Anatomy of a crisis

The global financial and economic crisis which began in 2007 has unquestionably been the most severe to have afflicted the world economy since that of 1929–33. The latter marked the start of the Great Depression of the 1930s – a disaster which was only finally ended by the stimulus of massive destruction and armaments production induced by World War II. The huge scale of wealth and livelihood destruction caused by the present disaster – which is ongoing at the time of writing (summer 2009) – is reflected in the fact that the market capitalisation of the world's major stock exchanges fell by 47 per cent in value (a loss of $29.4 trillion – equal to about half of global GDP) in the twelve months to December 2008. To put this in perspective, the proportionate scale of loss not only dwarfed that in any previous calendar year on record (at least since World War II) but compares with a net decline of only 35 per cent over the whole of the previous market collapse (from end 1999 to end 2002).

One of the most striking phenomena of the unfolding crisis has been the uniformly superficial nature of the analysis of its causes presented by mainstream observers, whether government officials, academics or business representatives. Thus it is commonly stated that the crisis was caused by a combination of imprudent investment by bankers and others (often incentivised by reward structures appealing to extreme greed) and unduly lax official regulation and supervision of markets. Yet the obvious question begged by such explanations – of how or why such a dysfunctional climate came to be created – is never addressed in any serious fashion. This omission is all the more remarkable when it is well known, for example, that

• the US Glass-Steagall Act – enacted in 1933 in order to outlaw many of the conflicts of interest and excesses in the financial markets that had led to the Wall Street crash of 1929 – was repealed in 1999 by the Clinton administration with bipartisan support in Congress, thereby facilitating a reprise of the more or less criminal practices of seventy years earlier and thus contributing greatly to the present financial market implosion;

• the Commodity Futures Modernization Act of 2000 – also enacted by President Clinton with strong Republican support – legalised forms of speculation (in commodities and financial derivatives such as credit default swaps – see below) that were previously classified as illegal gambling.

The inescapable conclusion, therefore, is that the crisis was the product of a conscious process of facilitating ever greater risk of massive systemic failure. At the same time, given the competitive, profit-maximising climate in which financial institutions are operating, and the creation of incentive and reward structures encouraging the pursuit of short-term gain at all costs – individual agents effectively had no choice but to exploit every loophole to push risk-taking to the limit of what was allowed – and often beyond it.

Moreover, the power of the vested interests behind this compulsion has been revealed by the lack of will on the part of regulators such as the Securities Exchange Commission in the USA and the Bank of England and Financial Services Authority in Britain to enforce those rules that remained in force – such as the laws against fraud. Given the obvious culpability of the ruling establishment revealed by this line of enquiry it is perhaps only too unremarkable that mainstream analysts do not wish to pursue it – all the more so as it serves to highlight the fundamental unacceptability of a system dependent on sustaining impossibly high levels of economic growth.

If this anarchic situation was deliberately contrived, one might suppose that those now ostensibly seeking ways to order affairs better in future would try to discover why such a high-risk policy has been consciously pursued. To this question there can be only one plausible answer (which obviously cannot be spoken in mainstream circles): the compulsion to find ever more outlets for the rising volume of investible funds generated by the inexorable expansion of accumulated profits as the global economy has continued to grow over the years (albeit at a progressively slower rate from the 1970s). This in turn points to a recognition (if only unconscious) on the part of the ruling establishment that the historic source of capitalist instability – the business cycle of boom and bust, linked to the phenomenon of the falling rate of profit, first identified by Karl Marx – was reasserting itself.

Consistent with their general reluctance to apportion blame, there has been little attempt in establishment circles to expose the serial dishonesty of such key officials as Alan Greenspan, chairman of the US Federal Reserve Board, 1987–2006. The latter, having famously warned of the 'irrational exuberance' of stock-market investors as prices on Wall Street soared in late 1996, nevertheless sought to justify them in 1999 at levels which by then had doubled again, on the manifestly spurious grounds that rapidly rising productivity in the USA meant that they were indefinitely sustainable - even though such a consideration was at best irrelevant, bearing in mind that weak demand in a slowing world economy was a decisively negative factor of far greater significance. Linked to this argument, the chairman also gave his blessing to the view that the so-called New Economy – based on the wonders of electronics, cyber-technology and enhanced telecommunications – could somehow provide the basis for sustained rapid growth. When shortly afterwards the related 'dotcom' bubble burst with disastrous consequences for the markets, Greenspan and his colleagues at the Fed proceeded to cut interest rates to 1 per cent in a determined and successful attempt to generate a speculative revival in asset prices. When this resulted in a manifestly unsustainable real-estate bubble, whose collapse in 2007 (after Greenspan had left office) was to be the catalyst of the present crisis, he quite falsely claimed throughout that it was impossible to identify the existence of such bubbles until after they had burst. So far from denouncing this systematic falsehood and betrayal of the public interest, politicians of both Republican and Democratic parties for years uniformly lauded Greenspan as a 'national treasure' and indispensable guarantor of economic prosperity.

The roots of disaster

In truth this tendency of the global establishment to engage in escapist fantasy may be considered understandable in view of the political realities that had become established after World War II. For it was a political article of faith for long after the war that Western governments – at least in the industrialised countries – could and should manage their economies so as to maintain more or less full employment most of the time, given the consensus that high unemployment was an unacceptable social scourge which had helped create the conditions leading to war. This objective was to be attained by a combination of (a) manipulating the level of economic activity through fiscal and monetary policy so as to sustain high rates of GDP growth (in line with Keynesian principles) and (b) selective state intervention to support different sectors through subsidies of one form or another. As a result any downturns could, it was believed, be kept mild and short-lived enough to avoid any serious social hardship, especially as the countervailing presence of the welfare state (also seen as indispensable by all political parties) would be able to mitigate any transient social damage. Small wonder that the apparent success of this 'mixed economy' model of economic management in delivering high rates of growth and rising prosperity for nearly everyone in the industrialised world over the twenty-five years after the war convinced many that the capitalist system's susceptibility to the business cycle had at last been permanently cured.

Against this background it was naturally hard for many, including the political establishment, to come to terms with the sudden onset of recession in 1974. (Even more disconcertingly, this downturn was accompanied by the highest rates of inflation experienced since World War I – something which economists had always been taught to believe could not happen while the economy was contracting.) For the reality revealed by this crisis was that the mixed-economy model was unable after all to deliver perpetual growth, as its champions had insisted, and indeed could not prevent the return of the business cycle. (With hindsight it may plausibly be concluded that the prolonged post-war boom had in any case owed far more to the stimulus of post-war reconstruction and pent-up consumer demand – which had been so constrained by recession and war for a decade and a half up to 1945 – than to the impact of 'demand management' policies.)

In face of this shock to the post-war consensus, all mainstream political parties and interest groups were agreed that the priority must be to restore and maintain the high rates of growth on which post-war prosperity had been built. Yet a strong difference of opinion emerged between those who, clinging to Keynesian orthodoxy, maintained that all that was required was further intervention in the market to control prices and incomes (thus limiting inflation) and those who claimed that what was needed instead was to remove government controls on markets and place reliance on monetary policy alone (in practice influenced solely through adjustment in interest rates) to maintain price stability. This so-called monetarist approach, which its advocates maintained would promote prosperity by 'unleashing the forces of enterprise', was soon to prevail and has remained dominant ever since, being identified successively with the political agenda of the administrations of Prime Minister Thatcher in Britain and President Reagan in the USA, which came to power in 1979 and 1981 respectively – but has since become more commonly referred to as neoliberalism.

While this change of emphasis was presented by many of its supporters as a 'revolution', to a large extent its radicalism was more apparent then real. For in one crucial respect even the most vocal enthusiasts for 'rolling back the frontiers of the state' accepted, indeed insisted, that no fundamental change in the mixed-economy model was to be contemplated. This was the continued judicious deployment of public-sector resources – particularly through tax breaks and other more direct forms of subsidy – to encourage private-sector interests and prop up their profits. Indeed a central tenet of the Reagan administration's policy was the belief that cutting taxes of the wealthy and the corporate sector would so arouse their enterprising 'animal spirits' as to generate a major expansion of investment and output, thereby offsetting the initial loss of government revenue resulting from the tax cuts. In truth, as a number of commentators pointed out at the time, this amounted to a form of Keynesian fiscal stimulus such as the Reaganite neoliberals claimed had been discredited. Meanwhile there was also a massive increase in those areas of public spending of benefit to the private sector – notably the armaments industry, which was disproportionately well represented in the Reagan cabinet. As against this, however, social welfare benefits and entitlements were successively curtailed, as also by the Thatcher regime in Britain, even if their total budgetary cost was not contained as the number of claimants grew in the wake of rising unemployment in the 1980s.

But while the socially regressive nature of these neoliberal strategies was perhaps the feature that excited greatest hostility from their opponents in the 1980s, their most serious failing was one that has gone largely unnoticed both then and subsequently: their inability to achieve any sustained revival of growth – not to mention the steep rise in public deficits and indebtedness stemming from the tax cuts. In fact, it should have been clear already by the time of the stock-market 'crash' of October 1987 – and certainly by its inflationary aftermath in the bursting of the banking and real-estate bubbles of 1989–90 – that the neoliberal model offered no better antidote to the recurrence of the business cycle than the Keynesian mixed-economy model. Thus annual GDP growth of the industrialised countries of around 3.5 per cent on average in the 1970s (accounting for around 80 per cent of global output) – already viewed as inadequate in comparison to the much higher rates achieved in the 1960s – actually declined further thereafter, to around 2.8 per cent in the 1980s and 2.5 per cent in the 1990s.

Thus, taking the post-World War II period as a whole, it may be concluded that the central failure of policy has been the ultimate inability to escape from the business cycle or neutralise its impact. This has not been for want of trying. For in tandem with official policies of 'demand management' the business community has been devoted, as never before, to stimulating and expanding consumer demand in what may be seen as the classic era of marketing and advertising (see Chapter 5). Likewise the attempt to sustain consumption growth has also been reinforced by the progressive relaxation of laws restricting such morally questionable activities as pornography and gambling (though strangely not the use of narcotics – see Chapter 4), thereby extending the scope of consumer markets. In the same spirit, the whole realm of sport has become fully commercialised since World War II, to the point where the Olympic Games – for long a purely amateur competition in line with its founding precepts – has become as professionalised, fiercely competitive and dominated by commercial interests as any major sporting event, complete with the ubiquitous taint of performance-enhancing substances. That this effort has nonetheless ended in failure may be ascribed not only to the inevitable saturation of markets – familiar from earlier business cycles – but also to a steadily growing resistance to 'consumerism' among sections of the public in the industrialised world (see Chapter 3).

This failure, it may be argued, was compounded by another crucial negative influence in the long-term evolution of capitalism that seems to have become more pronounced by the 1980s. This was the continuing long-term trend towards a decline in the growth of fixed capital investment (as a proportion of GDP in industrialised countries) which had set in since the end of the 1960s. There seems little doubt that this trend was largely a function of the falling capital intensity of production as a result of changing technology – and also of a shift in the pattern of consumer demand away from manufactures in favour of less capital-intensive services, which is an observable function of the rise in real personal incomes over time. At all events the resulting glut of capital looking for outlets for reinvestment – such as is always being generated as the 'surplus value' of the profits system – posed immense strain on global capitalism. Indeed, as capital became more of a super-abundant rather than a scarce factor of production there was increasingly a perverse incentive to utilise more of it rather than less – especially in situations of quasi-monopoly where the incentive to cost-effectiveness was blunted (see Chapter 4).

A related phenomenon of great significance in the evolution of economic strategies in the neoliberal era was the declining demand for labour – relative both to its supply and to the level of output. This was clearly the result of both the slowing overall growth of output and the same technological change that was tending to depress the demand for capital. Yet just as the authorities could not bring themselves explicitly to recognise the inescapable economic trends leading to the devaluation of capital, neither could they publicly acknowledge that the market for labour was similarly affected. This was because to do so would have meant taking steps to modify income distribution structures so as to assure greater social equality – whether through enhanced transfer payments by means of taxation and social protection schemes or through effective rationing of employment opportunities via reductions in working hours. More fundamentally, it would have entailed giving up the crucial ability of capitalist enterprises to exploit labour by driving down wages so as to enhance profit levels. Hence governments have found it necessary to continue pretending that unemployment is not a serious problem – mainly through statistical sleight of hand (changing definitions and targets) – and by the same token that full employment is perfectly attainable. Yet the reality is reflected in indicators that are harder to distort, notably the level of average wages, which in the USA (for example) fell by almost 20 per cent in real terms between 1974 and 1994.