Will you do a short interview on the condition of the world economy? developments since 2007-8? prospects?



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Hi,

Will you do a short interview on the condition of the world economy? developments since 2007-8? prospects?

It's to round out a series of interviews. I'll have interviewed you before in the series, or failed to but talked with you about the possibility of coming into the series at a later stage.

I've done two rounds of interviews with a number of left-wing economists, starting in March 2008, about the big crisis which got going around August 2007 and exploded in September-October 2008. In addition to those two main rounds, I've collected a few other relevant interviews, for example at times of special crisis in the eurozone.

My hope is to interview again everyone I interviewed the first two times round, or in one of the extra interviews, plus a few others who weren't interviewed then but may be willing to do an interview this time round.

I hope then to publish the entire collection of interviews. The collection would show not only a variety of views and angles, and some interaction between them, but also different economists learning from events, readjusting, reconsidering. It would do something different from and additional to all the monographs or collected debates-at-a-certain-point, and also, being a collection of interviews, would be accessible to a wide audience of activists.

There is rarely a good time to take stock in these matters. There's always the possibility that all assessments will quickly be outdated by some new development. But it's now eight years since the first seizing-up of lending between banks in August 2007. Enough time has passed to make some summaries for the time being, at least.

I've drafted some questions, in various categories, and listed them below. They're intended as an indication of areas I'd like to discuss, rather than as a questionnaire.

That is, if you're willing to do an interview, I'd like you to look at the questions and consider which of them you would find most interesting to discuss, have most to say on, etc. Then I would like to do the actual interview either face-to-face or over the phone, with the possibility of me adding follow-up questions, objections and requests for response, or questions for clarification, in the course of the interview. Then I'll send you the transcript to correct.

You may also want to rephrase the questions you'd like to respond to, or even formulate distinctly different questions.

I find that approach generates a more fluid discussion than can be got by collecting answers to a questionnaire. Besides, the ten questions make too long a questionnaire, and would take up too much of interviewees' time.

Most interviewees since 2008 have also preferred a less fixed approach. However, one or two preferred to select from questions I'd written, and write responses to them, rather than talking. If that's better for you, that's fine.

Thanks,

Martin Thomas



The big picture

1. We saw years in which leading capitalist governments went through policies which they would have previously damned, such as large nationalisations, or the massive creation of liquidity with no correlation to inflation targets. We have also seen their new plans for financial regulation. We’ve seen their “balanced budget” constitutional amendments. We have seen what they have forced on Greece. So: capital is still running its affairs on neoliberal lines, pretty much as before 2008? It is evolving a new, mutated neoliberalism?

2. Eight years after the crisis got going, how would you briefly sum up your assessment of its specific dynamic? What main considerations make you think that assessment is more accurate than others? What are the lessons for the general theory of crisis?

3. Proposals about what demands and campaigns the left should focus on in order to help and enliven working-class organising in the crisis have included expropriation of banks with real public control, and changes in housing and education provision so that worse-off people can get housing and education outside the circuits of financial capital, and one that for myself I see as something that may be an enforced expedient but not advanceful in itself, exit from the euro. What is your view on these, or other main demands and campaigns?

4. Do you think US hegemony in global capitalism was buoyant in the run-up to this crisis? Do you think it is still buoyant? Do you think the crisis has strengthened US hegemony? undermined US it? Not changed it much? Speeded up processes which will in the foreseeable medium term undermine it?

5. What future do you see for the euro?

Pressure points

6. Much was said in 2008 about the need for purging accumulations of debt (household debt, banks' holding of debt, corporate debt, government debt) and reducing debt ratios to lower levels. How important is that argument about reducing debt? Do you think this has happened?

7. Warren Buffet's claim that "derivatives are financial weapons of mass destruction" was much quoted at the peak of the crisis, and there was much talk of restraining derivatives markets. Nevertheless, derivatives markets have continued at similar volume since 2008. Have changed? How significant is the rapid expansion of these markets since the 1980s for the general shape of capitalism?

8. The big economic crisis after 1929 led to and was made worse by countries and blocs moving to economic-protectionist policies and choking off world trade. So far that hasn't happened in this crisis. What accounts for the difference?

9. For many years now the large US current-account deficit, and the correspondingly large flow of purchases of US Treasury bonds and other US financial paper from outside the US, have been reckoned as factors of instability. Some writers say, on the contrary, that the large flow of capital to the US is a product of US economic strength and relatively stable. What do you think?

Analytical puzzles

10. Some economists see a substantial general rise in rates of profit from some time in the 1980s up to the crisis, so the crisis was a sudden break; some see a general decline or stagnation in profit rates ever since the early 1970s as an essential and previously-established background to the crisis. The two assessments depend on different ways of reading the statistics. Which view do you agree with more, and what do you think is wrong with the other way of reading the statistics?

10. It was often argued that mass consumer demand had been sustained in the run-up to the crisis only by the expansion of household debt. However, high levels of household debt, as such, may depress rather than increase mass consumer demand, because they mean that a sizeable part of household income is used to service debt rather than to buy consumer goods and services. Only a rate of increase of household debt high enough to outweigh the debt-service payments can produce a net increase in consumer demand. Bearing in mind the high levels of household debt before the crisis broke, do you think the rate of increase then was sufficient to produce a net increase in consumer demand? How do you assess the fairly modest reduction in the USA of household debt since 2007, and the actual increase in the UK of household debt as a ratio to household income?

11. What does it all tell us about how much, and when, crises in the financial sphere interact with1 general crises? In general, under capitalism? And under the specific conditions of the current era of “financialisation”?

20 March 2008. Fred Moseley - The Long Trends Of Profit

Fred Moseley is the author of a distinctive Marxist account of the decline in profit rates which brought crisis in the 1970s and 80s, one has spawned a whole series of further studies.

He is professor of economics at Mount Holyoke College in Massachusetts, USA. His books include The Falling Rate of Profit in the Postwar United States Economy (1991), and he edited the English edition of Enrique Dussel's Towards an Unknown Marx: A Commentary on the Manuscripts of 1861-3.

The rate of profit is the key barometer of a capitalist economy, and more specifically it is the main determinant of business investment.

The rate of investment is in turn a key determinant of the overall growth of the economy. So, the first main reason why the rate of profit is so significant is its impact on investment spending.

Secondly, the relative proportion of profits and debt payment is a key indicator of the financial health of corporations. If the ratio of profit to debt obligations is low, then the corporations have greater vulnerability to bankruptcy.

Both on the investment side and on the financial side, profit rates are of crucial importance.

There has not been a complete recovery of the rate of profit in recent years. I don't want to overstate it. There are different measures of profit rates, but according to my estimates, which are for the total business sector of the economy, by 2006 the rate of profit was within 10% of its earlier post-war peak.

Mid-2006 was the peak of this current profit cycle. The profit share and profit rate have declined a bit in the last year or so, and the trajectory seems to be down right now.

But there was a substantial recovery in the rate of profit. The rate of profit had declined roughly 50% from the peak of the sixties to the trough of the 80s. At least half of that previous decline - I would say, more than half of that previous decline - was reversed. Today profits are, by almost any measure, a lot better than they were in the 70s and 80s.

Bear in mind also a couple of additional considerations. One is that these estimates are for the domestic US economy. They do not include foreign profits; and foreign profits are an increasing share of total US corporate profits. 30 or 40 years they were less than 10%, today they are 30%. None of that gets counted in the official US government estimates of profit rates.

Some people argue that including those foreign profits is appropriate in terms of gauging the financial strength of corporations, but if you are talking about the impact of profits on investment in the USA, then perhaps profits made in the rest of the world do not have much impact on US investment spending.

Another additional consideration is that these estimates of profits also do not include the salaries of top executives, which are going through the roof, and could more appropriately be considered as part of profits rather than wages.

In sum, I would argue that there has been a substantial recovery of profit rates. Maybe not complete, and we may disagree a few percentage points on the extent, but a substantial recovery.

Another indication with respect to the financial aspect of profits is a substantial reduction in debt obligations in relationship to profits. Those ratios are well down from their peaks, both due to higher profits and also to lower debt, for some corporations, and lower interest rates. So there is less danger of corporate bankruptcy today than ten or twenty years ago.

Those ratios are for the economy as a whole. If you look at the distribution of debt ratios, there is a pretty fat tail at the high debt ratio end. There are a number of corporations, ten per cent maybe, which have very high debt loads, in part because of the junk-bond-financed acquisitions. And particularly in danger of bankruptcy are the home builders, the construction industry. I'm not saying there won't be bankruptcies. But it doesn't seem to be a very widespread threat yet.

Another reason why the threat of corporate bankruptcy might be more serious than it looks is that debt may be underestimated. As we learned from Enron, there are all sorts of accounting tricks to keep debt off the books. We'll find out pretty soon who's holding the debt. As Warren Buffet says, when the tide goes out, you see who's swimming naked.

The financial sector is in much greater danger than the non-financial sector.

But accepting that there has been a substantial recovery in the rate of profit, how did this happen? What were the main factors contributing to it?

I would argue that it's basically been the holding down of wages. The average real wage in the US economy is almost the same as it was in the early 1970s. For the average worker, there has been little or no increase in the real wage.

This is in striking contrast to the early post-war period, up through the 70s, when the average real wage in the US economy approximately doubled. That ended in the 70s with an all-out attempt to restore profitability, mainly at the expense of workers.

While real wages were being held constant, productivity increases continued every year - at a somewhat slower rate during the productivity slowdown of the 70s and 80s, somewhat faster since then, but they continued.

In Marxist terms, that reduced necessary labour time and increased surplus labour time, and therefore increased the rate of surplus value. Over the three decades we're talking about, the rate of surplus value has approximately doubled, from about 1.5 to around 3. Again, that is in striking contrast to the earlier post-war period, when the rate of surplus value increased a little bit, but not much.

That sharp increase in the rate of surplus value has been the main reason why the rate of profit has increased substantially.

It could be interpreted as contrary to what Marx expected: he expected that once the rate of profit had declined, it would take the devaluation of capital and widespread bankruptcies and so forth to restore it. What Marx didn't consider was the scenario we've lived in over the last decades of enough government management and government intervention to put a floor under the economy; but even so it's taken a very long time to restore the rate of profit.

A puzzle here is that what appears to be a substantial recovery in the rate of profit does not seem to have led to a strong revival of investment. The connection between profit rates and investment seems to have been weakened.

I haven't myself done a lot of work on this, but it seems like businesses are paying out a greater share of their profits as dividends, and using a greater share of profits to buy back their stock. Instead of investing in the expansion of the business, they are enriching themselves.

There's a lot of talk about stock options, and managers who have substantial stock options running the company in a way to maximise the stock price.

So you have a bigger proportion of surplus value going to capitalist consumption rather than investment.

A slower rate of investment spending has meant a slower rate of growth, compared to earlier periods, and that the growth of the economy has become more and more dependent on consumer spending - in part the luxury consumption of capitalists,.

But it's hard for workers to increase their consumption with stagnant wages. There have been different ways round that. The first was to have more family members working, and longer hours. But more recently the big one is the expansion of consumer debt - an explosion of consumer debt.

Now that debt has to be paid, and we have a debt crisis on our hands.

The numbers would suggest that the corporations should be more resilient in face of the crises in the financial sector. However, the housing sector and the construction industry will certainly not be resilient. The debt ratios could be understated, due to Enron-type tricks. And there is that "fat tail" of heavily indebted corporations..

The aggregate official numbers which show a healthier financial situation might be at least somewhat exaggerated. And the financial crisis is shaping up every day to look more and more serious.

The banks have responded by greatly restricting lending. If there are corporations out there that are heavily dependent on banks to refinance debt, there could be substantial effects.

The shock that they're going to experience is certainly shaping up to be more serious than what occurred 20 years ago [in the Savings and Loans crisis]. Maybe the sounder financial figures for corporations will not be enough.

As regards estimating profit, the main difference between my estimates and Robert Brenner's, for example, is that mine are for the total economy and his are for the non-financial sector only. The recovery of profits in the non-financial sector is less than for the total economy. Even for the non-financial sector, I'd say it has been substantial - but not as close to full recovery as for the total economy.

Which measure is more relevant and important? An argument could be made that in terms of investment spending the non-financial sector profit rate is the more crucial determinant. I wouldn't argue too strongly for the preferability of the total-economy measure.

And part of the financial profits may turn out to be fictitious - paper profits based on anticipated revenue from financial assets a lot of which are now having to be written down. The recovery of financial profits in the boom time could turn out to have been grossly overestimated.

But even if we accept Robert Brenner's estimates - and I think foreign profits and executive salaries are important corrections to those - there has still been a substantial recovery of profit rates. As yet no large revival of investment spending, so the economy has become more dependent on consumer spending.

Why are there unequal profit rates in the financial and non-financial sectors?

Part of it may also be that the financial profits are partly paper profits, as just mentioned.

It's surprising that financial sector profits should rise as a share of the whole, for a couple of reasons. One is that interest rates are low. You would think that would contribute to a smaller financial share. Secondly, if you look at the figures for debt for non-financial corporations, with less debt there should be lower debt payments from the non-financial to the financial sector.

Financial profits have been more and more coming from the consumer sector - from credit cards and from mortgages and so on. That expansion has now turned into sharp contraction, and financial profits will follow accordingly.

In terms of the long decline in the rate of profit, before the recent recovery, my emphasis has been on Marx's distinction between productive labour and unproductive labour. Productive labour is labour which produces value and surplus-value. According to Marxist theory, that is a fairly broad category, but it does not include two main types of unproductive labour - labour involved in various sales and circulation and exchange activities, including finance, and management or boss labour.

The relative proportions of unproductive labour and productive labour changed dramatically in the US economy in the early post-war period, up to the 70s. The ratio of unproductive to productive approximately doubled over that period; and, from the perspective of Marxist theory, that means a smaller share of the surplus value produced is left over for profits. An increasing share of the surplus value produced by productive labour has to go to pay the wages and other costs of unproductive labour.

When we talk about the rate of profit, in my estimates or in Brenner's estimates, this is always a net figure, only part of the total surplus value produced by productive labour..

The doubling of the relative proportion of unproductive labour to productive labour had a negative impact on the rate of profit and was, best I can tell, the main cause of the substantial decline in the rate of profit in that period. The composition of capital also increased and also contributed, in part, to the long-term decline in the rate of profit, but the increase in unproductive labour seems to have been a more significant cause.

What has happened since then? The ratio of unproductive to productive labour has continued to increase, but at a much slower rate than earlier, and so that factor has had less of a negative impact on the rate of profit. The small continuing negative impact has been more than overcome by the very strong increases in the rate of surplus value.

The financial sector, in the US anyway, is still only a small percentage of the economy. It has increased. How is that consistent with the overall proportion of unproductive labour levelling off?

Most of the levelling off has been in the supervisory element of unproductive labour, which is the majority of it. The financial sector is catching up now, but on the supervisory side, downsizing and eliminating layers of middle management have been a big factor.

Also, on the circulation side, the computer has greatly reduced circulation labour. Computer technology has perhaps been the main reason for the slowing down of the increase of unproductive labour, both in circulation and in supervision. You need fewer supervisors when you have computers. You could almost argue that the computer technology was developed to solve the problem of expanding unproductive labour.

In the end, I would say that the current crisis is more of a Minsky crisis than a Marx crisis. The main cause of the current crisis is not insufficient surplus labour in production, but rather excessive risk-taking by financial capitalists in search of higher returns, which was based on the erroneous assumption that housing prices would continue to rise forever.

The solution to this crisis has more to do with wiping out a large portion of the accumulated debt of households (and the corresponding assets of financial institutions) rather than the devaluation of production capital and the reduction of wages (although these latter will also happen to some extent). But that is a topic for another discussion.



10 April 2008: Costas Lapavitsas - A new sort of financial crisis.

Costas Lapavitsas is a Marxist economist specialising in the study of financial systems. His writings include Profiting Without Producing (2013), and he is a professor at the School of Oriental and African Studies in London.

It has gradually become clear that one of the key features of the last thirty years is increasing autonomy of finance.

Many things have happened in the world economy since 1973-4, which is basically the end of the long boom, but one thing that is clear is that the financial system has become proportionately much larger and increasingly autonomous from real accumulation - production and circulation of value and surplus value.

The reasons for this are many and varied. There are reasons of technological innovation. There are reasons of institutional and political transformation - the deregulation and liberalisation of finance which has been instigated by a number of governments.

There are also reasons, more fundamental perhaps, which have to do with big capital, the large enterprises, becoming progressively less dependent on banks for credit to finance investment. And so the financial system has begun to target the personal income of private individuals - workers and broader strata of the population - as a source of profit.

This is a new departure in capitalism. I’d call it direct exploitation - profit being extracted directly from personal income and not through the process of production. Financial institutions increasingly make their profits from private individuals by lending for housing, for consumer credit, and so on.

The US Federal Reserve’s own figures show that the proportion of personal income paid out in debt servicing went up from 15.6% in 1983 to 19.3% in June 2007. A fifth of personal income is used to service debt. The figures in Britain are comparable. And remember, in the United States, financial profits are now a third of total profits.

Money incomes that people receive as wages or salaries or whatever, are increasingly transformed into loanable money capital, and out of that, banks and other financial institutions make profits. The process has created new layers of the capitalist class, feeding off those profits - new power centres, new centres of influence over policy.

Financial institutions also increasingly make profits by drawing fee income, that is, by mediating in financial markets - not lending and borrowing, but facilitating the lending and borrowing of others. This is an activity that banks have engaged in since the beginning of capitalism, but the size and importance of it now are quite new in the history of capitalism.

Altogether, interest income derived by banks out of profits made by industrial businesses has become proportionately smaller, though it remains important. On the other hand, interest income drawn from wages and other personal income, as well as income from fees, have become progressively more important for banks.

These are key structural changes. As a result there has been tremendous instability in the financial system and the economy as a whole. As banks and other financial institutions have made this turn in drawing their profits, they have created gigantic and novel forms of instability which implicate broad layers of ordinary people.

The instability has to do with the methods through which the transformation of finance has taken place. To make the turn, banks and other financial institutions had to rely on technological advances. The reason is obvious - to make loans to large numbers of individuals, banks must have the ability to process large amounts of individual data.

Until recently, they were not able to do that. But with developments in computers and telecommunications, they have acquired this capability.

Banks have started to use computationally intensive techniques and statistical methods in order to assess risk and to judge to whom they should lend. Bank lending has become more of an arm’s-length process. People are turned into units which the banks can treat in a uniform way.

Instead of going to see your bank manager to ask for a loan, you tick a few boxes on an application form downloaded from the Internet. The bank adds other information it might have about you and then makes its decision by assigning a credit score to you. This, of course, raises problems of democratic control of information, but the point here is that the bank has lost personal contact with the borrower. The judgement they make of the borrower as a risk depends on a numerical assessment of data provided at a distance.

Moreover, since the banks and financial institutions have also moved into making money from fees - and not just from lending - they take these mortgage debts, package them into new securities, and sell them in open financial markets.

Thus, the mortgage debt that people used to owe to a bank for 20 or 30 years is now packaged by the banks offload onto others. The banks create composite or derivative types of debt on the basis of the original mortgage.

It is worth stressing the change that has taken place by looking more closely at the process of mortgage securitisation. In the past, a bank would grant a mortgage by the bank manager talking to the borrower and deciding whether the borrower was a good prospect. The bank had a direct interest in working out whether the borrower was likely to repay regularly because otherwise it would lose its money.

Nowadays it is not like that. The borrower ticks the boxes; if the credit score clears a threshold, the bank would give the money; and next week the bank would package the mortgage into new securities and sell it, essentially providing others with a right to the stream of debt payments from the mortgage. After that it is not ostensibly the bank’s concern whether the borrower repays normally, or not.

All that relies on someone else, other than the bank, vouching for the process by better examining the creditworthiness of the new securities. That was done by a credit ratings organisation, such as Standard and Poor’s, or Fitch.

But the credit ratings organisations are also remote from borrower. They are also paid by the bank that creates the new securities, and so have a conflict of interest.

Finally, another institution, an insurer, would come along and guarantee the new securities. That again is happens at a considerable distance from the original borrower.

None of the capitalist enterprises involved in this mechanism has a solid interest in assessing the long-term reliability of the person who obtained the original mortgage. Each just wants to collect its fee, or sell its securities, and go on to generate new business of the same type.

If there is “cheap money” in the system in the first place, that is, if the central bank has made money available at low interest rates, then this mechanism is a secure way of making profits for banks and others.

But, depending on how problematic the original mortgages were, risks are accumulating, and nobody knows where they are concentrated. In the USA subprime mortgages were advanced to very poor people without real prospects of repaying regularly, especially if interest rates rose. As they defaulted on their mortgages, banks and others were left holding new securities that were not worth very much at all. That is ultimately why Bear Sterns, a huge bank, failed in March 2008.

These problems were not clear until recently because this is the first time we have seen a financial system of this type emerge on this scale. At the time, economists and others were saying that it was a secure and stable way of doing things because the risk was spread out among a large number of people. Now we know that is far from the case.

The difference in responses to the crisis between the US Federal Reserve and the European Central Banks is based on a difference of outlook which has existed for a very long time.

It has to do with how those institutions were set up. The ECB is far more focused on price stability, whereas the Fed also sees itself as looking after the economy as a whole.

The Fed is also different from the ECB in the sense that the Fed produces world money and operates in the most important economy in the world. Its outlook is shaped by different concerns from the ECB’s.

At the moment, my judgement is that the Fed is so worried about the state of the American financial system that it is prepared to do whatever it takes to rescue it. Hence the huge amounts of money that it has made available to JP Morgan rapidly to take over the failed Bear Sterns. Hence also the rapid lowering of interest rates. The ECB takes a different line. It seems to think that the European financial system is in less danger.

In short, the Americans are less concerned about what is happening to the dollar and the international position of US capital, and even the domestic economy as a whole, than they are about rescuing the financial system.

Are they right? At the moment there is evidence that inflation is picking up. For the first time for many years, inflation might become a serious problem because of oil prices and food prices.

If that inflation problem materialises, then the Fed is going to regret what it is doing at the moment.

Moreover, the Fed has been overseeing a substantial, but quite orderly, decline of the dollar. The decision-makers in the United States seem to want the dollar to fall in order to remedy the US trade deficit. Is there a risk of that decline accelerating out of control? It is very hard to say, but it might. If the financial system were to receive an even bigger jolt than it has so far the decline of the dollar might accelerate out of control. That might happen, for instance, if some large financial institutions went under and holders of dollars across the world became very worried that US finance were collapsing.

There are some ruling class commentators in the Financial Times and elsewhere who have argued that the Fed’s measures might work, but at the cost of creating further problems for the future as they would be rescuing irresponsible banks. These comments are based on reality but most of those who make them are in an impossible position.

It is true that if interest rates are brought down, and if the Fed and other central banks pump money into the system, they are running the risk of creating another crisis down the road. The logical way of avoiding this would be to impose strong and pervasive controls on finance.

But the same people are completely against serious control and regulation of the financial system. They are in favour of liberalised finance. They believe that somehow the financial system, when it operates freely, improves the performance of the economy and everybody’s incomes. On this basis, it is impossible to take a consistent position.

My own view is that the Fed is reacting to very pressing requirements at the moment. It has to intervene to rescue the system. The risks are very great of a generalised crisis, and a few wrong moves by the Fed might lead to it. Whether as a result another crisis will happen down the road, in five or ten years’ time, is another matter that requires profound structural reform of finance.

Yes, people like Martin Wolf are rather embarrassed by the operation of a minimally-regulated financial system which means that when things are going well, you pocket the loot; when they go bad, you go to the government and ask to be bailed out. Can the left put alternative ideas into play on the question of regulating the financial system?

I think so. The ideas that are coming out of the orthodoxy and the capitalist class are terribly pedestrian. It’s the same old stuff that we have been hearing for more than two decades but appearing in technically different ways. In short, free markets and minimal regulation.

It is very important for the left to put across ideas of control. There is no reason, for instance, why the financial institutions cannot be controlled in terms of the assets they are required to hold and the proportions in which they hold them. At the moment, all the regulation is in terms of the capital they are required to have - Basel 1 and Basel 2*. The financial institutions have become very good at bypassing those regulations and using them to their own advantage. At the moment they can all meet the Basel 2 requirements, which presumably makes them safer, but at the same time several of them are at great risk, as we now know.

We should demand that regulation be imposed on where financial institutions lend and how. We should also demand that financial transactions are controlled and taxed. Financial institutions should not be able to trade any way they like, continually churning money over time and time again in order to generate fees.

More broadly and radically, we should insist that the mobilisation of money out of ordinary people’s incomes should become detached from securitisation and other speculative practices of the financial system. Houses, pensions, health, basic consumption should not be sources of profit for finance.

There should be public mechanisms that provide ordinary people with pensions in secure and controlled ways. There is no reason why the housing problems of society should be dealt with through the financial system. In London, for example, bringing housing well and truly into the realm of finance has meant that house prices have increased by a factor of about five in the last 20 years while personal incomes have increased by a factor of two. That divergence is related, in large part, to the grip that the financial system has acquired on housing. We should demand good quality social housing, while detaching housing from the financial system.

Since the 70s it has been a commonplace view, among Marxists and others, that the USA is in relative decline. But maybe it’s not. In all the big international forums of capital, the USA is still the dominant voice.

The United States has declined in terms of measures to do with production. But if you look at finance, there is no relative decline. The leading financial institutions of the world are US institutions. US banks dominate financial markets, and US ways of managing finance are very influential across the world. Financial systems across the world increasingly imitate the ways of the US financial system.

The dollar remains the closest the world has to world money, and it is produced by the United States.

At the same time, the US is structurally weak because it runs a huge trade deficit. But it has managed to turn even the deficit into a source of strength. The countries that make the trade surpluses end up holding the dollar as reserves of world money. If the dollar were to collapse these countries would make significant losses.

In short, in the realm of finance, the US remains very powerful, but its power is precariously based. That, in a sense, is the key problem of present-day capitalism. Note though that the current crisis has not yet brought the international aspect of finance strongly into play. But as the USA continues to be wracked by instability, the crisis could well become truly international.

What about the rise of the BRICs - big fast-growing economics like Brazil, Russia, India, and China?

This is a development of the first importance. The centre of gravity of productive capital is shifting east - to Japan for a long time now, to China and East Asia, and to a certain extent to India, though that is not comparable to China.

The implications in the sphere of finance are not as straightforward as the shift of productive power would indicate. The financial mechanisms are dominated by the United States, and world money is dominated by the United States.

A lot of the fast-growing economies trade in dollars and pay in dollars. Their key exchange rate is against the dollar. Consequently, they have an interest in maintaining stability of the dollar, and they accumulate dollar reserves.

In the last ten years, many developing capitalist countries have accumulated vast reserves of dollars. This imposes a huge cost on very poor people, since it represents a transfer of capital to the United States that could have been used to sustain investment and production in their domestic economies.

But it also gives to the countries that have the reserves some protection from the storms which are breaking in the world economy at the moment. The crisis which has broken out in the richer countries might not affect them as immediately as it would have done previously.

How long this factor of protection will operate, nobody can tell. Already, for example, US financial institutions are moving into Mexico and similar countries in order to trade mortgage-backed securities there. This might reproduce the same effects there as in the USA, or there may be a knock-on effect if the US financial system suffers a more serious collapse.

The rate of profit is generally reckoned to be the key factor in crises, and generally we expect to see some decline in the rate of profit in the run-in to crises. Do the fairly high rates of profit in production currently mean that production is insulated against this financial crisis?

That takes us back to the autonomy of finance. The financial system is now more autonomous and draws more of its profits out of personal income rather than from the surplus value created by productive capitalists.

Nonetheless, Marxist theory is of great use in analysing these phenomena. Marx differentiates between, on the one hand, financial crises which are continuations of a crisis in production, to do with profitability and the ability to sell, and on the other, crises which are generated within the realm of finance. The latter might or might not affect real accumulation in severe ways.

In other words, there has always been some autonomy of finance, and the world of finance has always created crises out of its own operations. In the last thirty years, the scope for this has become greater, and it now involves vast numbers of ordinary people, through mortgages, consumer credit and pensions. This makes financial storms more worrying and damaging for the working class and the majority of the population.

By impacting on ordinary people, the financial crisis could well impact on real accumulation as it might lead to cutting down on consumption. In short, there are complex ways in which financial bubbles and crises could affect the real economy. Novel developments have taken place in contemporary capitalism and the standard guidance of Marxism needs to be reconsidered, while maintaining its core principles.

* An international agreement of 2004 - “Basel 2”, superseding “Basel 1” of 1988 - set a “capital adequacy framework” for banks. Under Basel 1, capital (primarily, shareholders’ equity) must be at least 8% of the bank’s risk-weighted assets. Under Basel 2 it was proposed that large banks with technically sophisticated ways of measuring risk keep a lower percentage.





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