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Monday, May 31, 2010

Debt, Greece, and the Fight Back

Debt means different things to different people. For a family with two modest income jobs (if they're lucky enough to have jobs), a mortgage and two kids in college, debt is the only route to having a reasonable standard of living with some guarantee of the satisfaction of health care needs or other insurances against the contingencies of life. Debt and its burdens count as a withdrawal against future income and wealth. For most people – and most people fit this profile to some extent – mortgages, credit cards, home equity loans and other forms of borrowing – are the only bridge to a level of comfort available to the previous generation of working people.

For the professional and small business class – what Marx called the petite-bourgeoisie – debt is the mechanism that provides a standard of living that establishes a common bond and identity with the very rich. Jumbo mortgages, expensive car loans, small business loans, and lines of credit support membership in the clubs, associations, and parties of the wealthy, while greasing the track of access to business and social contacts.

But in the stratosphere of economic life – with the very rich and monopoly corporations – debt plays an entirely different role. At this rarified level of economic life, debt is an important – very important - tool for the accumulation of wealth. Apart from collecting the interest on the debt of everyone else, the very rich use the easy access to “other people’s money” to finance mergers and acquisitions, leverage investment opportunities, and influence and exploit the direction of economic events.

Economic textbooks celebrate the access to borrowed funds as the spigot for entrepreneurial initiative and bootstrap risk-taking, but this is merely a doctrinaire distortion of debt’s actual role. Even in the heralded boom and the popularization of venture capital as the debt-driven fuel for innovation and business creation, borrowed money was funneled into financial speculation and acquisition more than productive activity. The collapse of NASDAQ stocks saw the destruction of enormous reservoirs of unreal wealth – not unreal because it was fictitious, but unreal because it was obligations against future economic activity that would never be realized. That is to say, it was, broadly speaking, financial debt.

As economic data demonstrates and the current crisis underscores, debt-reinforced financial speculation plays a larger role in the capitalist economy than at any time in the past. In the US, in particular, financial activity nearly dominated the economy before the crash, accounting for over forty per cent of profits. Much of this explosion of activity was both speculative and debt-driven. Despite much inflamed rhetoric about taming it, the truth is that financial speculation marches on unabated: half of US corporate profits were derived from the financial sector in the last quarter.


In the fall of 2009, the media spotlight fell upon the fiscal health of Greece, a mid-level economy in the European Union. The newly elected social-democratic PASOK government revealed that the former conservative government had substantially understated the budget deficit. While tongues wagged, this revelation only exposed what everyone knew but never spoke. With only a few exceptions, every EU government ran budget deficits far beyond the EU guidelines. Moreover, in the face of an enormous world-wide economic downturn, deficit spending was the order of the day, urged by every responsible economist. The revised budget deficit as a percentage of GDP, while exceeding most EU countries, was less than Ireland’s and not that much greater than Spain’s and the UK’s. Total debt as percentage of GDP was also – roughly on the level of Italy – but not that much more than some other countries. In fact, Japan’s debt/GDP level is nearly double Greece’s. The next big fiscal challenge facing Greece was to be the redemption of 8.5 billion euros of Greek bonds on May 19, 2010, seven months after the budget announcement. Nonetheless, Greece became the poster child for fiscal irresponsibility. And a ferocious attack was launched on Greece from many quarters.

Like locusts, financial speculators descended upon Greece. Default insurance on Greek bonds rose from $120,000 on $10 million in September, 2009 to $425,000 in February, 2010 and over $900,000 on April 27. The yield spread between German 10 year bonds and their Greek counterparts grew from 1.3 in September, 2009 to 4 points in February, 2010, peaking at 5.17 on April 22 – a fateful day when trading in Greek bonds virtually stopped. In a rather tepid defense of speculative traders, The Wall Street Journal conceded that in November, “A wide array of financial firms now launched aggressive bearish bets against Greek bonds and the euro, too – some seeking to profit and some just to protect themselves.” Interestingly, the Journal notes that others seeking to protect themselves simply sold off their holdings in Greek bonds at that time, a move that softened the market for Greek bonds and assuredly increased the value of the “bearish bets”. Big players in credit default swaps in “late 2009 and early 2010 included Goldman Sachs Group Inc., Barclays, Spain’s Banco Santander and France’s Credit Agricole SA.” Unmentioned in the Journal apology for speculators was the pregnant fact that investors in credit default swaps (“bearish bets”) need have nothing to protect and only profits to gain, a now established modus operandi of the ubiquitous Goldman Sachs. As for the euro, speculators decidedly moved markets, betting against it. The same Journal article reported that “By February 9, Chicago Mercantile Exchange contracts betting on a decline in the euro against the dollar outnumbered positive bets by a record of over 54,000, according to CFTC [Commodity Futures Trading Commission] data.” It was no wonder that an exasperated Greek Prime Minister, George Papandreou, blamed “traders and speculators” for Greece’s woes.

With speculative capitalism, manipulation trumps perception and reality. The Bank for International Settlements (BIS) is the keeper of sovereign debt statistics, responsible for supplying data to all institutions – including the International Monetary Fund – regarding the debt of all countries. A curious thing happened this spring: “Then, on April 22, BIS released its fourth-quarter report. In the latest count European bank exposure to Greece dropped by tens of billions of dollars, led by Swiss banks’ exposure that plummeted 95% to $3.7 billion”, according to The Wall Street Journal (4-25-10). Remember, April 22 was the critical day when Greek bond trading nearly came to a halt. With nearly one-third of total Greek debt disappearing overnight, one would think that markets would have reacted; none did. With European banks miraculously reduced in exposure to Greece’s woes, one would look for some good news in euro currency trading; none appeared. “’We don’t fully understand the marked reduction in Swiss bank exposure to Greece’ Citigroup chief economist Willem Buiter, a former Bank of England official, wrote in 70-page report published this week on Europe’s sovereign-debt problems”, offered The Wall Street Journal.

The point here is not that the Greek debt was bogus – likely it was simply distributed differently than the BIS reported – but that perception had no effect on the debt or currency markets. The speculative attack on Greece continued relentlessly.

The speculative onslaught was expressed in other ways. As The New York Times reported on May 9, 2010: “The crisis, by contrast [to other debt-induced crises], seemed to ricochet from country to country in seconds as traders simultaneously abandoned everything from Portuguese bonds to American blue chips. On Wall Street on Thursday afternoon, televised images of rioting in Athens to protest austerity measures only amplified the anxiety as the stock market plunged nearly 1,000 points.” Despite the Times calculated attempt to bring the victims – the outraged Greek citizenry – into the explanation, the speed and scope of the financial onslaught underline the role of financial speculation. In Greece, the Acropolis still stood, but the financial world was in shambles despite an announced bailout of $146 billion the week before. Seemingly, nothing could satisfy the speculators – the same voracious beasts that brought the US economy to its knees in 2008 – once they had tasted blood.

The European Response

What began as a scold over $236 billion of Greek debt and a budget deficit of under $30 billion in the fall of 2009 morphed into a $955 billion euro-zone wide bailout package in May of 2010. How could a small cut in the Euro-body develop into a gaping, life-threatening wound half a year later?

Earlier in the global crisis, I wrote of the danger of “centrifugal forces” in the European Union undercutting any effort to construct a common solution to the crisis. Indeed, I projected “that these centrifugal forces… threaten to disrupt it [the EU], if not break it apart.” By that claim, I meant that the differently scaled economies of the constituent states with different levels of development, with different national and cultural values, with different standards of living, with different approaches to the market, etc. would prove to be an obstacle to a common program. In short, European integration was both mythical and incomplete. It was these “centrifugal forces” that made the EU, beginning with the contrived Greek crisis, easy prey for the speculative wolves.

In the US, when the banking system sagged and threatened to collapse under the weight of rampant financial speculation, the government anointed the largest institutions as “too big to fail” and supported this anointment with massive infusions of federal funds. This commitment effectively drove the speculative wolves from the door. At the same time, political forces and the labor movement in the US missed a golden opportunity to cage the speculators and socialize the financial sector. It must be remembered that sufficient public funds were made available to effectively buy the financial giants when they were on their knees. The opportunity is gone and these banks and speculators are now barking at the European door along with their global counterparts.

Much of the blame for the European fiasco is placed on the shoulders of the German government and its “Germany first” nationalism that delayed any effective response to the speculative attack. With the largest, most advanced and most thoroughly neo-liberalized economy in the EU, the German foot-dragging on a bailout demonstrated the “centrifugal forces” that challenge a united Union.

In the end, after toying with more modest bailout proposals that might have stemmed or, at least, slowed the tide of speculative assault, the EU was forced to offer a massive backstop to the attacks, signaling a determination to meet the bets regardless of the speculative ante. In this six month casino power play, no one in the popular or financial press challenged a financial system that could so utterly threaten global economic stability; instead tiny Greece was blame for its irresponsible and profligate economic policies.

The Political Ploy

Capitalism is anathema to cooperation. The very nature of capitalist social and economic relations based upon competition and self-enrichment foreclose the possibility of common action in the economic sphere. On the other hand, capitalists eagerly work politically to achieve common ends. They unfailingly pool their resources, direct the corporate media, and craft a common plan in pursuit of political advantage. These facts, more than any others, are the foundation for the Marxist theory of a ruling class. And nothing demonstrated this political solidarity – ruling class solidarity – more clearly than capitalism’s world-wide response to the Greek debt farce. Without exception, world leaders and their corporate mouth-pieces called for debt reduction through social austerity; the capitalist class saw an opportunity to benefit from the financial debacle and it seized it. The thrust of this call was to reduce public sector spending for human needs, not spending on the military, security services, corporate subsidies, or public-private partnerships, but salaries, pensions and social welfare. New revenues were to be generated through regressive taxes that would place even greater burden on working people, while leaving corporations and the very rich only modestly discomfited.

The promise of a financial bailout and the shabby decadence of social democracy, led the Greek PASOK government to surrender with only a whimper to the savage cuts demanded by the EU and the IMF: public sector salaries are to be cut, along with benefits. The retirement age will be dramatically increased and regressive consumption taxes will be imposed. Work rules will be changed to the benefit of employers and privatization will be sought. In short, the social democratic government agreed to dismantle the social democratic safety net that Greek and European workers fought so hard to establish. Even the IMF estimates that Greek unemployment will reach 15% next year. A former advisor to the IMF, quoted in The Wall Street Journal, said that “The scope of these conditions is brutal.”

With the capitulation of the Greek government, pressure shifted to other EU governments, including those with relatively modest vulnerability to speculative encroachment. Ireland has projected cuts of 5-15% for public sector workers, nearly$1 billion in welfare benefits, and a reduction in child-benefit payments; Spain has announced 65 billion euros in cuts including a five per cent cut in public sector wages; and Portugal projects public sector wage cuts and a value added consumer tax increase. The Sarkozy government in France has announced plans to raise the retirement age from its current minimum of 60 years to 62 or 63 and the newly elected coalition government in the UK plans to make drastic cuts totaling $8.65 billion even before a new budget is offered in the coming months.

In the private clubs and corporate board rooms these “preemptive” moves are cause for celebration. From the shadows of a speculation-induced crisis remotely involving Greece, elites are witnessing the collapse of the European safety net and the immiseration of the European working class with the quiet acquiescence of Social Democratic Parties.

Ironies abound. The rush to extreme austerity in Europe will dampen any hope of economic recovery; growth will be stifled and unemployment will jump with the loss of billions of euros in consumer purchasing power. The austerity programs will necessarily result in a self-induced economic downturn. Even more ironic, the US Treasury Secretary, Timothy Geithner, and other US officials are arguing forcefully that the Europeans should not abandon the course of economic stimulation, a course completely at odds with the new-found commitment to fiscal austerity and reduced public spending. US officials fear, correctly, that a deeper downturn in Europe will scotch any chance of a US recovery.

While lobbying in Europe, Geithner is urging Germany to back away from its unilateral ban on financial market speculation. Irony of ironies, Germany tacitly recognizes the devastation caused by financial speculation: “Certain transactions that threaten the stability of financial markets should be forbidden”, according to the deputy German finance minister. This amounts to a confession that the debt crisis wracking the EU was induced by financial bets not tethered to productive investment. And Geithner’s role in opposing this ban is to protect the financial behemoths that dominate the US economy. Such are the contradictions of capitalism for all to see.

A Line in the Sand

It is no exaggeration to say that the most intense and determined opposition to this capitalist ambush has come from the Greek Communist Party (KKE) and its All Workers Militant Front (PAME), a workers’ umbrella organization that unites Greece’s most militant unions and unionists. The Greek Party, since the demise of the Soviet Union, has served as the unifying center for Marxist-Leninists throughout the world and a significant force in electoral politics and revolutionary activism in Greece. Throughout the current economic crisis, the KKE has acted to defend the gains of Greek working people while calling for radical structural reforms to seize the opportunity afforded by a wounded capitalism. Unlike the maneuvering and temporizing of much of the left and Communist-lite Parties, the KKE has foregone Facebook militancy for demonstration and confrontation in the streets. Unlike the blurry all-class approach of many organizations, the KKE and PAME have struck a posture of working class partisanship with an unabashed goal of socialism. With the current violent assault on European living standards, the KKE was well-prepared to organize massive strikes and demonstrations to meet the attacks. By cajoling and shaming the more backward social democratic unions, KKE and PAME have brought hundreds of thousands of Greeks into angry and determined resistance.

As Aleka Papariga, the dynamic General Secretary of KKE said recently at a press conference:

It is a tragedy for the people to lose their rights, to see their wages being cut down despite the long lasting struggles in the previous years, despite the sacrifices that led even to blood shed. But above all it is a disgrace -and we do not believe that this will happen- these barbarous measures to pass without the people’s resistance, without the people’s counterattack and even more so to give the impression that the people consent to these measures.

On May 12, 2010, she affirmed:

Our strategy is to stop the barbaric measures being imposed as much as we possibly can under today’s conditions, to prevent them from being legitimized in people’s consciousness, for working people to disassociate from PASOK and ND and their policies, for the movement to regroup and move forward on a course of counter-attack in order to overturn today’s balance of forces, for people’s power. We are not indifferent and neutral observers but since the political balance of forces does not permit us effective intervention in favor of the people, we put priority on the movement, outside of the Parliament…

For this reason joining forces with KKE is necessary, regardless of whether working people agree with KKE on everything, or if they have questions or different viewpoints on socialism.

It is this boldness with a commitment to principled unity that separates the KKE approach from the more tepid left organizations in the EU and the US.
It has been said that early in his Presidency, Bill Clinton was told that he could not pursue a particular policy course because the bond markets would respond unfavorably. It is time for this shackle to be broken. Few have the courage to tackle this logic, but the Greek working class does under the leadership of Communists. We should all rejoice.

Further, the KKE sees success in this struggle as furthering Greek independence from the oppressive constraints of regional and international watchdogs and towards people’s power and socialism.

The example of Greece has shown the way for worker militancy in Portugal, Spain, and France. Demonstrations and strikes have been organized and called to meet the coming onslaught on working class standards of living in those countries.

We, too, in the US and other capitalist countries, should follow the Greek example. Currently, the Obama administration has a stealth plan under the innocuous name of the National Commission on Fiscal Responsibility and Reform designed to eviscerate Social Security, Medicare, and Medicaid after the November, 2010 elections. We must not only fight this but demand a strengthening of these three pillars of working class living standards.

We must go beyond a policy of awarding tax credits, encouraging contractor profiteering, and subsidizing low wage jobs to solve the unemployment crisis; we must fight for legislation establishing a shorter work week at the same pay to create the space for good paying, sustainable jobs.

We must re-establish the antiwar movement with a strong anti-imperialist voice to halt US, NATO, and Israeli aggression against countries entitled to their own peaceful course. Consider attending the inaugural United National Peace Conference in Albany, NY, July 23-25 (

And let us not forget our Greek comrades. I urge everyone to approach your union local, labor council, community group, movement chapter, and political organization to send messages of thanks and solidarity to the KKE ( and PAME (

Zoltan Zigedy

Thursday, May 20, 2010

Economists Tackle the Economic Crisis: IV

A good, old-fashioned crisis of capitalism – a disruption that rocks the whole system – produces one salutary result: wiser heads, serious students begin to re-examine widely held assumptions and popular theories of political economy. For those few, this may mean dusting off old copies of the works of Keynes, Schumpeter, or Minsky, and – only too rarely – Marx. For the honest observer, the crisis is an opportunity for a deeper understanding of the capitalist mechanism and its direction.

But others cling to the comforting views of infallible markets and perfect rationality that prevailed until recently, while amending their theories with warning labels touting the current crisis is a special case falling outside of the economic canon. Most economists, pundits, and policy makers fall into this latter category. They got it wrong and they continue to get it wrong. They have too great of an investment in the ideologies, careers, and honors of the past.

There is now a long list of books and papers offering explanations, in part or wholly, of what went wrong with the global economy. The worst of these offer simple and immediate answers: evil bankers, irrational borrowers, lax regulators, etc. The best offer longer and deeper views that locate problems in the evolution of capitalism and its inner mechanisms. They contest the too human urge for simple answers and easy solutions. This is the fourth in a series of commentaries on the views of various economic writers on the economic downturn. Zoltan Zigedy

Every budding economics student and learned professor, along with our media pundits and high ranking policy-makers, should be forced to read Why 10,000 economists Got It Wrong, a section of a series of articles written by Jack Rasmus appearing in Z Magazine (“Epic Recession: Prelude to Global Depression”, February, March, 2010). Rasmus, professor of political economy at Santa Clara University, playwright, and labor activist, constructs a tragically amusing collection of responses by prominent economists to the economic crisis. By taking these economists at their own words, Rasmus demonstrates the abject poverty of thought and shameless gall of most of the profession’s leading lights.

Among my favorites is the comment of Nobel laureate and godfather of the rational choice/game theoretical school, Kenneth Arrow, whose influence has swept through the social sciences and humanities over many decades. Skeptics have persistently challenged Arrow and his many followers to ante up and confess whether rational choice theory describes actual human behavior or rather offers a user’s guide to optimizing results, whether their results are descriptive or prescriptive. Advocates of unfettered markets have used this ambiguity to defend the infallibility of the market mechanism. According to Rasmus, Arrow’s response to the economic downturn was “that he and his fellow economists erroneously assumed the banks would act rationally and correct their growing abuses and problem. ‘We took it for granted these people protect themselves. We were wrong.’” Now we finally know: rational choice and game theory are recipes for success, but bankers do not follow the directions. It follows, of course, that Arrow’s mathematical formulae offer no support for the claim of market rationality. If financial actors act irrationally, the market cannot save their hides.

There are some other gems in Rasmus’s accounting. Laura Tyson, formerly a chief economic advisor to President Clinton, without cracking a smile, likened the economic crisis to ‘a kind of Greek tragedy.” And Paul Krugman, as Rasmus notes correctly, continues to slyly suggest that the root of the crisis may lie at the doorstep of The Peoples Republic of China for refusing to accede to the West’s demand that it devalue the yuan.

While the responses given by these learned professors may elicit some giggles, they reveal an intellectual crisis as well; no Nobel prizes should come from this performance.

Rasmus offers more than a devastating parody of the economics profession. His two lead articles promise an account of the current economic crisis – an account that goes beyond the shallow inanities that occupy so many academic economists.


Like Marx, and few others, Rasmus is explicit and conscious of his method, his framework for understanding the economy. And like very few others, he seeks “a deeper historical perspective” when pursuing answers. I think this approach is the cardinal virtue of his work and any other effort to seriously explain the current economic crisis. Without it, economic thinking is speculative and barren. He draws extensively on his study of earlier downturns, including The Great Depression. His study of the 1907-1914 crisis is particularly fresh and fertile; I confess I have overlooked this period in my own work, as have others.

On the other hand, I am surprised that he offers little on the so-called downturn, an event that I believe links up importantly to the current crisis. As the first false step of speculative capital, the collapse of 2000-2001 revealed important aspects of contemporary capitalism that foretold the current downturn and, in all likelihood, the next one.

Economic analysis is economic archeology, sifting through the shards and artifacts of previous economic activity. Rasmus does this and does it well.

Rasmus underscores a second tenet of his method: securing a theoretical framework for his analysis. Again, this is a sound and intellectually honest approach. One element of his framework is to forego the use of metaphor. I think this is too rigid. Metaphor – drawing on similarities with non-economic phenomena – enriches economic discourse and suggests fruitful paths of exploration. The problem with metaphor arises when it is both the beginning and end of economic explanation. While a metaphor suggests, it must be backed up with some theoretical muscle. At a time when few of us understood the new and opaque instruments employed by the financial sector, metaphor – “casino”, “bets”, “toxic”, etc. – was the best guide going forward. In fact, Rasmus makes good use of two rich metaphors: the imagery of “fracturing” and “fragility”.

By contrast, Rasmus argues for causal explanation, specifically explanation that distinguishes between fundamental, contributing, and participating causes. Certainly, these distinctions are not new; one finds similar distinctions as far back as the works of Aristotle. But, sadly, his point is a needed reminder to the multitude of academic economists who have lost their way in the thicket of mathematical models, game theory, and rational choice theory. Today’s academic economist fails to look beyond correlation, spinning connections that hang in the air absent a supportive theoretical web. Mainstream (bourgeois) economics decries theory and relies on correlative relationships. An example is the famous Phillips curve – the inverse relationship between unemployment and inflation - which served as a foundation for Keynesian economics until the 1970's when a period of stagflation burst that particular correlation. This provided an opening to Friedmanites who postulated that federal spending to reduce unemployment resulted in an only marginal shrinkage of the rate of unemployment at the expense of galloping inflation. Though it won a Nobel for its proponent, Edmund Phelps, the basic idea was consigned to the dustbin, supplanted by neo-liberal dogma.

The Theory

For Rasmus, leading fundamental causes of the current global downturn were “the forces behind the massive accumulation of excess global liquidity in recent decades, as well as the network of speculator-investors, shadow banks and institutions, and the new speculative instruments and markets they have spawned.” This is correct, but there is much more to say, much more to explain about the “forces behind…” Indeed, I wrote of this enormous pool of global liquidity in November, 2005 (Capitalist Surplus, Marx, and Crisis”), but I also sought to explain why this posed a particular problem at that time.

Thus, capital continues to accumulate at an accelerating rate, filling the coffers of the capitalist class. As the Wall Street Journal article [cited in my original article] notes, this has created considerable consternation with the capitalist class: the ability to make further money is now impeded. Capitalists are finding fewer and fewer investment opportunities. And when they find them, they offer at best modest returns. Higher returns are attainable at great risk, greater risk than most investors are willing to take. The WSJ quotes Gerd Häusler of the International Monetary Fund: “The search for yield has been the defining factor in financial markets for roughly the last two years.”

In my view, this search for yields prompted riskier and riskier investments – a point well made by Rasmus – though it is important to understand why. The growth of global liquidity is an instance of what Marx called “accumulation” – in this case hyper-accumulation. It defies the simple “savings=investment” depiction of conventional economics since this massive surplus can find no home that will promise greater return than that which is conventionally gained. In fact, its engagement with existing, relative safe, investment opportunities necessarily will exert downward pressure on the rate of return on all investments – the cost of capital will fall. Thus, the very existence of this enormous pool of liquidity challenges the growth of accumulation, exerting a downward pressure on its rate. As I argue in my article, “…this is an instantiation of the much misunderstood Marxist law of the tendency of the rate of profit to fall. This much maligned tendency towards crisis reflects the effects of capitalist exploitation upon unlimited growth, demonstrating how the drive to accumulate greater profit ultimately retards the ability to do so.” It is this tendency – prompted by hyper-accumulation – that motivated and drove “the network of speculator-investors, shadow banks and institutions, and the new speculative instruments and markets they have spawned”, the “fundamental cause” that Rasmus identifies.

Further, it is important to ask and answer: what is the source of this” massive accumulation of excess global liquidity”?

I offered a tentative answer:

The vast accumulation of capital noted in The Wall Street Journal has been generated from several factors, all part of a conscious program of the wealth-holding elites—the capitalist class. Fundamentally, the world-view of neo-liberalism—open, unfettered commodity markets, private ownership, the dismantling of the welfare state, and making human labor completely subject to the market—has been elevated to an article of faith, a world-view not only unchallenged, but unchallengeable. As a result, the class struggle becomes one of not denying these tenets, but accommodating them, by challenging “unfair” competition, by “rationalizing” the last bastions of public ownership, by “reforming” the welfare state to include market forces, and by “humanitarian” concerns for the most egregious work conditions.

The role of the state has been critical: both political parties in the US have joined to re-militarize the economy around a bogus “war on terrorism” while attempting to enlist the rest of the world into a reprise of the Cold War. This tactic has opened new, and vast, opportunities for transferring wealth to parasitic corporations that inflate costs, under perform, and invite corruption.

Today, I would add a more measured answer – one with “a deeper historic perspective”. In the first place, the disappearance of an entire alternative economic bloc – the European socialist community - opened enormous new markets and opportunities for profit from low-wages and bargain-basement acquisition of the means of production. Also, this development freed Cold War capitalism from its paternalism, its public relations competition with the Soviet Union. Without the competition, ruling elites felt no political obligation to tout the living standards of Western workers and began to intensify the class war and the rate of exploitation. While workers wages were stagnant during the 1970’s and 1980’s, wages lagged even further behind the growth in productivity after the fall of European socialism. Maintaining a modest standard of living became, for most working class families, a matter of assuming more debt, a further incentive for capital to pursue opportunities of financial speculation.

In addition, the expanded, and increasingly unregulated, global market encouraged a global capitalist division of labor, assigning production to low-wage, unregulated labor markets and finance to the most mature capitalist countries: principally, the US and the UK. Thus, by the moment before the world-wide crisis struck, financial activity accounted for nearly half of all profits in the US.

Rasmus writes of the “global money parade” and the $20 trillion that “sloshes around from one speculative investment opportunity to another…” I would only add the roughly $220 trillion notional value of credit default swaps that layer onto this total and further fuels the huge speculative orgy. Yet he leaves open the question of why this affliction strikes when it does.

He offers little to explain the roots of the system’s appetite for speculation, beyond hyper-accumulation, Federal Reserve policy, and investment innovation. One wishes he would say more.

Rasmus relies upon a business cycle model to explicate his theory of crisis. He sees the boom phase of a business cycle as generating debt accumulation and financial asset inflation. This seems generally reasonable. He goes on to argue that with the addition of hyper-speculation, the business cycle occurs more frequently and more severely, creating the possibility of a pernicious “feedback” mechanism that will send the economy into a spiral of “debt, deflation, and default”. “A vicious, downward spiral occurs in which all three feed upon and exacerbate each other.” This account, to my mind, is a vivid narrative, but theoretically spare. Hyper-speculation, as Rasmus acknowledges, began well before the 2000-2001 downturn (indeed it helped precipitate this event). Moreover, the trajectory of debt accumulation had a life independent of the 2000-2001 decline and recovery and, certainly when we include federal debt, the 2008-2009 collapse. And the asset deflation associated with both 2000-2001 and 2008-2009 was selective and not generalized throughout the economy. In short, I don’t think viewing the current crisis as an aberration of the business cycle is adequate or reflective of deeper fundamental causes located in the mainspring of capitalism; the current crisis does not emerge from a renegade sector of capitalism, but from capitalism itself.

I fully endorse Rasmus’s adamant refusal to place events like deregulation, Fed policy, or the personal actions of economic policy-makers center stage. While they played a role in intensifying the current crisis, deeper mechanisms are at play.

Historical Research and “Epic Recessions”

Rasmus distinguishes between “ordinary” recessions (type I) and more severe, system-threatening recessions (type II, “Epic recessions”). His taxonomy is useful and he defends the distinction with clarity and a command of historic data. For Rasmus, the 1907-1914 recession typifies a type I recession with an initial shock, policy adjustments (the creation of the Federal Reserve and the introduction of federal income taxes), followed by a longer period of stagnation interrupted by a war-induced recovery.

The early years of The Great Depression (1929-1931), on the other hand, typify a type II recession (Epic Recession). Distinguishing it from a type I is its severity and intractability. Rather than stagnation, a type II recession proceeds in fits and starts, but generally tracks downward. Rasmus shows a good grasp of the history of that era, a fact that separates him from the herd of commentators who either center matters on Roosevelt’s embrace of Keynesianism (Keynes had yet to write his opus) or posit a train wreck from bad monetary policies. As Rasmus understands, matters are a bit deeper than that simplified picture. On the other hand, Rasmus neglects the role of mass movements in ameliorating the harshness of The Great Depression for millions of people and in succeeding to stabilizing the decline to a great extent (see my: The Real Lesson of the New Deal for the US Left, ). His account is far too structural and policy-oriented and, therefore, misses the central lesson of the era: mass action makes a difference. And if Rasmus is correct – and I believe he is – that there are great similarities between The Great Depression and our current crisis, then this lesson is urgent for today.

Rasmus writes “By the summer of 1933, unemployment was 25-30 percent, production down by more than half, more than 15,000 small banks had failed, the stock market had declined 89 percent, and the Great Depression was at its low point.” In fact, the summer of 1933 was the peak of a false recovery - a factual correction, when made, which actually bolsters Rasmus’s claim of the intractability of the Great Depression and its historic uniqueness. I cite the following important history of the New Deal:

The index of production rose from 56 in March [1933] to 101 in July. Improvement was particularly marked in the steel, automobile, construction, and textile industries. The index of farm prices rose from 55 to 83 during the same period. Retail food prices rose from 59.8 to 71. Wall Street staged a bull market in industrial stocks which rose in price from an average of 63 in March to 109 in July. Monthly stock sales… which had been less than 20,000,000 in January and February rose to 125,000,000 in June.

These portents of prosperity were widely interpreted as proof that the new administration had already routed the depression. Wiser heads pointed out that no change in fundamentals had as yet been accomplished by the administration, except a slight fall in the value of the dollar. Employment rose between March and July from 58.9 to 71.5, and payrolls from 37.1 to 50.8, but purchasing power lagged far behind production and the rise in prices. The boom was compounded of speculation based on cheap credit and expectation of inflation and future profits, expansion of inventories as a hedge against rising prices, and the manufacture at prevailing wages of surpluses which could be sold at higher prices… Manufacturers, merchants, and investors hurried to change money, which had already begun to fall in value, into goods, which were rising in value. The “recovery” which resulted was false because it was speculative and without sufficient foundation in expanded purchasing power. It left the mass of consumers, who had no surplus funds to exchange for goods, worse off than before, because rising prices reduced the value of their income.

The most speculative elements of the boom were liquidated by the stock market crash of July. A more serious handicap on the administration’s recovery program was the decline of production from 101 to 71 in November. My italics (The History of the New Deal, Basil Rauch, p.93, 94)

If this reads ominously like the late spring of 2010, it is because the parallels are there for all to see. While this may conflict with Rasmus’s historical claim, I believe it vindicates Rasmus’s view– and my view – that we are far from shedding the deep flaws in the system that fueled the crisis. Once again, “cheap credit”, “expectation of inflation”, “expansion of inventories”, and “speculation” have generated an illusory recovery not unlike that reported by Rauch in revisiting The Great Depression.

Rasmus draws the right lesson from his historical survey: the only policy answer (short of socialism) to a crisis of the magnitude of the Great Depression or the current global crisis is massive government spending. That was the answer to the Great Depression and, as he points out, the recession of 1907-1914. In both cases, it was only a war that provided the political will to accept the level of deficit spending necessary for full recovery. But, as he notes, war is not the only answer. The PR of China sailed through the downturn relatively unscathed thanks to a stimulus program that far exceeded the scale of any other economy in the world. He might have noted the role of the publicly-owned banks in lubricating the flow of this massive stimulus. He might also have noted that most of the PRC stimulus was not diluted by public-private partnering as was the US Administration’s program.

Rasmus’ summary of where we stand is ominous, but accurate:

Having blown trillions of dollars bailing out banks and big companies…, consumer and household debt levels still remain at dangerously high levels. Meanwhile, the average household’s real disposable income continues to fall in general due to unresolved massive unemployment, continuing wage and earnings cuts, progressive benefits declines, deteriorating retirement income, various negative wealth effects, and a host of other forces…

[R]ecovery is not simply stabilizing the banking system. Nor is it even a return of GDP levels to positive growth… Normal fiscal policy responses… are likewise insufficient in generating a sustained recovery…
Obama and his administration, Congress, and the welfare of tens of millions are thus at a crossroads in 2010.Does Obama have the strategic foresight to make a turn to an FDR-like populist program? Or will he continue with another token jobs program, a tweaking of an already timid housing recovery program, and a lot of tough talk about bankers but little else?

These are questions we should all be asking and, more importantly, demanding of the current administration.

Rasmus’s new book, Epic Recession: Prelude to Global Depression (Pluto Press/Palgrave-Macmillan) should be available now and I look forward to reading about his insightful views in greater detail. I only hope that he gives some attention to the socialist option, an option that would put these concerns behind us once and for all.

Zoltan Zigedy

Sunday, May 9, 2010

Economists Tackle the Economic Crisis: III

A good, old-fashioned crisis of capitalism – a disruption that rocks the whole system – produces one salutary result: wiser heads, serious students begin to re-examine widely held assumptions and popular theories of political economy. For those few, this may mean dusting off old copies of the works of Keynes, Schumpeter, or Minsky, and – only too rarely – Marx. For the honest observer, the crisis is an opportunity for a deeper understanding of the capitalist mechanism and its direction.

But others cling to the comforting views of infallible markets and perfect rationality that prevailed until recently, while amending their theories with warning labels touting the current crisis is a special case falling outside of the economic canon. Most economists, pundits, and policy makers fall into this latter category. They got it wrong and they continue to get it wrong. They have too great of an investment in the ideologies, careers, and honors of the past.

There is now a long list of books and papers offering explanations, in part or wholly, of what went wrong with the global economy. The worst of these offer simple and immediate answers: evil bankers, irrational borrowers, lax regulators, etc. The best offer longer and deeper views that locate problems in the evolution of capitalism and its inner mechanisms. They contest the too human urge for simple answers and easy solutions. This is the third in a series of commentaries on the views of various economic writers on the economic downturn. Zoltan Zigedy

Paul Krugman, a Nobel laureate, is most likely the best known living academic economist in the US. His column in The New York Times is widely syndicated and often cited. A recent profile in The New Yorker touted his popularity and near celebrity status. Krugman represents, like Stiglitz, Shiller and a few others, a trend in academic circles skeptical, to various degrees, of the strict market fetishism increasingly dominant over the last three decades.

Along with his wife, Robin Wells – thought by some to be the more iconoclastic of the two – Krugman recently authored an article in The New York Review of Books (“Our Giant Banking Crisis – What to Expect” 5-13-10). The piece reviews a current book (This Time Is Different: Eight Centuries of Financial Folly p, Carmen M. Reinhart and Kenneth S. Rogoff), draws on IMF publications, and develops some of their own views of what lies ahead for the economy.

In light of the recent developments in Greece, Krugman and Wells cannot resist drawing Greek debt into the forefront of their account. They recite the charge, now largely taken for granted, that the current panic is induced by “excessive” debt: “The risks seem obvious: Greek government debt is at levels that have historically signaled deep trouble for middle-income nations…” Yet economists have struggled with giving any precise divide between high debt and excessive debt. What may “seem obvious” after the fact may well not have seemed obvious just months ago. This is especially true in light of the fact that Portuguese debt is even higher, Ireland’s three times greater, Spain’s four times greater, and Italy’s over five times greater. Why Greece? And why now?

Similarly, they summarize Reinhart and Rogoff’s findings: “In a nut shell, it is that too much debt is always dangerous.” But “too much” debt has as little explanatory power as “excessive” debt. In the run up to the crisis, economists had been warning of too much debt in different sectors of the economy for most of the decade. Why is debt “too much” for some and not for others? When is high debt transformed into “too much” debt? These questions go unanswered.

Part of the problem – unaddressed by professors and pundits – is the one- sided view typically proffered. Abundant scolds take the borrowers to task, hectoring them for “living beyond their means” or “profligate” spending. Little or no attention is paid to the lenders. Krugman and Wells note that “Greece has been in arrears on its debt for half its modern history.” But who loaned them the money? And why did they loan them the money given the notorious history and high debt load?

The answer is simple: banks and other institutions loan the money in order to make more money. In the confined world that Krugman and other economists theorize in, the omnipotent market should retard Greek borrowing well before the debt reaches the level of “excessive”. But that is not what happened.

Instead, the Greek debt grew until other financial institutions and figures attacked this debt, betting against its full repayment or resolution. They did not sit down with Greek policy-makers and argue for some adjustment for the good of the EU or the global economy. They did not meet with the European central bankers who had loaned the Greeks roughly two-thirds of Greece’s outstanding debt and suggest that this debt might strain the EU and the global economy. That is not what speculators do. They make money. Of course their bets – their purchase of credit default swaps against the Greek debt – affected the financial markets, driving up interest rates, lowering bond and credit ratings, and dramatically increasing the value of their bets. A crisis ensued.

Certainly there is nothing new in this course; it is precisely the scenario that amplified the capitalist crisis as it unfolded in the US three years ago. And like the earlier raid on banking, the elite policy decisions forced on the Greek people are aimed at bailing out banks and not the people. It is not Greece that is being saved, but lender banks throughout the world.

We know that speculation drives this crisis thanks to a little noticed correction by the Bank of International Settlements – the organization that keeps score on international debt – on April 22. On that date, the BIS downgraded Swiss bank exposure to Greek debt by 95% -a drop of $74.9 billion. One would have expected that this news would have, at least temporarily, slowed the mounting attack on Greek solvency. It didn’t.

These events underline how little has been done to reign in speculative capital. They also point to the likelihood that financial turmoil will be with us until policy-makers look to make serious structural changes in the world of finance capital. Nationalizing the 900 pound gorilla is an obvious answer, but one that most public figures - especially pundits and opinion-makers - don’t want to hear.

Studying History?

Krugman and Wells praise Reinhart and Rogoff for drawing on the long history of financial crises to both enrich and enlighten our perspective. They contrast their historical approach to those who “…take the easy road… [tending]… to focus their efforts on times and places for which numbers are readily available, which basically means the recent history of the United States and a few other wealthy nations.”

I would agree wholeheartedly that an historic approach is not only commendable, but essential to unraveling present economic events. Though it is not only the narrative and numbers that are essential, but the connections between economic events - the logic behind capitalism’s course.
One does not find these threads in the Krugman and Wells article or, I suspect, the work of Reinhart and Rogoff.

If there is a far-reaching, global financial crisis, then surely it cannot be separated from a crisis of capitalism. Creating an artificial barrier between financial behavior and systemic behavior a priori limits disclosing any connections between financial capital and other sectors of the economy. Such a narrow focus forbids, without argument, an examination of the role of the global division of labor, the explosion of trade, political changes in the balance of power, privatization, radical income redistribution, technological change and a host of other factors that may be deeper-seated causes of the financial expression of the current crisis.

Likewise, a truly historical approach to the downturn would explore the links between the dot-com downturn at the beginning of the decade and the current economic difficulties. When an entire decade exhibits little job growth, escalating income and wealth dispersion, expanding consumer debt and other ominous indicators, there may well be some common causes lurking in the shadows.

This refusal to look for explanation beyond a self-imposed intellectual enclosure is typical of modern academic economics and in sharp distinction from the method of classical political economy. If you don’t look for deeper and broader answers, you won’t find them.

Out of the Crisis

“History says that the next few years will be difficult. But can anything be done to improve the situation? This Time is Different says little on this score.” But Krugman and Wells have much to say.

Indeed, they make a strong, persuasive case for deficit spending as the way out of the crisis, an argument that would seem to be at odds with their finger-pointing at Greek deficit spending. In fact, they make a strong case for discounting the Reinhart and Rogoff stand against “too much debt”; where Reinhart and Rogoff find high debt causing low growth, they argue, conversely, that slow growth more likely generates high debt. Thus, they excise the principal theoretical basis for avoiding growing debt.

I would maintain that these seemingly paradoxical views coexist only because all parties in this debate subscribe to patch work economics, spinning conclusions from snap shots of economic events. They suffer from a dogmatic aversion to “grand” theories of the evolution or development of capitalism. While grand theories can take us well into the realm of speculation and fantasy, some sense of the structure and logic of capitalism can save us from the dead-end of disconnected events with disconnected causes.

In fairness to Krugman and Wells, they distinguish between “middle-income” nations like Greece and a large economy like the US, though they never tell us why that difference is decisive with respect to debt and deficit spending. We are left to guess why scale matters with two countries bearing potentially comparable relative debt obligations and deficit spending habits, but requiring different policy prescriptions.

In the US, no one was surprised that financial irresponsibility sent shock waves through the global economy. But how does a “middle-income” economy with far less debt than the cost of the CITIGROUP bailout create such an international panic as we are now witnessing? Surely some grander theory of speculative capitalism, a theory that would emphasize the role of new and more predatory modes of speculation, would be useful.

Without some further clarification, Krugman and Wells seem content to consign Greece to economic hell while rescuing the US economy with deficit spending.

It would be a mistake, however, to ignore Krugman and Wells’ case for deficit spending. They rehearse a host of examples –well known to serious economic historians and ignored by deficit hawks – that show dramatically that recovery from severe downturns occur when and only when policy makers intensely prime the pump with government deficit spending. While this is not a new observation, it demonstrates how discredited Keynesian thinking became after economists embraced the tenets of neo-liberalism after the economic experiments of the Thatcher-Reagan era. Today, Krugman’s principled and persistent advocacy of deficit spending often seems like a cry in the wilderness.

The Krugman and Wells prescription for avoiding future crisis is completely in step with current liberal orthodoxy: financial regulation. Certainly, regulation is preferable to no regulation or de-regulation. Like their colleagues, Krugman and Wells are fully aware of the seeming immunity to the global crisis enjoyed by The People’s Republic of China. During the global upheaval, the PRC economy perked along merrily with capital flowing freely from the banking spigot. In this regard, Krugman has often pointed to the immediate and intense stimulus that the PRC employed to sustain growth, a powerful buttress to his argument in support of deficit spending. On the other hand, he and most other economists conveniently ignore the essential role of the publicly owned banks, a critical factor in sustaining the growth. For ideological reasons, nationalization of the banks, rather than regulation, never enters the discussion.

One has to ask how many times you have to be bitten by a snake before you find a different pet.

Zoltan Zigedy