OPINION: Finances and the current crisis: How did we get here and what is the way out? Part 2

October 2, 2008
OPINION: Finances and the current crisis: How did we get here and what is the way out? Part 2

(To read Part 1, click here.)

The turmoil in financial markets and the bailout to the tune of $700
billion has turned the public eye and wrath on Wall Street and
Washington. While millions are aware of the triggering causes, ranging
from predatory lending to deregulation to insatiable greed, what isnt
so obvious is the longer-term process that brought our financial system
and economy to the edge of the abyss.

I call this process financialization. According to economist Gerald
Epstein, financialization is a process in which financial motives,
financial markets, financial actors, and financial institutions come to
play an increasing role in the operation of domestic and international
economies. (Financialization and the World Economy, 2005,

It started in the 1970s

In its present form, financialization goes back to the mid-1970s.
At that time U.S. capitalism was beset by seemingly intractable and
contradictory problems high inflation and unemployment, declining
confidence in the dollar, faltering competitiveness, slow growth, and a
falling profit rate.

Faced with this unraveling of the economy and weakening of the
position of U.S. imperialism on a global level, then-chairman of the
Federal Reserve Paul Volcker stepped into the breech and pushed up
interest rates to record levels. This wrung inflation out of the
economy, but it also sent unemployment rates to the highest level since
the Great Depression, forced the closing of scores of manufacturing
plants and many more family farms, brought incredible hardship to the
working class and especially the African American, Latino and other
communities, and negatively impacted the global economy, particularly
the developing countries in Asia, Africa and Latin America.

At the same time, the spike in interest rates to record levels
redirected domestic and foreign capital abruptly and massively into
financial channels where returns to capital were now extremely high.
Volcker, as an experienced banker, knew that the capitalists problem
wasnt too little money capital, but rather too few opportunities to
profitably invest a surplus of capital a crisis of over-accumulation
of capital.

Moreover, once in financial channels, money capital remained there,
but not idly. Driven by its own nature to constantly expand and
reinforced by competitive pressures of competing capitals (grow or die)
in a permissive regulatory environment, the financial agents of capital
(banks, investment houses, hedge funds, private equity firms and so on)
raced at breakneck speed into a massive buying and selling and
borrowing and spending spree for the next three decades all of which
led to an explosion of the financial sector in terms of employment,
transactions, instruments, players and profits. In other words,
financialization proceeded at a feverish pace and with a broad sweep.

Capital that produces little, destroys much

Unlike productive capital that reproduces and expands itself by
extracting surplus value and profits from labor power in the production
process, money capital is much more footloose and impatient. Its time
frame is short term. It travels the globe in an instant thanks to
computerization and the web. Sinking itself into longer-term
investments in plants, equipment and new technologies that create jobs
and grow the economy is something that financial capital does, but this
is not its favorite cup of tea, especially in recent years. In fact,
money capital is as likely to destroy plants and equipment as invest in
them witness our Rust Belt and the structural adjustment policies
imposed on developing and former socialist countries.

Where possible, money capital hides in the shadows beyond the eyes
of weakened regulatory authorities. Like a good entrepreneur, it
invents new products (options, swaps, futures, derivatives), but
highly risky ones, and then sells, buys and profits from them. When
turmoil seizes the financial markets as is happening now, money capital
cashes out and runs to safety until the storm blows over. In the event
that it doesnt reach a safe haven and absorbs huge losses, it is
relieved in the knowledge that the federal government and Federal
Reserve stand ready to bail out massive failures of big financial
institutions, as we are seeing.

The lubricant of financialization is the production and
reproduction of staggering amounts of debt corporate, consumer and
government. Debt is as old as capitalism, but what is different in this
era of financialization is that the production of debt, speculative
excesses and bubbles are now essential to the functioning of U.S.

A two-edged sword

As it gained strength and scope in the late 1980s and 90s,
financialization grew to the point where it became the main determinant
shaping the contours, structure, interrelations and evolution of the
national and world economy. While financialization was an outgrowth of
the systemic weaknesses and contradictions of U.S. capitalism, it was
also the leading edge of a neoliberal model of capital accumulation and
governance, designed to restore U.S. capitalisms momentum,
profitability and dominant position in domestic and world affairs.

But as we are painfully learning, financialization is a two-edged
sword, not all peaches and cream. Indeed, its very successes opened up
new fault lines in the U.S. and global economy, making it, as we so
graphically see, unsustainable.

While it stimulated the domestic and global economy, it also left
our nation with an astronomical pileup of household, government and
corporate debt which cant be unwound overnight.

While it gave an impulse to economic growth, it also introduced
enormous instability into the arteries of the U.S. and world economy,
evidenced by the frequent financial contagions at home and globally
over the past two decades.

While it prolonged the upward cyclical movements of capitalism, it
has also set the stage for a hard economic landing and a much deeper
crisis eventually, which is what we are experiencing now.

While it created wealth on a substantial scale, it also
successfully engineered the biggest transfer of wealth in our nations
history from wealth creators the worlds working people to wealth
appropriators, the upper crust of U.S. finance capital.

While attracting mobile capital to our financial markets, it also
has made us dependent on the willingness of foreign investors to absorb
massive amounts of debt, something that they are increasingly less
inclined to do, as the dollar drops in value on international currency
markets and our markets collapse.

While the debt-driven purchasing power of American consumers
bolstered global demand, it also tied the worlds economy to our
heavily financialized, indebted, and unstable economy.

New model of economic governance needed

And yet, despite this incredible wreckage, this almost
incomprehensible corruption, this reckless speculation, these merchants
of plunder, debt and hardship are still attempting to resolve this
financial crisis in a way that continues to leave them in charge of the
main levers of power and their wealth intact.

This is not socialism, as we hear from the extreme right. It is
parasitic state monopoly-finance capitalism. Or, in more colorful
language, out-of-control cowboy/casino capitalism.

The American people and their friends in Congress are faced with a
first-class challenge. In the near term, some immediate measures must
be taken to restore the orderly functioning of financial markets, to
recharge the economy, and, above all, to improve living conditions for
the American people.

In the longer term, what is required is a new model of economic
governance at the state and corporate level. By that I mean a
reconfiguring of the role and functions of government and corporations
so that they favor working people, the racially and nationally
oppressed, women, youth and other social groupings. This will not only
require the election of Democratic Party nominee Barack Obama, but also
a sustained struggle by a labor-led peoples coalition in concert with
its allies in the nations capital on what will be new political

Recent events have undermined the legitimacy of the neoliberal
model of governance and accumulation so eagerly embraced by the Bush
administration and Republicans in Congress. (No wonder they say they
dont want to play the blame game.)

But a substitute is not in place. Instead, we have a political
vacuum into which various contending forces will try to impose their
model of governance as we go forward.

In my view, such a model should draw from the New Deal experience,
but in the end it has to be shaped in the first place by todays
conditions and requirements for political and economic advance for our
nations working people and oppressed people, broadly defined. It wont
be socialist, but it would challenge the power and practices of the
agents of capitalism, insist on peace and equality, consider public
takeover of our energy and financial complex, and de-militarize and
green our economy and society.

Depression conditions prompted Franklin Delano Roosevelt and his
advisers albeit with a mighty assist from a powerful all-peoples
coalition led by the industrial unions and the multiracial working
class to reconfigure the role and functions of the state to the
advantage of the ordinary people. We should draw inspiration and energy
from this and set a similar course.

Sam Webb  is chairperson of the Communist Party USA.


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