tied to gold now meant that it had to be accepted internationally that  
the returns to those who held US assets would reflect the fluctuating  
value of US dollars in currency markets. But the commitment by the  
Federal Reserve and Treasury to an anti-inflation priority via the  
founding act of neoliberalism – the 'Volcker shock 'of 1979 – assuaged  
that problem. (This 'defining-moment' of US-state intervention, like  
the current one, came in the run-up to a presidential election – i.e.  
before Reagan's election, and with bipartisan support and the support  
of industrial and well as financial capital in the US and abroad.) As  
the American state took the lead, by its example and its pressure on  
other states around the world, to give priority to low inflation as a  
much stronger and ongoing commitment than before, this bolstered  
finance capital's confidence in the substantive value of lending; and  
after the initial astronomical interest rates produced by the Volcker  
shock, this soon made an era of low interest rates possible.  
Throughout the neoliberal era, the enormous demand for US bonds and  
the low interest paid on them has rested on this foundation. This was  
reinforced by the defeat of American trade unionism; by the intense  
competition in financial markets domestically and internationally; by  
financial capital's pressures on firms to lower costs through  
restructuring if they are to justify more capital investment; by the  
reallocation of capital across sectors and especially the provision of  
venture capital to support new technologies in new leading sectors of  
capital accumulation; and by the 'Americanization of finance' in other  
states and the consequent access this provided the American state to  
global savings.

Deregulation was more a consequence than the main cause of the intense  
competition in financial markets and its attendant effects. By 1990,  
this competition had already led to banks scheming to escape the  
reserve requirements of the Basel bank regulations by creating  
'Structured Investment Vehicles' to hold these and other risky  
derivative assets. It also led to the increased blurring of the lines  
between commercial and investment banking, insurance and real estate  
in the FIRE sector of the US economy. Competition in the financial  
sector fostered all kinds of innovations in financial instruments  
which allowed for high leveraging of the funds that could be accessed  
via low interest rates. This meant that there was an explosion in the  
effective money supply (this was highly ironic in terms of the  
monetarist theories that are usually thought to have founded  
neoliberalism). The competition to purchase assets with these funds  
replaced price inflation with the asset inflation that characterized  
the whole era. This was reinforced by the American state's readiness  
to throw further liquidity into the financial system whenever a  
specific asset bubble burst (while imposing austerity on economies in  
the South as the condition for the liquidity the IMF and World Bank  
provided to their  financial markets at moments of crisis). All this  
was central to the uneven and often chaotic making of global  
capitalism over the past quarter century, to the crises that have  
punctuated it, and to the active role of the US state in containing  
them.

Meanwhile, the world beat a path to US financial markets not only  
because of the demand for Treasury bills, and not only because of Wall  
Street's linkages to US capital more generally, but also because of  
the depth and breadth of its financial markets – which had much to do  
with US financial capital's relation to the popular classes. The  
American Dream has always materially entailed promoting their  
integration into the circuits of financial capital, whether as  
independent commodity farmers, as workers whose paychecks were  
deposited with banks and whose pension savings were invested in the  
stock market, as consumers reliant on credit, and not least as heavily  
mortgaged home owners. It is the form that this incorporation of the  
mass of the American population took in the neoliberal context of  
competition, inequality and capital mobility, much more than the  
degree of supposed 'deregulation' of financial markets, that helps  
explain the dynamism and longevity of the finance-led neoliberal era.  
But it also helped trigger the current crisis -- and the massive state  
intervention in response to it.

 From 'Great Society' to sub-prime mortgages
The scale of the current crisis, which significantly has its roots in  
housing finance, cannot be understood apart from how the defeat of  
American trade unionism played out by the first years of the 21st  
century. Constrained in what they could get from their labour for two  
decades, workers were drawn into the logic of asset inflation in the  
age of neoliberal finance not only via the institutional investment of  
their pensions, but also via the one major asset they held in their  
own hands (or could aspire to hold) – their family home. It is  
significant that this went so far as the attempted integration via  
financial markets of poor African-American communities, so long the  
Achilles heel of working class integration into the American Dream.  
The roots of the sub-prime mortgage crisis, triggering the collapse of  
the mountain of repackaged and resold securitized derivative assets to  
hedge the risk involved in lending to poor people, lay in the way the  
anti-inflation commitment had since the 1970s ruled out the massive  
public expenditures that would have been required to even begin to  
address the crisis of inadequate housing in US cities.

As the 'Great Society' public expenditure programs of the 1960s ran up  
against the need to redeem the imperial state's anti-inflationary  
commitments, financial market became the mechanism for doing this. In  
1977, the government sponsored mortgage companies, Freddie Mac and  
Fannie Mae (the New Deal public housing corporation privatized by  
Lyndon Johnson in 1968 before the word neoliberalism was invented),  
were required by the Community Reinvestment Act to sustain home loans  
by banks in poor communities. This effectively initiated that portion  
of the open market in mortgage-backed securities that was directed  
towards securing private financing for housing for low income  
families. From modest beginnings this only really took off with the  
inflation of residential real estate values after the recession of the  
early 1990s and the Clinton Administration's embrace of neoliberalism  
leading to its reinforcement of a reliance on financial markets rather  
than public expenditures as the primary means of integrating working  
class, Black and Hispanic communities. The Bush Republicans'  
determination to open up competition to sell and trade mortgages and  
mortgage-backed securities to all comers was in turn reinforced by the  
Greenspan Fed's dramatic lowering of real interest to almost zero in  
response to the bursting of the dot.com bubble and to 9/11. But this  
was a policy that was only sustainable via the flow of global savings  
to the US, not least to the apparent Treasury-plated safety of Fannie  
Mae and Freddie Mac securities as government sponsored enterprises.

It was this long chain of events that led to the massive funding of  
mortgages, the hedging and default derivatives based on this, the  
rating agencies AAA rating of them, and their spread onto the books of  
many foreign institutions. This included the world's biggest insurance  
company, AIG, and the great New York investment banks, whose own  
traditional business of corporate and government finance around the  
globe was now itself heavily mortgaged to the mortgages that had been  
sold in poor communities in the US and then resold many times over.  
The global attraction and strength of American finance was seen to be  
rooted in its depth and breadth at home, and this meant that when the  
crisis hit in the sub-prime security market at the heart of the  
empire, it immediately had implications for the banking systems of  
many other countries. The scale of the American government's  
intervention has certainly been a function of the consequent  
unraveling of the crisis throughout its integrated domestic financial  
system.  Yet it is also important to understand this in terms of its  
imperial responsibilities as the state of global capital.

This is why it fell to the Fed to repeatedly pump billions of dollars  
via foreign central banks into inter-bank markets abroad, where banks  
balance their books through the overnight borrowing of dollars from  
other banks. And an important factor in the nationalizations of Fannie  
Mae and Freddie Mac was the need to redeem the expectations of foreign  
investors (including the Japanese and Chinese central banks) that the  
US government would never default on its debt obligations. It is for  
this reason that even those foreign leaders who have opportunistically  
pronounced the end of American 'financial superpower status' have  
credited the US Treasury for 'acting not just in the US interests but  
also in the interests of other nations.'  The US was not being  
altruistic in doing this, since not to do it would have risked a run  
on the dollar. But this is precisely the point. The American state  
cannot act in the interests of American capitalism without also  
reflecting the logic of American capitalism's integration with global  
capitalism both economically and politically. This is why it is always  
misleading to portray the American state as merely representing its  
'national interest' while ignoring the structural role it plays in the  
making and reproduction of global capitalism.

Continue reading:
www.socialistproject.ca/bullet/bullet142.html#continue

~~~~~~~~~~~~~~~~~(((( T h e B u l l e t))))~~~~~~~~~~~~~~~~~
The Bullet is produced by the Socialist Project. Readers are
encouraged to distribute widely. Comments, criticisms and
suggestions are welcome. Write to info at socialistproject.ca

If you wish to subscribe: www.socialistproject.ca/lists/?p=subscribe

The Bullet archive is available at www.socialistproject.ca/bullet

For more analysis of contemporary politics check out
'Relay: A Socialist Project Review' at www.socialistproject.ca/relay
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~