DISARM THE MARKETS!

New Attac Basis Text. The Financial Crash: Causes, Backgrounds and Alternatives

By Peter Wahl

[This excerpt from the 96-page pamphlet published February 2009 is translated from the German on the World Wide Web, www.weed-online.org/themen/01finanzen/2293780.html]

[“Disarm the Markets!” was the first slogan of the Attac movement founded in 1998 on the backdrop of the financial crisis in Southeast Asia. It is just as actual and burning as ever. The time is ripe – for a democratic control of the finance markets.

The most severe financial crash since the worldwide economic crisis of 1929 spread from the financial sector to the real economy at the beginning of 2009. Thus the world is mired in a general economic crisis. In addition, this coincides with a dramatic intensification of the climate- and energy-crises. Thus we are confronted with a problem imperiling the history of humanity.

In this Attac Basis Text, Peter Wahl shows the bankruptcy of the neoliberal model in the free financial markets and offers facts and arguments for reforms not limited to repairing particular crisis-igniting moments. “An emancipating alternative faces the task of working out the systemic character of the present crisis and developing alternatives that give a systemic answer to the crisis.”]

1. INTRODUCTION – THE GREATEST CRASH SINCE THE WORLDWIDE ECONOMIC CRISIS OF 1929

“We have lost control,” Ben Bernanke, head of the US Federal Reserve, declared succinctly and correctly after the bankruptcy of the Lehman Brothers investment bank on September 15, 2008. In December 2007, the volume of credit derivatives not traded on the stock exchange amounted to $596 trillion (Der Spiegel Nr. 47, 1/17/2008). With so many zeros, one naturally loses track of things. Compared to this, the $200 billion made available by the US to bailout the real estate giants Fanny Mae and Freddy Mac, the $85 billion for the insurance giant AIG or the $29 billion in J.P. Morgan’s takeover of the Bear Stearns investment bank seem almost modest.

These numbers show that we have to grapple with something that surpasses human powers of imagination. We have accustomed ourselves to simplifying the inconceivable. We cannot comprehend these numbers. Taken together, US expenditures for the different bailout packages amounted to $1.3 trillion by the end of 2008.

The numbers become more concrete when comparisons are made. The worldwide gross domestic product (GDP) in 2008 amounted to around $62 trillion. This is 10.4% of the volume of credit derivatives mentioned above. In other words, if the sum of these credits were exchanged for cash, one could buy ten times all the goods and services produced by humanity in 2008.

The gross domestic product (GDP) of Germany is the fourth largest national economy of the world after the US, Japan and China and amounted to $3.8 trillion in 2008. On the other hand, the stock losses on the stock exchanges in the same year came to $23 trillion worldwide, six times greater than what Germany produced the same year in goods and services. The dimensions of the US bailout package become clearer when compared with the US GDP that amounted to $14.3 trillion in 2008. The largest national economy of the world spent almost 10% of its GDP for bailout packages up to the end of 2008. The new president Barack Obama announced an additional program of $800 billion to stimulate the economy. The costs of the state emergency program were almost 15% of the GDP of the US in 2008. This is certainly not ending. Unlike the worldwide economic crisis, the bubble did not burst with a single big bang, Black Friday (October 15, 1929). We have to deal with a salami crisis. In slices, one bad news strikes after another.

DECLARATION OF BANKRUPTCY OF THE NEOLIBERAL MODEL

Meanwhile bankers, politicians and neoliberal economists declared again and again that the worst was over. A short time later the forecasts proved wrong. The history of this crisis is also a singular disgrace or embarrassment for the objective competence of the mainstream experts. The head of the European Central Bank, Jean-Claude Trichet especially distinguished himself. In July 2008 he predicted a positive economic development and contributed to intensification of the crisis with an interest hike for the European Central Bank. The crash represents the declaration of bankruptcy of an economic theory, neoclassicism, and of the economic-and social-political model based on that theory, neoliberalism. With the crash, the idea that the market is the best form of regulating the economy, that private parties can do everything better and that liberalization, privatization and deregulation would bring prosperity for all prove to be an ideological soap bubble that now bursts like t he speculative bubble on the financial markets.

For years, warnings were given. Unorthodox economists like Nobel Prize winner Joseph Stiglitz, Paul Krugman and other critical scholars warned again and again of the risks emanating from the financial industry. Criticism was directed at the financial markets from leftist parties, unions, some NGOs and the global justice movement. For example, Attac Germany issued a Declaration of Principles on 5/31/2000 that “the boundless freedom of capital flows leads to a growing instability of international economic relations that explodes in crisis at ever-shorter intervals. Through financial crashes, years of economic efforts of whole economies were destroyed over night. Even an insider like the big speculator and multi-billionaire George Soros who carried out a successful attack on the British pound at the beginning of the 1990s warned the world of this for years.

From the middle of September 2008, a change occurred in the discourse of the functional elites. When the German minister of finance Peer Steinbruck who was an uncritical spokesperson for the German financial industry said in a Spiegel interview (Nr. 40, 5/29/2008): “We experience the most serious financial crisis in decades… After this crisis, the world will no longer be the same as before… Certain parts of Marxist theory are not so wrong or upside down.”

FROM THE FINANCIAL CRISIS TO THE BLOGAL ECONOMIC CRISIS

In fact, we are confronted with the most severe financial crisis since the worldwide economic crisis. At the beginning of 2009, the crisis spread from the financial sector to the real economy. In other words, the world is mired in a general economic crisis. The US is already in a recession. Th3e unemployment numbers skyrocketed. Recession means the economy shrivels and does not grow any more. In the US, recession occurs after two consecutive quarters of shriveling and in the EU when two quarters are below last year’s marks. If the recession continues a long time and is accompanied by high unemployment, firm bankruptcies and deflation, one speaks of depression.

The sales of the US auto industry dramatically collapsed. In December 2008 alone, Chrysler posted a minus 52%; Ford 32% and General Motors 23%. In Japan the sales of cars declined 22%. The recession also started in the euro zone. For Germany, a shriveling of the GDP of 2% is predicted; unemployment could increase by a million. Great Britain was hit very hard. Until then the largest financial center of the world, the City of London pulled the whole country into crisis. Between August 2008 and January 2009, the price of the English pound had fallen a quarter in relation to the dollar.

All forecasts assume a great collapse of growth will occur in 2009. Developing and threshold countries including the growth locomotive China will also be stricken. The financial- and economic crisis coincides with a dramatic intensification of the climate- and energy-crises. The most recent data about the melting of the ice sheets in the Arctic Ocean show an alarming acceleration of climate change. At the same time a global energy crisis is on the way. Even if the energy need temporarily declines because of the financial- and economic crisis, it will rise irrevocably in the medium-term. The economic development of the threshold countries and the growth of the world population from 6.7 billion today to 9.2 billion by 2050 are tremendous challenges that can only be mastered by a massive conversion to renewable energy. On the other hand, fossil energy leads inevitably to climate catastrophe.

Thus we are confronted with a problem impacting the history of humanity. To avoid political catastrophes like the 1930s – the worldwide economic crisis was not the only but one of the most important factors that furthered the rise of fascism – the danger exists that the financial- and economic crisis will absorb so much strength that solving the climate- and energy problems will be delayed again. Unlike social and political processes, we cannot console ourselves that our grandchildren will fight it out better. The dynamic of physical and chemical processes is not ordered according to the logic of diplomatic negotiations a la Kyoto or according to the reduction plans that prove to be paper tigers. With climate change, the time factor has a new quality, namely the inexorability of laws of nature.

CRISIS AT THE CENTER OF THE SYSTEM

Financial crises were frequent in the last quarter century. In 1982 the great debt crisis of developing countries broke out. In 1994 there was the crash in Mexico, in 1997/98 the Asian crisis and in 1999 the crisis in Russia, Brazil and Turkey. In 2000 the bubble of the New Economy burst. In 2001 Argentina fell to the abyss. But today’s crash is different. The epicenter lies in the US. If one could brush aside the past crises as problems of the periphery with their incomplete markets and crony capitalism, nepotism and poor monitoring, everything began this time in the country with the most fully developed financial markets and the supposedly best oversight.

ON GREED, RATINGS AND OTHER ATTEMPTED EXPLANATIONS

There are a multitude of explanations in the discussion about the causes of the crash. The greed of managers and the false incentives arising through payment of stock options are often underlined. In some editorials and Sunday sermons, the small shareholder and saver are chastised who invested a few thousand euro at an Icelandic bank because it earned 0.9% more interest than at other institutions. The failure of rating agencies that gave a seal of approval to toxic securities is also denounced. Others speak of easy money since the former head of the Fed, Alan Greenspan, flooded the world with cheap money with his low-interest policy and thereby fed the real estate and other bubbles. Still others refer to the failure of the monitoring authorities or the state that set no limits to the intrigues. Then when the crash occurred, the US government allowed Lehman Brothers to go bankrupt and triggered a fatal chain-reaction.

Certainly these explanations are not co0mpletely wrong. Obviously there is greed as with Deutsche Bank head Ackermann. But there is a considerable difference whether someone at the top of a bank is greedy with a balance sheet of 2 billion euro or a household with a monthly income of 1500 euro. Like other abrasive characteristics of the homo sapiens, for example conformism, herd behavior and greed, selfishness is an economic behavioral determinant whether one likes this or not. Market theoreticians even declare selfishness or self-interest the crucial foundation of the market economy. The well being of the whole, namely a functioning efficient market, results when every market actor follows his egoistic interests. So the invisible hand of the market allegedly operates.

Greed existed long before capitalism and will exist in the future. Therefore this thesis does not explain why this epochal crisis occurs today and not in the 1970s. Human behavior patters first develop in connection with corresponding structures and rules. If these stand in the way of a certain human conduct, this conduct remains a marginal phenomenon. Conversely, as Karl Marx said, human behavior is an ensemble of social relations and not an innate unchangeable constant (Marx, 6th Thesis on Feuerbach, MEW 3:533ff).

SYSTEMIC CHARACTER OF THE CRISIS

The rating agencies failed like the financial monitoring in the US and Europe. The real estate crisis in the US undoubtedly launched everything. Still that crisis was only the trigger, not the cause of the crash. Low interests consciously applied by Greenspan to overcome the consequences of the New Economy crisis contributed to the genesis of a gigantic credit bubble. As Stiglitz rightly notes, the liquidity glut was only the reverse of a poor demand because of stagnant or falling real wages and growing inequality in assets distribution (FTD, 1/21/2009). However a gigantic collapse cannot be explained in a mono-causal way from a single primal cause. A systematic analysis is even demanded in the political mainstream, as for example by German president Horst Kohler: “That no systematic causal analysis was made in the past alarms me” (SZ, Sueddeutsche Zeitung, 12/11/2008). The above-mentioned factors – and others – are only individual elements in a general connection or total structure. The systemic teamwork of certain business models like speculation, procedures and instruments like guaranteeing credits, derivatives with market shares, banks, new actors like institutionalized investors and political institutions from the IMF to the offshore centers constituted the structure.

Therapy depends on diagnosis. As a result, a strategy of change limited to only one or several of these factors is too simplistic. Sooner or later the structural problems will break out again.

An emancipating alternative must reveal the systemic character of the present crisis and develop alternatives that give a systemic answer to the crisis.

Systemic does not mean that the crash is an anonymous system-error as one of the well-known neoliberal agitators, the head of the Munich IFO-Institute, H.W. Sinn, formulated to justify the neoliberal mistakes. Mechanisms, instruments and actors can be identified whose action and teamwork led to the crash.

What does system mean? The rating system? Or the system of regulation with monitoring authorities, central banks and the IMF, the whole financial system, banks, savings accounts, insurances, funds of all kinds and all other financial market actors? Or does system mean capitalism as such? The range and effectiveness of the changes depend on the answer to this question…

6. ALTERNATIVES AND PERSPECTIVES

…The variants of capitalism reflect different ways of organizing the economy and society. Like the present crisis, the crisis of the 1930s was the result of systemic internal contradictions of capitalism at that time and was not primarily the effect of protest, pressure of social movements or class struggles.

The New Deal was completely unexpected for the working class movement and the left in Europe. While the working class and the left hoped that capitalism would collapse under its own contradictions, they underrated capitalism’s capacity for substantial reforms, regeneration and adjustment to the new situation. The change- and renewal capacity of capitalism today should not be underrated. Certainly the New Deal should not be transfigured; the past cannot be wished back. It is too early to judge whether Obama will be the Roosevelt of the 21st century. Still this possibility cannot be excluded.

THE FUNCTIONAL ELITES AND THE ZERO HOUR

The functional elites’ main problem is that finance capitalism cannot guarantee a regular and stable accumulation. The machine does not function any more. The elites have lived for some time with the negative effects of unequal distribution, with a certain degree of unrest in the center of the system, with strikes, social movements and protest. All this was not really alarming for them. What they could not accept was an across-the-board destruction of their assets, shriveling profits, instability, insecurity, financial turbulences and recession.

Moreover the US cannot accept the further erosion of the dollar. The key currency is one of the most important supports of its hegemonial position. Nothing less than the failure of the neoliberal type of accumulation will force the functional elites to a new order after the crisis. The following themes – sketched here and presented unsystematically – come to them and us:

a) Since the bubble burst, the central question is raised: Where will new growth incentives come from? If one refuses the failed growth model, the only other candidates are the demand side, wages and the state.

b) The massive balance of payments deficits and surpluses must disappear. Two-thirds of the global savings could be sucked up by the US balance of payments deficit. This happened in the last years and presumably will not be tolerated any more.

c) To control inflation, governments must regain control over the exchange rates and interests.

d) The global money system will move toward several key currencies or currency blocks and away from the hegemony of the dollar.

e) Capital controls will experience a rebirth in light of the dangers of infection by the crisis.

f) The multilateral cooperation of central banks, regulatory agencies and monitoring organs must be institutionalized. New institutions will arise or present institutions, particularly the IMF, will be considerably reorganized. Their possibilities will greatly depend on the attitude of China and the other mammoth threshold countries… There will no longer be only the instruments of the US. An IMF with substantial influence of the G20 that follows a new conceptual model will be different from that we experienced in the last decades.

PRESSURE OF A RIVAL MODEL

The existence of a successful alternative under simple growth criteria in the form of China’s authoritarian state capitalism is another important determinant of substantial change. There is no reason for fanaticism here. The sustainability of this model is very dubious. However it is hard to be choosy in an intensified crisis situation. This is especially true for the periphery. While those countries that followed (or had to follow) the prescription of the Washington Consensus had no economic success, China, several Asian countries, India and Russia to a certain extent realized amazing economic productivity. This gives a model character to their concepts for many developing countries.

Finally, the bilateral economic relations between China and the US are very important. By accumulating enormous currency reserves of $1.5 trillion, China financed a large part of the US deficit. This mutual dependence gives China an influence on the future outlines of the world economy. In Latin America, acceptance of the neoliberal model ahs also dissolved.

The increasing economic plurality of Asia and Latin America is transferred to the political plane. A reconfiguration of the international system is underway. The age of a uni-polar world that began after the Cold World War was very short when seen in historical categories. A multi-polar world develops in which the US will play a prominent role in the future. However its exclusive dominance is over.

DEEPENDING THE TEAR IN THE RULING BLOCK

An historical chance is opening for all those fighting against finance capitalism. But the hegemony in the reform discourse of the reform-oriented elites is striking in view of the present relative strengths. For cultural reasons, Obama will first meet a wave of sympathy. Whoever thinks of treating him like Bush will probably be quickly marginalized. Instead, a politics could be developed that can prevent the divided elites from merging into a homogeneous block. Functional elites ready for reform in politics could be driven toward a consistent conversion. How far this succeeds depends on how much pressure arises from below.

FINANCE CAPITALISM VERSUS CAPITALISM AS A PSEUDO-OPPOSITION

Another debate that has now broken out turns around the question whether a mastery of finance capitalism is not too little or whether the focus should be on capitalism as such.

This comparison creates a pseudo-opposition. If finance capitalism is transformed along the perspectives presented in this chapter – socially just, democratic, ecological, future-friendly -, the result will be a different society than the one we have now. In January 2009 this is still a utopia. How much capitalism may exist in such a redesigned society and whether the new can be made even better will only be decided by the relative political strengths, not with a discussion about the pseudo-alternative finance capitalism or pure capitalism.

WHAT IS CRUCIAL NOW

The coming months or even years will be marked by an intensive struggle over reforms. The hegemony with a group of the elites is now led by the United States with its President Obama. Without falling to illusions, this is a dramatic improvement compared with the Dark Age of a Bush or the Stone Age that would have come with Sarah Palin and John McCain. Whether the further course of the negotiations will be future-friendly will depend on the emancipatory forces. Encountering the challenges with as much realism as necessary and as much radicalism as possible is the first step.