From Global Finance to the Nationalization of the Banks:
Eight Theses on the Economic Crisis by Leo Panitch and Sam Gindin.
1. The current economic crisis has to be understood in terms of the
historical dynamics and contradictions of capitalist finance in the second
half of the 20th century. Even though the spheres of capitalist finance and production are obviously intertwined (in significant ways today more than
ever before), the origins of today’s US-based financial crisis are not
rooted in a profitability crisis in the sphere of production, as was the
case with the crisis of the 1970s, nor in the global trade imbalances that
have emerged since. Although the growing significance of finance in the
major capitalist economies was already strongly registered by the 1960s, it
was the role finance played in resolving the economic crisis of the 1970s
that explains the central place it came to occupy in the making of global
capitalism.
The inflation that was the main symptom of that crisis had a
strong negative impact on those holding financial assets and destabilized
the international role of the dollar. Under the guidance of the US Federal
Reserve, financial markets used very high interest rates to drive up
unemployment, defeat trade union militancy and restrict public welfare
expenditures in the early 1980s – all of which had come to be seen as the
source of the intractable profitability and inflation problems of the
previous decade. Yet it was precisely the contradictory ways finance
contributed to global capitalism’s successes in the closing decades of the
20th century that laid the foundation for the massive capitalist crisis
that now closes the first decade of the 21st century.
2. The spatial expansion and social deepening of capitalism in the last
quarter century could not have occurred without innovations in finance.
The development of securitized financial markets and the internationalization of American finance allowed for the hedging and spreading of the risks associated with the global integration of investment, production and trade.
This provided risk insurance in a complex global economy without which
capital accumulation would otherwise have been significantly restricted. At
the same time, finance penetrated more and more deeply into society,
integrating subordinate classes as debtors, savers, and even investors
through private pensions, consumer credit and mortgages for private
housing. This became especially important in facilitating the maintenance
of consumer demand in a period of wage stagnation and growing inequality.
In terms of directly fostering capital accumulation, finance was not only
an important site of technological innovation in computerization and
information systems, but also facilitated innovation more generally in high
tech sectors through venture capital, especially in the US. The central
role of the US dollar and Treasury bonds in the global economy as the key
store of value and the basis for all other calculations of value, alongside
the global institutional predominance of US financial institutions, acted
as a vortex for drawing the global surplus to American financial markets
and instruments.
This allowed for the mobilization of cheap global credit
for the US economy, and sustained its place as the major import and
consumer market in the global economy. The lowering of US interest rates
was important to the macroeconomic stability reflected in the fewer and
milder recessions within the US in comparison with the post-war era (‘The
Great Moderation,’ as economists refer to the 1983-2007 period).
3. The competitive volatility of global finance produced a series of
financial crises whose containment required repeated state intervention.
Global financial competition for higher yields led to institutional and
market innovations that allowed greater leveraging and therefore more
credit relative to the capital base. This in fact amounted to a vast
increase in the effective money supply, but rather than yielding the price
inflation that monetarists predicted, the defeat of labour and the
increased corporate ability to fund investments with internal funds meant
that increased liquidity translated into asset inflation.
This asset inflation was uneven across sectors, producing financial bubbles from stock markets to real estate at various times, while the size of these bubbles was expanded by virtue of the material expansions in the real economy related to each of these areas.
The bursting of these bubbles became a common feature of capitalism and the state interventions required to contain them reinforced the confidence that supported future bubbles.
The alleged withdrawal of states from markets amidst the globalization of
capitalism was a neoliberal ideological illusion: states in the developed
capitalist countries pumped more liquidity into the banks in the face of
financial crises, while they ensuring that crises in the developing
countries were generally used to impose financial discipline. The
neoliberal American state played the most active role as the imperial
guarantor, coordinator and fire-fighter-in-chief for global capitalism.
4. Both finance’s central role in the making of global capitalism and the
American state’s role in sustaining it produced the bubble that emerged
inside the US housing sector. Rising demand for home ownership at all
income levels, partly reflecting limits on public housing since the crisis
of the 1970s, was encouraged by US government support for meeting housing needs through financial markets backed by mortgage tax deductions.
And, reflecting the increasingly unequal income distribution that was the
consequence of the defeat of labour generally and the restructuring of
production and employment, a broad stratum of the working class population also sustained their consumption through taking out second mortgages on the bubble-inflated values of their homes,
But all this was really only made possible by the acceleration of financial securitization and the creation of a broader market for mortgage-backed securities in particular. This developed amidst rising house prices that apparently increased the wealth and credit-worthiness of those borrowing, and gave rise to the acceptance of lower standards (including for ‘teaser’ subprime mortgage rates) by regulatory agencies, largely supported by both parties in Congress.
The Federal Reserve’s low interest rate policies, especially in the wake of the bursting of the dot-com bubble, reinforced by the high demand for US Treasury securities as the safest store of value in a highly volatile
global financial system, intensified competitive pressures on finance
everywhere to get higher yields through greater leveraging of assets and
innovative securitization to stretch the boundaries of risk. The historical
safety of collateralized home loans (with such a large portion having been
backed by the US government) reinforced the confidence in perpetually
rising home prices and made housing debt the most attractive arena for the
systemic exercise of arbitrage between low-interest US Treasury bonds and
high-interest mortgage-backed securities.
5. The inevitable bursting of the housing bubble had such a profound impact because of its centrality to sustaining both US consumer demand and global financial markets. The eventual bursting of the housing bubble was inevitable once, as was the case by 2005, housing prices peaked. By this time, not only had the Fed’s low interest rate policy come to an end, but teaser rates on many subprimes had run out. The rise in foreclosures and the number of houses offered for resale had immediate effects on housing prices, new home construction and furniture and appliance sales.
Moreover, by virtue of the loss in value of the primary asset figuring in workers’ perceptions of their personal wealth, this in turn led to an overall
decline in US consumer spending and import demand in a way that the
bursting of stock market bubbles had not. At the same time, since the
spreading of risk in subprime mortgages had been effected through their
packaging into derivative securities with more highly-rated tranches of
debts, the housing crisis undermined the econometric equations that valued these assets in global financial markets. Mortgage-backed securities became difficult to value and to sell, and this produced a contagion throughout financial and inter-bank markets that spread the collapse internationally.
Taken together with the impact of the housing crisis on mass consumption
behaviour, and thus on the US economy’s ability to function as the key
global consumer, illusions that other regions might be able decouple from
the US in this crisis were quickly dispelled.
6. The crisis reinforced the centrality of the American state in the global
capitalist economy while multiplying the difficulties entailed in managing
it.
The rise of the US dollar in currency markets and the enormous demand
for US Treasury bonds as the crisis unfolded reflected the extent to which
the world remained on the dollar standard and the American state continued
to be regarded as the ultimate guarantor of value. Treasury bonds are in
demand because they remain the most stable store of value in a highly
volatile capitalist world: illusions that foreign states were previously
doing the US a favour by buying Treasury securities may finally be
dispelled by this crisis.
The American state’s central role in terms of global crisis management – from currency swaps to provide other states with much needed dollars to overseeing policy cooperation among central banks and finance ministries – has also been confirmed in this crisis. Yet despite its very active interventions, the American state has proved unable
to contain the effects of this particular crisis. The massive drops of
liquidity that it has helicoptered onto the financial system since August
2007 have not restored the banks’ capacity or willingness to lend at
anything like previous rates – even to each other, let alone to firms or to
consumers. The whole system of securitized finance that has grown up over
the past few decades – whereby the risk on mortgages, consumer credit and
business loans is sliced, diced, repackaged and traded around the world -
has imploded.
7. The scale of the crisis today is such that nationalization of the
financial system cannot be kept off the political agenda.
It is increasingly apparent, that monetary and fiscal stimulation alone are
unlikely to succeed in ending the crisis since the banking system’s
dysfunctionality today undermines the multiplier effect, just as new
regulations are supposed to make finance more cautious and prudent in their lending. Indeed, there has been an increasing realization that it may not be possible to keep off the political agenda much longer the issue of
bringing large portions of the financial system into public ownership.
This is advanced today along the lines of the temporary nationalizations that took place in Sweden and Japan during their financial crises in the 1990s whereby the state took on the banks’ bad debts and then passed the banks back to the private sector. It is a measure of the severity of the crisis
that nationalization is now being quite generally proposed even within the
US although it poses a host of problems as a way of saving global
capitalism. It is highly significant that the last time the nationalization
of the banks 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. Now that bank nationalization is back on the
political agenda (albeit now coming from very different sources), it is
very important to contrast the type of band-aid nationalization now being
canvassed with the demand for turning the whole banking system into a
public utility, which would allow for the distribution of credit and
capital to be undertaken in conformity with democratically established
criteria. And it is necessary to point out that this would have to involve
not only capital controls in relation to international finance but also
controls over domestic investment, since the point of making finance into a
public utility is to transform the uses to which it is now put.
8. The call for nationalization of the banks provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism.
The severity of today’s economic crisis once
again exposes the old irrationality of the basic logic of capitalist
markets. As each firm (and indeed state agency) lays off workers and tries
to pay less to those kept on, this has the effect of further undercutting
overall demand in the economy.
At the same time, the financial crisis
exposes new irrationalities, not least those contained in the widespread
proposals for trading in carbon credits as a solution to the climate
crisis, which involve depending on volatile derivatives markets that are
inherently open to the manipulation of accounts and to credit crashes.
In the context of such readily visible irrationalities, a strong case can be
made that – to save jobs and the communities that depend on them in a way that converts production to ecologically-sustainable priorities during the course of this crisis – we need to break with the logics of capitalist
markets rather than use state institutions to reinforce them.
We need to put on the public agenda the need to change our economic and political institutions so as to allow for democratic planning to collectively decide how and where we produce what we need to sustain our lives and our relationship to our environment.
However deep the crisis, however confused and demoralized are capitalist elites both inside and outside the state, and however widespread the popular outrage against them, making this case will certainly require hard and committed work by a great many activists, many of whom will see the need for building new movements and parties to this end. This is what is really needed if this crisis is not to go to
waste. •
Leo Panitch is Canada Research Chair in Comparative Political Economy at
York University.
His most recent books are American Empire and the
Political Economy of International Finance and Renewing Socialism:
Transforming Democracy, Strategy and Imagination.
Sam Gindin, formerly
Chief Economist and Assistant to the President of the Canadian Autoworkers Union, holds the Packer Professorship in Social Justice at York University.
He is the author of The Canadian Auto Workers: The Birth and Transformation of a Union and (with Panitch) Global Capitalism and American Empire.
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