Understanding the Financial Crisis: Inside “the secret laboratory of the bourgeoisie”

Alejandro Nadal

Marx is the ultimate critic of capitalism, so what does a Marxian analysis offer when applied to the present global economic and financial crisis?

Two preliminaries are important. First, for Marx crises are not pathologies of capitalism. They are the necessary outcome of the contradictions that define the essence of this mode of production. The backdrop of Marx’s analysis of crises is always class struggle. Second, capital has its own views of crisis and cycles: they are designed to facilitate policy and intervention. These views vary in their degree of accuracy, but in general they do not question capitalism. Marx’s perspective has a different objective: to reveal to the working class the forces that can overthrow capital.

Marx’s theory of crises is disseminated in several key writings. We concentrate our attention on the following: Grundrisse, Contribution to the Critique of Political Economy, Capital, Theories of Surplus Value. It must be remembered that Engels first advanced his theory of overproduction in his Outline of a Critique of Political Economy (1843).

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EU’s airlines carbon tax starts trade wars over climate change

Martin Khor

A group of 26 countries are organising themselves to retaliate against the European Union for its move to charge airlines for the greenhouse gases they emit on flights into and out  of Europe.

This seems to be the start of a trade war fought over climate change.

Many countries whose airlines are affected – including China, India, Malaysia, Nigeria, South Africa, Egypt, Brazil and the United States – consider this to be unfair or illegal or both.

This is the first full-blown international battle over whether countries can or should take unilateral trade measures on the ground of addressing climate change.

Developing countries in particular have been concerned over increasing signs that the developed countries are preparing to take protectionist measures to tax or block the entry of their goods and services on the ground that greenhouse gases above an acceptable level are emitted in producing the goods or undertaking the service.
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Emerging Asia next?

C.P. Chandrasekhar

It is now more than four years since the onset of the real economy recession in the United States. It is also close to five years since the disclosure by the investment-banking firm Bear Stearns that two of its subprime mortgage-linked funds were worthless, which signalled the onset of the financial crisis. Yet the global economy has not emerged out of both crises.

In the January 2012 update of its World Economic Outlook, the International Monetary Fund (IMF) has revised downwards by three-fourths of a percentage point (to 1.2 per cent) its global growth forecast for 2012. It also fears that things could be even worse. “The world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected,” said Olivier Blanchard, the IMF’s Economic Counsellor. The IMF has also noted, in a parallel January update to its Global Financial Stability Report: “Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems.”

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A Better Deal? Chinese Finance in Latin America

Kevin P. Gallagher, Amos Irwin, and Katherine Koleski, guest bloggers

Lending by the Chinese Development Bank (CDB) and Export-Import Bank of China (China Ex-Im) to Latin America is larger, newer, and growing faster than its Western counterparts.  According to our research, since 2005, China has provided $75 billion in loans and credit lines to Latin American countries.  In 2010, Chinese funding exceeded the region’s combined financing from the World Bank, Inter-American Development Bank (IDB), and U.S. Export-Import Bank. In fact, China overtook the World Bank and IDB even as those banks doubled lending to the region from 2006 to 2010.

China’s emerging role as a major lender to Latin America has raised concerns regarding the competitiveness of loans from World Bank and Western export credit agencies and implications on governance and environmental initiatives. In an article for The Washington Post, journalist John Pomfret further outlined these concerns stating that “China is a master at low-ball financing, fashioning loans of billions of dollars at tiny interest rates that can stretch beyond 20 years… This has become a headache for Western competitors, especially members of the 32-nation Organization for Economic Cooperation and Development (OECD), which long ago agreed not to use financing as a competitive tool.”  Others argue that Chinese financing provides an alternative source of financing without the restrictive policy conditionalities imposed by the World Bank. Deborah Bräutigam, a professor at American University, believes that in Africa, China is filling an unmet need for energy, mining, infrastructure, transportation, and housing lending, which was all but abandoned by the World Bank decades ago.

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“Memento”, the Meltdown and the Mainstream

Gerald Epstein

In “Up to Speed, but Still Lagging Behind” Matias Vernengo presents an important critique of Gary Gorton’s and Andrew Metrick’s (GM) “speed read” survey, “Getting up to Speed on the Financial Crisis” which is to be published in the Journal of Economic Literature, the predominant U.S. general literature survey journal in the economics profession. As Vernengo shows in his Triple Crisis blog piece, the Gorton and Metrick piece demonstrates just how far behind mainstream economics is in its understanding of the causes, dynamics and impacts of the financial crisis, both in an absolute sense, and also – and this was Vernengo’s main point – compared with the rich heterodox literature that both predicted the crisis and has been analyzing it dynamics since it has broken out.

In fact, the Gorton and Metrick piece presents an even more devastating picture of the ability of mainstream economics to “get up to speed” than Vernengo suggests. For it essentially admits that mainstream economics, which, for the last several decades, has cost society millions and millions of dollars on highly paid economists’ salaries at elite universities and prominent public institutions such as the IMF, the Federal Reserve and all the Federal Reserve Banks which have armies of economists– to say nothing of the high priced economists working in financial institutions themselves – completely missed the financial crisis and, according to Gorton and Metrick, are just now getting up to speed.

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Once we are up to speed, then what?

Edward B. Barbier
(also available in Portuguese at INESC)

The survey by Gary Gorton and Andrew Metrick on what happened during the 2008-9 financial crisis, “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature, focuses on an important cause of this crisis: global imbalances in the world economy.  As Gorton and Metrick suggest, such imbalances include the “institutional cash pools” caused by sovereign wealth funds and the “global savings glut”.

While the United States has been amassing large current account deficits, China, Japan, other Asian emerging market economies and some oil exporters have been generating trade surpluses.  Similar structural imbalances were occurring within major regional economies, such as the European Union, where the large current account surpluses of France and Germany were offset by deficits in Ireland, Greece, Portugal, Spain and the United Kingdom.  The result was that economies with chronic trade deficits were receiving large and sustained capital inflows from surplus economies seeking new asset investments. These massive credit flows precipitated the bubble and subsequent bust in financial markets, and the persistence of such global imbalances continues to add to the uncertainty and instability of the world economy.

Understanding how the global imbalances caused the financial crisis and subsequent recession is important. But addressing these imbalances in the world economy will need a much more profound change in global economic development.

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Up to Speed, But Lagging Behind

Matías Vernengo

Gary Gorton and Andrew Metrick have just produced a survey on the vast literature on what happened during the last financial crisis (and to a lesser extent why it did) titled “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature. They used only 16 documents, between papers from ‘top journals,’ reports and speeches and congressional testimonies. It must be noted that the objective of the review is to provide “a one-weekend-reader’s guide” to the crisis.

The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession. I will use three of their cited documents as an example of what I mean.

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Household Profligacy vs. Rentier Neoliberalism as a cause of Household Indebtedness

Arjun Jayadev

American households have been profligate spenders over the last 30 years and have lived beyond their means for too long. Or so it is proclaimed repeatedly in the media and among policy makers. What else could explain the fact that household debt to income ratios have increased while the personal savings rate has fallen?

As it turns out, there are other ways in which debt-income ratios can increase other than actually borrowing more. Specifically, income can grow slower than the real interest burden. The latter in turn depends on both nominal interest rates and inflation. In the case of public debt, there is a long and distinguished literature trying to separate the relevant importance of these effects in periods of leveraging and deleveraging. Interestingly enough, although household debt exceeds public debt substantially (look here at Table L1), there has been virtually no research trying to assess the importance of each channel.

Josh Mason and I have attempted to address this in a new working paper.  The basic idea of our paper is to apply the standard equation used to analyze government debt trajectories to the debt of the household sector. We decompose changes in the sector’s debt-income ratio into a primary deficit (i.e. net new borrowing), nominal interest rates, real income growth and inflation. Using this approach, we find some interesting and underappreciated patterns.

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Oil and Environmental Damage

Fander Falconí

The recent upholding of the ruling against Chevron Corporation by the Provincial Court of Justice of Sucumbíos, Ecuador, comes as an inevitable reminder of the decades-long situation in Nigeria, Africa, with the Shell Oil Company – the one with the sea-shell logo. In Nigeria, the consequences have been disastrous.

It is worth pointing out that inhabitants of Ecuadorian Amazonia, organized in the Amazonia Defense Coalition, state that Texaco, acquired by Chevron in 2001, is responsible for social and environmental damages caused by oil-related activities carried out over the past 26 years. The company was sued for damages and a judgment was pronounced. Although Chevron appealed this decision, the ruling has been fully upheld and the company is now to pay a USD 18 billion damage award. This is a case involving Ecuador. Not the government but the judicial system is responsible for determining the socio-environmental liabilities of the company.

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Recipe for Disaster

Jayati Ghosh

It is clear that the raging policy debate on allowing multinational companies a greater role in the Indian retail sector, particularly food retail, is not yet over. Already Commerce Minister Anand Sharma has declared that the decision to hold back on liberalising rules of foreign direct investment (FDI) in this sector following the political backlash is only to provide breathing space for the government. It is only too likely that the United Progressive Alliance (UPA) government will seek to push through this “reform” at some point over the next two years of its term.

This makes it all the more important for Indian citizens to become aware of the extent of concentration and control of multinational companies in global food distribution, and the implications of this for both producers and consumers of food. These aspects are drawn out in some recent studies that deserve much more public attention.

A new report produced by Timothy Wise and Sophia Murphy (“Resolving the Food Crisis: Assessing Global Policy Reforms since 2007”, GDAE and IATP, January 2012) makes several interesting points about how the global food crisis is related not just to medium-term supply factors that reflect the effects of more open trade and the policy neglect of agriculture, but also to the biofuel subsidies that have diverted grain acreage and production. Recently, financial speculation too has played a role in pushing up prices of food. But Wise and Murphy also highlight a feature that is often ignored in policy discussion on the food crisis: market power in the food system.

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