The Capitalist Crisis and Credit (2008)

10-17-08, 10:13 am

As I write (17 Oct 2008):

“…The [UK’s] Treasury is being urged by one of the City's biggest institutional investors, Legal & General, to rewrite the terms of the £37bn bank bail-out...”

“Legal & General is among the City's most powerful institutions as it owns about 4.5% of the FTSE 100 share index. It argues the bail-out's ban on dividends is counterproductive, making shares less attractive, and has lobbied the government to allow the three banks in the scheme to continue to pay their dividends.”

The 'urging' here is pressure to still pay dividends to shareholders who, remember, had stocks in what were previously failing banks, but because now the government has intervened to 'rescue' them, the possibility of dividends has once more arisen, whereas before bankruptcy was a real possibility. The bourgeois broadcast media tries to cover up the sheer venal audacity of this pressure by simply reporting it with minimum comment. Likewise, we are forced to conclude, we can expect that the recent oft reported suggestions that there are going to be schemes to regulate remuneration for future bank executives is probably in grave danger, even while such schemes are only glints in the eye of the government.

Meanwhile in the US there is an effort to explain the crisis:

“UBS bank’s motto is: ‘You and us.’ But the world we created was actually ‘You and nobody’ — nobody was really connected in value terms,” said Seidman. “Parts of Wall Street got disconnected from investing in human endeavor — helping business to scale and take up new ideas.” Instead, they started to just engineer money from money. “So some of the smartest C.E.O.’s did not know what some of their smartest people were doing.”

Smart people then…

A funny quote from a recent Guardian Unlimited blog:

'...Deborah Summers has forwarded me a link to the satirical website Daily Mash, which has a very straightforward guide to today's announcement. 'Banks to lend you your own money, ' it announces.

The government is to invest £50bn of your money in British banks so they can lend it back to you with interest….'

It is currently being said, by way of various apologies to the people for the crisis, that they may make profits from these new nationalizations if they get shares in the banks. But we must remember that these banks have already taken money from customers, who are also the taxpayers. And, these banks have already swindled it away. So now they are asking the taxpayer again, in effect, for more money; but the question is: how are these banks to make a future profit unless this is to be extracted from the taxpayer again (in charges etc)? How could it be possible for the taxpayer to make a profit from this? It is highly unlikely in the short or medium term. Higher taxes will result, but another question is, when jobs are being lost, who can pay the taxes? Still more, this arrangement that is supposed to be for the benefit of the people is supposed to be temporary, and to end as soon as the banks return to 'normal,' hence to profitability, which means that the humble taxpayer’s notional profit evaporates anyway.

The usual way out of such crises for capitalism is to adopt some expedient short term pseudo-socialist measures, as with the nationalizations of the banks, and/or to go to war. War can cover up the cracks showing in capitalism. But there are ideological ruses and mystifications that suffice in the interim. This term, 'real economy,' pops up now amongst the apologists: the idea that two capitalisms, a good one and a bad one, a real one and an unreal one, is being employed to exculpate it as a whole; so we get the 'good old' real economy, which exploits real workers and makes real useful products and real, um, capital that can be invested in a, um, bank, versus the 'bad' financial capitalists who have swindled us all and become too abstracted from real peoples lives and the production of real goods, and benefited too much from lax regulations in the market.

There is, however, no such thing as a really free capitalist market; it is always regulated in some way. The problems exposed by the crisis just 'calls for' regulation of a different kind, and the media label for this is and has been 'socialism.' Why is it not socialist? Because the capital and profits are not and will not be coming back to the exploited in any of the new schemes being promoted frantically, but will be and are being filtered off by the state to the rich.

Alongside this there is currently a big effort to depict the crisis as a party political issue between left and right, Democrat and Republican, and not a problem with the actual economy. Yet it has become easier to see such false dialectical arguments for what they are (illusions), in recent times by the way the ruling class has joined together, even the big contenders in the US election, Obama and McCain. We know these factions will each support the bankers, because they believe the people will suffer if they do not do something; but to do this in such a way as to leave all the causes of the crisis intact and operating has been very revealing of their mutual class ties. All the attendant bluster and disgust of the 'greed' of the bankers actually misses the point here. It was not the greed of the guy who sold me the mortgage that led him not to account for whether I could really pay for it or not, but his need to get his commission, as I was sure he was not so highly paid in his basic salary. Likewise, it need not be greed for the bosses at the bank to try to out-compete other banks by exploiting that same bank worker by casualizing his labor more than them, because they must compete. The issue that became obscured in this process is why would a casual worker on a temporary contract really care about the long term future of a bank that will not care about him long term? We find that greed does not need, necessarily, to play a defining role. It can probably all happen in capitalism with the best will in the world. But fear at least plays a bigger part than greed. Fear of failure, of losing, of looking stupid, of being thrown to the wolves.

I found this which seems to explain the immediate problems, though not the underlying causes, of the US credit crisis and its 'solutions':


'...Bernanke Theories All Failing… The Term Auction Facility (TAF) is not working to increase bank to bank lending.”

“The Primary Dealer Credit Facility (PDCF) was supposed to prevent more dealers from blowing up. Yet, Lehman went bankrupt anyway and Merrill Lynch had to merge with Bank of America to avoid collapse.”

“Slashing interest rates to 2% did not prevent a recession.”

“The ABCP MMMF Liquidity Facility may have stopped a run on money markets but it has not done anything to restore confidence in in (sic) the ABCP market itself.”

“Keynesian theory suggests the Fed is in a dreaded 'liquidity trap.' The reality is there is no such thing as a 'liquidity trap,' at least in Austrian economic terms. There is no trap, because it is impossible to prevent the liquidation of credit boom malinvestments.”

'Purging of bad debts must take place before a lasting recovery can begin. The mistake the Fed is making is (sic) attempting to force liquidity down the throat of a market that does not need it and cannot use it.'

(…) and:

“…The credit markets are choking on credit, yet Bernanke is attempting to force more credit down everyone's throats. Logic dictates the solution cannot be the same as the problem.”

“Trapped in academic wonderland, such simple logic is far too complex for Bernanke to understand. Sadly, we are all forced to watch Bernanke flop about like a fish out of water attempting to solve a solvency problem with ridiculous liquidity schemes like the TAF, PDCF, TSLF, TARP, and the ABCPMMMFLF.”

Mike 'Mish' Shedlock …'

The same seems to apply to the recent UK bailouts. They seem to have had a limited effect, or none at all.

Obviously, all politicians involved have inherited economic conditions from previous politicians and none of them invented the economic system, called capitalism, and so they all merely tinker with this system around the edges, which they would rather not 'control' anyway; hence the really crude 'tools' they have at their disposal to try to solve crises like these (i.e. changing interest rates and 'pump priming' with liquidity). They do not, after all, really want to know what the real causes of these crises are. It would not be popular with their class, and diminish the possibility of their reward even for failure (the principle that if nobody can understand the system, then nobody can really be blamed for it when it hurts). Thus, in the crisis, all the emphasis tends to be put on the current leaders, in this case Bush and Brown, and on their party affiliations, and do not include the history, which goes back even to Cromwell and the English revolution, and to the earliest rise of capitalist production; this forgetting of history all deflects culpability from the real causes. They look for things to blame: Bush, Brown, Greed, Bankers, the 'unreal' economy, 'sub-primers'; all of these are the usual sidetracks; and they have a dangerous edge to them, because after a certain point the blame falls on to specific groups of people.

It is necessary to see the history: houses do not decline in value all by themselves, because 'sub primers' cannot pay. It requires an already existing market which makes a decision (unless the houses physically get burnt down, etc, of course) to devalue, because it is so shocked at its own ridiculously high confidence, or is aware it has passed on such a big swindle and starts to realize it is unsustainable.

This is all a part of a process intrinsic to capitalist markets. In this, one cannot separate 'good currency' and 'bad currency'; they are all currency, which is an abstraction of value. If the banks have a hyper-inflated currency, then so do we, we just perhaps do not feel its full effects yet, because it appears first in the credit markets. Yes, all money is a symbol, but some is more symbolic than others, and some is downright fictitious, like CDSs and derivatives. In reality the massive debt we are left with from the crisis will affect currency as a whole nationally and internationally, which is actually what is happening in the global chain reaction now taking place (re Iceland).

The taxpayer, and more importantly the productive workers, cannot fork out anymore value and it is them who are now, in this crisis, expected to borrow more and work harder. Who would lend in such circumstances anyway?

Other than raw natural resources the working people are the source of all wealth and value. But they have now been so shafted and conned that they cannot support anymore of it. They cannot suddenly separate 'their money' from the capitalist system (unless, that is, they actually implement genuine socialism). There is a glut of money and credit stored up, but it cannot go anywhere. We might think that credit 'backed by future tax revenues' (nationalization) is a better, 'more real' form of money than 'debt backed currencies,' but it is still abstract, it does not yet exist; and at the moment there is so much debt it devalues even that future 'real' labor, as does the recession in any case in a series of knock-on and circular effects, due to increasing unemployment and thus bigger social welfare costs.

Whilst letting many banks fail is seductive in this situation, because it seems like due punishment, we cannot however say that it would be good for a population who cannot get their money out of the banks to live on, or be good for the companies who could not be able to meet payroll for the employees, or of course for those employees. But with no serious different political alternative to the present crop of politicians on both sides (in the UK and US) we are all going to suffer additional pain if this crisis is not handled well, and manifestly it is not being handled well at the moment. It may be tempting to think it possible to just sit back on some sideline and watch it all disdainfully, but this is mistaken, the current crisis will touch everyone except the very rich minority.

It is in these times of crisis a rather strange experience watching Bush and Brown, they speak of strong strategies and policies, of the great 'tools' at their disposal, but there is little mention of what these tools actually are, and President Bush addresses the US people on TV in a dramatic way, but he seems to have nothing new to say, just a description of what has already been done, and things that have already failed anyway. Other schemes, other 'rescues,' are and have been obviously planned behind the scenes, without the people knowing, but even those things don't work, and they seem the result of panic. Stuff has moved on faster than our leaders seem able to grasp. We see they do not command capital, it controls them. They thus seem, collectively, to be sulking in a peculiarly political fashion, to be a bit downcast and irritated that they have to say these things, sort of out of joint. And Mr. Brown even smiles a lot, as if gleeful of his new found opportunity to show his (now obviously failed!) economic credentials as the former chancellor (Mr. Prudence himself).

Many, particularly in the US, of course hate the way the state is getting involved in the banking system, even for rescue purposes. They hate the apparent triumph of socialist policy. They forget that because it is a capitalist economic system, it is a capitalist state that here intervenes on behalf of capitalism to bail it out, and nothing very socialist. To nationalize is thus to put a 'private' business regulated by the laws of the state (already) into the more direct hands of the capitalist state, but in a place where any losses are incurred by the exploited, while any profits are (still) to be taken by the ruling class. But, even so, these policies have elements of socialist planning to them, formally, and they are the only short term answer to this crisis. Yes, another solution would be to institute rationing, abolish the banks and their unworkable debts, abolish mortgages, bring everything into social ownership, abolish the government and its machinery and set up the unions as a new type of government in which people will have their say via their 'real economy' work (i.e. worker councils). But at the moment we must realize that this is not likely to be on the table for discussion amongst politicians at the top, and it does not seem we are in the historical position of struggle to enact such proposals.

But what is being done? It seems that just pouring good money after bad is the finance experts' only solution. The problem is thus not just the piles of worthless credit debt that has grown to bursting point, it is also piles of fictitious knowledge, stocked up in the academies and in these politicians; the whole thing has become an abstraction built upon an abstraction, so we get people in charge in every field of endeavor who seem not to be real people, just amassed lumps of illusionary ideology.

Marx Vol. III 'Capital': especially from Chapter XXV 'Credit and Fictitious Capital' gives insight and clarity to the basis of the current crisis. And a lot of what Marx quotes for his argument is already taken as fact by the standard bourgeois economists:

'The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself. This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production.

The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labor of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Péreire with the pleasant character mixture of swindler and prophet.'

The increasingly global proportion of the market has meant, evidently, that this 'pleasant character' is repeated on the world stage far more frequently these days. Only this greater global interconnectivity of economy, media, and politics, is different, by degree, from previous capitalist crises:

'In our progress toward a resumption of work,' President Roosevelt said in 1933, 'we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.'

And so history repeats itself and the evils of the old order are now the evils of the present order. And Fukuyama seems an idiot alongside all the others in the past who dared to say Marx failed to understand capitalism and history.

For Marx, as we see, stock is fictitious capital, related but not the same as acting capital investments; we, the taxpayer who gives to the government and the central bank, have now bought fictitious capital in failing banks, whose practice has been to take part in one of the biggest swindles in capitalist history by extending the instruments of fictitious capital (credit) to an awesome degree.

At the moment we are not at the end but at the beginning of a recession, a capitalist slump, and production is seizing up, so there will be less people able to borrow the loans that the banks are being told to unblock. There will be too much bunged up credit going nowhere, stagnating; capitalists will not find it necessary because they cannot shift commodities in any case, imports and exports will be affected, protectionism will result, and other similar measures, even in spite of the apparent 'unity' of world leaders and their almost unanimous past agreement, vigorously and viciously enforced, that ‘free trade’ was the universal panacea.

And so we have come (with Bush and Cheney, of all people!) to nationalization! Nationalized industries in capitalism are always bled dry by the ruling class, so become useless, yet still they are only usually just as useless as the privatized capitalist industries are. Actually trading them back and forth like this, building up monopolies and destroying them, makes the middle-men very wealthy. If Marx says that such crises prepare the ground for social ownership he obviously does not mean it in the sense that capitalists should still run the state, but only in the way it does render the capitalist as such actually superfluous, because the obvious question becomes: why do we need exploiters when the whole system can reflect back on itself and be made to 'trickle down' via the social ownership of the banks back to those who produce the real wealth in the first place?