Financial Meltdown And The Madness Of Imperialism
By Raymond Lotta
The events of the last ten days on Wall Street represent a new and more destabilizing phase of the turmoil gripping financial institutions and markets in the U.S. A financial crisis has been unfolding for more than a year. It is now the most serious financial crisis of U.S. capitalism since the Great Depression of the 1930s. And it is by no means contained or under control.
The financial edifice of U.S. imperialism is in danger of crumbling. And the U.S. ruling class is cobbling together desperate measures to prevent wholesale collapse.
This analysis examines the recent eruptions on Wall Street of mid- and late September and the deeper structural causes of the crisis.
I. Wall Street Panics, the Guardians of U.S. Capitalism Scramble
A). A Week of Deepening Financial Crisis
Two of the last two independent investment banks on Wall Street ceased to exist in mid-September. In a matter of hours, Lehman Brothers went bankrupt on September 15, while Merrill Lynch was forced into liquidation and then absorbed by Bank of America. This follows the government-promoted buyout in April of Bear Stearns, another giant investment banking firm that was on the ropes, by JPMorgan Chase.
It was only several weeks earlier that the U.S. government had taken over the two major and failing mortgage-finance giants--Fannie Mae and Freddie Mac. At the time, this takeover was presented as providing an effective firewall against future financial eruptions. But it proved to be no more than the patching up of a pothole during an earthquake. This past week the government had to take over the American International Group (AIG), the giant insurance-financial firm.
AIG had over a trillion dollars in assets. It had earned enormous profits from insuring mortgage-backed investments circulating in the financial system that were held by other banks. But this has turned into a disaster. Here is some of what happened:
Through deceit and aggressive marketing, banks pushed mortgages on people. The Federal Reserve Bank had pumped low-cost funds into the banking system to prop up mortgage loans. These loans were then combined into larger groups of loans by investment banks (like Lehman Brothers) and turned into financial products that were sold on financial markets. All kinds of lending took place with these original loans as collateral. But when housing prices fell, and mortgages could not be paid, much of this collateral became worthless.
AIG was insuring much of this lending against the risk of loss. But as the losses mounted astronomically, AIG could neither cover the costs of backing this debt nor borrow funds on the financial markets to keep itself afloat.
The financial markets had basically lost confidence, and AIG’s assets tumbled in value. AIG was in danger of collapse. But if AIG went under, the probability was great that it would have taken down other financial institutions with it. This forced the government’s hand.
Normally, so-called bad debt is marketed at distress prices. During the financial storm of mid-September, not only were there no takers for debt but it also proved impossible for the financial markets to establish any kind of value on this debt.
As the pace of the financial crisis grew more frenetic during the week of September 15, the U.S. ruling class was faced with a two-fold danger: additional and cascading losses and bankruptcies in the financial sector; and the possible choking up of lending channels, which could send the economy as a whole into a rapid downward spiral.
On September 19th, the U.S. government announced what will likely turn out to be the largest bail-out operation in U.S. history. Its initial cost is $700 billion, and this is on top of the $200 billion earmarked to shore up Freddie Mac and Fannie Mae and the $85 billion to bail out AIG.
B). International Dimensions
This is a rolling financial and credit crisis. It is amplifying internationally with bursts of instability. In the midst of last week’s U.S. market gyrations, the Russian stock market sank and shut down for two days. In other parts of the world, concern spread about whether dollar-based loans in global markets would continue on the scale necessary to sustain daily business operations. In response, the central banks of Germany, Japan, England, Canada, and Switzerland pumped some $185 billion into the financial markets.
And investor worry is mounting in East Asia. China, Japan, and South Korea, for instance, count on the U.S. as a major export market.
One of the most significant features of world growth and expansion over the past decade has been the deepening integration of the world capitalist economy. This is happening both on the level of production and trade—like the parts that go into an automobile being manufacturing in different factories around the world. And it is happening at the level of finance—where banks are more globally and tightly interlinked with one another through chains of borrowing and lending and even, as in the case of AIG, insuring the risks of borrowing and lending.
The rescue operation announced by the U.S. government was motivated, on the one hand, by the need to stanch the bleeding of the U.S. financial system; and, on the other, by the need to restore international confidence in the U.S. economy.
A particular matter of concern for U.S. rulers is the international strength of the dollar. When we think about the dollar, we mostly think about it in terms of buying and selling with dollars changing hands. But the dollar is also an investible commodity—major currencies are bought and sold and traded on international currency markets. The dollar rises and falls in value in relation to other currencies and in response to international political and economic developments.
The dollar is the world’s leading currency for settling transactions, clearing debts, and holding foreign exchange reserves (trade and investment earnings that become part of the reserves of foreign central banks).
The dollar has been a linchpin of U.S. global supremacy. And it is a linchpin of the whole current global economic order.
If foreign central banks and investors were to flee from dollar holdings, this could set off a global monetary crisis and/or strengthen the position of rivals to U.S. imperialism and rival currencies (like the euro in Western Europe).
The dollar has for the most part held firm over the past month. But this is perhaps the calm before the storm.
C). Uncharted Waters and the Needs of Empire
These are uncharted waters for imperialist policymakers. They are uncharted in terms of the scale and complexity of the crisis. They are uncharted in terms of the magnitude of the rescue operations required to prevent financial breakdown. And U.S. imperialism does not have unlimited maneuvering room.
The U.S. is already the largest debtor nation in the world. It is waging costly wars for greater empire in Iraq and Afghanistan. And neither John McCain nor Barack Obama has any serious intention of ending America’s global “war on terror”--the umbrella under which the U.S. is waging these “wars for empire.”
And here an important dialectic comes into play. “U.S. military dominance,” to quote Kenneth Rogoff, the former chief economist for the International Monetary Fund, “has been one of the linchpins of the dollar.”(Kenneth Rogoff, “America Will Need a $1,000bn Bail-Out,” Financial Times, September 17, 2008). But this military dominance and the wars the U.S. is waging have increasingly come to depend on the steady inflow of foreign capital into the U.S. economy, especially investments by foreign central banks in U.S. government debt (the U.S. Treasury sells bonds to cover the deficits). For this to continue requires that the U.S. economy and dollar remain stable. This is a major contradiction for U.S. imperialism.
When, since April, three of the five independent investment banks on Wall Street have gone bankrupt or been absorbed, when the U.S. government intervenes in the financial sector on the scale that it has…this has profound geopolitical implications.
At the same time, the world economy is not standing still. There are major shifts in global economic power. U.S. global economic dominance is declining. And U.S. imperialism is also facing new competitive challenges and the emergence of potential rival constellations of imperial and big powers.
D). The U.S. Ruling Class and Imperialist State Come Into View
As this financial crisis has unfolded, some of the realities of bourgeois rule came into sharper focus.
To begin with, while the jobs, homes, and futures of literally millions in this society are in jeopardy, what is the paramount concern of the ruling class? It is the protection of a financial system that sits atop a global system of exploitation. It is the bail-out of the owners and investor beneficiaries of that financial system.
There was no public debate over bailouts and loans for financial institutions. And the constant refrain from on-high was, “This is no time to assign blame.” Certainly, there is never a time, from the standpoint of the bourgeoisie, to talk about capitalism and its exploitative and anarchic functioning.
Politically, the system operates in such a way that the masses of people are either conditioned to be passive bystanders, or mobilized under the wing of this or that bourgeois political party or bourgeois-led movements--or subject to repression when people engage in serious resistance.
And through the media, the politicians, and the official “experts,” people are trained to look at things through a certain ideological filter. When a crisis like this one hits, the problem is never presented as the system but rather as particular flaws and malpractices that can be corrected: “excessive greed,” “Wall Street irresponsibility,” “too much regulation” or “too little regulation.”
The truth is that this crisis has deep structural causes in the very nature and workings of global capitalism and the particular position of U.S. imperialism within that global framework.
Lenin once described bourgeois parliaments (like the U.S. Congress) as “talk shops.” This time, Congress did not even get a chance to “talk” first. It has been basically presented with an accomplished fact: a bailout program. Now the bailout will be debated around the edges, with vying bourgeois economic and political interests also being fought out.
There are key institutional mechanisms of bourgeois rule and of the imperialist state. They include the Federal Reserve Bank--which plays a decisive regulating and lubricating role in the U.S. economy and which also plays a special role in the world capitalist economy-- and the Department of Treasury. Several mainstream news stories described how the head of the Federal Reserve and of the Treasury, and major Wall Street figures, met to sort out the AIG situation, to come up with a plan to deal with this phase of the crisis, and then to act on it.
As for McCain and Obama, one of whom will be the next “commander in chief of empire,” their response to the crisis has been an amalgam of the absurd, the hypocritical, and sworn allegiance to the system.
In the midst of the financial turmoil, McCain described the U.S. economy as having “sound fundamentals.” Then he moved to launch a rhetorical attack on “casino economies” and “greed” on Wall Street. Then he returned to his boilerplate calls for tax cuts, which will largely benefit the rich.
For his part, Obama has generally endorsed bailouts while deriding the policies of laxity and deregulation of the Bush presidency. The amnesia is striking. There was an orgy of deregulation during the Clinton years, including the repeal of regulatory legislation that laid the ground for the kind of mortgage-backed securities that became the rage on Wall Street. But then again, one of Obama’s chief economic advisers is none other than Robert Rubin, former chairman of Goldman Sachs (one of the last-standing independent investment banks) and head of the U.S. Treasury Department under Clinton.
Meanwhile, in Nevada on September 17, Obama declared, “Our free market is the engine of America’s great progress. It’s a market that has created a prosperity that is the envy of the world.” Tell that to the hundreds of millions around the world who are experiencing the ravages of a global food crisis. This food crisis is inextricably bound up with the operations of free markets that turn grain and rice into international commodities bought, sold, and speculated on by global investors. It is inextricably bound up with the “freedom” of U.S. agribusiness to dominate world food production and distribution. And it is inextricably bound up with so-called free-market “reforms” imposed on poor countries by the International Monetary Fund (which the U.S. also dominates).
E). Uncertainty Reigns
This crisis is far from over. There may be new rounds of financial upheaval. The economy is already in recession. And it could very well enter into a major slump.
And true to the workings of monopoly capitalism, investors and speculators are feverishly positioning themselves to take advantage of the market turmoil. They are unloading and grabbing up assets, angling to get a bite of the government bailouts, and shifting funds into different markets.
Whoever wins the election in November will be inheriting a battered financial system and a huge overlay of debt and bailout. This is not going to be an era of expanded social spending by government. But it will be an era of more direct government intervention in financial markets. And however U.S. capitalism tries to reconfigure itself, it will rest on more intense international exploitation, austerity, and more misery for people throughout the world and in the U.S.
For millions in U.S. society, this crisis is beginning to throw up many deep and troubling questions about the economy and this whole system. And it has the potential to throw up even deeper ones.
This is a fraught and rapidly unfolding situation.
II. The Deeper Structural Causes and Dynamics of the Financial Crisis
The buildup and collapse of the U.S. real estate bubble, the convulsions on Wall Street, and intensifying financial fragility that could lead to massive breakdown are the outward expressions of deeper processes and transformations at work in the world capitalist economy.
We need to take a step back.
A. Globalization and Financialization
For the last 15 years, world capitalist expansion has pivoted on a particular international dynamic and structure. This has involved heightened financialization and parasitism in the advanced capitalist countries —with the United States at the epicenter of this process; and the fuller integration of low-cost, export-producing countries of the Third World into the world capitalist market —with China at the epicenter of this process.
The turning point in this process was the collapse of the social-imperialist Soviet Union in 1990-91. With the implosion of the Soviet bloc, the main geopolitical obstacle to U.S. imperialist freedom of action was removed. At the same time, and very much in connection with this, imperialist globalization accelerated.
Over the last 15 years, a globally integrated cheap-labor manufacturing economy, with huge labor reserves from China, India, and other parts of the Third World, along with labor from the former Soviet bloc, has been forged. The globalization of production has had enormous effects on world accumulation: raising profitability for imperialist capital, acting to compress wages, and lowering inflationary pressures. The integration of cheap-labor manufacturing into world production is now so deep that in the U.S., fully half of imports (mostly consumer goods) come from the Third World.
A revealing statistic: a University of California study looked into who gains when an iPod manufactured by national firms in China is sold in America for $299. Only $4 stays in China with the firms that assemble the devices, while $160 goes to American companies that design, transport, and retail iPods.1
When we speak of capitalist accumulation, we are referring to the competitive production of surplus value (the source of profit) based on the exploitation of wage labor; and the investment and reinvestment of profit on an expanding, cost-cheapening, and technologically more productive basis.
When we speak of “financialization,” we are referring to two particular features of the larger structure of capitalist accumulation in this period of imperialist globalization: a) the vast expansion of financial activities and of financial services, like organizing and financing corporate takeovers, insuring investments against risk, creating new financial instruments, etc.—activities in which profit-making involves the siphoning, centralization, and reinvestment of surplus value through financial channels; and b) the increasing separation of finance from production.
This process of financialization has gone the furthest in the United States, and it is a major factor in U.S. imperialism’s ability to preserve and extend its dominance in international financial markets.2
Financialization is also a means through which wealth, and effective control over productive forces, is centralized by the imperialist countries—even as production has grown more geographically dispersed and increasingly carried out within subcontractural networks in the Third World.
Financialization involves efforts to squeeze out more “value” from already created value. One measure of this is that in 2006, the daily volume of trading in foreign exchange markets and in derivatives (financial instruments) added up to $11.4 trillion—which almost equals the annual value of global merchandise exports that year. In terms of the shifts in the structure of the U.S. economy, the financial services sector, comprising finance, insurance, and real estate, far exceeded other sectors—totaling over 20 percent of U.S. GDP by 2005, while manufacturing had fallen to 12 percent of U.S. GDP. The financial sector’s share of total corporate profits has risen from 5 percent in 1982 to 40 percent in 2007.3
B. Financialization and Production
As far removed as finance may be from processes of production, and as elaborate and multi-layered as its operations have become, finance cannot break free of the sphere of production. Even as it objectively seeks to do so—and even as the disjuncture between the two spheres (production and finance) grows—it is the underlying conditions and profitability of production that set the overall conditions for the accumulation of capital.
Imperialism is a worldwide system of production and exchange. It is the structure of social production—it is the global production of surplus value based on exploitation of people—that is at the foundation of this whole system. And in relation to the production of surplus value, “financialization” is both parasitic and functional. It is parasitic in the sense that financialization drains value from production.
But financialization is functional to the workings of global capitalism in the sense that it facilitates the gathering of money capital into ever-larger agglomerations of capital and finds new profit-yielding channels in which to rapidly invest it…and just as quickly to withdraw it! Global capital faces all kinds of financial uncertainties and risks on its competitive global playing field as it moves through different channels, or circuits, of production. And the “risk-management” techniques provided by the global financial system are actually vital to the accumulation of capital, to the success of “risk-taking,” in the turbo-charged globalized economy.4 That’s why, for example, money jumps into Thai real estate markets one day, and pulls out and goes into ethanol production in Brazil the next… and then back to mortgage securities.
And there is something else: the inflows and outflows of short-term and speculative capital also act as a perverse means of imposing discipline on and restructuring capitals—a major manufacturing firm can be starved of credit or threatened with a leveraged buyout. And this kind of “financial discipline” has been imposed on whole countries in the Third World—aided, abetted, and orchestrated by the U.S.-dominated International Monetary Fund.
All this is part of the reason that financial instability is a constant feature of capitalism in its more globalized and financialized forms of existence.
Financialization and the globalization of production have been tightly bound up with each other. It can be put this way: there is a relationship between sweatshop labor in Guangdong province in China, the recycling of China’s export earnings into the U.S. Treasury and U.S. financial markets, and the credit-financed expansion in the U.S. of the last decade. Or, to put it more graphically, there is a link between the agony of superexploited labor in the bowels of the new industrial zones of the Third World, the feverish search for high and quick returns at the top of the financial pyramids, and the chaos of the housing markets with people losing their homes in the U.S.
This is an extreme concentration of the nature of world capitalism. This world is highly bound together by production, trade, and finance. The requirements of life (consumer goods) and the requirements of production (machines and raw materials, etc.) are socially produced, that is, they involve the collective and interconnected efforts of wage-laborers in factories, warehouses, and so forth. But this wealth, the technology and means of producing it, and knowledge itself—all this is privately controlled and deployed by a small capitalist class.
C. Barriers, Contradictions, and Shifting Tectonic Plates
What we are witnessing now is that a particular dynamic of growth, marked by intensified financialization, is generating new contradictions and new barriers to sustained accumulation.
The level of debt to economic output in the U.S. is at an all-time high. The financing of the trade and government deficits of U.S. imperialism (that is, providing credit for purchases of imports and having investors buy Treasury debt) depends on a steady and growing inflow of capital from abroad. But the weakening of the dollar and the emergence of competitor currencies, like the euro, increasingly threatens these mechanisms. And very crucial to this has been the process where dollars earned by countries like China through trade with the U.S., are then recycled back into the U.S. economy through purchase of Treasury bonds and other investments.
In the U.S., the financial sector is seriously strained and is a flashpoint of heightened global financial instability, if not breakdown, leading to a major economic slump.
Here we come to a basic point of this analysis: A financial crisis has broken out because of the severe imbalances built up between the financial system—and its expectations of future profits—and the accumulation of capital, that is, the structures and actual production of profit based on exploitation of wage-labor.
The imperialist state is intervening to head off further damage and to discipline and restructure the financial system. But the very complexity of the “financial packages” created during the speculative boom—with their bundled-up loans and long strings of finance—are producing new challenges for policy-makers. As one Yale economist put it, perhaps unintentionally echoing a phrase from Marx: “like the sorcerer’s apprentice, we have created things we do not understand and cannot easily control.”5
This explosive uncertainty is developing against a larger international canvas. Major shifts are taking place in the world capitalist economy. The European market recently eclipsed the U.S. market in size. China’s growing demand for raw materials to fuel its export economy is making it a new player in the scramble for resources and control over them. And China’s increasing importance as a supplier of capital to the U.S. is giving it new leverage. Russia is reemerging as a world imperialist player, owing in part to its vast energy reserves and rising oil and gas prices.
At the same time, and at this very moment of financial crisis, U.S. imperialism’s freedom of maneuver is severely hobbled—and this includes its ability to stimulate the economy through fiscal and monetary policy. The United States has never run such large current account deficits and no single country’s deficit has ever bulked as large relative to the global economy.
D. The Military Fix
Which brings us to one of the “dirty little secrets” of the financial crisis: the military needs and the military costs of empire…and “greater empire.”
There is a brute fact of imperialist accumulation. The whole imperialist system rests on the domination of vast swaths of the globe through savage force, with the U.S. military colossus playing a special role. The U.S. military helps “create the conditions” for U.S. domination, pro-U.S. client regimes in the Third World, and conditions for investment by U.S. corporations.
In the Bush era, U.S. imperialism has been attempting to parlay its military might into a new world order. This involves a restructuring of global political and production relations that will enable it to resolve or mitigate some of the problems and tensions it faces—and to lock in its global supremacy over rivals and potential rivals for decades to come.
The U.S. share of world production has declined to about 20 percent, down from 30 percent forty years ago. But U.S. imperialism is compensating for this by pressing its military advantage as sole imperialist “superpower” (since the collapse of the Soviet Union).
In a recent study, Chalmers Johnson has calculated that defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. Leaving out the wars in Iraq and Afghanistan, defense spending has doubled since the mid-1990s.6
Militarization is also embedded in the U.S. economy. It is a key structural component of growth, scientific research, and technological prowess of U.S. imperialism. And because of its sheer size, it also plays a role in the attempts of the U.S. imperialist state to “manage” and stimulate the economy.
But the recent wave of militarization has put enormous financial strains on U.S. imperialism. It has produced huge deficits that cannot be sustained without the inflow of capital into the U.S. And the wars for “greater empire” are incurring astronomically greater costs than military and government planners had anticipated. Not least because of the setbacks and difficulties U.S. imperialism has encountered in Iraq and Afghanistan.
This is a sharp contradiction for U.S. imperialism—because in many ways it is staking the future of empire on these wars; but these wars have become more costly to wage. And it is the height of hypocrisy for Democrats to now blame the Iraq war for financial crisis—as they consistently voted for war-spending authorizations, to the tune of $500 billion.
E. A Reflection: Transparency and Anarchy
The free market is extolled by bourgeois ideologues for its “transparency.” This is the idea that markets, prices, and interest rates convey all necessary information: about supply, efficiency, choice, and reward.
But one of the distinguishing features of this crisis is the incredible and pervasive lack of knowledge among lenders, borrowers, traders, and insurers about the quality and backing of what they borrow from others…and even of what they lend to others! Things are obscured, covered up, and very opaque.
* There is the anarchy of capitalism, as giant agglomerations of capital battle others for market share and profits, and pursue competitive strategies that have unforeseen effects on the larger system.
* There is the emergence of a newer banking system operating parallel to the older commercial banks. These are the so-called hedge funds, private equity firms, and investment banks. They move huge amounts of capital in and out of financial markets to take advantage of momentary and slight changes in bond prices, interest rates, and currency exchange rates. They borrow against assets that have a shadow existence, far removed from the actual production of value. They have led in creating new financial instruments, in which all kinds of loans of varying risk are bundled together into interest-yielding bonds and the like. And this newer banking system operates in a more unregulated environment than do the commercial banks.
* This is a highly competitive, turbo-charged financial world, where huge blocks of capital seek quick gains at the expense of others. In this setting, speculation, fraud, and deception become part of survival strategies. One example of this in the unfolding of the financial crisis: financial agencies that rate the risk of things like mortgage-backed securities earn higher fees for providing favorable ratings on these new “financial products.” So they lied and deceived investors about real risk. This led to mis-pricing and to baseless expectations of return on investments.
F. A Reflection: A House…Is Not Always a House
As we descend from the skyscrapers of finance to ground level, the human toll comes into clearer view. At the start of 2008, nearly 1.3 million homes in the U.S were in some phase of foreclosure. That works out to more than one in every 100 U.S. households. According to Moody’s Economy.com : “not since the Depression has a larger share of Americans owed more on their homes than they are worth.”7
Think about it. Something as basic and essential as shelter is commodified. A house becomes an investment; its purchase underwritten by tradable financial instruments; and the lure of homeownership then engulfed by the devastating trade winds of the market. And what happens? People’s savings are wiped out. Their creditworthiness is damaged if not destroyed. And many face the prospect of homelessness.
The problem is not that people don’t need houses. Nor is it that society doesn’t have the resources or knowledge to build houses. The problem is that capital stands as a barrier to meeting human need.
1 Cited in Charlemagne, “Winners and losers,” The Economist, March 1, 2008, p. 56.
2. Among informative studies of financialization, neoliberalism, and dollar hegemony are David Harvey, A Brief History of Neoliberalism (London: Oxford, 2005); Andrew Glyn, Capitalism Unleashed (London: Oxford, 2006); Kevin Phillips, American Theocracy (New York: Viking, 2006); Ramaa Vasudevan, “Finance, Imperialism, and the Hegemony of the Dollar,” Monthly Review, April 2008; and C.P. Chandrasekhar, “Continuity or Change? Finance Capital in Developing Countries a Decade after the Asian Crisis,” Economic and Political Weekly, December 15, 2007.
3. See Chandrasekhar, “Continuity or Change,” pp. 37-38; Kevin Phillips, Bad Money (New York: Viking, 2008), p. 5; Tony Jackson, “Has the Supercharged Banking Model Run out of Control?” Financial Times, January 21, 2008.
4. On financialization as a means to contain financial disorder and to impose neoliberal discipline, see Christopher Rude, “The Role of Financial Discipline in Imperial Strategy,” in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (London: Merlin Press, 2004).
5. David Dapice, “Bad Spell on Wall Street,” Policyinnovations.org, January 24, 2008.
6. Chalmers Johnson, “Why the US has really gone broke,” mondediplo.com (English edition), February 5, 2008.
7. Data from RealtyTrac.com, January 29, 2008; Moody’s Economy.com, February 21, 2008.
Raymond Lotta is author of America in Decline and edited and wrote companion essays for Maoist Economics and the Revolutionary Road to Communism. He is a contributing writer for Revolution newspaper (revcom.us).