The current stage of capitalism is characterized by the increased power of finance capital. How to understand the economics of this shift and its political implications is now central for both the left and the larger society. There can be little doubt that a signature development of our time is the growth of finance and monopoly power.1
In 1980 the nominal value of global financial assets almost equaled global GDP. In 2005 they were more than three times global GDP.2 The nominal value of foreign exchange trading increased from eleven times the value of global trade in 1980 to seventy-three times in 2009.3 Of course it is not certain what this increase means, since such nominal values can fluctuate widely, as we saw in the Great Financial Crisis. They cannot be compared directly and without all sorts of qualifications to the value added in the real economy. But they do give an impressionistic sense of the enormous magnitude by which finance grew and came to dominate the economy. Between 1980 and 2007, derivative contracts of all kinds expanded from $1 trillion globally to $600 trillion.4 Hedge funds and private equity groups, special investment vehicles, and mega-bank holding companies changed the face of Western capitalism. They also brought on the collapse from which we still suffer. Ordinary people may not be acquainted with the numbers (and even those best informed are not sure of their significance), but people generally understand in different and often deep ways what has been happening: namely, an ongoing process of financialization that has come to dwarf production.
What is particularly important is that despite the huge bubble created by this metastasizing growth of finance, the economy did not expand as rapidly as it had in the postwar years, before the goods producing industries lost ground in terms of employment to other sectors of the economy, and when government spending was used actively to promote growth. While the nature of much of the growth that occurred then is certainly open to criticism from all sorts of standpoints, at the time there was widespread understanding in policy circles that government spending was necessary to absorb the surplus which capitalism generated.
It nonetheless became harder and harder to generate growth by the combination of government spending and financial inflation, and an overaccumulation of capital that grew more unhealthy over time culminated with the Great Recession in 2007–2008. A temporary stimulus created by the profusion of “fictitious capital,” in the form of debt claims that did not have a counterpart in the real value of assets, was not sustainable. Nor was the “growth” as substantial as might have been expected from such an enormous financial explosion. In considering why this was the case we may start by noting a partial acceptance by important mainstream economists of the Marxist expectation of secular stagnation which was developed by Paul Baran and Paul Sweezy in their 1966 book, Monopoly Capital.
In a November 8, 2013 speech at the International Monetary Fund Larry Summers suggested that the United States might be stuck in what he correctly called “secular stagnation,” described by Bloomberg Businessweek as “a slump that is not the product of the business cycle but a more-or-less permanent condition.”5 Summers’s conclusion was deeply pessimistic. “If he is right, the economy is incapable of producing full employment without financial bubbles or massive stimulus, both of which tend to end badly.”6 The speech got a lot of attention. Summers after all had been a U.S. Treasury Secretary and is noted as one of the smartest, if not the most politic, economists around. He has accepted many millions from major financial firms he has advised and is widely understood as a Wall Street-oriented policy maker. Therefore, important people take his analysis seriously. It is also a powerful indictment not simply of financial capital, but of capitalism itself that the logic of its development now takes the form it does.
There have always been financial crises; as Marx long ago explained, they are part of capitalism. The question now being raised is whether the expansion of the parasitic financial control currently being experienced is historically unprecedented. It is prompted by the inability of the system to reinvest in the production of the goods and services people need. In short, the problem is the system, and more and more people are seeing this. I shall try and explain how and why it is true that, although we could potentially create the jobs and economic security, the ecological sustainability, and the participatory democracy we desire, existing class forces prevent this from happening.
Let us look first at some of the problems that we face due to the financialization of the economy. As the power of transnational corporations and international finance has grown (with financialization came globalization)—and new possibilities have been offered by computers, the Internet, and robotics—there has been a loss of middle-class jobs in the United States, and a race to the bottom in jobs globally. The political power of the very rich in the United States has grown, manifested in the increasing extent to which their income escapes taxation—as does that of corporate capital, which parks significant quantities of money in offshore tax havens and moves the profits they received in such abundance to low tax jurisdictions. Between increased consumer lending and marketing new financial products to investors, the financial industry grew dramatically. In 1950 it was equal to 2.8 percent of GDP; in 1980, 4.9 percent; and 7.9 percent in 2007.7 Money management fees from mutual funds, hedge funds, and private equity accounted for over a third (36 percent) of the industry’s increased share of GDP.8 The other major source of growth was consumer lending, especially mortgage lending. According to the International Monetary Fund, in the advanced economies during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percent, to 138 percent.9 When such credit booms go bust, the ensuing downturn is long-lasting and painful.
Finance contributes to GDP through income created in the FIRE (Finance, Insurance, and Real Estate) sector and through the “wealth effect,” i.e., the increase in consumption that is the result of the gains in asset value—almost all of this is luxury consumption. But it generates little in the way of use values and can be seen as appropriating value produced by working people elsewhere in the economy—thus Matt Taibbi’s colorful description of Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”10
Harvard finance professor Jeremy Stein suggests “banks’ private incentives lead them to overdo it.”11 One indication of the “overdoing” by today’s newer aristocracy of finance is that financial profits as a percent of total domestic profits for 1998–2007 averaged 33 percent, with a few years (2001, 2002, and 2003) over 40 percent.12 Needless to say, after the collapse the losses have been ours and not the bankers.
The top executives at Lehman Brothers and Bear Stearns, two investment banks that failed spectacularly, did quite well. Over the 2000–2007 period, the top five executives at Bear received cash bonuses in excess of $300 million and at Lehman in excess of $150 million. These numbers exclude what they received in sale of company shares. Unloading their banks’ stock netted the ten executives $2 billion.13
The impact of financial incentives was devastating to many U.S. companies and their employees; as a combination of extracting maximum shareholder value and the extraction going to top executives removed resources from other shareholders and undermined corporate America’s future prospects. And while Dodd-Frank and other legislation was supposed to make the system safe, the too big to fail banks are much bigger than they were before the crisis, with the six largest banks possessing assets equal to more than 60 percent of U.S. GDP.14
All this has created a different economic reality in the United States. The CIA’s ranking of countries by income inequality finds the United States to have a higher degree of inequality than Egypt or Tunisia; as noted earlier the 1 percent have more wealth in the United States than the bottom 90 percent.15 The Congressional Budget Office reported in 2011 that the top 1 percent of earners had more than doubled their share of the nation’s income over the previous three decades.16 A lot of these people are in finance.
Politically the power of finance capital comes from its having become a major source of financing for politicians; for instance, Hillary Clinton has received generous Wall Street contributions, including large speaking fees from the likes of Goldman Sachs. That there is so much buzz around a possible challenge from Elizabeth Warren, and that Obama was not able to get liberal senators to go along with Larry Summers as head of the Fed, are indications that there is wide recognition that mainstream Democrats are in Wall Street’s pocket. Summers has received millions from venture capital and asset management firms. He has consulted for Citibank and Nasdaq. Because of the power of Wall Street there is not the needed financial regulation. And there is little to no penalty for financial fraud. This is hardly surprising. As former Delaware Senator Edward E. Kaufman commented to the New York Times in response to the Justice Department’s failure to pursue financial wrongdoers in connection with the bursting of the housing bubble: the report of the Financial Fraud Enforcement Task force “fits a pattern that is scary for a democracy, that there really are two levels of justice in this country, one for the people with power and money and one for everyone else.”17
The right always blames workers, unions, and the poor (most of whom, of course, are also workers) for being greedy. One of our tasks is to get the basic facts across to people.
The focus must be on the 1 percent whose share of after-tax income has doubled in the last thirty years and nearly tripled between 1980 and 2006. The top 1 percent took 95 percent of the gains between 2009 and 2012.18 Real median income earnings for full-time workers between twenty-five and sixty-four have stagnated since their peak in the late 1970s. This may explain why the most recent poll shows 75 percent of Americans rating the state of the economy as “negative” or “poor.”19
From 2000 to 2007, Emmanuel Saez’s research tells us, the richest .001 percent doubled the share of total income they received to 6 percent of the total of all Americans, and the top 1 percent captured half of all of the overall growth between 1993 and 2007.20 Between 1993 and 2012 the top 1 percent captures just over two-thirds of income growth.21 This was the group the Republicans protected with the threat of closing down the government. But it is also the fraction of capital that supports the Clintons and Obama.
The tax system has become a joke for leading corporations, who can legally avoid taxation. An estimated 30 percent of multinational corporate profits passing through tax havens costs the U.S. taxpayer $255 billion annually; this includes not only lost individual income taxes but also vastly more in lost corporate taxation (based on crude calculations from the Government Accounting Office in 2008 of the one hundred largest U.S. companies’ subsidiaries abroad and especially in tax havens).22 Citigroup alone had over 400 tax-haven subsidiaries, ninety-one in Luxembourg, and another ninety in the Cayman Islands.23 Apple, one of the most profitable and highly valued corporations, moves its profits to low-tax countries. Apple is an innovator in the tax area. It pioneered the accounting trick known as the “Double Irish With a Dutch Sandwich.” Now used widely, this strategy routes profits through Irish subsidiaries and the Netherlands, and then to the Caribbean.24 iTunes, it turns out, has a letter box and a few employees in Luxembourg where downloads made in Africa, the Middle East, or other places are registered as having originated for tax purposes. Its overseas stores are part of a system that routes sales through Cork, Ireland. The company has reorganized its corporate chart so it needs to reveal less information about its business practices. Through such techniques Apple manages to pay less than 10 percent in corporate income taxes in this country. As far as state taxes go, although its actual headquarters are in Cupertino, California, it claims a small office in Reno, Nevada for tax purposes, thereby denying the state of California and twenty other states millions of dollars in taxes. (While California’s corporate income tax rate is 8.84 percent, Nevada’s is zero.) The company explains that all of this is perfectly legal. It probably is.25
Greater inequality makes restoring economic growth hard because working people have less money to spend and so demand does not go up. The rich get so much of the surplus that this feeds new speculative activity and threatens a new collapse. Much of the surplus appropriated by the 1 percent cannot be realized from the sale of expanded output and so stays within the sphere of financial speculation (including loans—student, credit card, mortgage lending—and the bundling of receipts receivable from these loans as collateralized debt obligations that are pyramided and so eventually collapse).
It is important to understand that the various asset bubbles of recent years arose in large part from the large amount of surplus funds that could not find profitable investment in the “real economy,” where goods and non-financial services are sold to businesses, government, and households. From 1980 when working-class incomes began a three decade plus period of stagnation and all the gains from productivity growth went to capital, to the present, there has been an enormous increase in inequality. Ordinary Americans, feeling pinched by their inability to maintain living standards, were compelled to borrow in an attempt to maintain them; they became an enormous source of profit to banks and other financial institutions. Mortgage debt, credit card debt, and student loans grew in absolute terms and as a proportion of national income. The campaign to delegitimize taxation forced governments to borrow in lieu raising revenue, and government debt increased as well (with the wars in the Iraq and Afghanistan adding significantly to this debt).
Much of the assistance given to the major Wall Street banks was extended to them by the New York Federal Reserve at the time it was headed by soon-to-be Secretary of the Treasury Timothy Geithner. Serving on the board of the New York Fed were people such as JPMorgan CEO Jamie Dimon, who was asked in senate hearings by Senator Bernie Sanders, “How do you sit on a board, which approves $390 billion of low-interest loans to yourself?” Dimon was hardly the only self-interested banker on the board. As another member of the committee, Senator Barbara Boxer, stated, “There is a clear conflict of interest…not a perceived conflict of interest, but a real conflict of interest when bank presidents and employees of banks sit on the very boards that regulate them and sometimes bail them out.” Soon-to-be Senator Elizabeth Warren also called on Dimon to step down from the board of directors of the New York Fed.
The extent to which central banks prop up financial institutions has grown enormously. Between 2007 and the end of 2012, the central banks flooded the world with trillions of dollars in liquidity to support asset markets and keep banks solvent. This process continues with quantitative easing—essentially printing money—to avoid collapse, and holding interest rates to historic lows (a fraction of a percent above zero). Yet, despite these efforts, the global economy stagnates.
The goal of course is to lower borrowing costs and stimulate financial markets. This has been achieved, but the impacts desired—encouraging more spending and real investment outside of finance—have been disappointing. This is hardly a surprise. Central bankers are the first to say that expanding the money supply is not a substitute for better fiscal policy. In the absence of governments creating demand to replace the lack of private spending and addressing structural problems in the economy, central banks can have only limited positive impact. Households already burdened by large debt positions are not inclined to borrow more—indeed the fact that consumer debt is creeping up again, much of that as student debt, is more a sign of desperation on the part of households than anything else.
There are all sorts of reasons to worry about the impact of extended low interest rates which feed new asset bubbles. One might also be concerned about the quality of the tens of billions of mortgage-backed securities that the Fed has been buying each month.26 The Bank of Japan is buying corporate debt and stock, an intervention in the market that, while it holds the economy up, also distorts allocation. Such emergency measures, if carried on too long, may come back to haunt central bankers and governments when they eventually try to unwind these positions.
Almost daily headlines tell of one bank or another being hit with a large suit by the Justice Department for some “brazen” fraud including “robo-signing” and preying on the unsophisticated. The names of those agreeing to settle with the government are a Who’s Who of U.S. finance. From defective mortgage processes that hoodwinked homeowners, to dishonest debt collecting and foreclosures, to credit card lawsuits where the bank or collection agency cannot prove that the person owes the debt (the situation in 90 percent of the cases, according to a judge who presides over as many as a hundred such cases a day), the headlines never cease.27 A 2012 audit by San Francisco county officials of hundreds of recent foreclosures determined that almost all involved either legal violations or suspicious documentation.28 Violations ranged from the failure to notify borrowers when their loans fell into default (as required by law) to auctioning properties where banks and other assignees had no proof of ownership. Nationally the foreclosure system was found to be riddled with false documents, forged signatures, and all manner of other abuses.
The big banks lobby to influence mortgage rules so they can continue practices that make them money. Federal and state authorities allowed the banks to settle for their extensive illegal activities with a mere $26 billion worth of relief, a small part of the damage they had done in wrongful denials of loan motivations, wrongful foreclosures, and other documented abuses.29 Certainly the settlement did not end bank abuses. People who paid off debts years before are harassed by collection agencies. People who have been cheated on their mortgages are cheated again in a new round of abuse coming with the loans that are supposed to help them stay in their homes—this by brokers selling new mortgages especially targeting the elderly. Foreign banks are charged with money laundering for assisting U.S. citizens to avoid taxes owed. Private investors who bought toxic collateralized debt obligations, believed to have been sold by banks knowing they would soon collapse, continue to pursue compensation in the courts.
Perhaps the most lasting impact of the Great Recession, holding back recovery, was the housing market collapse. Millions lost their homes while millions of other homeowners went underwater, owing more on their mortgages than their homes were worth. Many borrowed up to 90 percent of the selling price and then, having negative equity and facing foreclosure, were unable to sell because of the millions of other homes that stood empty, holding prices down.
The Obama administration has had to come up with plan after plan even where federal subsidies to banks are involved, with each and every one a failure from a homeowner’s standpoint, largely because bank participation is voluntary. With housing values so drastically reduced, and vacant properties bringing whole neighborhoods down, local governments face declining property tax income which ravages local finances and adds to budget deficits. They thus have little choice but to make deeper cuts in public services and lay off teachers and police. We are all, the metaphorical 99%, paying to restore the banks’ profitability while for the majority the economy is stuck in an extended secular stagnation with widespread, and from a socialist perspective unnecessary, suffering of working people.
This is at some level understood, especially by young people, half of whom when polled by the Pew Research Center for People & the Press favor socialism and reject capitalism.30 They have lived through constantly deteriorating economic conditions coupled with increased corruption and cronyism; they expect, if nothing is done fundamentally to change things, that they will have to continue their struggle to live in an economy in which they incur insupportable student debt that, because of failing job prospects, promises a life of indentured servitude to the banks.
The shrillness of the hard right and the obtuseness of the mainstream media not withstanding, the system stands exposed to a substantial extent. More people of all ages see the Federal Reserve and Treasury Department efforts to support the banks at all cost as preventing changes they can believe in. The general attitude of solicitousness to the banks shown by the administration has been termed the Geithner Doctrine, to call attention to the clear policy choice to protect the banks from any threat to their post-bailout recovery. While most people may not understand all the details of corporate abuse and financial manipulations, the prominent movement slogans both capture the essence of Wall Street criminality and propose solutions. Indeed, those with ears to hear and eyes to see recognize the truth in now familiar placards: “America Is Not Broke,” “Tax the Rich,” “Money Is Not Speech,” “Assure Everybody a Good Job,” “Young, Educated, and Unemployed,” “Corporations Are Not People,” “Stop Foreclosures,” “Speculation Never Creates Anything,” “Wall Street: Where Crime Really Pays,” “Economic Inequality Is the Enemy of Prosperity,” “Stop the Wars,” and “Trickle Down Is Baloney.” The majority support for Occupy Wall Street and its project strongly suggests that ordinary people understand the demands of the movement.
These placards announce the unjust state of things. They are not really asking a corrupt political system to meet demands. They are not really asking the 1% for anything. They are saying “we need a society and we will create a society in which there is not a 1% and a 99% and these injustices will not exist.” This is not to say that participants do not want Obama to change, that they do not have ideas for meaningful reforms. But it does say that the system itself is on trial as it has not been since the 1930s. Undergirding even the mildest reforms and the most idealistic hopes is an undercurrent of rejection of the system under which we live. There is discovery of the truth, in the words of Dorothy Day, a fore- mother of the movement, that “Our Problems Stem from Our Acceptance of this Filthy Rotten System.” People increasingly do not accept it. The issue is not only to make this rejection manifest but to develop sustainable institutional forms of resistance and transformation.
- ↩ The classic analysis of this problem on the left, describing the role of monopoly, stagnation, and financial expansion was provided by Harry Magdoff and Paul Sweezy. See, for example, their article “The Logic of Stagnation,” Monthly Review 38, no. 5 (October 1986): 1–19.
- ↩ Charles R. Morris, Two Trillion Dollar Meltdown (Philadelphia: Perseus, 2008), 140.
- ↩ Charles Leadbetter, “The Right Kind of Innovation,” Financial World, February 2011, https://fw.ifslearning.ac.uk.
- ↩ See William K. Tabb, The Restructuring of Capitalism in Our Time (New York: Columbia University Press, 2012), 100.
- ↩“Larry Summers at IMF Economic Forum, Nov. 8,” November 8, 2013, http://youtube.com; “Larry Summers has a Wintry Outlook on the Economy,” Bloomberg Business Week, November 18, 2013, http://businessweek.com.
- ↩ Ibid.
- ↩ Robin Greenwood and David Scharfstein, “The Growth of Modern Finance,” Journal of Economic Perspectives, 27, no.2 (2013): 3–28, http://pubs.aeaweb.org.
- ↩ Ibid.
- ↩ International Monetary Fund, World Economic Outlook, August 2012, chapter 3, http://imf.org.
- ↩ Matt Taibbi, “The Great American Bubble Machine,” Rolling Stone, July 9, 2009, http://rollingstone.com.
- ↩ Jeremy C. Stein, “Central Banking and Financial Stability,” October 2011, 31, http://bancaditalia.it.
- ↩ Economic Report of the President, 2014, Table B-91, http://whitehouse.gov.
- ↩ Tabb, The Restructuring of Capitalism in Our Time.
- ↩ Simon Johnson, “Testimony Submitted to the Subcommittee on Financial Institutions and Consumer Protection, Senate Committee on Banking, Housing, and Urban Affairs, Hearing on ‘Examining the GAO Study on Government Support for Bank Holding Companies,’” January 8, 2014, http://piie.com.
- ↩ Central Intelligence Agency, World Fact Book, accessed March 2013, https://cia.gov.
- ↩ Congressional Budget Office, “Trends in the Distribution of Income,” October 25, 2011, http://cbo.gov.
- ↩“A Loan Fraud War That’s Short on Combat,” New York Times, March 15, 2014, http://nytimes.com.
- ↩ Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the United States,” September 3, 2013, http://elsa.berkeley.edu.
- ↩ “October 2013 Post-ABC Poll- Obama, Republicans and Shutdown Fallout,” Washington Post, October 25, 2013, http://washingtonpost.com.
- ↩ Saez, “Striking it Richer.”
- ↩ Ibid.
- ↩ “Revealed: Global Super-Rich Has At Least $21 Trillion Hidden in Secret Tax Havens,” Tax Justice Network, July 22, 2012, http://taxjustice.net; United States Government Accountability Office, “International Taxation: Large US Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions,” December 2008, http://media.washingtonpost.com/wp-srv; Kenneth Thomas, “Offshore Accounting on the Rise and Costing Taxpayers,” Fiscal Times, July 29, 2012.
- ↩ U.S. GAO, “International Taxation.”
- ↩ Charles Duhigg and David Kocieniewski, “How Apple Sidesteps Billions in Taxes,” New York Times, April 28, 2012, http://nytimes.com.
- ↩ Ibid; “Apple’s Response on Its Tax Practices,” New York Times, April 28, 2012, http://nytimes.com.
- ↩ Schuyler Velasco, “Bernanke, Fed Say No Taper. Will Housing Bounce?,” Christian Science Monitor, September 18, 2013, http://csmonitor.com.
- ↩ Jessica Silver-Greenberg, “Problems Riddle Moves to Collect Credit Card Debt,” New York Times, August 12, 2012, http://dealbook.nytimes.com.
- ↩ Gretchen Morgenson, “Audit Uncovers Extensive Flaws In Foreclosures,” New York Times, February 15, 2012, http://nytimes.com.
- ↩ Mark Memmott, “Settlement Reached with Banks on Relief for Some Homeowners,” NPR, the Two-Way, February 9, 2012, http://npr.org/blogs.
- ↩ “Little Change in Public’s Response to ‘Capitalism,’ ‘Socialism’,” PewResearch Center for the People & the Press, December 28, 2011, http://people-press.org.