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  • Why did the economy fail?

    by Sunny
    12th March, 2009 at 12:11 pm    

    I did study Economics at university so I suppose during this collapse of western capitalism era, its time to start dusting off some books. First, a hello to Duncan, who’s starting blogging on economic matters from the left. We need more of this, people!

    There are two main reasons for this crisis, according to Duncan:
    1) The high savings (east) / spending (west) imbalance between world economies
    2) Financial ‘innovation’ and instruments like derivatives, that allowed banks to package bad loans and sell them in a way that made it difficult to assess that risk adequately.

    I have some issues with this analysis. Firstly, if Duncan is saying that we, those in the west, didn’t save enough, then I’m not convinced because even high savings economies like Japan are doing worse. Secondly, it was long pointed out that the west was basically living off the savings of countries such as China. These are just flows of capital and goods - I’m not convinced in themselves they are the problem. The mismanagement of risk is a huge issue, and actually says that companies don’t necessarily best evaluate risk. That is a fundamental blow to free market ideology itself (hence Alan Greenspan’s shock).

    What I think many are missing is in this analysis is that the inter-dependence of banks is in itself a problem. We end up with some banks (Citigroup, Lloyds TSB) that are effectively too big to fail because they would take down the entire financial system with them.

    So either you limit this inter-dependence, or you limit the size of banks, or you put in regulation such that even if one fails, the others are sufficiently protected (have enough money to survive). And you definitely create some mutual banks who don’t engage in risky investments. The key problem for me is this inter-dependence of financial institutions.

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    1. pickles

      New blog post: Why did the economy fail? http://www.pickledpolitics.com/archives/3640

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    1. Duncan — on 12th March, 2009 at 12:43 pm  

      Hi Sunny,

      High savings economies are suffering (esp Japan and Germany), but this is driven by the fall in their exports.

      The global imbalance was not good for either side. We spent too much but they saved too much. The consquences will be painful for both. Although, I suspect the high savers will recover first - even if in the immediate downturn they are harder hit.

      Agree entirely on the banks’ over reliance on each other - any bank with a loan-to-deposit ratio over 100% is dependent on wholesale markets for funding.

    2. The Common Humanist — on 12th March, 2009 at 12:48 pm  

      I urge people to read the Will Hutton column in the Observer from Sunday - ‘What a price we have all paid for Bankers Freedoms’

      What a price indeed. Twats*.

      *Eloquent and cogent arguments today!

    3. Jai — on 12th March, 2009 at 12:57 pm  

      The Times has some good articles on the subject today:

      - The FSA and its changing (and, apparently, now hardline) attitude to British banks because of the meltdown :

      - The US and the impact of the Obama Administration’s current situation (and what will happen if their measures fail, as some partisan quarters in the US want them to): http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5891045.ece

    4. The Common Humanist — on 12th March, 2009 at 12:59 pm  


      Like the Blog - keep it up.

      If we were to name names from the banking sector - who have lead us to this point - would it be less then a thousand people globally?

      Am asking because along the Thames near the tower we only have room for so many heads on spikes. Well, these people are traitors to everyone right? Lets get Medieval on them.

      (Sorry, but am watching my family and friends economic lives fall apart and am incredibly angry at the Bankers [TCH spits out bile])

    5. chairwoman — on 12th March, 2009 at 2:29 pm  

      Shock! Horror! I agree with Sunny!

      BTW, did anyone see the Times letters page today?

      Someone suggested that the economy be re-booted by the Government insisting that the Banks, as part of an agreement as they’ve taken the Queen’s shilling, so to speak, write off all credit card debts and personal loans, allowing us to spend again.

      Obviously it’s a non-starter, but it’s bizarre enough to work.

    6. Shamit — on 12th March, 2009 at 4:07 pm  

      Good post Sunny.

      “The key problem for me is this inter-dependence of financial institutions.”

      I think that is spot on —

      But if you go through the Japan experience I am sure you would agree there was massive collusion among corporate chiefs and Bankers to support inflated pricing of real estate both in Japan and in California. And one fine morning someone said, sorry I am not paying that much for that piece of land or building — which started the ripple effect and killed Japan’s economy.

      The reason I mention Japan is because all the policy tools that the West is now trying including stimulus, interest rates and printing additional money has already been tried in Japan and none of them got the consumers’ confidence back.

      And, we are trying the exact same things in the exact same way — and why do we think it would work? I don’t know but at least in the US they have the money or credit with the world to invest heavily in infrastructure both roads and information highways which in turn would create jobs and stimulate the economy.

      In the UK, we dont have the money to do anything of that sort. That’s scary. Europe has similar issues.

      Another angle which worries me is the word going around in punditry in DC and news media in US that the US federal Government needs another stimulus. That would only come from bond issues which they expect countries and people in China, Japan and South East asian countries.

      But the more US bonds the Government and population of these countries buy the less money they have to spend in their own economy. Which is a cause for worry as these countries are very dependent on their export markets and so they need to build up their internal markets to ensure social stability. No wonder people are worried in Taiwan, Thailand etc.

      Add to that the protectionism crap coming out of US, and Europe. It seems its okay to borrow chinese and indian and other money to fix our economies but stop trading..and this is happening within EU itself. Sarkozy is the biggest offender like the US Congress.

      Finally, we should not absolve politicians and policy makers. While to some extent unwittingly they did encourage financial institutions and others to take greater risks and lower regulatory controls to facilitate more home ownership and faster economic growth.

    7. Riz Din — on 12th March, 2009 at 5:05 pm  

      Nice post. Concerning the interdependence of financial institutions, to me it looks like a global keiretsu, or better still, lets call it a ‘shadow keiretsu’ because each participant probably didn’t engage in loading up on cross holdings of competitors (primarily through bonds and various insurance contracts) with the deliberate aim of holding the gvts hostage, but the gvt did allow it to get this far.

      Folks such as the FT’s Martin Wolf are calling to sort out the mess first and then look at the architecture later, and while I didn’t like this idea, I guess the limited number of skilled apparatchiks is such making it a necessary. However, that is no excuse to ignore all architecture issues completely in day-to-day fire fighting as it can lead to stupid decisions such as the Lloyds HBOS merger.

      Like Sunny, I too have issues with ascribing specific causes to the crises. I would say these factors contributed to the cause, but the confluence of factors is such that we will probably never know the truth, as can be expected of a complex, global system. Let us not forget Greenspan’s lowering of interest rates, the promotion of home ownership by Thatcher, Reagan et al, the ratings agencies, the AIG’s writing of insurance that fuelled the fire…the list is endless (I have made a list of all the reasons I have come across).

      PS - The libertarian’s threw Greenspan out of the club a long time ago. How can someone in control of the most importance price in the world, and who is willing to abuse it to save the players each time they suffer a bit of pain, be called a free market advocate. I’d say he was but a partial believer.

    8. Roger — on 12th March, 2009 at 6:45 pm  

      “Financial ‘innovation’ and instruments like derivatives, that allowed banks to package bad loans and sell them in a way that made it difficult to assess that risk adequately.”
      Not just that; banks paid management and others in a way that discouraged them from assessing risks adequately. They were better paid personally if they took other bankers’ word that bonds and loans were worth what they said they were than if they checked the actual value and the banks made larger immediate apparent profits- by recombining and selling on these bonds and loans- than if they’d checked their immediate value. As the great- some would say only- virtue of market capitalism was that it could accurately assess costs, risks and values more quickly than any other system the crash was so much more serious when it happened.

    9. Refresh — on 13th March, 2009 at 12:52 am  

      In the end we the people lost out by being forced into a universal economic model on a global scale, rather than have multiple economies even within individual countries.

      We destroyed the mutuals, we have players who seek to be global monopolies, without constraint. Civil society has had its levers of influence amputated – one critical lever being trade unions.

      We sought to create an homogenous culture, homogenous invariably means dominant, which borrowed very little (the odd chick tikka masala aside), all in the pursuit of creating markets. These markets cover just about every aspect of living. From bottled water, to pirated versions of trainers. The brand became king.

      The monopolistic behaviour of the brand now cuts across all aspects of our lives. Underlying it is the marking of individual lives as economic units.

      Education is now an industry, where standards are dropped to deliver business plans. Genuine scholarly activity is becoming a private affair, the ivory towers have long gone. The measure determining value of learning is the brand behind the degree. When universities are ranked in world league tables, it is a marketing exercise.

      We have industries such as the creative sector, take Tracy Emin, Damian Hirst, Girls Aloud where before we might have had genuine talent admired for their output, we are now media-massaged into preferring a particular sound and a particular look.

      We had sports as a healthy mutually beneficial activity, which is now a global industry. We had people who would sneak off to place a bet in some seedy back street shop; its now a global industry played from home over the internet.

      We had characters who lived in the shadows collecting private information on individuals; we now have a land-grab maturing where our trusted corporates collect information on our internet habits so they can sell on access to you in your own home. And they have the power to lobby for less stringent controls.

      Which no doubt is what the banks lobbied for.

      News is no longer news but an exhortation to participate in celebrity. Long gone are the reporters and the documentaries which would have taken us through the jungles of Bangladesh, Cambodia, Timor or the tunnels at Rafah to give eye-witness accounts. All replaced by embeds and talking heads.

      Whilst we accept the economy as all transcending we become slaves to it. We honour capital as the wealth creator, without recognising for one minute that the shameful concentration of such wealth has happened whilst we were publicly wringing hands over growing poverty. And the most absurd thing of all was the G8 commitment to make poverty history, only then to twist the arms of countries who were not even present to pay for it; and for the African nations to privatise what little they had.

      The economy looked ever more absurd as the personal valuations of billionaires soared to a point where being a millionaire became inconsequential. The billionaires that suddenly appeared out of the rubble that was Russia after the collapse of the Soviet Union was surely a sign that the lunatics were everywhere and they had joined hands around the globe; just as the Jubilee Campaign were encircling the leaders of the richest nations on earth in Birmingham.

      I would say the signs were always there. And it started in earnest in 1979, although defined in democratic terms it was resolute in transferring power from the many to the few. Blair and Brown felt they had no choice but to continue.

      How wrong they were.

      The way ahead will emerge, and it will not be from any exhortations by the great offices of state or any particular Harvard or Carnegie school of thought, but from people rebuilding for themselves. They will come together and recreate those institutions that stood for 200 years without a stain on their reputation.

      Common Humanist, the anger is there and it will spill on to the streets. And the slogan on everybody’s lips will be ‘show me the money’. Its all very well for the punditry to talk about derivatives and leveraging, but what we want to know is where did the money go? Who had it, and how do we get it back?

      I contend that what has happened here had already happened to Russia. And before that it was in Latin America and so it goes. The people have been robbed with the connivance of people in power. They had Yeltsin, we had Thatcher-Reagan-Bush-Blair-Brown.

    10. Sunny — on 13th March, 2009 at 2:39 am  

      Duncan: We spent too much but they saved too much. The consquences will be painful for both. Although, I suspect the high savers will recover first - even if in the immediate downturn they are harder hit.

      Mmm, not necessarily. I did my dissertation on the Japanese financial crisis as it happens, and it was obvious that one of the main reasons why it took the Japanese so long to come out of the financial crisis was because their consumers kept saving any money pumped into the economy instead of spending.

      Inherently, there’s no reason why such imbalance should cause a crash (unless the imbalance gets too large and unwieldy). But I have a feeling we’ll recover faster than china or Japan.

      TCH: Am asking because along the Thames near the tower we only have room for so many heads on spikes. Well, these people are traitors to everyone right? Lets get Medieval on them.


      Chairwoman - unfortunately that would only increase their liabilities and hence keep them in even more debt than before! We might as well liquidate them in that case.

      Shamit: The reason I mention Japan is because all the policy tools that the West is now trying including stimulus, interest rates and printing additional money has already been tried in Japan and none of them got the consumers’ confidence back.

      Well, as I said, there are various reasons. The Japanese propensity to be extremely cautious and thus not spend money ensured the economy remained in doldrums for a while.

      They also didn’t clear out the bank losses off balance sheets quickly enough. And the fiscal stimuluses were small doses over time, rather than one big dose as it should be.

      Culturally though, the Japanese economy is very different to the US economy, which is why I don’t necessarily think the comparisons are useful.

      Riz: Folks such as the FT’s Martin Wolf are calling to sort out the mess first and then look at the architecture later, and while I didn’t like this idea, I guess the limited number of skilled apparatchiks is such making it a necessary. However, that is no excuse to ignore all architecture issues completely in day-to-day fire fighting as it can lead to stupid decisions such as the Lloyds HBOS merger.

      I agree. I think we need to start advocating structural solutions now rather than afterwards.

    11. Sofia — on 13th March, 2009 at 9:54 am  

      how about good old fashioned greed.

    12. Refresh — on 13th March, 2009 at 10:25 am  


      ‘how about good old fashioned greed.’


      I used a thousand words to say just that. Yes, the mantra was ‘greed is good’.

    13. Riz Din — on 13th March, 2009 at 1:21 pm  

      Wikipedia says of greed:

      “Greed is the self-serving desire for the pursuit of money, wealth, power, food, or other possessions, especially when this denies the same goods to others. It is generally considered a vice, and is one of the seven deadly sins in Catholicism.”

      I agree that denying to others is completely wrong, but what’s wrong with self-serving pursuit of money, wealth, food, etc. Yes, it needs to be checked to make sure we don’t infringe on each others liberties, but look around you - the computer you are typing on, the furniture you are perched on, the clothes you are wearing. They are not there out of benevolence.


      Going back to the CNBC Jon Stewart showdown, here is Boing Boing on last night’s face off between Stewart and a normally apoplectic Jim Cramer. I can’t wait..it should be on tonight:

      Jim basically sat there, starry-eyed like a lost puppy, and was virtually silent throughout the three-segment show featuring him. He basically waved the white flag and said, “You got me.”

      Comedy Central had to edit out eight minutes of video to accommodate the show format, and it will be available on their website tomorrow.

      Stewart’s point was that Wall Street got fat off of all our pension plans, 401K’s and long-term investments, while the “Fast Money” crowd cashed in our long-term investments — and CNBC was complicit in the entire gambit…

      It’s also front page on their site:


    14. Shamit — on 13th March, 2009 at 1:39 pm  


      Getting the toxic assets of the banks’ books quickly could be the right way to go as you have suggested. It seems like some of the venture capital groups including Carlyle are buying off some of the toxic assets as they believe they would make money of them. If thats the case the taxpayers would benefit and the fiscal deficits could be reversed to a large extent. But the big question is if.
      However, I don’t agree with your assesment on China recovery. China is putting major emphasis in domestic consumption like India and so far in 2009 its paying dividends — at least what the statistics say.

      We picked this up yesterday from daily updates received from Chinese Government —

      China’s retail sales grew 15.2 percent in the first two months to 2 trillion yuan (293.8 billion U.S. dollars.

      And on Credit flow — Banks loans rose to 1.07 trillion yuan (156.3 billion U.S. dollars), up 827.3 billion yuan from a year ago.

      You can see the entire release here:


      Seems like India is focusing massively on domestic consumption as well and the election bonanaza is acting as stimuli to the economy too.


    15. Refresh — on 13th March, 2009 at 2:37 pm  

      Riz, don’t confuse greed with computers and our collective advance as a civilistion. Trade is a fundamental basis of society and innovation is not an impulse of greed.

      Greed is behind monopolistic behaviour, and a hinderance to innovation.

      Interestingly, the second half of your comment accepts the greed argument without calling it by its name. Which in itself suggests we have been conditioned to accept greed (or whatever you may want to call it) as the norm.

      Profiteering used to be a great insult, but you just don’t hear it any more. Excess profit is accepted as just reward for cunning.

    16. Duncan — on 13th March, 2009 at 4:50 pm  


      “Inherently, there’s no reason why such imbalance should cause a crash (unless the imbalance gets too large and unwieldy). But I have a feeling we’ll recover faster than china or Japan.”

      On Japan you may well be right - the demographics are simply horrible.

      But, for want of another term, ‘emerging Asia’ has a lot of potential. Dependence upon exports will lead to short term pain. But if (and I know it’s a big if) the consumers start spending domestically, there will be a lot of growth. Without the debt burden and need for higher taxes, growth may well be quicker in the recovery than in the West.

      For what it’s worth, my tip as to the best performing economy over the next two years (relatively speaking) would be India.

    17. Arif — on 14th March, 2009 at 2:14 pm  

      An excess of uniformity (promotion of a global economy, with a narrow range of models) and complexity (interdependent mechanisms beyond political understanding let alone regulation).

      That’s my simplification of the causes.

      The economic system was never working from my point of view, when increasing growth beyond any historical precedent went alongside massive poverty and destruction of environmental resources. And I don’t think the assumptions that made such models acceptable is going to be overturned in the minds of those with most power. Unless it begins to affect them personally.

      Maybe there is no better model, but I think it would be a good idea to encourage more models to be tried, and for trade to become interregional at least, rather than global.

    18. comrade — on 15th March, 2009 at 7:38 pm  

      this article is from our party journal, oct 2007, it’s marxist analysis of the credit crunch. I don’t know if it’s fits into Sunny,s leftwing category.

      Proletarian issue 20 (October 2007)

      The current ‘credit crunch’ is the latest manifestation of overproduction crisis.

      The so-called ‘credit crunch’ that is convulsing the financial world expresses in a very sharp and dangerous form the most fundamental contradiction upon which capitalism is founded, and upon which it must in the end founder. That contradiction is the conflict between (a) the social, public character of the productive forces that capitalism brings into play and helps to develop, and (b) the private character of capitalist appropriation. It is that contradiction which again and again plunges capitalism into the crisis that is central to this system of production relations: the crisis of overproduction.


      Capitalism expands the manufacture of commodities as if the universe were populated exclusively by consumers with bottomless pockets. This is because in order to stay competitive and keep ahead of their rivals, individual enterprises must constantly be expanding, taking advantage of economies of scale and selling greater numbers of products. Under capitalism, a business can either expand and grow, get taken over by a bigger business or go bust.

      We say that the self-expansion of capital is the mainspring of production. This means that capitalists produce in order to make profits – to increase their capital; satisfying the wants (or not) of the people is, as far as the capitalist is concerned, an accidental by-product of expanding his capital.

      Meanwhile, however, that self-expansion is necessarily accompanied by the impoverishment of the mass of workers, since, to make profits from economies of scale, capitalist enterprises increase mechanisation and discharge as many workers as possible. Those that are left work harder, faster, and usually for diminishing wages.

      The fruits of public labour are appropriated into private hands; the work of many people creates wealth that goes into the pockets of the few people who happen to own the means of production (factories, etc), despite the fact that these owners have not done the work that created their wealth.

      But this appropriation hits a major problem. How can the capitalists continue to expand their capital if the surplus value1 that it sweats from living labour (the workers) cannot be realised through the sale of commodities at their full exchange value on the market? What happens when the mass of impoverished workers are unable to buy the huge numbers of products that have been produced?

      On the one hand, we have the impoverished masses with restricted or non-existent purchasing power; on the other we have a system of commodity production that can brook no restriction. Put the two together and you have the recipe for a crisis of overproduction. It’s not that there are more articles of use in the shops than are required for consumption; it’s that the same system that brings this profusion of goods onto the supermarket shelf – the system of capitalist commodity production – is also the system that systematically ‘restricts’ consumption by the working class (by making them poorer and poorer). The end result: lots of goods but no money to pay for them.

      This phenomenon, visible at its starkest amongst the impoverished masses of much of Asia, Africa and Latin America, is to a degree camouflaged in the West. The superprofits drained from the exploited labour and looted resources of the rest of the world help to keep absolute poverty and starvation within the imperialist homelands to a minimum, leaving the sharpest consequences of exploitation to be borne by our unacknowledged proletarian brothers and sisters on distant shores.

      Welfare capitalism, applied in varying degrees of dilution by most imperialist powers after the war, was a necessary concession that had to be made to the proletariat of the imperialist countries, which might otherwise have become overly impressed with Soviet successes in raising the material and cultural conditions of life of the masses. Unlike the Soviet achievement which it aped, of course, this domestic concession was paid for by the continued oppression of the rest of world’s masses.

      Even during the most prosperous years and in the wealthiest countries, poverty has always kept a grip on a substantial minority. And now, as the general crisis imposes itself with ever greater insistence, the polarisation between rich and poor is becoming increasingly sharp, not only between ‘have’ and ‘have not’ nations, but between the superrich and the proletariat within the homelands of imperialism itself.

      And with the retreat from welfare capitalism and the decline in real-terms wages in Britain and elsewhere, it is clear that it is the proletariat in general whose living standards are under attack, revealing the class identity between more privileged skilled industrial workers, for example, and the poorest sections of the proletariat.

      What took it so long?

      A glance back at the last ten years should convince us that the real question is not so much ‘Why crisis now?’ as ‘What took it so long?’ After all, the only way that the markets were set back upon their feet after the dot.com debacle of 2001 was by slashing interest rates, thereby giving a kick start to demand. Had it not been for the investment of Asian banks in western currencies, combined with the ready availability of cheap commodities made in China, this creation of a borrowers’ paradise would have long ago collapsed into an inflationary mess.

      That is because if extra money is made available to consumers through a massive programme of lending at low rates of interest, this increases demand for commodities in relation to supply and thus tends to cause prices to rise higher than they would otherwise have been – ie, inflation. Inflation, however, eats into the purchasing power of the capitalists’ profits so it is not something that they welcome. However, the inflationary effect of cheap borrowing over the last few years has tended to be countered by the cheapness of Chinese imports, and investment of the massive profits being made by Asia in dollars, euros and pounds has helped to maintain the exchange value of those currencies, when normally one would have expected them to decline because of rampant inflation.

      But judging from the way the Bank of England and its counterparts have over the last two years been nosing the interest rates upwards, it’s no secret in bourgeois circles that the inflationary demons are closing in. The temporary reprieve secured by capitalism after the 2001 crash nearly tipped the entire world economy into all-out recession (as it also nearly did after the 1997 Southeast Asia ‘Tiger’ economy crashes) was just that: temporary. It was a reprieve bought by piling up ever higher mountains of debt. This could never be a lasting ‘solution’ to the world’s problems, though, and the international economy is heading for an even bigger crash than those that were temporarily averted (averted in the West, that is; the world recession has been hitting hard in the oppressed world for some time already).

      For the last five years, the western consumer-led boom has been stoked up by the device of encouraging folk with middling or low incomes to bridge the gap between what they need and what they can afford by borrowing, notably by taking out mortgages and incurring credit card debt. Consumers in the US and Britain in particular have been spending more than they earn for years, taking advantage of easy credit terms and low interest rates. By this seeming largesse, capitalism has created a kind of phantom army of consumers, workers who have been helping the bourgeoisie out of its overproduction hole by digging themselves into a hole of personal indebtedness.

      What has been helping prop up capitalism in the high street has also been helping to shunt surplus value around between the capitalist players, assisting imperialism in its task of concentrating ever denser masses of capital into ever fewer hands. The mergers and acquisitions (M&A) whereby this concentration is achieved also rely on the ready provision by the big institutional lenders of cheap loan capital to the would-be buyers.

      Whether on the dizzy peaks of high finance or on the supermarket shelves and estate agent windows of the high street, what has kept the show running since 2001 has been a vast web of indebtedness. It was only a matter of time before a thread got pulled in this web. That thread turned out to be the ‘subprime’ mortgage debt market in the USA.

      ‘Subprime’ con-trick backfires

      ‘Subprime’ mortgages are offered to the low waged or those with poor credit ratings. By targeting the poorest to transform into temporary ‘consumers’, capitalism reaches the most desperate limit in its quest to squeeze demand out of stones.

      Using a tactic known as ‘bait and switch’, the economically vulnerable are lured into taking on what looks like a low-interest mortgage. After a year or two, the interest rate is ‘reset’ to a punishingly high level. The borrower must either submit to being bled dry, or default and lose his home. This cynical practice, now inveighed against in high moral tones in the capitalist press, would never have raised an eyebrow had the subprime scam not become enmeshed in the world of ‘securitised debt’, burning the fingers of people who ‘count’ – ie, capitalists.

      In recent years, with too much capital chasing after too few profitable investment opportunities, there has been something of a boom in the buying and selling of debt itself. The banks that lent money to the subprime victims followed suit, selling the debt on to investment banks, which then were given the right to recover the loan plus interest. These high-risk loans were then packaged up along with some (supposedly) less risky loans into something called ‘collaterised debt obligations’ (CDOs) and sold on to all manner of investors, not least pension fund managers.

      The subprime loans offered easy money – after all, even if the debtor defaulted, you still got his house. However, when the speculative investment in property development resulted in a glut and resultant collapse in house prices, aggravated by the number of repossessions choking the market, these ‘high risk’ loans began to be described as ‘toxic waste’. And because this bad debt passed between so many hands, at each stage further camouflaged as a different form of ‘financial instrument’ and ever more hopelessly entangled with what was supposed to be ‘good’ debt, it crept unannounced into the asset holdings of major investors, banks and pension funds all over the world.

      The exchange value of any commodity derives from the labour time it embodies and reveals itself as an average of price fluctuations on the market. Debt as commodity is no exception, however mysterious seems the process by which that labour time finds itself thus expressed. But in the case of complex financial instruments like CDOs, there is no open market to put a price on them. When the market was booming, nobody bothered to challenge the high valuations attributed to these CDOs by their vendors. However, once the market faltered, the valuations went through the floor. In the USA, Sowood Capital Management lost half its value in July and has since gone bust. Goldman Sachs only hung onto its hedge funds by an injection of $3bn, and Bear Stearns closed two hedge funds. The best and brightest at Harvard University’s investment team have lost $350m so far on a duff hedge fund investment.

      Such is the slippery nature of this shape-shifting debt that the damage does not stay solely with the investment agencies directly exposed to subprime debt. Since nobody knows for sure who is holding the ‘toxic waste’, there develops a general paranoia about lending to anyone. Every banker is sitting on an unacknowledged and unquantifiable heap of the stuff, and knows that each of his rivals is doing exactly the same. The result is a general freeze on lending. Despite the vast amounts of capital transfused into the patient by all the central banks, M&A activity remains close to paralysis at the time of writing, and nobody wants to buy debt any more.

      In short, the astronomic indebtedness made possible by years of low interest rates looks like coming back down to earth with an almighty bang.

      Writing on the wall for capitalism

      Claims that, beneath the speculative froth, the ‘real’ economy plods uneventfully onward are without foundation.

      The crises of 1997 and 2001 brought untold misery to millions of people who suffer in the ‘real’ capitalist economy – the economy of factory closures, foreclosed mortgages and pension fund losses. There is no doubt that the present debt crisis will bring no less misery.

      One need but consider the fate of young working-class couples who have just scrambled onto the bottom rung of the housing ladder, only to have their feet kicked out from under them by negative equity. Or consider those workers who have seen their final salary pensions melt before their eyes, after the two previous outbreaks of market turmoil convinced the bourgeoisie that this was yet another aspect of ‘welfare capitalism’ that needed ditching in the battle to protect their profits.

      Now the level of their pensions depends entirely on what particular somersaults the market happens to be turning upon retirement. With no second chances, the fragile pot of savings that has taken a lifetime’s work to accrue must be splurged out in a moment in the purchase of whatever annuity the insurance companies choose to offer. And if the FTSE happens to be in free fall on the day in question, the outlook will be bleak indeed.

      If capitalism cannot resurrect demand through building the debt mountain higher, it must instead try to tackle the other end of the overproduction crisis: it must trash the very productive forces it has brought into being in the first place, thus revealing itself as the real enemy of all social progress.

      However, making people homeless, stealing their jobs, robbing their pensions and imposing below-inflation wage deals, whilst perhaps saving the bourgeois hide for a while, can in the long run only stoke up yet worse crises of overproduction, as effective demand is further undermined by the further impoverishment of the masses.

      Whether the lords of high finance can postpone for a few more years the decisive crash of the world financial system is beyond scientific prediction. What is clear however is that every ‘smart’ move capitalism makes to save itself from its own insoluble contradictions only succeeds in further tightening the noose of history around its throat.

      Even in the midst of the miseries such crises inflict, let the proletariat rejoice in this knowledge and organise to overthrow this decadent, parasitic system once and for all.

      1 The only source of capitalist profit is the surplus value extracted from workers, ie, the difference between what workers are paid as wages and the net sale price of the commodities they produce (after deducting other costs of production). Profits made from takeovers and mergers, buying and selling land, buying and selling shares, etc, are essentially speculative, involving merely the passing of surplus profit appropriated by one capitalist (which he may be forced to share with landowners, financiers, and others) from one person to another.

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