Busted: Stories of the Financial Crisis
Among the many acronyms of the great bailout, certainly the most significant were TARP and TALF: the Troubled Asset Relief Program and the Term Asset-Backed Securities Loan Facility (together they're the Public-Private Investment Program for Legacy Assets). Different in many regards, they share a core purpose: to assist in the purchase of "toxic assets" that are otherwise unsellable, so as to pump liquidity back into markets.
Ponder this for a moment. The market, functioning freely as Hayek would have hoped, has assigned a value to these assets: zero. There they should rest. But instead the government steps in to pay people, in effect, to buy things they think are worth nothing. By people I still mean corporations.
We could complain that this is another handout to the financial sector, and that is inarguable. But this is to miss its true significance: the price signal is dead. Capitalism's virtue has survived its greatest modern rival by scarcely a generation. At a minimum, the triumphalism of the post-'89 era lies in tatters at our feet. The much-bruited Project for the New American Century didn't last a decade and has been replaced by shivering anxiety about what China will do next. (A Chinese company moved to purchase the bankrupt Hummer brand, DOB 1992, and was blocked by Chinese regulators: an allegory worth reflection.) And yet somehow we want to tell a story about a few bad banks and rogue financiers, a glitch in the human spirit, the resiliency of Team Regulation.
The time has come, all of this makes clear, to assess capitalism again from the outside. We should begin by understanding that it is the utter discrediting of capitalism's most basic premises that explains the return of Karl Marx as spectral bogeyman. Not the current president's (staunchly pro-corporate) proclivities, not ACORN and not China's nominal communism. Marx's Capital reached an all-time high in sales in the same season that the Public-Private Investment Program was announced.
Capital is the strangest of books: not a work of political economics but, per its own insistence, a "critique of political economy." It is a concerted effort to understand the faux objectivity of modern economics not as an explanation of a system but as its apologia. At the same time Capital is economics as such; a landmark in materialist philosophy; a theory of history larded with empirical studies. It can be intractable.
David Harvey has been teaching courses on Capital for more than three decades; his seminar is freely available at various sites online. Now it arrives in published form. A geographer by trade, Harvey is particularly brilliant on the spatial dimensions of economics (as in his landmark earlier work, The Limits to Capital). But A Companion to Marx's "Capital" is at once sleeker and more lucid, communicating the theoretical nuances of dialectical thought and the history of struggles over the length of the working day with marvelous grace. It is without a doubt one of the two best companions to Marx's pivotal work (the other is Ben Fine and Alfredo Saad-Filho's Marx's "Capital"). One can glean much of the primary text's character from reading Harvey's companion alone; Harvey is rightly insistent that they be read in tandem.
At our conjuncture, we must ask of these texts one simple question: can they help us tell the story of capitalist crisis better? The answer is, certainly. Perhaps too well. As the old joke goes, did you know that Marxist economists have predicted ten of the last three crises? This is pretty funny.
Marx's Capital is, among its cornucopia of analyses, a theory of crisis: how capital, with its immutable compulsion to expand or collapse, pushes itself via self-destructive competition into disaster—at which moment it endeavors to shake apart and reform itself even more grandly. This is, at least, a story. And a pretty good one: it narrates usefully the development of a market economy out of the Renaissance and eventually into the British Empire, yielding to an even more global US order. It also reminds us of the simplest fact, yet one seemingly elusive to most of the recent crackup's commentators: greed is an irrelevancy. When the investment bank across the street leverages up to a debt/equity ratio of twenty-nine to one, you leverage up to thirty or get out. Greenspan's account, and those of Lanchester and Johnson and Kwak, and an army of like cases, are pure hoodoo. Your moral sentiments have nothing to do with it.
Moreover, Marx's 150-year-old guide renders specifics of the current crisis that appear only as intuition in the other books. Something really did happen in the 1970s. The long postwar boom played itself out; intensive competition born in that period pushed industries to accept lower and lower profit rates. Eventually they got too low, and capital itself needed another profit center if it was to continue its requisite expansion. Enter finance, on the heels of creeping deregulation, among other things, seeming to provide not just its own profits but a broader cycle of consumption-fueled growth.
This raises our last question; fittingly, it is the same as the first, the part Lanchester never quite answers. We know why everyone owes everyone: because there was fresh dough to be made in extending credit, until there wasn't. What we don't know is, Why can't anyone pay? Why didn't property values ascend forever? Why didn't the market just keep expanding? This is not a question answered by Johnson and Kwak either. It is, let's say, above their pay grade (or perhaps far below). To tell the story, one would need an account of where value actually comes from. This is not impossibly complex; unlike the niceties of derivatives, it's not rocket science. If value is generated by people laboring to produce stuff that gets sold, and profit comes from exploiting the productive value of labor—this is a simplification, of course, but not a mistake—sooner or later people will have to labor productively to make good on any extended credit. By people I mean people.
But this becomes decreasingly likely, until it is impossible. Promises to do all that work later will reach limits, particularly as companies cut labor costs, replace workers with machines and outsource work to overseas markets. New value, arising only from the discrepancy between wages and productivity, appears elsewhere when it appears at all (witness the growth of India and China). Or it appears to glimmer in the future: credit is the name for spending it now. But even the future has a limited number of hours, technically. Meanwhile, over in the finance sector, where the money seemed so recently to reside, there is only a genteel, bloody struggle over how existing value is divided; no new value is created. The gap between value that can be realized and "fictitious capital"—claims on future value, all those derivatives purling through the purportedly new economy—has become a chasm. No one can vault over it any longer.
But the economy made its tiger's leap out of the stale factory and into the open air of finance for a reason; we can't just return to the fading industrial base with an oops shrug. We have no new line of widgets to labor over and sell. This is why ours is a real crisis, not just a panic. This is why we have seen exactly what the analysis grimly promised: shortages cheek by jowl with surpluses, unemployed workers stacked up next to unused factories. We deferred this reckoning once, twice, three times, depending on your measure. Certainly the most recent credit bubble was pure deferral, pure delusion: Wile E. Coyote out over the gap, legs spinning. He hovered there for a while, and lots of people pretended the laws of physics had been revised, even as he started to plummet. Boom. By boom I mean bust.
Versions of this plaint have been made frequently enough by "mainstream" economists, seemingly unaware they're borrowing the lineaments of an account they've spent careers disavowing as a mystery cult. Well, there are no atheists in foxholes. Or, as a friend says, Marxism is like gold; in an economic crisis, everybody runs to those who have it. Not surprisingly, economists cannot borrow, even at low levels of interest, the insights most needed: the basic understanding that capitalism's flaws are internal to its own logic and can't be whisked away by another round of financial regulation or everybody promising to be less of a creep. It is indeed a compulsion, and it ends poorly.
The possibility of an unhappy ending for capitalism is exactly the one thing that a thousand books written from within the crisis won't contemplate, even as we know that everything ends eventually. And so, as we parse the flood of explanatory texts, we should turn to China one more time—but not to speculate about whether it will revalue the renminbi against the dollar. We must resurrect the judgment of Zhou Enlai (often misattributed to Mao) on the success of the 1789 French Revolution, offered some century and a half on. But we must take it as an admonition regarding our race to grasp the historical import of the 2007 Crisis of Capital: "It's too early to tell."