When Jean Baudrillard announced that the year 2000 would not take place, one had to suspect evil. It is no exaggeration to say that the financial crisis of 2008 was the only event of world historical significance in the new millennium (as is well known, according to Baudrillard, the Iraq war of 2003 did not take place either). And we are writing the year 2018, more precisely 15 September 2018, the tenth anniversary of the collapse of the investment bank Lehman Brothers. In September 2008, the business of Lehman Brothers depended on being able to refinance 200 billion dollars a day, i.e. a third of its total balance sheet. These are deposits borrowed for 24 hours from another bank, which then decides whether to lend the money for another 24 hours. In the first week of September, Lehman Brothers still received 200 billion, but in the second week of September nothing more.
Adam Tooze in his new book “Crashed” calls this the “stroke that naturally spread through the system because everyone suddenly backs out.” That’s right. If the financial system is the central nervous system of the capital relationship, then the mega-crisis of 2008 can certainly be described as the stroke of the system. Tooze also agrees that the post-crisis balance of power has changed on a global scale, i.e. China’s rise has accelerated, Europe has been plunged into a protracted crisis, and US dominance is slowly but surely crumbling but can still be maintained.
The dominance of the US financial industry and the dollar is based on the closely interwoven global network of private banks, hedge funds and financial markets, with Wall Street and the City of London at its core. The structural dynamism of this network was also responsible for the financial crisis of 2008, as it was not so much the unfolding crisis in the real estate market that caused Lehman Brothers, for example, to stumble, but rather the anticipatory actions of the banks in response to their imbalances that caused the interbank market to collapse, as well as the downgrading of securitised mortgages and their derivatives. The latter triggered a wave of demands for additional collateral in the form of new collateral required for the downgraded mortgages, and billions of dollars of collateral caused even corporate giants like AIG to falter. Government intervention following the 2008 financial crisis reaffirmed the dominant role of the dollar and the US Federal Reserve. In the US, the major US banks were forced to accept government financial aid in September 2008, with the government guaranteeing their debts. And it was the central banks, above all the Fed, that provided sufficient liquidity to prevent a collapse of the financial system. The US Fed distributed trillions of dollars on both sides of the Atlantic and later bought up bonds on a large scale. The program is called Quantitative Easing.
So it is not to be underestimated how the American Fed replaced the frozen interbank credit market after 2008 by taking over the function of providing liquidity not only for the American banks but also, together with the ECB, for the European banking system. In 2008, approximately 30 percent of the riskiest US mortgage-backed securities (MBS) were held by foreign investors, due to the fact that the banks operated in a single integrated global market. When the short-term inter-bank lending business, the wholesale refinancing market, collapsed, European banks were in an even worse position than their American counterparts because their assets were denominated in dollars and European central banks did not have enough dollar holdings to compensate their banks’ defaults in the short term. The Fed had to use all available means, in particular swap lines1 (foreign exchange swaps), to rescue the global dollar-based financial system and keep it afloat. In doing so, the Fed had simultaneously strengthened the function of the dollar as the most important reserve currency on the world market and established itself once again as a dominant hub of the international financial network. The dollar was further strengthened by the surge in demand for US government bonds. Although the Fed and the state had acted as lenders of last resort after the crisis, with the state financing bank capital increases and the Fed providing liquidity in epic dimensions (trillions of dollars) for the global banking system, this did not lead to comprehensive regulation of the financial system.
But let us come back to some remarks of principle. The reference to the generally negative characteristics of the financial system (excessive speculation) or to its recurrent errors (the issuance of too many mortgage loans, incorrect risk management, asymmetric information, etc.) sheds little light on the real causes of the global crisis processes of capital in recent decades. Mainstream economists have identified four main causes of the crisis: high debt, global imbalances, financialisation and the issuing of promises of payment for which people were not prepared. They also repeatedly point out the errors in the regulation of the financial markets, for example, that the ratings of companies by the rating agencies, which were of course related to their own interests, were not correctly carried out from 2000 onwards; they mention the dangerous use of CDSs by the banks, which would have led to a reduction in their capital reserves; they mention the lack of transparency in the OCT markets and the fact that investment banks were able to use their own models to assess market risks and the necessary reserves for risky investments from 2004 onwards, and so on. Other factors were then the rapid rise in house prices, the issuance and securitisation of prime loans, the mispricing of collateral, the opaque relationship between SPVs and money markets (especially in the US) – but all these are not the real reasons for the so-called subprime crisis of 2007 onwards, but at best manifestations of the crisis-ridden development of the global capital economy, which today we believe is represented by the neo-liberal model, i.e. by the special organisation of capitalist social formations since the 1980s. Incidentally, many of these situations continue to exist even after the 2008 financial crisis, such as the concentrated power of the three major rating agencies, the timid attempts by governments to regulate the financial industry by creating new “loopholes” and exploiting empty spaces, the invention of new forms of derivatives and complementary risk models, whose success, however, remains dependent on the fragile and crisis-ridden accumulation of capital.
The deepening of the financial system in the sense that today, at least in developed economies, potentially every existing sum of money can be capitalized and profitably invested as a promise to pay is an important moment in the international expansion of capital, i.e. the global mobilization of certain monetary potentials for the capitalist mode of production in order to further increase or at least maintain the profitability of capital. For some time now, additional players have been entering the world market, e.g. through the privatisation of state insurance systems, and this has led to a further mobilisation of sums of money that do not necessarily have to be invested directly in production, but are rather part of the capitalisation of future income flows and promises of payment. This requires an ever larger non-banking sector within the financial system itself. At the same time, pressure on so-called risk-free profits is increasing, which in turn leads to the issuance of new financial collateral, integrating previously undiscovered markets into the world of credit, thereby increasing the risks that are now constantly fluctuating and migrating across the globe.
An important aspect of the neoliberal model is therefore its international character, in that the world market tends to be transformed into a single type of profit. The international character of capital, combined with the expansion of new markets and the generalisation of risk management techniques used to insure against risks of all kinds, has led to a deeper and broader distribution of risks since the 2000s, but it is precisely risk management itself that has been functioning since the first rumours of the lack of collateral for mortgage loans in the United States began to emerge. Today, the much-vaunted “wisdom of the markets” presupposes that every single security is valued by the financial system, but this is precisely what has led to the loss of trust between the major players.
The accumulation of capital also falls into crisis when functioning capital is over-accumulated also due to credit financing, whereby the resulting production of weaker growing demand can no longer be profitably realized and shows itself as overproduction. An over-accumulation crisis can begin with the bursting of a credit bubble. Thereby
If the production of added value and/or its retransformation into additional constant and variable capital is reduced, investment and the employment of wage labourers slows down. In a crisis, over-accumulated capital and commodity capital are destroyed and devalued until capacity utilization does not decrease further and investment processes stabilize again.
Sometimes financial crises open a period of over-accumulation of capital, but sometimes they also mark the end of an over-accumulation crisis, and sometimes financial crises manifest themselves relatively independently of real economic cycles, i.e. they then have no significant effect on the movement of industrial profit rates and on employment. In any case, the crisis-like movements of financial capital cannot be completely synchronized with the cycles of industrial profit rates, as traditional Marxist theory often enough tries to do, but the development of financial crises and their bubbles always has a certain autonomy. Carlota Perez has made an attempt to explain the connections: In the expansion phases, innovative companies have problems to finance themselves because the companies using the already established technologies absorb the available capital, while when these technologies have reached their highest efficiency and the profitable investment opportunities are lacking, there is sufficient monetary capital available. In the downturn phase, financial capital can intervene by financing new innovative projects or the modernisation of existing sectors, while unprofitable industries are liquidated. However, the establishment of new technological-economic paradigms and productive forces remains an unstable process, as the realization of new projects is contingent, regardless of the establishment of new institutional frameworks that support the new developments. Technological innovation remains inscribed in the capital movement.
Financial crises manifest themselves in a drastic reduction of liquidity due to a lack of buyers for securities, the only two means to end the crisis being the refinancing potential of central banks and the issue of new government bonds that serve as collateral for new loans, thus initiating a further increase in lending. One must assume a non-fractal chain of migrating bubbles, with a new bubble never developing where the old one has previously burst.
It is also often assumed that due to the lack of demand or the inability of capital to find new investment opportunities, the surplus surplus capital simply migrates to the financial sector, where bubbles form over time or where unproductive policies of purely monetary accumulation based on indebtedness take place. But, in contrast, Samir Amin insists: “Financialisation is therefore not only the only way to absorb excess capital, but also the only stimulus for the weakening growth in the US, Europe and Japan since the 1970s. Consequently, pushing back financialisation would only further weaken the growth of the “real economy”. As far as the operations and strategies pursued by the financial industry are concerned, it should therefore be noted that they have their strongest effects precisely not in the sphere of circulation and consumption, but on investment. Take, for example, the dot.com boom and the corresponding hype on the international stock markets. Not only did financial investments multiply, but real investments in the computer and telecommunications industry also increased. When the stock market crash occurred, investments in these industries in particular also declined again, leading to a recession.2 The role of derivatives in the ensuing financial crisis consisted, among other things, in massively fuelling the speculative boom from a certain phase onwards, with deals with them extending far beyond the USA and overcoming all local barriers. Nevertheless, derivatives were not the sole cause of the crisis, but they gave it a special intensity and a specific financial form.
Economic growth requires, on the one hand, sufficient monetary capital and, on the other, higher employment and/or rising labour productivity, which is always linked to a growing and qualitatively improved capital stock (gross fixed assets). The value added produced is the sum of the transferred value of the means of production (constant capital), the value of the labour force employed (variable capital) and the value added produced. The slowdown in investment growth and the decline in the
The investment rate and the accumulation rate (growth rate of capital) are to be understood as important criteria for stagnating capital accumulation and dwindling investment opportunities. From the point of view of individual capital, it is irrelevant whether the utilization of capital arises from an investment in functioning real capital or in financial assets. In order to assess the tendencies of accumulation, it is necessary to examine all forms of capital. Since for the enterprise the profit as a whole counts and not the coverage of the demand for goods, it is ultimately irrelevant for the individual capital whether it achieves this profit with real investments or with financial assets. In Germany, the macroeconomic savings ratio has fallen from 20 to about 10 percent since 1970. This decline is largely due to the increasingly indebted state (negative savings) and private households, while the savings ratio of the entire corporate sector, including non-financial corporations, has increased. The change in the investment behaviour of enterprises in the productive sphere can be explained by the fact that returns on financial assets can be much higher in the relatively short term compared with those in the productive sphere. This means that the expectations of shareholders and institutional investors, but also of management, for quick profits and bonuses are better satisfied than in the case of investments with their long and therefore uncertain realisation periods. This is largely due to the growing global capital requirements of the emerging markets and the liberalisation of the international financial markets on the one hand, and an overly cyclical over-accumulation of productive capital in the highly developed countries on the other. another reason for falling investment ratios is the economisation of investments. The investment ratio is the quotient of investments and gross domestic product. Its reduction can be explained by the denominator as well as the numerator. If we look at gross fixed capital formation in the numerator, no secular slowdown can be seen. Since the beginning of the 1950s they have increased linearly – with the exception of the crises. In other words, the decline in the ratio is due to the fact that the annual absolute growth in gross domestic product has been greater than that in investment. In important areas of the national economy the ratio of production output to physical capital input has improved, i.e. the investment requirement per unit of output growth has fallen slightly in some areas as a result of capital-saving technical progress and increasing returns to scale. This development is reflected in a capital coefficient (ratio of gross fixed assets to gross value added) that has stagnated or even fallen in some cases compared with the past, especially in manufacturing, the information and communication sector and agriculture. In macroeconomic terms, the growth of the capital coefficient was thus slowed down, which has a dampening effect on the investment ratio Finally, companies increased their investments abroad more than at home, so that the German stock of foreign assets will increase from 8 to 43 percent of gross domestic product between 1990 and 2012
The generally low growth of the economy and the low profitability of its various sectors were also important reasons for the boom in derivatives trading and for the rise of financial innovation, whereas, conversely, derivatives, together with other aspects of the credit system, stimulated capital accumulation by reducing the transaction costs of companies, widening risks and releasing funds and payment promises for the generation of profits. However, when large amounts of credit can no longer be repaid, with myriads of other financial transactions behind them, this can become the trigger for financial collapse. This also leads to a self-reinforcing lack of confidence in the financial markets, to the point of a collective fear that the expected profits will remain illusory, and in this respect the financial crises are always in relation to the “real economy”.
Contrary to the theses of under-consumption theory, it is important to point out that the causality arrow runs from the reproduction of capital to demand and not vice versa. It is therefore necessary to insist on the validity of Marx’s thesis that “the size of accumulation is the independent variable, the size of wages the dependent one, not vice versa” (MEW 23, 648). The dynamics of capital accumulation ultimately determines the effective demand and the respective level of employment, although Marx’s critique of Say’s law does not show that the dynamics of capital accumulation are not the same as the dynamics of demand.
and this precisely because of the cyclical development of capital accumulation. Crises are of course always symptoms of this tendency towards imbalance, but the main features of economic crisis are, on the one hand, processes of over-accumulation of industrial capital and the associated tendency for the general rate of profit, and, on the other hand, the over-accumulation of fictitious and speculative capital, which then circulates aimlessly around the financialized globe.
1With the swap lines, the Fed offered other major central banks a temporary reciprocal currency arrangement. The Fed agreed to keep an offer of dollars available for trading with another central bank at a certain exchange rate. In return, the Fed received an interest rate premium, so that the swap lines were only used when there was no more liquidity in the markets. The dollar amounts that other central banks received from the Fed were passed on by them to domestic illiquid banks (which also had to bear the costs of the swap line). On 3 October 2008, the Fed granted the ECB, Bank of England, Bank of Japan and the Swiss National Bank access to unlimited dollar liquidity. Within three years, the amount of loans granted under swap facilities grew to a staggering $10 trillion.
2 However, the influence of the financial sector on demand cannot, of course, be ignored. Since the 1990s, the US has been the world’s largest capital importer, with capital import flows co-financing the growing US trade and current account deficits. For a long time, this inflow of capital also served to finance the consumption of US citizens, whose wage incomes stagnated and who, as compensation, financed a growing share of their current consumption with rising debt. As a result, economic growth in the USA was higher than in Europe or Japan. Since consumption accounts for 70 percent of the US economy and the US economy is still the world’s largest economy with about 30 percent of the world’s national product, the debt-driven demand also had a positive effect on the world economy. While China focused its export industry of consumer goods strongly on the USA, Japan and Germany mainly supplied capital goods all over the world, but also remained indirectly dependent on the steadily increasing demand for consumer goods in the USA. In a nutshell, speculation on the financial markets supported US debt and thus countered the trend towards economic stagnation at a global level. When the financial crisis broke out in the summer of 2007, international capital ceased to finance the consumption of US households. Due to the decline in demand, the US economy slid into recession at the end of 2007. It took about nine months for the weakening demand to be reflected in orders from the German export industry.
In his book Cyber-Proletariat, Nick Dyer-Witheford deals with the problem that the reduction or stagnation of labour costs, which was made possible by automation and outsourcing, among other things, raises the question of who should actually buy the products flowing out of the global supply chains, a problem that has been increasingly answered in the USA since the 1980s by granting consumer credit. It is also possible to increase demand by increasing the number of workers, as has been the case in China, when real wages are falling or stagnating, or by increasing luxury consumption, as has been the case in the USA, and by building up new social strata with considerable purchasing power, as well as by increasing the number of actors who are responsible in advance for the realisation of the goods (brokers, trading capital, real estate, etc.). However, this does not solve the problem of realisation nor that of over-accumulation. The latter can be delayed by excessive prices and fees, higher taxes and a radical austerity policy, but this does not eliminate overproduction and the lack of profitable investment opportunities and thus the over-accumulation of capital. In the context of the over-accumulation of capital, it is precisely the rising costs of technological investments in complex and expensive cybernetic systems and infrastructures that have partly compensated for the tendencies that have counteracted the fall in the profit rate, which are based on the technological innovations of cybernetics (microchips). And the real estate sector shows what can happen when the construction sector is lent large sums of money by banks, while at the same time mortgages are granted to consumers to cover the costs of construction companies.