The Great Financial Crisis reviewed in Work, Employment, & Society

‘Greed is (not) good’: the causes and consequences of the financial crisis

Les Leopold, The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions and Prosperity – and What We Can Do About It, White River Jct, VT: Chelsea Green Publishing, 2009, $14.95 pbk (ISBN: 9781603582056), xvii + 220 pp.

… In The Great Financial Crisis, Foster and Magdoff reproduce a cogent collection of essays previously published in Monthly Review between 2006 and 2008. Five essays are prefaced by an introductory chapter which evaluates the historical causes of the financial crisis and followed by a concluding chapter considering its larger political-economic aspects. The book considers firstly, the causes of the crisis and secondly, its consequences.

An impressive and stimulating analysis of the historical origins and structural roots of the financial crisis, The Great Financial Crisis has much to commend it, providing an excellent reminder of the power of Marxist political economy in revealing the dynamics and contradictions of the present financial crisis, and indeed, of capitalist crises in general. Financialisation, the largest countervailing force to economic stagnation in recent times with the expansion of household debt and ever increasing speculation seen in the USA since the late 1960s, is said to have been largely responsible for preventing economies sliding into deep recession while simultaneously preventing them from overcoming the underlying stagnation tendency.

… Foster and Magdoff’s analysis privileges historical explanations for the present malaise and convincingly argues that the crisis is the latest in a long series of crises, symptomatic of the inherent structural weaknesses of capitalism. Their explanation of the cause of the present crisis begins with a discussion of insights derived from the work of Keynes along with other Keynesian and Marxist economists. Firstly, Keynes’ identification of the tendency of capitalist economies towards ‘underemployment equilibrium’ and the concomitant economic stagnation that accompanies it is considered. Keynes’ central paradox of capitalism is then considered: that for capitalist economies to prosper, surpluses must be reinvested in productive capacity despite investment being at best a risky decision as investment decisions that determine present levels of output are based on expectations of a profitable return a number of years in the future. Dominated by uncertainty, investment shortfalls are said to result from any number of factors, including the build-up of overcapacity in plant and equipment. Any reduction in investment levels would, according to Keynes, tend to generate a vicious circle, increasing unemployment, and decreased income and spending, negatively affecting the business climate and further slowing investment.

Foster and Magdoff then discuss Hansen’s work on the transitory historical forces that had propelled capitalist economies allowing them to achieve a high rate of growth. The tendency towards ‘secular stagnation’ is attributed in part to maturity in capitalist economies in which investment becomes increasingly geared towards replacement of plant and machinery with little net investment, the result being the vanishing of investment opportunities. Discussion also focuses on Baran and Sweezy’s restatement that stagnation was the normal state of monopoly capitalist economies due to their inability to absorb ever increasing surpluses through the normal channels of consumption and investment. Driven by the need to continuously expand themselves such economies become dependent upon the generation of larger and larger amounts of ‘waste’ in a number of forms such as military expenditure and speculative finance which act as external stimulants temporarily boosting production. Minsky’s financial instability hypothesis is then discussed, which argued that the

financial structure of the advanced capitalist economy exhibits an internal flaw driving it relentlessly from robustness to fragility, making the whole economy susceptible in the end to debt-deflations of the kind exhibited in the Great Depression. (Cited on p. 17)

The dependence of advanced capitalist economies on a constant flow of profits to support and validate their continued expansion is argued to be their Achilles’ heel. Over time the instability of the financial system increases with debt piled on debt in a credit bubble, waiting to burst when the flow of cash inevitably slows. The chronic dependence on the lender of last resort function of the central banks and Treasury departments, which charges them with supplying liquidity in a crisis, is held to be a defining feature of modern economies. Foster and Magdoff presciently highlight Minksy’s major concern that governments as lenders of last resort would not be able to keep up with the ever increasing financial markets unless some restraints were placed on them, something which was the antithesis of discourses governing speculative growth.

Finally, Foster and Magdoff draw upon Magdoff and Sweezy’s accounts of the changing role of the finance sector in US capitalism arguing that from the mid-1960s finance has moved on from being an aid to the capitalist accumulation process to become a driving force. Speculative finance has become a secondary growth engine but has resulted in an accelerated build-up of unprecedented levels of debt. According to Magdoff and Sweezy the symbiotic embrace between stagnation and financialisation was the essence of capitalism’s dilemma in its monopoly stage. In short, ‘the economy could not live without financialisation … and it could not in the end live with it’ (p. 19).

Through detailed analysis in Chapters One to Four Foster and Magdoff highlight two fundamental lessons in understanding the present economic crisis. Firstly, financialisation manifested in the growth of debt relative to GDP has been a long term trend that accelerated beginning in the 1980s. Secondly, the stagnation of goods production relative to GDP has worsened over time despite the enormous economic stimulus provided by the financial explosion….

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