A correspondent takes me to task for suggesting in my last post that capital acts as an autonomous force, like Adam Smith’s invisible hand, when in reality only humans act in history. It is the actions of human bankers, she says, that have created so much fictitious value that it now stands at an exponentially higher level than the amount of real value, and she asks what the pressure of this expansion of credit will do to the social relations that sustain capitalism today.
Of course, I agree with her that only humans act in history. The actions of the bankers were described well last week by Will Hutton in the Observer: “Simply put, the world has trillions upon trillions of excessive private debt financed by too many different currencies whose risk is allegedly mitigated by even more trillions of financial bets which in aggregate do not minimise the systemic risk one iota. This entire financial edifice, underwritten by tiny amounts of capital, has been created over three decades backed by the theory that markets do not make mistakes.”
So the question is: can this development be understood in terms of the drive of capital to increase itself, or are we talking instead about collective rogue actions by the banking class, driven by greed or a mistaken confidence in the markets?
First of all, the excessive private debt Hutton refers to is the other side of the excessive creation of credit by the financial industry, as he says, underwritten by tiny amounts of capital. An important paper written recently by economists working for the Bank of International Settlements concludes: “The distinguishing characteristic of our economies is that they are monetary economies, in which credit creation plays a fundamental role. The financial system can endogenously generate financing means, regardless of the underlying real resources backing them. In other words, the system is highly elastic. And this elasticity can also result in the volume of financing expanding in ways that are disconnected from the underlying productive capacity of the economy.”
The document is written in highly technical language, but it has been summarized in layman’s terms by Andrew Dittmer in Naked Capitalism [numbers refer to the page numbers in the original paper]: “So what caused the crisis? Clearly, the shadow banking system (mainly based around US and European financial institutions) succeeding in generating huge amounts of leverage and financing all by itself (24, 28). Banks can expand credit independently of their reserve requirements (30) – the central bank’s role is limited to setting short-term interest rates (30). European banks deliberately levered themselves up so they could take advantage of opportunities to use ABS [asset-backed securities] in strategies (11), many of which were ultimately aimed at looting these same banks for the benefit of bank employees.”
Asset-backed securities – such as the bundled mortgages sold on the financial markets – were employed to enable financial institutions to lend in risky markets. Why did they do this? If you look at what bankers did in different parts of the world, independently of each other, in the aggregate rather than as individual cases, you will see that they leveraged their capital to the maximum possible and increased lending to riskier debtors in order to keep up the rate of profit on the capital they controlled.
Three analysts working for the Bank of England reason as follows: “The individually rational actions of heterogeneous lenders can generate collectively sub-optimal credit provision in both the upswing (a credit boom) and the downswing (a credit crunch). … In the face of stiffening competition, banks were increasingly required to keep pace with the returns on equity offered by their rivals – a case not so much of ‘keeping up with the Joneses’ as ‘keeping up with the Goldmans’. To achieve these higher returns, it was individually rational for banks to increase their risk profiles in various ways … As fundamentals improve, high-ability banks are more likely to achieve high returns than low-ability banks. So posting low returns in the boom is particularly damaging to reputation as this constitutes a clearer signal of low ability. This strongly incentivises excessive risk taking to boost short term returns as fundamentals improve.”
So in this case competition among banks enforced a certain logic, that it was essential to make greater profits by extending credit to higher-risk ventures, rather than by, say, lending to manufacturers. They didn’t confine themselves to safer bets because the growth of the real economy worldwide was inadequate to absorb all the available capital. So the need to maintain a certain rate of increase of capital (valorization) and satisfy investors who demanded a higher rate of return drove their actions, which were individually rational but in the aggregate crashed the system.
The imperative for capital to increase directed the activities of bankers the world over, partly through individual greed and misplaced optimism in the markets, but mainly because their rivals were doing it. The way the system works as a whole means that owners of capital will not part with it without expecting payment of interest, and they will move it to where they can get the greatest return.
The financial industry and banks, as holders of this capital, are to this day resisting regulation on their activities because they need the capital they control to hold its value and to increase. The political power they have accumulated is shown in the demands for austerity and cuts in state spending in both the U.S. and Europe.
The New York Times comments: “There was a long-lived bipartisan consensus in the United States — it lasted at least from 1992, when Mr. Greenspan helped banks recover from bad loans to Latin American nations, through 2008 — that the Fed was expected to steer the economy and would be treated gently by politicians. … That consensus seems to have vanished, with candidates for the Republican presidential nomination vying with one another to show their hostility to Mr. Bernanke, even though he is a Republican who previously served as the chief economic adviser to President George W. Bush. …
“Similarly, Mario Draghi, the Italian central banker who will take over from Mr. Trichet on Nov. 1, will be under great pressure from Germany to avoid actions that might increase inflation, even if they may be needed to prevent a new financial collapse. … Major banks around the world have seized on the disarray of governments to begin campaigns to reduce regulation, complaining that new rules adopted after the 2008 debacle threaten growth. They want capital rules eased and hope that few will remember it was their excessive risk-taking, relative to the capital they had, that helped to create the 2008 disaster and that threaten a new one.”
Jeffry Frieden, Professor at Harvard University’s Department of Government, explains it this way: “When the global financial crisis began in October 2008, the European debtors were largely frozen out of financial markets. As their economies spiralled downward, they faced grave difficulties in servicing their debts. The problems of Europe’s debtors were not just worrisome for the debtors themselves. Most of their debts were owed to Northern European banks and investors, and the crisis threatened the very solvency of major European financial systems. This – not some abstract desire to extend a hand to the Greek and Portuguese people, or to save the euro – has been the principal reason for Europe’s ongoing debt bailout.”
The bailouts have been the means to task states with extracting wealth from society and restoring value to the banks’ worthless investments. But it is not at all certain that this strategy will work. The latest moves by the Fed to move its holdings into long-term securities and push down long-term interest rates have led to shares tumbling as investors move their money into cash holdings, despite the low interest rate. In other words, they are now hoarding money because they fear losing their wealth altogether.
Since investors are not investing, corporations are not hiring, and cutbacks at the state and local level have cancelled out federal transfer payments, it makes sense for the federal government to revive the economy by directly employing people in a revived “New Deal.” That’s what commentators like Paul Krugman have been calling for; and progressive Democrats like Elizabeth Warren speak of a return to the social contract where the rich actually paid taxes. But that means overcoming the entrenched political opposition of the financiers and super-rich who scream “class war”. A different logic is being followed here, where the interests of social stability are subordinated to the demands of the super-affluent that social wealth be entirely devoted to restoring the value of their assets. In this sense, the bankers are acting as the personification of the needs of capital.
Professor Frieden concludes his piece: “In Europe as in America, the real question is how the costs of this devastating debt crisis will be distributed. Who will pay – creditors or debtors? Taxpayers or government employees? Germans or Greeks? More realistically, what combination of sacrifices will be politically tenable, both across countries and within countries. The aftermath of every debt crisis sinks into conflict over who will bear the burden of adjustment to the new reality.”
That is how the masses of fictitious value are exerting pressure on social relations throughout the world today, and it is by no means a settled question. There is no sign that Americans or Europeans are volunteering to give up their standards of life without a struggle. Obama’s role in the U.S. is to ease the way for cuts in federal entitlements while heading off any mass resistance. However, while there is little news of strike struggles at the present time, there are plenty of workplace conflicts simmering across the country which could spread rapidly and lead to a challenge to the authority of the state in enforcing poverty.