Who caused the great crash of 2008?
analyzes the roots of the worst economic crisis since the Great Depression--and shows why Marxism offers the best way of understanding what went wrong.
THERE ARE plenty of people who should be held accountable for turning an ordinary recession that began a year ago into a global catastrophe.
Topping the list is former Federal Reserve Chair Alan Greenspan, who fed the bubble by keeping interest rates at rock-bottom levels, urging home buyers to take on adjustable-rate home loans and refusing to use the Fed's powers to oversee a mortgage industry rife with fraud.
Then there are the former Treasury Secretaries from the Clinton administration, Robert Rubin and Larry Summers, who teamed up with Greenspan to block regulation of so-called derivatives--complex financial instruments based on underlying assets like mortgages.
Backing them up was former Sen. Phil Gramm, the Texas Republican who, as chair of the Senate Banking Committee, pushed through legislation repealing the Depression-era Glass-Steagall Act that restricted commercial banks from entering the high-stakes financial activities of investment banks.
Former President Bill Clinton, who signed Gramm's bill into law, bears responsibility as well.
This Clinton-era deregulation opened the way for operators like former Countrywide Financial CEO Angelo Mozilo, whose company pushed sub-prime loans on people who qualified for better deals.
Countrywide paid mortgage brokers a higher commission on high-interest sub-prime mortgages, since those mortgages were more profitable to sell to Wall Street investment banks--like the now-bankrupt Lehman Brothers, where CEO Dick Fuld pushed the company into the obscure but highly profitable market for collateralized debt obligations (CDOs), which packaged together large numbers of prime and sub-prime loans as investments for Wall Street's biggest players.
And there's Robert Rubin--again. This time, as chair of Citigroup's executive committee, Rubin egged on executives as they plunged the bank ever deeper into the market for CDOs. "According to current and former colleagues, [Rubin] believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman Sachs, and he pushed to bulk up the bank's high-growth fixed-income [bond] trading, including the CDO business," the New York Times reported.
Those assets turned toxic with the housing bust and resulting credit squeeze. Now, Citigroup is the latest financial institution to be bailed out by the Bush administration, with a rescue package that will put $45 billion of government money into Citigroup--and put taxpayers on the hook to insure $306 billion in bad assets.
But back at the start of the decade, with the table set by Clinton's economic policies, Wall Street could gorge itself on an ever-expanding financial menu, as the new Bush administration looked on approvingly.
Even when the financial crisis first broke out in the summer of 2007, Bush and Treasury Secretary Henry Paulson insisted that the problem would be "contained" in the sub-prime mortgage market. It was only after the failure of the investment bank Bear Stearns in March 2008 that Paulson and Federal Reserve Chair Ben Bernanke lurched into action with an array of new lending programs and multibillion-dollar bailouts of Fannie Mae, Freddie Mac, AIG and, now, Citigroup.
According to Bloomberg news service, taxpayers are on the hook (so far) for an astonishing $7.7 trillion--a figure equivalent to more than half the total U.S. economic output, or gross domestic product, for 2007.
But despite this immense sum, the crisis has gotten worse--not least because free-market ideologues like Bush and Paulson delayed taking decisive action before carrying out its series of confused and contradictory "rescues."
So yes, the people who presided over this crisis should be held accountable. But the global scale of the crisis points to a far more fundamental problem--the crisis-prone nature of capitalism itself.
With even the most pro-capitalist analysts and commentators panicked about the prospect of a repeat of the Great Depression, it's important for those on the left to revisit the work of capitalism's first great scientific critic and revolutionary opponent--Karl Marx.
TO UNDERSTAND the dynamics of today's crisis, it's helpful to look briefly at what Marx's identified as contradictions at the core of the capitalist system.
Marx stressed that a key distinguishing feature of capitalism is its reliance on wage labor. Unlike previous societies, in which most production was carried out by slaves, peasants or small crafts producers, capitalist production relies on workers who have nothing but their labor power to sell to the boss.
Of course, independent producers and small farmers still exist. But the system as a whole is dominated by big capitalists, who own the factories, offices and other "means of production," to use Marx's term. Where the output of pre-capitalist societies was primarily geared to creating "use values"--items that met an immediate human need--capitalists produce for sale on the market, or for "exchange value."
Under capitalism, competing employers command the labor power of workers, who are "free" to work--or starve.
What gives capitalism its dynamism is that workers' labor adds value to the commodities they produce, by transforming raw materials into something that can be sold on the market. The value of a given commodity, Marx argued, is determined by the amount of labor time necessary to produce it. And in this process, Marx said, "surplus value" is created.
What is surplus value? Capitalists can pay workers wages that are sufficient (in boom times, anyway) to cover the costs of food, housing, raising children, etc., and still have a surplus left over when commodities are sold. Essentially, workers are paid for only part of their workday. This is true whether the boss appears to the workers as a "good" or "bad" one.
These basic relationships give capitalism both its dynamism and its propensity to crisis, Marx argued.
In order to compete with one another, rival capitalists are compelled to maximize the productivity of labor--that is, to get more commodities produced from the same expenditure on labor power. They can try to do so by forcing workers to work harder and longer--but the physical limits of (if not resistance by) workers and the length of the day restrict how far this can go.
Real breakthroughs in productivity can only come through the use of labor-saving technology that allows workers to produce the same commodity in less time. Thus, Marx described capitalism as constantly revolutionizing the means of production. Capitalists who invest in technological innovations win out over rivals who are unwilling or unable to do so.
For capitalists, Marx wrote, the motto is, "Accumulate, accumulate! That is Moses and the prophets!...Therefore, save, save, i.e, reconvert the greatest possible portion of surplus value, or surplus product into capital! Accumulation for accumulation's sake, production for production's sake..."
This drive to technological change is the reason why industrial capitalism could start to transform the world in a few decades.
However, the rapid accumulation of capital created a boom-bust cycle. Investment would pour into industries that seemed to be the most profitable. As capitalist enterprises grew larger, they increasingly relied on credit to carry out the years-long investments needed to develop, say, a new steel mill. Since all these investments take place without any overall coordination, there's an inevitable disconnection between production and demand--and when the gap reaches a certain point, the boom turns into a bust.
In Volume III of Capital, Marx described the perverse nature of capitalist crisis this way:
The contradiction of the capitalist mode of production...lies precisely in its tendency towards an absolute development of the productive forces, which continually come into conflict with the specific conditions of production in which capital moves, and alone can move. There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.
This "crisis of overproduction" is the defining feature of a capitalist crisis, according to Marx. Factories are shuttered even as workers look for work. People go hungry while food sits unsold in warehouses or rots in the fields. Homes stand empty although millions lack an affordable place to live.
In 1880, Marx's collaborator Frederick Engels described capitalism's periodic crises in words that could have been written last week:
Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution.
The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again.
Little by little, the pace quickens. It becomes a trot. The industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit and speculation, which finally, after breakneck leaps, ends where it began--in the ditch of a crisis. And so over and over again.
Beyond this destructive boom-slump cycle, capitalism had an even more fundamental tendency toward crisis, Marx argued.
Because capitalists are under constant pressure to invest in ever-greater amounts of machinery, there is a long-term tendency for the rate of profit to fall. The reason: because labor is the source of the surplus value that capitalists keep as profit, a rising proportion of machinery to workers creates a downward pressure on the rate of profit over the long run.
That, however, didn't mean that Marx expected capitalism to collapse of its own accord as profit rates dried up. He identified several countervailing influences--and pointed out that capitalist crises actually clear the way for a revival of growth by bankrupting unproductive capitalists and devaluing capital in general.
BY THE early 20th century, capital had become concentrated in ever-larger business entities and centralized into fewer ones. These monopolized companies, the forerunners of modern corporations, were increasingly intertwined in their home nation-states.
Military and economic competition between rival countries gave rise to a new, imperialist stage of capitalism and the slaughter of the First World War. Rather than rival capitalists trying to put one another out of business and take over their markets, competing imperial states sought to destroy the economic capacity of their rivals.
The war didn't overcome the underlying economic problems of the world system, however. The boom of the 1920s gave way to capitalism's biggest slump ever--the Great Depression of the 1930s.
The Great Depression confirmed Marxist crisis theory in all its essentials. It was only overcome through another imperialist slaughter--the Second World War. So as the war drew to a close, the allied powers led by the U.S. created a new, American-dominated world economic order (excluding the Eastern bloc controlled by the USSR).
Unlike the prewar era, financial services and capital flows were strictly regulated. But capitalism nevertheless boomed as never before, and the depression was seen as an aberration, the result of poor political leadership. Capitalism, according to its apologists, had overcome its contradictions.
The reality was different. As the late British Marxist writer Mike Kidron explained, the Cold War had given rise to a permanent arms economy that gave the system a constant stimulus. But because these enormously expensive nuclear weapons were never used, arms spending acted as a kind of safety valve for the system: It drained capital away from investment in new machinery that would have increased the tendency of the rate of profit to fall.
By the mid-1970s, however, the picture had changed. Profit rates had fallen sharply across the advanced industrial countries as a revitalized Germany and Japan, the losers in the Second World War, were able to compete with the U.S. Efforts to stimulate the economy led to a combination of inflation and slow growth, known as "stagflation." Marx's theory of the tendency of the rate of profit to fall was validated once more.
The capitalist solution to this crisis was to go back to market fundamentals. Economists like Milton Friedman, for decades seen as a right-wing crank, were suddenly promoted as sages for preaching deregulation of business, privatization of government services and "flexible" labor policies.
Politicians like Ronald Reagan in the U.S. and Margaret Thatcher in Britain turned Friedman's ideas into policies by smashing unions, slashing government spending and turning finance capital loose. The Clinton administration shaved off some of the rough edges of these policies, but basically consolidated what is now known as "neoliberalism."
For U.S. capitalists, neoliberalism was a spectacular success. The deep recession in 1982 gave rise to a boom, and following the relatively mild (for capitalists) recession of 1991, U.S. GDP increased by 49 percent until the slump of 2001. Total non-agricultural employment grew by 22.5 percent in the same period. By the late 1990s, U.S. profit rates approached those of the late 1960s at the peak of the long boom.
Bill Clinton hailed this as the "miracle economy," and once again, capitalist ideologues proclaimed that capitalism had finally cured itself of the tendency to crisis.
The dot-com stock market bust of 2000 and the recession of 2001 threatened to undo that success. The number of corporate bankruptcies soared--with Enron and WorldCom among the highest-profile casualties. In response, Federal Reserve Chair Greenspan cut interest rates to effectively zero to stimulate the economy, repeating measures he had taken in the late 1990s when the East Asian financial crisis threatened to sweep the world.
For business, Greenspan's rock-bottom interest rates allowed them to clean up their balance sheets and begin investing again--but not in the U.S. Even as the economic expansion began in 2002, job growth remained miserable and wages flat--or worse. According to the Economic Policy Institute, real income for the median family fell by 1.1 percent between 2000 and 2006--and wages remained flat during the 2002-2007 expansion.
For the wealthy, however, the 2000s saw continued dramatic increases in income. Between 1989 and 2006, the wealthiest 10 percent got more than 90 percent of all income growth. The richest 1 percent saw their income increase 203.7 percent, while the wealthiest 0.1 percent saw an increase of 425 percent.
By contrast, if workers wanted to maintain, let alone improve, their standard of living, they had to take on debt. Personal debt increased by 159.1 percent since 1997, from about $5.5 trillion to $14.4 trillion. In that same period, the ratio of debt to disposable income increased from 93.4 percent to 139 percent.
By 2006, the average debt owed by every U.S. adult was about $52,000, compared to average yearly pay of less than $31,000 for non-supervisory production workers. Buying a house that would supposedly keep increasing in value seemed like a way out of this dilemma--and the likes of Angelo Mozilo and Robert Rubin engineered the financial system to take full advantage of working people.
WITH CONSUMER demand sustained by debt, the U.S. economy was able to maintain its role as the importer of last resort into the 2000s.
For China, the prospect of an endlessly expanding U.S. market was the basis for crash investment programs to build steel mills, airports, roads and factories of all sorts. China's industrial revolution, in turn, spurred demand for oil and other raw materials, particularly from Latin America. Japanese and German companies profited by selling machine tools and other goods to rapidly expanding Chinese capitalism. By early 2007, the world economy was growing at its fastest rate in 30 years.
Fueling this expansion was a vast extension of credit from both the $10 trillion traditional banking system and an unregulated shadow banking system of equal size.
But as the U.S. Federal Reserve Bank began to raise interest rates and the economy slowed, the dominoes of debt began to fall. What began in the U.S. sub-prime mortgage market became a global financial credit crunch, as capitalists were forced to reckon with the fact that assets of all types were overvalued.
Here, too, Marx's analysis of capitalism is validated. Credit, he argued, may postpone a capitalist crisis, but it cannot overcome the contradictions created by capitalism's drive toward production for its own sake. "The means--unconditional development of the productive forces of society--come continually into conflict with the limited purpose, the self-expansion of the existing capital," he wrote.
Thus, at some point, a crisis of "overproduction" is inevitable, as capitalists can no longer realize their profits through the sale of goods on the market. At that point, financial instruments of various sorts are depreciated, as are elements of fixed capital.
Next, Marx wrote, "[t]he chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction."
Such periodic crises have not always been catastrophic for the capitalist system. Today, however, a prolonged slump seems inescapable--both because the U.S. can no longer drive the world economy through debt-financed consumption, and because the world financial system is staggering under the weight of bad debt.
The risk of such a long and deep recession has forced policymakers in the U.S. and Europe to toss free-market orthodoxy aside to try to find a way out. But as Marx showed, capitalism will inevitably generate crises until it is replaced with a socialist alternative.