Tuesday, March 24, 2009
Road to Perdition
This interview of Prof. David Harvey and Alexander Cockburn of Counterpunch made me want to review the origins of this crisis. Harvey claims that now that America has only five banks standing, this consitutes a consolidation of class power in that country.
Contrary to what some have been saying, this has been a crisis thirty years in the making. Whilst we in the developing world have been in permanent crisis in for decades, Capitalism has come full circle and landed square in the heart of the world's largest economy.
Capitalism’s ‘Golden Age’ in the 50’s and 60’s saw expansion and growth. Between 1950 and 1975, income per person in the developing countries increased by 3% annually on average, accelerating from 2% in the 1950’s to 3.4% in the 1960’s. In the developed countries GDP and GDP per person grew almost twice as fast as in any previous period since 1820.
This was a stable regime of accumulation regulationists termed Fordism. If Fordism was the regime of accumulation, then the mode of regulation, indeed the mechanisms that enabled such a system to work, were the Bretton Woods institutions.
A regime of accumulation, according to Regulation theory, is a period where crisis is put on hold, where crisis, indeed, is ‘regulated.’ Tensions of the contradictory social relations are managed by politically instituted compromises.
Within the core, national models of capitalisms meant the State’s support of national industries and class compromise between the State, Capital and Labour (Corporatism). With these compromises, Capital’s mass production had a steady market in Labour’s increased purchasing power due to rising wages. Because Capitalism’s survival is based on continued growth in profits, and domestic markets could only grow so much, expansion is necessary. Crisis is defined as lack of growth.
Regulationists generally agree that in the 70’s the world broke away from the old regime of accumulation. This was a crisis-prone period, one where the old mode of regulation (i.e. the Bretton Woods System) no longer worked to continually expand profits. The 70’s therefore saw a painful transition to Capitalism’s latest form.
Whereas the State was mainly concerned with juggling conflicting class interests within the national territory and resolving these conflicts as best it can within the domestic context, internationalisation meant the destruction of national capital and national labour compromise brokered by the State.
With capital’s logic of expansion in search of cheaper cost of production and more markets, production was increasingly internationalised. The very first multinational corporations were born in the 60s. The economic orthodoxy of ‘comparative advantage’ or specialisation made “less sense” as corporations’ production globalised.
As American firms went abroad, their banks followed. To remain competitive, European and Japanese multinationals followed suit as well. And so did their banks. Even when doing financial transactions abroad, MNCs tended to act out ‘nationalistically.’ Japanese firms borrowed from Japanese banks, German firms from German banks and so on. Banks wanted to escape financial regulation, taxation and capital controls. US banks went to Europe to escape the legal reach of the nation-state.
Inadvertently, American monetary policies enacted by the Federal Reserve in the 60’s, which were meant to keep capital at home, effected the opposite. The Voluntary Foreign Credit Restraint Program, which was designed to curb foreign firms and governments borrowing from US banks, and the Foreign Direct Investment Program, which limited the amount of capital US firms could send abroad, were what caused US banks to leave in the first place, taking residence in Europe.
American capital surpluses ‘hiding out’ in Europe saw the growth of Euromarkets. The Euromarkets are “an organized market for foreign currency deposits. To take the example of dollar deposits, a Eurodollar deposit is no more…than dollars deposited in a bank outside the US (Kapstein, 1994: 32).” Estimates saw the growth of the Eurodollar market from $20 billion in 1964 to $305 billion in 1973.
In the late 60s, the US dollar was overvalued, capital was exiting American shores and the Vietnam War was draining the American economy. The announcement of 1971 did not take long in coming, and exchange rates were set free to ‘float.’ On August 15, 1971, President Nixon announced the dollar was no longer freely convertible to gold, effectively abolishing the fixed exchange rate system. Currencies were allowed to float letting ‘markets’ dictate values of currencies according to the laws of supply and demand. The Bretton Woods system had collapsed.
This unilateral decision was a political one. The impact, made in defence of American national interest, was nevertheless felt world-wide.
Globalisation of production corresponded with the corollary globalisation of finance. As the leading capitalist power, the United States’ decision to abandon the old regime of accumulation for continued growth of its corporations was perhaps best manifested in its abandonment of the mode of regulation.
Period of Transition: Loose Capital
The only successful group in the developing world able to change the terms of exchange using ‘commodity’ power were the oil-exporting countries of the Middle East. The newly-established Organisation of Petroleum Exporting Countries (OPEC) quadrupled oil prices from $2.48 to $11.65 per barrel in 1973.
The oil crisis of the 70s affected all oil-importing countries in the world, both rich and poor. There was severe recession in the West resulting to depression in demand for developing country exports, further spurring the deteriorating terms of trade. The decreased income of developing countries resulted to large-scale borrowing to finance balance of payments deficits.
The oil-exporting countries of the OPEC on the other hand, saw a prodigious increase in income estimated at $125 billion in the years 1974 to 1976 alone. $48 billion were invested in government paper, portfolio and long-term direct investments in the industrial countries. $49 billion, or 37 percent of total, were deposited in private commercial banks in New York and London.
The depression in the ‘real’ economy and the prodigious growth of financial markets via MNCs’ Euromarket deposits and OPEC’s ‘petrodollar’ deposits in multinational banks were the contradictory trends of the 70s. Both these two trends gave birth to a new regime of accumulation, one where growth is based on the expansion and accumulation of ‘fictitious’ capital.
Highly liquid, banks began lending to non-oil-exporting developing countries. Prior to the crisis, banks were wary of lending to these poor countries. In the 60s however, they seemed capable of servicing debt due to growth and rising exports. Further, banks had limited markets “in the slowly growing developed countries (Spero 1990: 167).” From 1970 to 1983 "the share of bank loans in total long-term financing increased from 4 percent to 22 percent (Singer & Ansari 1988: 220)."
Here it is important to note that banks were not operating on their own, but had active encouragement from governments and the IMF “which saw [lending] as a mechanism for recycling (Spero 1990: 167).”
The IMF enacted a mechanism to facilitate lending to the Third World. The ‘Facility to Assist Members in Payments Difficulties from the Initial Impact of Increased Costs of Imports of Petroleum and Petroleum Products,’ was in effect a "multilateral program to recycle petrodollars through 1975.” At first hesitant, the United States later acceded to the IMF’s proposal.
By the end of the 70s, governments in the Third World looked increasingly unable to make payments, incurring new debts to service old ones. The IMF played a central role in managing the ‘Debt Crisis.’ Two strategies were formulated and applied to all debtor countries to ensure that they could make their payments. These were the Brady and Baker Plans respectively. Both were named after US Treasury Secretaries.
The 1982 Brady Plan aimed to decrease government spending and increase tax collection. To garner increased revenues, governments should also seek to improve exports and devalue their currencies to make exporting more attractive for domestic enterprises. By 1984, the Brady Plan was not working as effectively as planned since these governments still had difficulty making payments. Its assumption that the problem was only a matter of lack of liquidity on the part of the debtors was a misdiagnosis of the problem.
The second strategy, the Baker Plan, was more aggressive in restructuring debtor economies in order to ensure their debts would be serviced. These structural changes would ostensibly make their economies more efficient, generating more revenues and being better able to pay debt. The IMF made further disbursements of capital conditional on enacting these changes.
In taking steps to resolve the Debt Crisis, i.e. making sure overexposed banks would recoup their investments, the IMF played an increasingly political, indeed politicised, role in the global economy. From its early mandate of merely overseeing a stable international monetary system it had not only transformed into a mediator between debtors and creditors with a demonstrable bias for the latter, but also into an unaccountable, unelected house of economists imposing economic policy on governments and polities far, far away.
Financial Liberalisation and More Crisis
The ‘Debt Crisis’ of the 80s faded into memory as banks were assured by their governments and the IMF that their loans would get paid, rescheduled perhaps, but paid nonetheless. Capital shortage for the Third and Fourth Worlds, however, would not go away. The 90s presented a different kind of crises and indebtedness. If capital was owed to banks in the 80s, today they are owed to literally hundreds of thousands of private individuals investing in ‘emerging markets’ and all kinds of funds.
Governments ‘freed’ money capital by removing restrictions on international capital movements. The very first to do so were Canada, Swtizerland and Germany in 1973. In 1974 the US did the same, followed by the Britain in 1979, Japan in 1980, France and Italy in 1990 and Spain and Portugal in 1992.
In Economic orthodoxy, the freedom of financial markets were supposed to effect a redistribution of capital world-wide. Capital was supposed to “flow from capital-rich developed countries to opportunity-rich emerging countries (Eatwell 1997: 11).” Not only that, markets were also expected to discipline governments for greater ‘efficiency.’
The IMF itself advocated deregulation of capital controls among members. Deputy Managing Director Stanley Fischer claimed capital account liberalisation would “outweigh the potential costs," hence the need to adapt “economic policies and institutions, particularly the financial system [to] operate in a world of liberalised capital markets (Singh 2003: 195).” Its sister institution, the World Bank also encouraged opening capital markets to foreign portfolio investment. Interestingly, China had not liberalised its capital account, but has maintained economic growth for the last two decades.
The result was the permutation of money into what Marx might recognise as ‘fictitious capital.’ The last thirty years has seen the creation of credit and wealth never before witnessed in Capitalism’s history. From 1975 to 1994, the stock of international bank lending from grew from $265 billion to $4200 billion despite crises. This is perhaps because of the nature of the debtors themselves. Unlike businesses or individuals that can declare bankruptcy, Sovereign states will always be able to pay as long as tax payers are born every day.
The Bank of International Settlements (BIS) estimated the value of exchange traded derivative products at $13.5 trillion in 1999. Over-the-counter (OTC) transactions, i.e. private transactions between institutions was estimated at $72.6 trillion (Nesvetailova 2005: 400).
Increasingly, investments have moved away from the “bricks and mortar” kind to short-term portfolio investments, the kind that can pull out quickly at the first sign (imagined or not) of trouble. The most obscure, highly ‘conceptualised’ capital circling the globe today such as swaps, options, derivatives and futures, are perhaps better explained by mathematicians than the space in this discussion allows. Indeed this ‘electronic herd’ of money managers, armed with computers, use algorithms and pure mathematical formulae to ‘read the mind’ of the market.
Increasingly, the way these highly liquid forms of capital move have little to do with the real economy. Investors wanting a quick return would prefer portfolio investments over FDI because they are easily recoupable with a few strokes on computer keyboard.
Surreptitiously, the phrases ‘economic fundamentals’ or ‘the real economy’ as distinct from the weird world of high finance…Indeed the financial sector is now often dismissed as a casino society where speculators play out their compulsive habits.
The past decade has seen one financial crisis after the next as rogue capital chase profit opportunities across the globe. Like the tide, money instruments ebb and flow in the developing world with the whims of the market. Their flow triggered imaginary ‘prosperity’ in the hands of local capital and there was some growth due to increased local consumption. Their ebb triggered crashes in Mexico in 1994, Asia in 1997, Brazil in 1998, Russia in 1999 and Argentina in 2001.