The Economic Crisis and the Great Recession of 2008, an Unfinished History

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In economies, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies. (Quoted from GDP – Wikipedia article, my emphasis)

The crisis appeared on the surface to began with the so-called 'credit crunch' and global bank insolvency in early 2008, highlighted by the collapse of the US Lehmans investment bank and the failure and massive bail outs of the giant insurer AIG.  

At first sight it was the bursting of a property bubble, coupled with an unsustainable rise in asset prices. But underlying this was a huge credit boom. One of the "solutions" to the problem, highlighted by Marx, of the falling rate of profit was to swamp consumers with cheaply available credit. This created asset rises which were not backed by much substance, i.e. a "bubble." For certain reasons this solution became relied upon to a greater and greater extent in recent history, perhaps because it was easy to do, it could almost be an entirely automated, computerized process. The sudden realization that the original problem had not evaporated in spite of all the increased debt then caused the so called credit crisis; the question was: who was holding the most stinking assets? With no clear answer to this conundrum, the bourgeois class returned to its normal response.  

That is, when capitalism finds its biggest corporations and banks failing to make their expected profits, and when they do not know where to turn next to solve this, governments’ default to the common ideology of their class, to an ideology that seeks to blame others in the time honoured fashion: anyone who is weak, poor, perceived as less capable of defending themselves against their onslaught. Even old Greek spinsters came into the frame during the Greek bail out. The Roma gypsies were thrown out of France en masse, despite the glories of the EC and its regulations "governing" the free movement of member citizens (Romania was a member country). Such laws in such times are simply ignored, as is almost any "white collar" fraud which might seem to act as a palliative to the problems facing the big profiteers. The poor became, and are, in the crisis figured as an annoying irritation, but even more so when they are expected to pay for ‘their profligacy’ through their future labour, but do not seem to be up to the task. "Beat up the Poor!" (Baudelaire) was the only way forward.

You know the ideology well I assume: love of titles and flashiness and the fast buck, faith in "information technology" but dislike and mistrust of real knowledge, an overbearing sense of self regard, and over confidence, and seeking all this in others to whom they would lend; in short, the banks before the crisis would only lend to people who seemed like themselves. They were foolish, so they lent to fools, and the crisis was partly the consequence of this. I do not mean ordinary householders; I mean their huge corporate loans, their bundling of debts, and their Credit Default Swaps and other "special vehicles." It showed up a total lack of insight and empathy on one level, on another level of course it just disclosed how capitalism "worked" without much regard for that thing: "society." That is, if you did not believe that some aspects of it at least were conspiratorial: that it was a rough way to consolidate smaller nation states into debt slavery. And of course, in the end, these fools were not really so foolish, that is, if they managed to be bailed out by ordinary people, by taxpayers, in fact they seemed dangerously enlightened, in some quarters they were indeed likened to financial terrorists.  

The media and press (generally owned by players in this game) tended to argue at first that "sub-prime" borrowers were chiefly to blame because of the widespread taking of ridiculously high mortgages, and that banks were only a secondary factor in obliging this binge. This angle did not succeed for long however, since commercial property became known to be an even bigger burst bubble, and the problem with the banks "special instruments" became more common knowledge.

Most of the larger banks were bailed out, and the debts were taken on by the governments, and thence transferred to the taxpayer in the nations implicated and then onto the poorest people via welfare cuts and higher taxes. Essentially the debts became borrowings on future workers labor time, this caused increasing import/export deficits set against the backdrop of rising unemployment and welfare costs, and falling profits and tax returns.  

After the rescue the big banks seemed to feel safer, and the earlier policy to combat the crisis by injecting monetary "stimulus" and "quantitative easing" (or printing money) was generally considered a passed "Keynesian" phase by many "economists" (which had become by now, with the exception of a few individuals, a laughable moniker denoting the total failure to predict the crisis) and "reducing the deficit" became the new mantra, since the banks and their beneficiaries could now apparently reap the financial rewards from their revived position. But the talk of bank revival was actually Scotch mist, and it covered the fact that, in the absence of Keynesian policies working, the bourgeois class needed a culprit to blame other than their own policies and interests.

In spite of the fact that retailers still wanted the consumer to spend more, a new ideology was required to support this new position: the typical post stimulus argument went like this: ordinary folk have borrowed too much and been profligate, now they must pay this back by being thrifty. This meant cutting adrift the poor and those who needed welfare and who ultimately relied on state services. The state was also to blame for "pandering" to these groups and at least notionally it was thought right to cut "government." Those in receipt of state benefits were characterised repeatedly throughout the media as "scroungers," though in reality bankers were quickly becoming the most hated and blamed group for the crisis.  

The US situation was a little different in its crisis rhetoric, being such a powerful nation and having the world’s reserve currency meant it could still borrow and spend on "stimulus," and its deficit reduction talk was less strident, also given the politics of the incumbent Democrat administration and President Obama, the "Keynesian" route was not such a taboo, but the arguments were similarly divided with the Republicans calling for more attention to the deficit, for government cuts and savings, targeting welfare reduction.

That ‘people should be better off in work than on welfare benefits’ appeared and appears intuitively true, and for some was the magic answer to the crisis, as well as its secret cause for boneheads, as well as for those intent on deflecting criticism, and those willfully against the working class. They conveniently forgot that there were and are a finite number of jobs and in a crisis this number falls in any case due to industry cost cutting, widespread bankruptcy (such as in the US car industry), as well as the contribution of the governments own austerity policies.  

It also forgets society: that many people work in real jobs on wages that already only just separate them from poverty (hence one reason why they begin to rely on the credit drug). If benefits become less than this already paltry sum, the result is self evidently that a person cannot live on it. At the same time, and in reverse, if people on benefits receive a properly livable amount, why would they do the horrible dull jobs that only seek to exploit them and offer them the very lowest wage? Though still, if the unemployed are offered state manufactured jobs at a wage that rewards work rather than being on benefits (and such schemes were and are considered a viable solution to crisis), yet they are on benefits, and this is the only way that they can receive these rewards, then they are being rewarded for being on benefits (!), and they compete with other workers and private employers, that is, unless these jobs are fictitious, ridiculous jobs and the schemes are just frauds which will again fleece the taxpayer.  

There is no real solution in capitalism to these contradictions. Capitalism must pay people not to work or its state risks undercutting the very private employers which it champions; hence the inevitable frauds. One way out of these problems is the US system of course, where there are no unemployment benefits after a certain time period and the poor must rely on charity or "fade away." 

This, we must assume, was what global capitalism, led by IMF crisis policy, was actually hankering for, although this was happening all the while the U.S. administration at least partly saw the need to do the reverse and put in place greater social welfare, such as in health.  

Think of it this way: removing welfare provision at a time of crisis was and is the opposite policy to wartime economics, when the rhetoric of 'we are all in this together' is taken more seriously and welfare is seen as an essential part of the comradely effort. That such socialist type policies work in wartime is a truism, so we might ask why it was and is not considered when we are at war in the competitive economic sense. Of course though, it is, but only for the rich and those corporations "too big to fail," or when protectionism begins to rule the international market, the harder effects of this war must be borne in raw capitalist terms by the workers and the poor. The fact is, the only way that this ruling class would enable itself to look at such socialist policies would indeed only be in the context of war, which it probably feels would be a useful ideological cover for the failure of capitalism.

The first bail outs were probably a necessary evil because there were no social safeguards in place to deal with widespread bank failure. But after this, things should and could have changed, at the very least in the regulatory sense, but they did not. No politician was rising to their responsibilities in the face of the fact that it was still possible, even likely, that the global financial system would collapse; all the politicians could do was throw more money and credit at the already guilty and endanger the sovereignty of whole nations, nations which took on the mountainous debt, a debt which increased every time it was renegotiated.  

Western democratic politics seemed particularly impotent, traditional left and right wing merely following the fickle dictates of the market, sometimes seeming ludicrously out of touch.

The key to understanding the apparently symbiotic relation of democracy to capitalism in this crisis is that neither of them represents a form of control by human beings over, respectively, their politics or their economics. And politics and economics are intertwined, this is obvious. The love of the free market (so called) is similar to the love of the free voter, who votes with "free will." With democracy chance plays a bigger role than expertise in what happens, and so also in capitalist economics. If both lead to disaster, in tandem, there are consequently few methods or "tools" available to the politicians or economists to assuage the situation, and they eventually resort to laying blame on things other than (their) democracy and the economy.  

So they blame the poor, immigrants, the old and the ill, and "the enemy" whoever that may be chosen to be, whomsoever does not represent a threat to their power. They, in other words, personify the problem. Democracy separates the powerful from their power by the process of ceding that power to a representative through the voting system. But this always leaves those who already have the power, before democracy, in the established position of power. Hence we may say every democracy is really a dictatorship of a class which has the de facto power always/already. To be sure, democracy is important in the way it enables a change in the leadership of the class in power, within that class, but it is usually powerless to change the actual power-holding class and the basic economic system.

The best illustration of this, in this crisis, was the Irish government’s situation in November 2010. The Irish government had a very thin majority in a weak coalition. It had tried repeatedly to claim that it did not need a bail out of the government’s finances, which could fund itself until the next year. However, the EU and IMF made their way to Dublin anyway to try and put in place its loans and conditions, given the parlous state of the Irish banks, which were basically insolvent, frozen out of borrowing and having deposits withdrawn. The officials were afraid of ‘contagion’ in the bond markets and the effect of the lack of a ‘solution’ reverberating to Portugal, Spain, and other Eurozone countries. It seemed that these officials were in contact with the Irish central bank and their statements now openly bypassed the Taoiseach and the Irish parliament, rendering democracy apparently null and void.  

Yet there was a small political problem, the incumbent government was obediently rushing to secure its new budget which would include the new EU/IMF loan conditions, but the Greens in the coalition demanded a new election, and the government’s now even weaker hold on the reins of power meant there was some doubt as to whether the budget could be finalized if this election were to be demanded to come before the date of the budget. This sent the share markets down and the EU echelons into a panic of secret meetings, because the very existence of the Euro was at stake if more of its countries "fell." Whatever the Taoiseach said or did seemed almost irrelevant amidst these communications between European politicians and the big banking officials, and the Irish parliament itself quite ‘out of the loop’ concerning such grave matters as Irish national sovereignty. For most of these people, it became obvious that in any case, money was of more importance than Irish history or its independence. Essentially the officials needed the bail outs to keep the loans being paid to private investors and private corporations for whom they were their class representatives. But suddenly there was some, understandable, reluctance (perhaps borne by a real fear of the angry Irish people) in the Irish parliament to actually be the party, or indeed individuals, to help sell-out the future of Ireland and to make the Irish workers pay for the crisis.  

What the EU/IMF was recommending was that the Republic should gradually cut unemployment benefits the longer a person is out of work, and that the country should reduce its minimum wage to bring it in to line with the general fall in wage levels. The Irish government had already intended to take €6bn (£5bn) out of the economy the next year as part of its four-year plan, it aimed to reduce Ireland's proportion of debt to three percent of gross domestic product, sought a tax of about €200 on every property in Ireland and social welfare cuts of between five percent and 10 percent, weekly payments for jobseeker's allowance were to be cut and child benefit and payments to lone parents were to be slashed by about 5%. Carers' allowances for those looking after dependants were also likely to be subject to a cut of up to 10 percent. Some 600 voluntary and community organizations that worked with Irish people with disabilities were also told there would be a 20 percent cut in their funding and there were also likely to be public-sector job cuts, even though the government had agreed with the unions that there would be no job losses in public services. It is thus easy to see how those least able to help themselves were being targeted to carry the major burden of responsibility for the crisis.

When a government of a people ensures that its public takes the loss for private banks and private foreign investors/bondholders on such a massive scale, then that government is obviously not working for its people but for those same speculators and investors. This reveals the true class relations at work.  

In the same way also appeared the Conservative-Liberal Democrat coalition UK government, which astonishingly, in the midst of all its criticisms of the "European project" and cutting social benefits at home, suddenly committed more than nine billion pounds to the Irish bail out, that this award of credit sat rather awkwardly alongside its much vaunted ideology of austerity and thrift did not matter to it. And only recently it had held up of Ireland as a disciplined "austerity loving" free market example to follow in the crisis! The loan was spun as a pragmatic investment for the UK of course, but when this government and its banks do not find it similarly ‘pragmatic’ to invest in its own nation and ordinary people, even its small and medium sized businesses, it is known to be only pragmatic for its particular class interests.

Could it be true that this crisis would only stop when there was no more money to bail out entire nations? The market did and does not care for the social consequences of its actions, its concerns are its profits, and the politicians did and still do not care because they are run essentially by the market. This was and is a runaway train. The governments were and are weak, and would not adopt socialist policies for the people as well as for the banks.  

We may recall that only a few years ago capitalism was warning against triumphalism when the Soviet Union collapsed, but now capitalism was imploding and even the most ardent capitalists (such as Bush) had resurrected some socialism to save them from themselves. Profits were privatised, and gained by the ruling class, but losses were ‘socialised’, and forced onto the working class. There was and is nothing "socialist" about "socialising" such bank losses of course, but still a few right wing pundits did not lose this sad opportunity to blame socialism for the crisis. "Living beyond their means," and "living on unearned income" became two favourite phrases that have been repeated, quite nauseatingly, in this crisis by the right wing to try to blame it on the "socialism" of government policies.  

Neither made or makes any real sense. In the first place, the means always change in capitalism, what may be one day entirely within your means is the next day wildly beyond them, and this can happen without you lifting a finger. And, what is 'unearned income' but the basis of the whole of capitalism itself?  

By exploiting labour the capitalist derives capital from unpaid labour time, thus, aside from production and use value, it (i.e. capitalism) is all based on 'unearned income'. If everybody lived on "earned income" and "lived within their means" we would probably be talking about a sustainable system with little "growth" – a completely different system, maybe called socialism – but the commentators who always use these trite phrases rarely mean this, what they mean is some kind of mythic, fictional capitalism in which the 'good' are rewarded for their obedient behaviour to the "rules." Sometimes endearingly they confuse a few legitimate moral standards (thrift, honest hard physical work) with the ever re-written (especially in these times of crisis) regulations of the capitalist mode of production. Below I have slightly modified, simplified, and paraphrased some of Marx’s theory (from “Capital III”) that is particularly relevant to this circumstance.

The process of actual economic thrift and abstinence (e.g. by savers, hoarders, stashers, misers), to the extent that it supplies elements of accumulation, is left by the division of labour (which comes with the process of capitalist production) to those who receive the smallest of such elements, and who frequently enough lose even their savings, as do the workers, when banks fail. However, on the one hand, the capital of the industrial capitalist is not "saved" by himself, because he has control of the savings of others in proportion to the size of his capital, while on the other hand, the money-capitalist makes the savings of others his own capital, and the credit (which the reproductive capitalist gives to one another and which the public gives to them), he makes a private source of enrichment. The final illusion of the capitalist system, i.e. that capital is the fruit of one’s own labor and savings is thereby debunked. Not only does profit consist in the appropriation of other people’s labour, but the capital with which this labour (of others) is set in motion is comprised of other people’s property, which the money-capitalist places at the disposal of the industrial capitalist, and which he in turn exploits. For the lender of loan capital money has been transformed into a paper claim to money, a title of ownership (of a debt). The same mass of actual money can therefore represent very different masses of money-capital.  

With the development of the credit system in capitalism giant concentrated money-markets are created, such as in London (or New York), which is at the same time a main seat of trade in this kind of paper. The bankers place huge quantities of the public’s money-capital at the disposal of this bunch of gamblers, and these gamblers multiply.

In times of crisis the demand for loan capital and therefore the rate of interest reaches its maximum, but the rate of profit, and with it, the demand for industrial capital has to all intents and purposes dried up. During such times, everyone borrows only for the purpose of paying in order to settle previously contracted obligations or debts. In our crisis, this has even been the case with the biggest banks, which, as we have seen, have been bailed-out by public money, and which have then used the opportunity to purchase other failing banks. In fact now this process has become so bloated and globalized, that is has led to a sovereign debt crisis, as in Europe, that has in turn developed into a dangerous domino effect, in which because the market suspects that each of the obligations to furnish the loans cannot be met except with greater and greater credits and so debts, the race was apparently on to be the final creditor nation rather than the debtor nations.  

In times of renewed productive activity after a standard chaotic crisis, loan capital is again demanded for the purpose of buying and for transforming money-capital into productive or commercial capital. The industrial capitalist invests it in means of production and in labour power. But the notion that the market rate of interest is determined by the supply and demand of loan capital tries to jumble up the credit swindler with the industrial capitalist investing in production, and to make this credit swindler seem the only capitalist and his capital the only real capital. In times of austerity, as already implied, the demand for loan capital is a demand for means of payment, and nothing else, it is not a demand for money to purchase. At the same time, the rate of interest may rise very high irrespective of whether real productive capital is in abundance or is scarce. So this demand for means of payment is merely a demand for convertibility into money, as far as merchants and producers have good securities to offer. And it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives them not only the form of money but also the equivalent they lack (whatever its form) with which to make payment.  

This is the point where, according to Marx, "both sides of the controversy on the prevalent theory of crises are at the same time right and wrong" (and they still are at this same stage in ideology!):  

1) a) Those who say that there is merely a lack of means of payment either have only the owners of bona fide securities in mind; or b) they are idiots who believe it is the dutiful power of banks to transmogrify all bankrupt swindlers into solvent, upright capitalists by means of pieces of paper.  

2) a) Those who say that there is merely a lack of capital, who are either just quibbling about words, since exactly at such times there is a mass of inconvertible capital as a result of over-imports and over-production, or b) they are referring only to such players with credit who are now in a position where they can no longer get other people’s capital for their own operations and demand that the bank should not only help them to pay for the lost capital, but also enable them to continue their swindles.(!)

Yes, Karl Marx understood such crises as we have been experiencing, but since his death they have grown enormously and become globalized, and the stakes are even higher. It is also doubtful if there will be the return to "normality" after this crisis, and that productive or commercial capital will again be invested. The now grown long in the tooth idea of a "services based economy" epitomizes the new big problem: investing in actual commercial productive capital is, amongst the big morass of interconnected globalized gamblers, today seen as needless and vulgar. The market and its political champions are like a philosophical idealist or worse, a sophist, it believes it can live on thin air, confidence, and computer data, even while every crisis hit nation expects to "kick-start" an "export led" recovery back to the previous boom conditions.  

Moreover, the much vaunted "services based" and "knowledge based" economies expect that it will still be able to sell and export these services, which they have latterly concentrated on. And so, prominent in its line up are the very financial services that have been generating the credit bubbles and are a significant root of the crisis. As I write the list of Fortune 500 companies contains more service companies and fewer manufacturers than in earlier times, and many products are being transformed into or marketed as services. There has also been a related shift to a subscription pricing model for all goods – rather than receiving a single down payment for a piece of made equipment, many manufacturers are now pulling a regular flow of revenue for ongoing contracts, which can be computerized through banks direct debits (a cherished system that can lead by default to overpaying). This trend encourages the financing of these services, the creation of financing arms of traditional manufacturing companies, and more promotion of credit and thus debt. The concomitant process of electronic digitalization and the move to the internet also enforces the sense of "virtuality" for those engaged in these processes, a feeling that is hard to shift, though in the harsh reality of stringent austerity people suffer the pain of increasing poverty, and are thus prone to see the very mundane problem that confronts them as the horrible thing it is.

Photo by Bill Burke/AFL-CIO, cc by 2.0

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  • Great article but I believe we should date the onset of the financial crisis to June 22, 2007, when Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. Bear Stearns had originally put up just $35 million, so they were hesitant about the bailout, however CEO James Cayne and other senior executives worried about the damage to the company's reputation. Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios. During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
    On August 1, 2007, investors in the two funds took action against Bear Stearns and its top board and risk management managers and officers. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others since then. Co-President Warren Spector was asked to resign on August 5, 2007, as a result of the collapse of two hedge funds tied to subprime mortgages that were managed by Spector. A September 21 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses. the S&P 500 Index peaked on October 8, 2005 at 1,561. With Samuel Molinaro's November 15 revelation that Bear Stearns was writing down a further $1.2 billion in mortgage-related securities and would face its first loss in 83 years, Standard & Poor's downgraded the company's credit rating from AA to A.

    Posted by Steven Nagourney, 12/07/2010 9:31am (7 years ago)

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