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By Walden Bello
Georges Soros says that what we are going through is the crisis of the financial system, the crisis of the "gigantic circulatory system" of a "global capitalist system ... that is bursting at the seams". To continue with the idea of the arch-speculator, what we are witnessing is the intensification of one of the central crises or contradictions of global capitalism, which is the crisis of overproduction, also known as over-accumulation or overcapacity. It is about the tendency of capitalism to build a huge productive capacity that ends up exceeding the population's consumption capacity due to the inequalities that limit popular purchasing power, which ends up eroding profit rates.
Georges Soros says that what we are going through is the crisis of the financial system, the crisis of the "gigantic circulatory system" of a "global capitalist system ... that is bursting at the seams". It is about the tendency of capitalism to build a huge productive capacity that ends up exceeding the population's consumption capacity due to the inequalities that limit popular purchasing power, which ends up eroding profit rates.
Many on Wall Street are still digesting the epochal events of recent weeks:
* Between 1 and 3 trillion dollars of financial assets evaporated.
* Wall Street, nationalized, with the Federal Reserve and the Treasury Department making all the important strategic decisions in the financial sector, and all that, with a government that, after the rescue of AIG, goes on to run the largest insurance company in the world .
* The biggest bailout since the Great Depression, with $ 700 billion desperately pooled to save the global financial system.
The usual explanations are no longer enough. Extraordinary events require extraordinary explanations. But before…
Has the worst happened?
No, if something has become clear with the contradictory movements of these weeks in which, while the bankruptcy of Lehman Brothers was allowed, AIG was nationalized and the takeover of Merril Lynch by Bank of America was forged, it is that there is a strategy to face the crisis; at best, tactical responses, like firefighters stepping on the hose, overwhelmed by the magnitude of the fire.
The rescue of 700 billion dollars of mortgage-backed obligations held by the banks is not a strategy, but basically a desperate effort to restore confidence in the system, to prevent the erosion of faith in the banks and in other financial institutions and to avoid a massive influx of bank withdrawals like the one that triggered the Great Depression of 1929.
What caused the collapse of the nerve center of global capitalism? Was it greed?
Old and revered greed played its part. That's what Klaus Schwab, the organizer of the World Economic Forum, the global elite's jamboree held annually in the Swiss Alps, was referring to when he told his clientele in Davos this year: "We have to pay for the sins of the past."
Was Wall Street a sheriff's case?
Of course. Financial speculators curled the loop until they confused themselves with creating more and more complex financial contracts, such as derivatives, trying to make money from all kinds of risks (including exotic futures instruments, such as credit default swaps or contracts derivatives protection, allowing investors to bet, for example, that borrowers from the banking corporation itself would not be able to pay back their debt! Such is the unregulated multibillion dollar trade that ended up bringing AIG down.
On December 17, 2005, when the International Financing Review (IFR) announced its annual awards of the year - one of the most prestigious award programs in the industry - it said this:
"Lehman Brothers not only maintained its global presence in the market, but also led the penetration into the space of preference ... developing new products and designing transactions capable of meeting the needs of borrowers ... Lehman Brothers is the most innovative in the space of preference precisely for doing things that cannot be seen anywhere else. "
Was it lack of regulation?
Yes. Everyone now recognizes that the ability of Wall Street to innovate and excogitate more and more sophisticated financial instruments has gone far beyond the regulatory capacity of the State, and not because the State was not able to regulate, but because the attitude The prevailing neoliberal, laissez-faire, prevented the State from designing effective regulatory mechanisms.
But is there nothing else? Is there nothing systemic?
Well, Georges Soros, who saw it coming, says that what we are going through is the crisis of the financial system, the crisis of the "gigantic circulatory system" of a "global capitalist system ... that is bursting at the seams".
To continue with the idea of the arch-speculator, what we are witnessing is the intensification of one of the central crises or contradictions of global capitalism, which is the crisis of overproduction, also known as over-accumulation or overcapacity.
It is about the tendency of capitalism to build a huge productive capacity that ends up exceeding the population's consumption capacity due to the inequalities that limit popular purchasing power, which ends up eroding profit rates.
But what does the overproduction crisis have to do with recent events?
Very much. But to understand the connection, we have to go back to the so-called Golden Age of contemporary capitalism, to the period between 1945 and 1975.
It was a period of rapid growth in both the core and underdeveloped economies, growth fueled in part by the massive reconstruction of Europe and East Asia after the devastation of World War II, and in part by the new institutionalized socio-economic configuration under the new Keynesian state. A key aspect of the latter was severe state controls on market activity, aggressive use of fiscal and monetary policies to minimize inflation and recession, and a relatively high wage regime to stimulate and maintain demand.
So what happened?
Well, this period of high growth ended in the mid-1970s, when the core economies were immersed in stagflation, that is, in the coexistence of low growth with high inflation, which neoclassical economic theory assumed impossible.
However, stagflation was but a symptom of a deeper cause, namely the reconstruction of Germany and Japan, as well as the rapid growth of industrializing economies such as Brazil, Taiwan and South Korea, added a enormous productive capacity and increased global competition, while social inequality, within each country, and between countries, globally limited the increase in purchasing power and demand, thus eroding the profit rate. The drastic rise in the price of oil in the 1970s only made matters worse.
How did capitalism try to solve the crisis of overproduction?
Capital tried three ways out of the quagmire of overproduction: neoliberal restructuring, globalization and financialization.
What did the neoliberal restructuring consist of?
Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and structural adjustment in the South. The objective was the reinvigoration of capital accumulation, which was achieved: 1) by removing state restrictions on growth, use and flows of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich, in accordance with the theory that this would motivate the rich to invest and fuel economic growth.
The problem with this formula was that, by redistributing income in favor of the rich, it strangled the income of the poor and the middle classes, thus restricting demand, without necessarily inducing the rich to invest more in production. .
In fact, neoliberal restructuring, which became widespread in the North and South throughout the 1980s and 1990s, had poor records in terms of growth: average global growth was 1.1% in the 1990s. and 1.4 in the 1980s, while the average in the 1960s and 1970s, when interventionist policies were dominant, was 3.5% and 2.54%, respectively. Neoliberal restructuring could not end stagflation.
To what extent was globalization a response to the crisis?
The second global escape route tried by capital to cope with stagflation was "extensive accumulation" or globalization, that is, the rapid integration of semi-capitalist, non-capitalist and precapitalist zones into the global market economy. Rosa Luxemburg, the celebrated German economist and revolutionary, became aware of this mechanism long ago, seeing it as a necessary mechanism to restore the rate of profit in metropolitan economies. How? Gaining access to cheap work; gaining new markets, even if limited; gaining new sources of cheap agricultural products and raw materials; and creating new areas for investment in infrastructure. Integration occurs through trade liberalization, removing obstacles to capital mobility, and abolishing borders for foreign investment.
China, needless to say, is the most prominent case of a non-capitalist area integrated into the global capitalist economy in the last 25 years.
To offset their declining profits, a significant number of business corporations in the top 500 of Fortune magazine's ranking have moved a significant part of their operations to China, in order to take advantage of the so-called "Chinese price" (the advantages of costs derived from seemingly inexhaustible cheap Chinese labor). In the middle of the first decade of the 21st century, between 40 and 50 percent of the profits of US corporations came from their operations and sales abroad, and notably, in China.
Why was globalization unable to overcome the crisis?
The problem with this way out of stagnation is that it exacerbates the problem of overproduction, because it adds productive capacity. The China of the last 25 years has come to add a tremendous volume of manufacturing capacity, which has had the effect of depressing prices and profits. Not by chance, the profits of US corporations stopped growing around 1997- According to a statistical index, the profit rates of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90, at 2.29 in 1990-99 and at 1.32 in 2000-2002.
Given the limited gains obtained in order to contain the depressive impact of overproduction, already through neoliberal restructuring, and with globalization, the third way out was vital to maintain and increase profitability. The third way is financialization.
In the ideal world of neoclassical economic theory, the financial system is the mechanism, by means of which savers, or those who are in possession of surplus funds, get together with entrepreneurs who need their funds to invest in production. In the real world of late capitalism, with investment in industry and agriculture yielding meager returns from overproduction, large amounts of surplus funds circulate and are invested and reinvested in the financial sector. In other words, the financial system turns on itself.
The result is that the gap between an overactive financial economy and a stagnant real economy widens. As one financial executive observes: "There has been a growing disconnect between the real economy and the financial economy in recent years. The real economy has grown, but nothing comparable to the financial economy ... until it exploded."
What this observer does not tell us is that the disconnect between the real economy and the financial economy is not accidental: that the financial economy soared precisely to cope with the stagnation resulting from the overproduction of the real economy.
¿ What were the problems of financialization as a way out?
The problem with investing in financial sector operations is that it is equivalent to squeezing value from value already created. It can create profits, okay, but it doesn't create new value - only industry, agriculture, commerce and services create new value. Since profits are not based on the creation of new or added value, investment operations are extremely volatile, and the prices of stocks, bonds and other forms of investment can radically diverge from their real value: for example , stocks in internet start-ups, which held up for a time, supported mainly by spiraling financial valuations, then plummeted. Profits depend, then, on taking advantage of the advantages offered by price movements that diverge upwards in the value of the goods, to sell in a timely manner before reality forces the "correction" downwards to adjust to real values. The radical rise in the prices of an asset, far beyond the real values, is what is called the formation of a bubble.
Why is financialization so volatile?
With profitability depending on speculative shocks, it is not surprising that the financial sector goes from bubble to bubble, or from one speculative mania to another.
Sustained by a speculative mania, financially-induced capitalism has not stopped breaking records in financial crises since capital markets were deregulated and liberalized in the 1980s.
Before the current Wall Street debacle, the most explosive were the 1994-95 Mexican financial crisis, the 1997-1998 Asian financial crisis, the 1996 Russian financial crisis, the 2001 Wall Street stock market crash and the Argentine financial collapse of 2002.
Former Treasury Secretary Bill Clinton, a Wall Street man - Robert Rubin - predicted five years ago that "future financial crises will almost certainly be inevitable, and could be even worse."
How do bubbles form, grow, and burst?
Let us take, as an example, the Asian financial crisis of 1997-98.
* First: balance of payments and financial liberalization imposed by the IMF and the US Department of the Treasury.
* Then, entry of foreign funds in search of rapid and high profitability, which means that they entered the real estate market and the stock market.
* Overinvestment, which led to the collapse of prices in the Stock Market and the Real Estate Market, which, in turn, led to panic and the consequent withdrawal of funds: in 1997, in a few weeks 100 billion of dollars left the East Asian economies.
* Rescue of foreign speculators by the IMF.
* Collapse of the real economy: the recession sweeps across East Asia in 1998.
* Despite large-scale destabilization, all attempts made to impose national or global regulations on the financial system were rejected on purely ideological grounds.
Let's go back to the present bubble. How was it formed?
The current Wall Street crash is rooted in the tech bubble of the late 1990s, when the share price of start-ups in the Internet world soared, then plummeted, all resulting in the loss of assets worth $ 7 trillion dollars and in the recession of 2001-2002.
The lax monetary policies of the Federal Reserve under Alan Greenspan stimulated the technology bubble, and when it collapsed giving way to recession, Greenspan, trying to prevent a lasting recession, cut interest rates in June 2003 to an unprecedented level in 45 years (at 1%), keeping it at that level for more than a year. With that, what he did was stimulate the formation of another bubble: the real estate bubble.
As early as 2002, economists like Dean Baker of the Center for Economic Policy Research warned of the formation of a housing bubble. However, as late as 2005, the then president of the Economic Council of advisers to the Presidency of the nation and current president of the Federal Reserve, Bern Bernanke, attributed the increase in US housing prices to "economic fundamentals. robust ", and not speculative activity. Who is to be surprised that the outbreak of the subprime crisis in the summer of 2007 caught this little man completely off guard?
And how did it grow?
Let us hear it from one of the markets' own key players, George Soros: "Mortgages encouraged mortgages to refinance their mortgages by taking advantage of the appreciation their homes experienced in the meantime. They lowered their lending criteria and introduced new products, such as Variable-rate mortgages, "interest-only" mortgages, and "promotional offers" with interest rates to make people laugh - all of which encouraged home speculation.Home prices began to rise at a double-digit rate.
That served to feed back speculation, and rising house prices made homeowners feel rich; the result was the consumer boom that has sustained the economy in recent years. "
Looking at things more closely, it is seen that the mortgage crisis did not result from a supply exceeding the actual demand. The "demand" was largely manufactured by the speculative mania of promoters and financiers bent on making huge profits from their access to the foreign money that flooded the US in the last decade. Vast volumes of mortgages were aggressively offered and sold to millions of people who normally could not have afforded by offering ridiculously low interest rates, subsequently adjustable to get more money out of homeowners.
But how could subprime mortgages degenerate into such a problem?
Because the assets then became "secured": those who had generated the mortgages, proceeded to amalgamate them with other assets in complex derivative products called "collateralized debt obligations" (CDO, for its acronym in English), which was relatively easy given that they worked with various types of intermediaries who, knowing the risk, disposed of those securities as quickly as possible, passing them on to other banks and institutional investors. These institutions, in turn, disposed of the product, passing it on to other banks and foreign financial institutions.
When interest rates on subprime loans, variable mortgages and other real estate loans rose, the game was over. There are about 6 million subprime mortgages, 40% of which will default in the next two years, according to Soros estimates.
To which we must add another 5 million defaults in the next 7 years, derived from variable mortgage rates and other "flexible loans". But securities, worth trillions of dollars, have already infiltrated the global financial system like a virus. The gigantic circulatory system of global capitalism has been fatally infected.
But how could the Wall Street titans collapse like a house of cards?
What happened to Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac and Bear Stearns was simply that the losses represented by those toxic stocks far exceeded their reserves, leading to their downfall. And they will probably fall more when their books of account, that in which those titles now appear in the Credit, are corrected to reflect the present value of those assets.
And many others will follow, as other speculative operations become exposed, such as those focused on credit cards and the different varieties of risk insurance. AIG fell due to its huge exposure in the unregulated area of credit default swaps, financial derivatives that allowed investors to bet money on the possibility that companies could not repay loans.
Such bets on credit defaults now represent a $ 45 trillion market - a market, as I have said, lacking any regulation. The cyclopean size of assets that could be damaged in the event of AIG collapse was what prompted Washington to change its mind and step in to rescue it, after dropping Lehman Brothers.
What will happen now?
It can be said bluntly that there will be more bankruptcies and more nationalizations and public interventions, with foreign banks and institutions playing an auxiliary role to the US government. That the collapse of Wall Street will go further and prolong the North American recession. And that the recession in the US will be communicated to Asia and the rest of the world, that it will also suffer a recession, if not worse. The reason for the latter is that China's main foreign market is the United States and that China, in turn, imports raw materials and intermediate goods - which it uses for its exports to the United States - from Japan, Korea and the Southeast. Asian. Globalization has made "decoupling" impossible. The US, China and East Asia are now like three prisoners tied to the same chain.
And in short?
The Wall Street crash is not just due to greed and the lack of state regulation of a hyperactive sector. The collapse of Wall Street is rooted in the overproduction crisis that has plagued global capitalism since the mid-1970s.
The financialisation of investment has been one of the escape routes from stagnation, the other two being neoliberal restructuring and globalization. Neoliberal restructuring and globalization having been of little relief, financialization seemed attractive as a mechanism for restoring profitability. But what has now been shown is that financialization is a dangerous path that leads to the formation of speculative bubbles, capable of offering a short-lived prosperity to a few, but ending in business collapse and the recession of the real economy.
The key questions are these: How deep and long will this recession be? Will the US economy need to generate another speculative bubble to emerge from this recession? And if that is the case, where will the next bubble form? Some say the next one will emerge in the military-industrial complex or the "disaster capitalism" that Naomi Klein writes about. But that's another matter entirely.
Walden Bello, professor of political and social science at the University of the Philippines (Manila), is a member of the Transnational Institute in Amsterdam and president of the Freedom from Debt Coalition, as well as a senior analyst at Focus on the Global South.
Translation for www.sinpermiso.info: Ricardo Timón and Minima Estrella