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Erinç Yeldan

The global capitalist economy has now entered its sixth year of recession, as it continues to suffer from its worst crisis since the Great Depression. Initially dismissed as routine financial turbulence in the summer months of 2007, the crisis conditions accelerated slowly, yet continually, to reach an officially declared full-fledged recession in the late 2000s.

What is more revealing, the current crisis began not in the so-called emerging markets of the global periphery, but erupted directly in the hegemonic centers of the capitalist world. At the root of the crisis are not, as commonly accused, the “corrupt” governments of crony capitalism, and their over-interference with market rationality, but the upfront irrational exuberance of “free markets,” with their unfettered workings guided by the private profit motive.

Thus, however the current crisis may devolve into a new kind of austerity, one lesson remains clear: it is no longer possible for the global capital to return to the patterns of trade and finance constructed in the post-1980 era. The world economy has exhausted the fantasy tales of “free trade,” “liberalized” finance, and “flexible” labor markets, where private profit-seeking was taken as the unabated single rule for efficient allocation of resources—leading to high incomes, human rights, civilization, prosperity, and so on. The post-1980 phase of capitalism, often described as neoliberal globalization, was characterized by a wide-encompassing restructuring of both the economic realm—consolidating the reign of the markets—and the political —the states.

All these points have already been laid out previously. (See, e.g., Martin Khor’s recent contribution on this site.) Still compelling, however, is the question, why couldn’t economists foresee what was forthcoming? Why, despite hours and hours of high-quality research that appeared in the scholarly journals, could the looming conditions of the crisis not have been traced out?

Sure enough, economists from the heterodox tradition had long set their analysis on the decline of the Golden Age of Bretton-Woods capitalism. Recall, for instance, David Harvey’s seminal observation that “something significant has changed in the way capitalism has been working since about 1970” (Harvey, 1989: 192), when a set of distinguishing characteristics of the casino were already visible. Krippner (2005:174), in line with Arrighi’s The Long Twentieth Century, defined the process as a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.

Since 1971, when the U.S. dollar was spared of the gold standard, values turned fiat; to be governed by “expectations” and by the speculative games played in the financial casinos of capitalism. Perhaps for the first time in its history, capitalism was successful in creating monetary gains out of value without any recourse to production; that is, the circuit of M—M’ apparently replaced the roundabout scheme M—C—M’. In the words of common folklore, the genie was out of the bottle.

Yet, the whole episode occurred under fanatical deregulation blessed by mainstream economic theory. Business-cycle theories with rational expectations, under perfectly competitive markets, with nice, smooth, convex technologies, perfect foresight, and full information sets provided the ideological foundation for the theater on show since the early 1980s. Simply put, the mainstream models of fictitious capitalism created in the seminar rooms of the Ivy League simply lacked the tools to analyze the underlying structure of a modern market economy. Describing conditions of a real sector where uncertainty and risk premiums were virtually absent and issues of conflict were conveniently assumed away (with an emphasis on models of an infinitely lived representative agent), the theory was caught by surprise. In fact, as has been said many times over, what was behind the crisis was not the toxic assets per se, but the toxic textbooks themselves.

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To these broad contours of capitalist expansion we will add one further hypothesis: crises, often followed by periods of wild expansion and euphoria, are part of the anarchic character of capitalist mode of production. Capital, historically speaking, has not hesitated to impose costly transformations, often culminating in what Rosa Luxembourg termed “corrective wars.” The need for warfare is not limited to the need for Keynesian demand management, but goes deeper than that. In order to ensure that the misery of the masses of the exploited and the oppressed will not be turned against a systemic movement, capital diverts attention to violence based on ethnicity, religion, color, and nationality.

The ongoing local wars in Syria, the Iraq invasion (part of the so-called “war on terror”), the ethnic violence in sub-Saharan Africa, … the list could be continued.  What is cut and dry is that capitalism has now entered a conjuncture where it cannot govern the global economy without resorting to wars.

References:

Harvey, David (1989) The Condition of Post-Modernity, Cambridge University Press.

Krippner, Greta R. (2005), “The Financialization of the American Economy,” Socio-Economic Review, No:3, 173-208.

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2 Responses to “As We Now Enter the Sixth Year of the Global Recession”

  1. Ian Crowther says:

    Nice article Erinc. I could not agree more!

    In the spirit of looking elsewhere for answers (away from the Eugene Fama school), I read a book recently framing the crisis in a different way.

    The book looked at bank balance sheets, and bank business models, drawing from the type of business banks such as JP Morgan et al were doing in the years pre crisis. The academics involved found only 30-40% of revenue contribution was from capital allocated supporting economic growth (so banks of this ilk are not intermediaries now as most central bankers persist in saying!).

    The remainder of bank revenues were linked to banks lending to each other! Why was this? Well, the market requests that actors within said organisations, board members, were to allocate capital to make ever greater ROE ratios – up to a ridiculous 25% pre crisis!! In order to achieve these levels of return, it was necessary to stop lending to retail and commercial customers as they once did, and to begin generating ever larger volumes of fees, (no cost of capital – originate and distribute model) via taking extended risks and developing securitised products into complex financial engineering and the emergence of CDO structures (and other shadow banking / off balance sheet type instruments).

    This market segment was scaled up quickly amongst investment banks, especially using subprime mortgage debt (RMBS) and discussed amongst central banks as portfolio distribution, a recycling of capital, and of course Basel II regulations encouraged banks and senior board members to run with this this behaviour!!

    This was a giant machine in the end, and unbridled release of economic might, that both senior central bank officials and senior bank officials had no real idea how it really worked or the risks they were taking, (heard this story before post collapse of Barings Bank when seniors had no idea what their banking employees were up to), illustrating a complete lack of control, a story we here only to often it seems.

    The CDO’s were sold on incorrect correlated default risk (no historic default numbers to lever from, so they were leant from other sectors and amended via certain incorrect assumptions), and so investors were sold a ‘pup’, so to speak, buying so called diversified risk, supported by central and elite bankers thinking this was a good thing.

    Of course, the defaults soon came when subprime cracked, and the CDO structures imploded leaving massive losses, and the rest as we know is history via bail outs! I think this view is certainly different from most I have read about, and a welcome breath of fresh air. We need to stop listening to Bernanke and other central bankers with the Chicago School view as the lone voice, and look for reasons outside of CAPM’s etc to guide our thinking (post Minsky).

    I would certainly recommend the book, it is called ‘After the Great Complacence, Financial Crisis and the Politics of Reform’, by Ewald Engelen et al (2011) Oxford University Press. Enjoy!

  2. Erinc yeldan says:

    Many thanks for the suggestion. Indeed, along with Jim Crotty’s contribution above, we now have more at our arsenal to undress this ludicrousity.

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