Online at: http://politicalaffairs.net/article/articleview/6915/

Financial Crisis and Class Struggle

By Paulo Nakatani and Rémy Herrera
Archives - Dates and Topics 2008 – print June-July click here for related stories: economy

5-28-08, 1:00 pm


(illustration by Julie Laquer)
Marxists and non-Marxist economists have predicted the current financial crisis for some time. Its conditions have been in operation since the acceleration of the deregulation processes in the monetary and financial markets. It is impossible to determine the exact day it all began, but it first affected Mexico in 1994 – at the very beginning of its integration into NAFTA – then the “emerging” Asian countries (South Korea, Thailand, Malaysia, and others), Russia and Brazil in 1997-1998, and Argentina in 2001. Its main manifestations in the United States and in Europe should not cause us to forget its global repercussions. Since 2006, the present troubles in the housing sector have their own self-feeding mechanisms, but they can’t be separated from the implosion of the “dot-com” bubble in 2001 or the deregulation and free trade projects of the 1990s.

On August 9, 2007, the European Central Bank agreed to grant an amount of $130 billion of new loans to the banking system there to improve liquidity and avoid a credit crunch. The US Federal Reserve followed with $24 billion and the Central Bank of Japan with $8.4 billion. The goal was to stop the fall in the stock market exchanges, especially after the suspension of the business of three investment funds of the French bank BNP Paribas involved with faulty real estate investments.

After five days of intervention, the Central Banks had injected more than $350 billion into the monetary and financial markets. During the second half of that year, the financial markets still exhibited a strong volatility each time that one of the largest US-based banks, like Citigroup or Morgan and Stanley, announced staggering losses. In London, the Bank of England was forced to help Northern Rock which underwent a run on the bank, the first one in a European country in almost a century – and the British government is discussing the possibilities of its nationalization.

January 21, 2008 was a new day of panic in the financial markets, just after the discovery of a record fraud in the French bank Société Générale. Stock markets from Frankfurt and Paris, to São Paulo and Buenos Aires, Hong Kong and Shanghai, to Mexico and New York collapsed. The following day, the Fed reduced its prime rate from 4.25 percent to 3.50 percent, then to 3.0 percent, in an extraordinarily aggressive ten-day period.

In the US, George W. Bush eventually announced a weak plan to aid some homeowners to pay their mortgages and, a few months later, tax rebates. These two schemes, however, have been criticized as insufficient to cope with the full extent of the crisis. The first one would concern only a restricted number of families, and the second would focus principally on those earning sufficiently high enough wages to pay income tax and would serve to do little more than temporarily fend off mounting personal debts for most recipients.

The origins of the crisis

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Economic crisis is a “normal” mode of functioning of the capitalist system, even if
in each historical period the mechanisms can vary. Since the dismantling of the Bretton Woods institutions and financial deregulation, the credit system underwent tremendous changes, especially with the creation of “derivatives,” or speculative contracts on exchange rates, interest rates, stock exchange prices, among other things, created by financial institutions and sold on the international monetary or financial markets.

The take-off of these products, associated with the integration of the stock exchanges and banks into globalized markets, has transferred economic decision-making to financial groups, submitting economic logic to a purely financial one. The credit system, including banks, stock exchanges, insurance companies, pension funds, hedge funds and other institutions, is the center of the creation of the so-called fictitious capital – the state and the firms representing the two extremities of this channel. According to Marx’s Capital Vol. III, banking capital, stock exchanges and credit and debt systems, among others, are the main forms of fictitious capital.

“Derivatives” markets began in the 1960- 70s with the over-accumulation of money capital, taking the form of euro-dollars and petro-dollars on interbank markets, under the impulse of London. After the October 1979 Fed’s “coup,” which characterized the return to the power of finance, by the sudden increase in the prime rate, the expansion of this capital provoked the external debt crisis of the 1980s, starting in Mexico in 1982. The attempts to escape this crisis took the form of the financial deregulation and a securitization of loans.

In order to get an idea of the volume of this fictitious capital, let’s say that the external (public and private) debts consolidated by all the countries of the world were estimated to $5.26 trillion at the end of 2004. In late 2007, the reserves – including those financed by internal debts – accumulated by Brazil, Russia, India and China (BRIC), Japan, South Korea and Mexico alone exceeded $3.6 trillion. Most of these debts are transformed into fictitious capital and marketized and sold. The reserves, coming from deposits in the banks, are converted into loans or lent to the US government to finance its twin (fiscal and trade) deficits. As to the sole currency sector of the markets of derivatives, the average amounts exchanged each day were about $3.2 trillion, and the per-day sales of over-the-counter derivative contracts (OTC, directly negotiated between private agents, without mediation by the stock exchanges or any intermediary) were $4.2 trillion in 2007.

By comparison, the world aggregated GDP estimated in purchasing power parities reached $65.82 trillion in 2007, and the total international trade $13.72 trillion in exports and $13.64 trillion in imports in 2006. A rising part of this fictitious capital becomes parasitic; its amount exceeded that destined for the reproduction of industrial capital. Furthermore, in spite of no participation in productive output, it grows from surplus redistribution, and fuels the creation of more fictitious capital as a means of its own regeneration. As a consequence, the financial crisis should devaluate a gigantic amount of this parasitic fictitious capital in order to allow a new cycle of capital accumulation. But the contradiction is such that this devaluation could push the capitalist world system into a global collapse, whose consequences cannot be precisely evaluated by anyone.

Current manifestations

What is called today the housing crisis is the result of several years of accumulation of fictitious capital starting from loans to US households to buy houses. Commercial banks or institutions specialized in the financing of investments in real estate granted loans with mortgages, and
transformed them into securities by creating new derivatives sold on financial markets.

The default risks were downplayed and credit over-extended, the borrowing capacity of the households artificially boosted, and the housing prices raised. From the end of 2004 to the beginning of 2006, more and more loans have been provided to lower-income families without favorable credit profiles (“subprime”), by contracts begun with payments at very low interest rates (often at one percent), then increasing (up to more than 15 percent sometimes) after a couple of years.

To make all these mortgage-backed derivatives marketable, insurance companies created other financial products, securing the refunding and a participation in interest. For their part, credit rating agencies gave the best marks to these financial products and to the institutions issuing them, which facilitated their sales everywhere to financial institutions, such as the funds of BNP Paribas or Northern Rock, among many others. In the US, they were sold to municipalities and even to schools.

The current crisis exploded when a portion of the debtors began to have difficulties paying their interest charges, because of the rise of the prime rate by the Fed. One of the reasons for this increase in the prime was the need to attract investment in order to finance the US deficits, mainly associated with the enormous expenditure caused by the wars in Iraq and Afghanistan. In a context where the security prices and the real risks could no longer accurately be evaluated by professionals, the troubles quickly moved from the subprime mortgages sector to the “safer” prime one. The bursting of the mortgage-backed products bubble logically contaminated other segments of the markets. Nevertheless, the reasons for the crisis are not just financial; loan defaults by many households are due to wage cuts, longer working duration, job insecurity, unemployment, and increased costs of other necessities like health care. This picture is made even more complicated by the systemic need to devaluate a considerable volume of fictitious capital accumulated.

Consequently, the present monetary and financial system is full of paradoxes. The first one lies in the illusion of finding solutions by continuing the neoliberal management of the crisis of capital expansion. We left one financial bubble (the “dot-com” crisis of 2001) to go to another one (housing), even more dangerous than the previous one. All the solutions proposed – as in the new Basel II regulatory regime – are inherent in the system and rely on the market institutions without imposing limits by new mechanisms external to the logic of profit maximization.

A second paradox is the appearance of a liquidity crisis, like during summer 2007 and the loan injections by the Central Banks, in a world economy brimming with over-liquidity. The replacement of a negotiated wage-profit sharing model (requiring a strong trade union movement and workers’ rights laws) with spiraling household over-consumption and over-indebtedness makes reducing inequality and avoiding stagnation impossible without breaking the engine of economic growth. A third paradox is that “independent” Central Banks refuse any intervention in “free markets” by the state, but intervene themselves massively when the whole system is threatened.

The prospects for the class struggle

As usual during a capitalist crisis, the bourgeoisie has to accept huge losses, while trying to avoid too severe ones. Crises are moments when more capital – generally the less productive or innovative and that which presents too much risk in terms of credit – goes into bankruptcy, then can be incorporated into a more concentrated capitalist ownership structure. By this, the dominant classes leave the crisis stronger than before, even if fractions of them dropped to the middle-class. During each period of such major capital reorganization in the 20th century, the improvement of the macro-economic policies has created stronger tools to try to smooth the effects of the crisis, but it did not allow the system to prevent the deepening of its internal contradictions and a trajectory towards stagnation or a more severe depression in the future.

Nevertheless, the worst effects of the current crisis in the United States will be suffered by the poorest households. As the crisis is presently centered on real estate, millions of US families are expected to lose their homes (in addition to the 2.5 million estimated up to now), the rate of exploitation of the labor force, unemployment and poverty are going up, while wages fall. Without universal health insurance or expansion of unemployment benefits, along with the financial difficulties encountered by some states and municipalities, the living conditions will become even more difficult for working families. And the devaluation of fictitious capital will cause serious trouble for those who kept their savings in bankrupted pension funds and health insurance, e.g. Enron. But the crisis in the United States and in Europe will spread all around the world.

Through the channels of surplus transfers from the South to the North, it will hit the poor countries of the South and the peripheral labor forces. The present situation is complicated, however, by the fact that a number of countries own significant amounts of foreign reserves, which means that their governments are helping the United States to avoid a general collapse. As a matter of fact, a fall of the dollar would strongly devaluate their own reserves. Some of them already helped banks in difficulties thanks to their sovereign funds. In one way or other, the deepening crisis and the military defeats of the US in its wars in Iraq and Afghanistan is shifting world hegemony from the United States – likely in favor of China.

Concerning the prospects for class struggle, a systemic crisis could theoretically open the opportunity to shift political and economic power from the bourgeoisie, in particular by expropriating the means of production, to the working class. Unfortunately, the workers and their organizations, trade unions, leftist parties, and even social movements, did not recover from their defeats following the victory of neoliberalism and the collapse of the USSR. Until now, they remain without organization and direction to fight for socialism. In Latin America, the regression of the imperialist centers may be the moment to go ahead and to open new spaces for socialism.

But this direction is not inevitable. The fact is that the poor suffer most during capitalist crises, and there comes the risk that they may submit to the dominant ideology and support anti-crisis, but pro-systemic measures. In times of economic crisis, capitalists are often successful at substituting the demand for the workers’ emancipation with the call for the right of employment, i.e. the right to be exploited. Crises are moments when it becomes possible to push the contradictions to their maximum, until the end of the domination of capital and of the ruling classes – that is the destruction, not of the means of production, but of the capitalist relations of production. So, it is urgent to rebuild programs for socialist transitions, against the exploitation of labor and for the end of capitalism.


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