The Financial Crisis and the Need for Systemic Change
When middle-of-the-road commentators are beginning to sound like blood-thirsty Jacobins, you know something extraordinary is going on. The global financial crisis has driven the implacably centrist Simon Jenkins of the Guardian to pen articles like this:
“If the mistakes that have collapsed the world’s financial markets had been made by statesmen and had led to war, there would be corpses swinging from lampposts. If they had been made by generals, they would be falling on their swords. If they had been made by judges or surgeons or scholars, some framework of professional retribution would be rolling into action. But those responsible for our finances can apparently vanish into the forest like Cheshire cats, leaving only gold-plated grins. Not for them a Hague tribunal or a Hutton inquiry. They are not just good at shedding risk - they shed blame …when this saga is through there should be a tribunal of inquiry. Then we can be told what needs mending, and whom to take out and shoot.”
There’s no sign yet of any serious pay-back for the guilty parties in Wall Street, the City of London and the other financial centres of the West. No government or opposition party is proposing to shoot the bankers or even give them a good root up the hole. All we’ve heard so far has been some vague huffing and puffing about super-sized bonuses and “golden parachutes” for incompetent executives, but the people who have brought the world economy to the brink of a long-term recession and squandered hundreds of billions of dollars have every reason to believe that their property, lifestyle and status will remain intact.
Their apologists even have the nerve to strut around the media telling us that we can’t trim executive pay and bonuses - we need “incentives” if we’re going to attract the best talent. To listen to them speak, you’d almost think we should be grateful to the brilliant minds that have got us into this mess.
Even those who favour a more regulated version of capitalism have been very keen to stop the backlash against corporate greed and recklessness from going too far. When David Marquand was given the chance to put his views forward lately, he was careful to balance his criticisms of “market fundamentalism” with a broad-side against the “populist left”. Apparently this is what the “populists” have to say about the crisis:
“Markets are nasty at best and wicked at worst. Bankers are evil, and ought to be punished, not rescued. Ordinary people who live beyond their means, put their money into dodgy institutions and take out mortgages they can’t afford, are blameless. They have been manipulated by an inherently wicked financial services industry. Globalisation, the true author of the financial crisis, is evil too. We should put a stop to it, or at least slow it down.”
Unlike sensible moderates such as Professor Marquand, populist left-wingers can only manage a cartoon-strip view of capitalism that could be read out to primary-school children. They have nothing grown-up to say about the big economic questions of our time, and should be kept well away from the debate. Of course, Marquand felt able to present such a juvenile caricature because he knows that most of his readers will be unfamiliar with the arguments of the radical left. So let’s see what radicals who know their stuff have actually been saying about the crisis, shall we?
We can start with Filipino scholar-activist Walden Bello, known for his work with the radical NGO Focus on the Global South. Bello challenges the limited scope of the arguments made by neo-Keynesian pundits like Marquand. That this crisis was caused by a lack of regulation is now uncontroversial. But was there something deeper, something systematic behind the failure of governments to regulate the financial sector? Bello explains:
“What we are seeing is the intensification of one of the central crises or contradictions of global capitalism which is the crisis of over-production, also known as over-accumulation or over-capacity. This is the tendency for capitalism to build up tremendous productive capacity that outruns the population’s capacity to consume owing to social inequalities that limit popular purchasing power, thus eroding profitability … the Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyper-active sector. The Wall Street collapse stems ultimately from the crisis of over-production that has plagued global capitalism since the mid-seventies.
“Financialization of investment activity has been one of the escape routes from stagnation, the other two being neo-liberal restructuring and globalization. With neo-liberal restructuring and globalization providing limited relief, financialization became attractive as a mechanism to shore up profitability. But financialization has proven to be a dangerous road, leading to speculative bubbles that lead to the temporary prosperity of a few but which ultimately end up in corporate collapse and in recession in the real economy.”
However distasteful they may find Bello’s argument, defenders of capitalism would struggle to refute it. The spark for the financial crisis was the collapse of the sub-prime mortgage market in the USA - in layman’s terms, people on low incomes had been encouraged to take out mortgages they couldn’t afford in the long run, so that banks could carry on making money from a real-estate feeding frenzy.
Although they would never use the Marxist terminology favoured by Bello, George Bush and Alan Greenspan had encouraged the real-estate bubble as a way to overcome the problem of over-production. The incomes of American workers were stagnating, so how could they be induced to keep spending and sustain the economy? By keeping interest rates low to generate a consumer boom fuelled by cheap credit. But speculative bubbles that lack a firm grounding in the real economy are always liable to burst sooner or later. And that’s what happened with the sub-prime mortgages:
“The ‘demand’ was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low ‘teaser’ interest rates that would later be readjusted to jack up payments from the new home-owners … when the interest rates were raised on the sub-prime loans, adjustable mortgage and other housing loans, the game was up. There are about six million sub-prime mortgages outstanding, 40 percent of which will likely go into default in the next two years.”
The migration of capital into finance, and the constant search for new sources of profit in that sector, left the world economy vulnerable to the sub-prime collapse. The inter-penetration of financial markets from New York to Hong Kong meant that a problem in one sector of the US economy quickly became a crisis for everyone.
Leo Panitch and Sam Gindin argue against those who believe the present disorder could have been avoided if the financial system hadn’t been de-regulated, and that a new system of regulation will solve the problem:
“It was not so much neo-liberal ideology that broke the old system of financial regulations as it was the contradictions that had emerged within that system. If there was going to be any serious alternative to giving financial capital its head by the 1970s, this would have required going well beyond the old regulations and capital controls, and introducing qualitatively new policies to undermine the social power of finance … many of the criticisms and proposed reforms today often display an astonishing naiveté about the systemic nature of the relationship between state and capital …even proposals for stringent regulations to prohibit financial imprudence mostly fail to identify the problem as systemic within capitalism. At best, the problem is reduced to the system of neo-liberal thought, as though it was nothing but Hayek or Friedman, rather than a long history of contradictory, uneven and contested capitalist development that led the world to 21st century Wall Street.”
Panitch and Gindin want the Left to aim higher than simply demanding new regulations to make the banks and hedge funds more prudent: its goal should be “the transformation and democratization of the whole financial system”. They make no bones about the radical changes that would be necessary:
“This would have to involve not only capital controls in relation to international finance but also controls over domestic investment, since the point of taking control over finance is to transform the uses to which it is now put. And it would also require much more than this in terms of the democratization of both the broader economy and the state. It is highly significant that the last time the nationalization of the financial system was seriously raised, at least in the advanced capitalist countries, was in response to the 1970s crisis by those elements on the left who recognized that the only way to overcome the contradictions of the Keynesian welfare state in a positive manner was to take the financial system into public control. Their proposals were derided as Neanderthal not only by neo-liberals but also by social democrats and post-modernists. We are still paying for their defeat.”
That’s certainly enough to make David Marquand blanch. But instead of a childish morality play, what we’ve seen from serious left-wing critics of capitalism is a well-documented structural analysis of the system and its failings, without any mention of wicked bankers stealing toys from orphans and kicking old women in the face. Of course, those who think the worst ills of capitalism can be managed and minimised without rejecting the system altogether will not agree with the neo-socialist view. But they should take it seriously. And the “populist left” needs to build movements that can force them to take it seriously.
Discussion
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Comment by: Philip Pilkington
Oct 16th 2008 at 23:10
Great article. But I think you should give Robert Brenner a mention, he seems to have possessed, in the last few years, nothing short of a crystal ball. Even a glance at a 2007 Guardian article on the mortgage crisis reveals his impressive premonitory powers:
http://www.guardian.co.uk/commentisfree/2007/sep/26/comment.business
And his recent books rack him up as a veritable Cassandra.
I agree that the left are capable of fairly strong critique in the face of this crisis. Its also nice to see a lot of people who derided the more concrete leftist commentators put firmly in their places - especially those who claim to be themselves on the left. However, what really worries me is whether there will be enough people to pick up the gauntlet here.
On the one hand there is an undoubtable tendency for leftists today to wash their hands of reality and flee to the ivory towers of philosophy, psychoanalysis, cultural theory etc. and even though some of the material can be interesting its hardly relevant for real social policy (with the notable exceptions of Harvey and a few others).
On the other hand even if you do want to approach some of the more concrete aspects it often proves very difficult to do so. My memories of attending first-year economics classes are still, after two years, quite fresh, supply and demand formulas still haunt my dreams at night… Personally I found it very difficult to learn about economics, because I was either faced with the option of learning an awful lot of useless crap or the daunting prospect of having to teach myself. Although I’m glad I opted for the latter I can imagine many simply giving up and going for an A in Marxist literary cristicism or something of the sort…
Comment by: Ed Walsh
Oct 17th 2008 at 11:10
You’re right about Brenner, and there’s plenty of other left-wing academics who have produced excellent stuff on economics - David Harvey of course, Andrew Glyn and others. They’ve just been pushed to the margins of the debate by the orthodox view - hopefully one side-effect of the financial crisis will be to create more space for critical voices like theirs.
I agree about the retreat into subjects like philosophy and literary criticism - it’s telling that probably the best-known academic Marxist in the Anglophone world, Terry Eagleton, is a lit crit - although in fairness he’s always argued against retreating from social engagement and criticised people who just see Marxism as another interesting way to interpret 19th C French novels.
I think what’s really been lacking from the Left is not so much discussion about economics, as discussion about politics and political strategies - the work that people like Ralph Miliband were doing until the 1990s hasn’t been carried on as much as it should. Of course this wasn’t just caused by laziness or a retreat into less relevant areas of study – the last couple of decades have been very defensive for the Left so that limits the scope for discussion about positive strategies. Still, a lot more could be done.
There’s a useful interview with one of the leading members of Portugal’s Left Bloc, Francisco Louca, at http://www.internationalviewpoint.org/spip.php?article1420 – the Left Bloc is one of the most successful radical-left parties in Europe at the moment, he discusses some of the questions about the balance to be struck between arguing for radical change in the long run and trying to put forward policies that appear relevant to the majority of people.
Comment by: Philip Pilkington
Oct 24th 2008 at 00:10
To be honest I’m not sure.
I mean, I’m talking wholly from a personal perspective here, but any time I’ve mentioned leftist politics to, what I suppose you could call the bourgeios majority, they seem like they don’t really care. You bring up justice in any sphere and they shrug it off and reconcile themselves with their contributing €20 a month to Trocaire…
However, when you bring economics, when you explain the catch-22 of over-production and over-capacity you tend to get their attention. When you attempt to formulate the reasons for the inevitable stagnation which is about to occur in the global economy (if not worse…) you tend to get ears turn…
What I’m saying is that, possibly, and I emphasise POSSIBLY here, there may be, shall we say, a path to critique through bourgeois structures themselves… its a beginning if nothing else…
I mean we have to remember that the bourgeiosie are NOT a class in-themselves (they’re too thick), but perhaps if a discourse that can be at least accepted by this class were deployed it could open up new possibilties, by opening up a different mold within which to cast an argument…. I say perhaps… But its a different approach!
Comment by: Philip Pilkington
Oct 24th 2008 at 00:10
Sorry, I meant, the bourgeiosie are not a class FOR themselves…