[OPE] Martin Wolf and the financial crisis

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Thu Feb 07 2008 - 17:33:47 EST

Martin Wolf writes:

"The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007, even though their share of corporate value added only rose from 8 to 16 per cent. Banking profit margins have been strong, until recently. Now, at long last, earnings per share and valuations have collapsed. (...) In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it. Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run." http://www.ft.com/comment/columnists/martinwolf

That would mean an end of the neoliberal era - of the idea that markets, left to themselves, will sort themselves out, insofar as it is empirically proved that they don't. I assume he means by the "banking sector" the sum total of credit-issuing financial institutions (since, particularly in the US but also the UK, a lot of lending is non-bank lending). Probably it is not just "hundreds of millions" of innocent bystanders, but billions, insofar as a drop in final demand, credit restrictions and unemployment affects a lot more people indirectly who all depend on income earners. If you assume e.g. a standard nuclear family of four with one income earner, you have to multiply the "hundreds of millions" by four. In poorer countries you often have larger families with more young kids, who, insofar as they work at all, earn a pittance anyway.

But most probably the path of capitalist development will run some way between the two extremes in the foreseeable future, i.e. means are found to mediate or mitigate the contradiction to a workable extent. But those mediations typically hurt the less well-off more, because their lives involve more risks. If you own $10 million and you lose $1 million or even $3 million, that's bad news, but you still have the rest, but if you earn let's say $2500 a month in a job and you lose your job, or your cost of living goes up by 20%, that has much more impact on your life, and your capacity to borrow anything at all. Banks will not lend to people without collateral or an uncertain job future.

The more profound contradiction lurking in the background is that of social and economic inequality, the fact that a rather small elite in the world population owns or controls around third of all wealth, while this wealth itself has a rather unstable value, insofar as even the value of tangible assets is mostly expressed in fiduciary currencies. The whole trend is therefore towards attempts to gain control over resources which people necessarily have to buy, or which at any rate hold their value rather well, because only that ensures a guaranteed, fair stable income. Enter the era of "resource-based" capitalism, in which the development of infrastructure stagnates in favour of buying up, with the enormous masses of capital available, those critical nodes in the existing infrastructure which are absolutely essential to a lot of people - people who, insofar as their incomes are low, may be forced to rent or lease items because they lack the capital to own anything much themselves beyond what they must necessarily consume. 

It makes large-scale market activity more directly political, since it depends more and more on "resource-based power". In turn, that begins to politicise people again, insofar as they recognise that their survival an welfare depends directly on who controls the critical resources. Extrapolating, the resource moguls in control of the critical nodes in the commodity chain - whether corporates or state functionaries - acquire a whole retenue of dependents who draw some income from it - in future perhaps not unlike the large East India trading companies of the 17th century, which operated their own security arrangements, including a whole system of businesses catering to employees and ancillary support staff. Tendencies towards that kind of set-up are already visible across the world, in which large corporations often have a larger output and income than whole countries.

The ultimate question is really whether the system can permanently contain a mass of people who, as a result of financial crashes, becomes disintegrated from society, and really have nothing left to lose. Since, short of exterminating them in wars, it becomes impossible to integrate them if their number grows quite large, you can at best "wall them out" from the good life, with heavy investments in security and defence systems, and systematic monitoring to anticipate or smash revolts. In which case globalisation mutates into ghettoisation, a "global gated community" in which you would not even think of stepping into certain territories, not just because you are not welcome anymore there, but because you risk your freedom or even your life in doing so. Freedom is only on one side of the wall - it may not necessarily be a physical wall, but a boundary nevertheless. 

Right now all this might only sound like science fiction, a speculative extrapolation or horror story, but tendencies towards that result are already visible. To the extent that privacy is eroded, new ways emerge to shut part of the world out, with a set of cultural or other types of complexes to regulate access. And that shutting-out ultimately means that part of the world is in practice no longer of any concern at all, except to ensure you do keep it out. After all, personal freedom depends on having a certain minimum amount of privacy, a zone in which people cannot intrude without your consent, and which you can have some predictable control over. Otherwise you are practically the slave of someone else determining the essentials of your life, whatever the formalities.


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