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May 2008 (Volume 60, Number 1)

Notes from the Editors

The subprime mortgage crisis that emerged late last summer in the United States led to a massive seizure in the world financial system that has had capital staggering ever since. This has now carried over to the “real economy” of jobs and income. As reported in the Wall Street Journal on April 4, “The National Bureau of Economic Research probably won’t say this for months. But why wait? The U.S. economy fell into recession sometime in January” (“Job Market Hints Recession Has Started”). World economic growth as a whole is expected to decline sharply this year.

The natural question at this point is: How severe will the economic crisis be?

The short answer is no one really knows. Some, believing that we may be headed toward a massive economic meltdown, underscore the unprecedented perils associated with a financial system that has developed new complex investment vehicles beyond anyone’s comprehension. The traditional relations of lending dominated by banks have now been taken over by what Bill Gross, chief investment officer of Pimco, a leading bond management firm, calls the “shadow banking system (meaning hedge funds, structured investment vehicles, all sorts of financial conduits)” (“The Big Picture Isn’t Pretty,” Kipsinger Personal Finance, April 2008).

This new world of exotic speculative investments is portrayed as full of “nitroglycerin,” rife with “weapons of mass destruction,” and carrying lethal “viruses”—to refer to only a few of the alarming metaphors now commonly employed by the financial press (“What Created This Monster?,” New York Times, March 23, 2008). With tens of trillions of nominal dollars in credit default swaps alone circulating—not to mention other credit derivatives and financial instruments generally—this system of shadow finance has become massive, opaque, and unpredictable.

Financial institutions are having growing difficulty valuing their assets or comprehending the chain reaction of defaults they may be facing. It would be an understatement to say that owners of capital are worried under these circumstances. With a recession now developing and the stability of the dollar increasingly impaired, a world financial meltdown and economic collapse of epoch-making proportions is at least imaginable.

Others, however, see the situation as approximating something more like a normal business cycle downturn—once the state has intervened to stave off financial collapse. They point to the extraordinary interventions of the Federal Reserve Board, most dramatically in managing the bailout of Bear Stearns and its absorption by JPMorgan Chase in March. The Fed in conjunction with the central banks in other advanced capitalist countries has been rapidly expanding its role as lender of last resort, lending out hundreds of billions of dollars in government bonds while taking as collateral mortgage based securities for which no market exists.

Everyone knows that the government will eventually take the loss of billions of dollars on this collateral—most clearly on the collateralized debt issued as in the case of the Bear Stearns bailout as “non-recourse” (that is, the borrower need not repay the “loan” beyond what the collateral realizes). The message to the financial markets is clear: the vast impending losses, which would otherwise fall upon the major financial institutions, will be socialized. If such a message did not give “confidence” to the key financial market players the situation would indeed be truly grave.

As we write, a semblance of confidence has for the first time been restored. Pointing to the quick recovery from the previous financial crisis (brought on by the bursting of the New Economy stock market bubble in 2000), the more optimistic analysts contend that the financial system is already stabilizing, and that this downturn will likewise be short. Nevertheless, even leading spokespersons for this position, such as Federal Reserve Chairman Ben Bernanke, admit that there are considerable “risks…to the downside” in the present uncertain economic climate which could result in severe “damage” to the economy and “the unwinding of positions” throughout the financial system (Bernanke, “Testimony Before the Joint Economic Committee, U.S. Congress,” April 2, 2008).

Yet, if the direction that the present economic crisis will take is still unknown, things are much clearer when we turn to the long-term, structural illness of the system, of which the current downturn is in many ways symptomatic. According to an argument that we have presented for decades in these pages (most recently in “The Financialization of Capital and the Crisis” in the April 2008 issue of MR), the financialization of the capital accumulation process that has been taking place since the 1970s is rooted in the underlying tendency to stagnation of the advanced capitalist economies. In essence the system is so productive and the results of this enormous and growing productivity are so unequally distributed (real wages of most workers in the United States have stagnated for thirty years while profits have soared) that there is a continual amassing of investment-seeking surplus in corporate coffers and in the hands of wealthy individuals. Lacking sufficient outlets for this vast surplus in the “real economy,” capital has been pouring it into the financial superstructure, where new innovative financial instruments have been developed to absorb this excess money capital. This has served to lift the economy since the 1970s. Yet, the consequence has been the creation over the last few decades (and even more rapidly in recent years) of a vast shadow financial economy above and beyond the real economy. The bursting of the housing bubble, the subprime mortgage crisis, and the general financial crisis that followed can be viewed as signaling a crisis in this process of financialization.

The best the masters of the U.S. system can hope for in the years to come is a deeper, more prolonged phase of economic stagnation, i.e. slow growth, weak employment, and growing excess productive capacity. As the United States moves—and it shall—to thrust the burden of its financial crisis onto the rest of the world, the resulting strains are bound to be global and unavoidable within the logic of really existing capitalist globalization.

For those desperately looking for a solution to this problem within the system we have to say, frankly, that we can think of none. The most that can be done is to alter radically the nature of the system itself: a drastic redistribution of income and wealth in favor of those less well-off and a massive program of social investment on behalf of those who most need it. But capitalism is only capable of traveling down this road to a limited extent and only under extreme duress—and then once the pressure is off it reverts to its old ways. Sooner or later (provided nuclear or environmental catastrophe doesn’t stop the clock) the world will be forced to seek a better, more humane way.

—April 6, 2008.

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