[OPE] Hillel Ticktin, "Notes on the Last Few Months"

From: <glevy@pratt.edu>
Date: Fri Jan 16 2009 - 09:10:44 EST

Notes on the Last Few Months OpenPublishing | News & Analysis

Submitted by mute on Wednesday, 19 November, 2008
- 17:32

By Hillel Ticktin

Here is Hillel
Ticktin's editorial for the forthcoming issue of Critique #46, due on
December 1st, analysing the current crisis and its denouement:


The most important ongoing
event is the spectacular implosion of the financial system and the ongoing
downturn. We will be having a number of articles on the subject in the
next issue. These notes have conducted a running theoretical and empirical
commentary but we will have more articles to supplement those in the April
2008 issue in the next issue-due to come out at the end of January.

The Implosion of Finance Capital-Depression and Deflation

It is almost impossible to open a newspaper without some reference
to the historically important nature of our times. It is clear that we are
living through a period comparable to that of the Great Depression in its
political economic importance, even though it is unlikely to reproduce its
length, depth and misery. These same establishment newspapers and journals
find it necessary to defend and justify capitalism as a system, when there
is no important movement challenging it. Marx is frequently quoted, both
to support and criticise capitalism.1 Nor is it only the media who are
enamoured of Marx and gripped with self-doubt. Bankers and other
establishment figures have excused themselves for not taking Marx
seriously. Banks' advice now includes the caution that Marx may be right
about capitalism collapsing under the weight of its own contradictions.2
Although, we may assume that the authors are not entirely serious, it is
nonetheless a sign of the times.

Karl Marx appears then to
have made a return from the grave to which he had been assigned in the
nineties. Marxism has been declared wrong, irrelevant and worse for one
and half centuries, only to return with renewed force. The suddenness of
the conversion was unexpected. After all, far-left parties are marginal at
best and detested at worst. The economics profession is, as ever,
pro-market. Why then has there been this criticism of capitalism itself?

It was almost an orthodoxy that capitalism could always
re-invent itself. That has been repeated by the historian Tristram Hunt 3
He points out that Engels had repeatedly expected a crisis to crack the
system. He derives his material from Engels' letters to Marx and concludes
that capitalism gets through its crises. There is no doubt that capitalism
is not at an end not least because there is no working class movement for
socialism. However, Tristram Hunt has missed the point. We are now living
in a period of instability, and the instability is that of the system
itself. When someone argues that capitalism has survived, the question is
always by what means. After all, the system has survived through
repression, imperialism, and war as well as through the welfare state. We
have never had a peaceful capitalism in the developed countries, without
exploiting peoples beyond its borders. In the third world, the situation
was and remains dire, with certain exceptions.

It is not
accidental that Marx can be quoted and that the system itself be
questioned by those at the heart of the system. This is in part because
those personages know the weaknesses of the system in some detail but it
is also in part because the Cold War is over and Marx is no longer
tarnished with the taint of Stalinism. It is of particular note that these
writers and commentators see capitalism as a system even if they argue
that there is no replacement. Once capitalism is perceived as a system,
its limitations can also be discussed and then it is a short step to
perceiving capitalism itself as in evolution from its birth to its dotage.

Defence of Capitalism in the Downturn

The wave of
questioning has led to three lines of defence. We are told that in the end
we will be back where we were before the downturn or perhaps before the
speculative rise in asset prices from 2004. Simon Jenkins, a liberal
commentator, has argued that all the discussion of the limits of
capitalism is just hot air.4 The failure lay in the regulators and the
politicians who removed the regulation or who urged banks to extend their
lending. Rationally considered, it can be argued that the financial crisis
was an accident of history caused by the greed or incompetence of bankers
or lack of regulation over a market which has to be regulated in order to
function properly. In fact, there are three theses being put forward here.

Firstly, it is argued that capitalism is necessarily cyclical,
but eternal, and hence the economy will recover and be better than ever,
having learned its lesson. Secondly, it is maintained that the market
requires regulation and regulation was systematically reduced over a
period of more than twenty years, notably through the repeal of the
Glass-Steagall Act in 1999 in the USA, allowing commercial banks to
operate as investment entities as well as continue their everyday
functions.5 Thirdly, it is held that things might not have gone awry had
not a number of individuals been so greedy for ever higher rewards. A
fourth thesis could also be put forward. The contradictions of capitalism
are showing themselves but the system will continue as long as there is no
political movement to replace it. The first view merges with the fourth.
Much of the organised left effectively supports the last view, having
given up on the idea of capitalism entering a systemic crisis. Tristram
Hunt's argument fits in here.

Clearly, none of these arguments
says much for the capitalist system itself but then 'the danger of
meltdown' has been a constant refrain in all the media. It would appear
that both the capitalist class and those who manage their operations have
been seriously frightened. Indeed, the two weeks that followed the
nationalisation of the mortgage companies was described in graphic detail
in the media, 'Nightmare on Wall St' being probably one of the best

At the same time, although there is no organised
left of any importance in the USA or Europe, the population is both
worried and angry. It is one thing for a factory owner to receive a
subsidy but another for bankers to be bailed out. Most people do not see
bankers as anything but parasitic, receiving huge salaries for receiving
other people's money and lending that money out at exorbitant rates of
interest. While financial capital is necessary for the capitalist system
to function, the dominance of finance capital and the huge rewards it
receives are a function of the present stage of capitalism itself and that
view is widely held. Outside of the Anglo-Saxon countries, industrial
capitalism plays a greater role and finance capital is often resented. As
a result, Finance Capital and its functionaries see themselves as
beleaguered, and in a fragile situation, both because of the threat to
their 'business' and because of a possible systemic threat.

The Implosion of Finance Capital - A Turning Point in History

In these notes, we have made the point that we are living through a
turning point in history6. Finance capital itself has imploded and as the
USA is the heart of finance capitalism, the dominance of the USA as the
controlling world power is in decline, without a successor. One author
writes that it is "inevitable that the Anglo-Saxon model of
unfettered capitalism that has dominated thinking for half a century will
be much diminished. What will replace it is unclear, but it may well look
more like a form of state capitalism - perhaps not full-blown, but
something much closer to Chinese capitalism than would have seemed
conceivable just a month ago." 7 However, it is clear that that the
USA will remain the dominant power and China will continue to be dependent
on it for investment, for technology and for the market for its goods.
Another writes:"The autumn of 2008 marks the end of an
era............To invert Karl Marx, investment bankers may have nothing to
gain but their chains". 8

At this point, it is worth
defining Finance Capital. Finance capital is a Marxist concept, which is
often misunderstood and insufficiently theorised. It is defined as
abstract capital: that is to say, abstracted from its conditions and
locality and hence automatically global as opposed to industrial capital,
which is confined to a locality or a number of localities. It is financial
capital become independent and dominant over the process of accumulation.
It is unproductive of value and so must extract it from the productive
sector. It is predatory and parasitic in that it transfers capital from
where it is originally accumulated to itself. It then invests where it can
obtain the maximum return in as short a time as possible. It therefore
invests in unproductive areas like property speculation, commodity
speculation, equity and bond speculation as well in itself -in derivatives
of all kinds. It invests in industry but in so doing it distorts the
economy and industry in its own interests in order to obtain maximum
returns as soon as possible. It therefore has every incentive to bend the
rules, change accounting practices, and avoid tax. In the present period,
it has extended the practice of asset stripping enterprises, the most
obvious examples being given by private equity. It avoids investing in
innovations that require long-term involvement, preferring industry that
will give high returns quickly. Even where industry does not borrow
capital, the norm is set by finance capital. In general, finance capital
is global and so dominated by the major economic power-the USA, with the
assistance of the UK, but not all countries conform to the same
degree-witness Germany and France.

In the 1970s, finance
capital returned to its former role, replacing industrial capital as the
dominant sector of capital. The theory of monetarism was its economic
policy while so-called 'neo-liberalism' was its political-economic
strategy. This was a deliberate shift in order to contain the working
class, who were demanding more control over production, higher wages and
better conditions. Industrial growth shifted downwards, unemployment rose,
the government found itself with a fiscal deficit and so reduced welfare
and other government expenditures. The levels of unemployment were hidden
by shifting the long-term unemployed onto new categories. For example, in
the UK, they receive disability benefit, over fifties receive pensions and
the young go onto various training schemes. The reality is that the number
of economic inactive rose from around 1 per cent in 1970 to figures lying
between 10 and 20 per cent, depending on the years involved. On the other
hand, profits rose, and management incomes rose many times. As is well
known, income distribution has never been so skewed since the Second World
War. On the one hand, there were large sums of money to invest but on the
other hand, there were limited investment opportunities. This was all the
more so once the Cold War came to an end. Official military expenditure in
the US budget as a percentage of GDP fell to well under half of what it
had been in 1986 by 1997. The Iraq and Afghan wars have doubled the figure
of military expenditure but the budgeted military expenditure as a
percentage of GDP is still not much more than half of what it had been in

The point of the last two paragraphs is to provide the
background to the current implosion. Apart from the flows of money coming
from pension funds and insurance companies, the rich and seriously wealthy
have had huge resources looking for an investment. The Swiss Bank UBS has
the largest total of 'Assets under Management' of any bank- some 3.2
trillion Swiss francs. One estimate argues that there is over 500 billion
dollars of money per annum, looking for investment coming from the third
world, apart from official flows. While the Chinese and Japanese
governments have accepted the need to put much their money into US
government bonds, private investors prefer to get higher returns. The
pressure, therefore, on the investment houses was enormous, given the
competition, which exists among them. Capital, therefore, turned to
investing in itself. We have given the figures in the previous Critique
Notes,9 but it is enough to note that the total over the counter
derivatives rose five times from 2001, while credit default swaps rose
from almost 1 trillion dollars to 62 trillion dollars. The Dow Jones index
of shares rose 7 times from 1987. There was a huge asset inflation during
this period of revived finance capital. The house price rise in the USA
and the UK was just one aspect of this asset inflation. At the same time,
the rewards to finance capital soared: "As the financial industry
prospered, its share of the American stock market climbed from 5.2% in
1980 to 23.5% last year".10

Derivatives became an arcane
way of extending credit on a huge scale, as banks could 'securitize' their
loans and so extend new loans. Combined with the expansion induced by the
Iraq War, there was a short-lived boom on a global scale. It was global
because finance capital both invested capital in China, which then
expanded industry on a vast scale, and vastly extended worldwide credit.
The increasing US balance of payments deficit temporarily boosted third
world balance sheets and so left the IMF with a weakened hand. The vast
expansion of derivatives, particularly credit swaps, could only end in
grief, given the limited base. Given the static nature of real incomes,
demand for goods and services, and Chinese industrial goods in particular,
could only reach a ceiling and go down. Without an extended war, the
system had to crack. The fact that it did so over house prices was not
coincidental since they embodied both the derivative expansion and the
limit on workers' incomes

The Current Crisis and Its

The fall of commodity prices, including oil in
particular, preceded the threat of meltdown. Oil had dropped by almost
half from 147 US dollars in July to 70 dollars in October. We have
asserted over a number of issues in these Notes that the impetus behind
the rise in prices was the same as the reason for the credit crunch and
overall downturn-the very- the large surplus of capital over areas of
profitable investment. Finance capital has turned to derivatives, wherever
it looked a possible haven, and so implicitly to loan packages of various
kinds, as well. While the press has been divided between the viewpoint
that shortages forced up the prices and the impact of speculation, it has
become known that the Federal Reserve played a role in helping to bring
down commodity prices11. It is, therefore, clear that speculation played a
crucial role in the price rises, even if shortage had some part to play.
The division between the West Europeans and the Anglo-Americans over the
cause of the price rises ran exactly between those where finance capital
was dominant and those whose economies remained primarily industrial.

It has to be said that there was every indication that the US
government needed to intervene in the world economy in order to ensure its
own stability both internally and internationally. So much for the market
bringing order or stability. The nationalisation of Fannie Mae and Freddie
Mac has made this point very clear. It seems that the Bush administration
did not want to do it and so took longer than was wise to put the two
firms into conservation, as it is put. The fact that a conservative
administration has had to intervene in saving Bear Stearns and the two
mortgage wholesale enterprises plus AIG has been justified by arguing that
these are temporary measures. However, commentators, like Martin Wolff in
the Financial Times, have pointed out that privatisation will take a long
time and certainly not two years. 12

It is possible that the
subsequent threat of meltdown would not have happened if the US Government
had acted faster and had it also saved Lehman brothers. It is clear that
market ideology prevented them acting until too late. In a sense, it was
too late because the end result has been an extinction of the investments
banks combined with the prospect of a tight regulatory regime, over partly
or wholly nationalised banks. Finance Capital will not be able to play its
previous role.

The subsequent passage of the Troubled Assets
Relief Program (TARP) by Congress was assailed as being socialist by the
right and the left has had much fun with the ultra-montane Congressmen,
who saw freedom coming to an end with the advent of 'socialist
intervention'. There is, however, a serious side to their complaints, in
that government intervention does limit the operation of the market and so
the functioning of capital. It does lead to the growth of government and
so of bureaucracy under capitalism. Without question, this is a far better
solution than a deep downturn or a depression. At the same time, Congress
and the capitalist class are faced with a choice of two evils, from the
point of view of capitalism, but only seriously stupid or blinkered
politicians could want to cut their noses off to spite their faces, and
refuse to bail out the banking system, so precipitating a possible repeat
of 1929.

The Effects of the Solution

There are two
results that follow here. The first is the question of ideology. The
doctrines propounded by finance capital going under the name of
'neo-liberalism' now look dated at best and a failure at worst. The market
does not know best and in fact would collapse without government
intervention. As the downturn is likely to last several years with further
government intervention quite certain, these issues will continue to come
to the fore. Governments have been pushed to intervene and will continue
to be forced to intervene to help those evicted from their homes and those
living in fuel poverty, while continuing to nationalise banks and probably
industrial firms, as well as to prevent a systemic collapse. Countries,
particularly those in the third world, will have to be helped to survive
both for their own sake and in order to avoid a domino effect.

Commentators talk of the socialisation of risk and the privatisation of
profit. In fact, this has always been the case, but the absurdity of the
Thatcherite claim that you cannot buck the markets has brought reality to
the fore. As the downturn continues, we might expect 'market
fundamentalism' and even the concept of 'lassiez faire' to lose their
dominance. Keynesianism has returned, at least in name. Sam Brittan, a
deputy editor of the Financial Times announced that:

"There will be no "glad confident morning" for
free-market principles for a long time to come."13

second question concerns the extreme nature of the dangers facing the
capitalist system. Again, it is clear that without the nationalisation of
the two mortgage companies and AIG there was a risk that many non-US
banks, who had invested in these companies, would be in grave trouble.
Given the fact that banks, like the Swiss bank, UBS, had already suffered
huge losses this could tip them over the edge. This situation would apply
to hedge funds and other financial institutions. The danger to the system
as a whole was considerable and had to be quickly dealt with. In fact, it
took some time for the government to make up its mind, and for Congress to
pass the administration's preferred bill, so prolonging the risks and the
agony. The nationalisations combined with the proposed government purchase
of 'toxic debt', supply of money to the money markets and further purchase
of shares in troubled banks have steadied the world monetary and credit
system for the time being. If the US government had followed the advice of
its right wing and let the market take over, then the crash of 1929 would
have looked like a picnic. Engels dictum that every crisis is worse than
the last would have been proven. The failure to pass the initial bill had
led to precisely such fears: "Terrified of a catastrophic Wall Street
meltdown, the House Friday approved an unprecedented $700 billion bailout
bill - and President Bush quickly signed it into law". 14

Keynesianism and Social Democracy

While commentators may
accept criticisms of capitalism, they remain bound to the system itself.
Will Hutton speaks for them when he argues that the issue is not
capitalism itself but the necessity of a fairer and more redistributive
form.15 However, the capitalist class will not willingly return to the
social democratic form of the immediate post-war period, as it would be
far too dangerous to the system itself. Full employment, a high rate of
growth, a rising standard of living, free health and education and
affordable housing provide a springboard for the working class to demand
greater control over its own life, better working conditions and higher
wages. In Marxist terms, the abolition of the reserve army of labour and
the removal of the fetishism of the commodity leaves the system without
control over labour. It only worked in that period because the working
class had come through a much worse period of fascism, depression and war
and was still contained within a Cold War.

The frequent
references to 'moral hazard' indicate that that the ideology of the market
remains. The fact that dithering over nationalisations due to worries
around the 'moral hazard' involved has receded shows that market ideology
is losing some of its hold.

The strategy of Finance Capital
has gone into meltdown and there is no replacement. We are at the end of
the beginning of this downturn. The next phase involves declines in
industrial production, and overall profits and a large rise in
unemployment. Governments are talking of investment in infrastructure.
Will Hutton points out that it makes sense to raise unemployment
benefit.16 At the same time, contemporary economic ideology dictates a
balanced budget or at least the lowest possible deficit. There is no
question that governments could pour money into the economy, nationalising
failed concerns where necessary and so limit the downturn. However, the
concept of workers' wages being raised in order to increasing spending
power is unlikely to be endorsed, as it would obviously reduce profits not
just immediately but for some time in the future.

The Military
Solution - A New Cold War?

The usual alternative of increasing
military expenditure is not an option at this time because of the failure
of Iraq war and the absence of a Cold War. It is possible that the sabre
rattling over the Russian invasion of Georgia was seen as an alternative
rallying point, raising the spectre of a new Cold War. However, the idea
that modern Russia could conduct a Cold War is so absurd that one wonders
whether the British and US foreign offices knew what they were doing.
Russia today is a weak power. Its troops went into South Ossetia, in
Georgia, in large part because of its weakness. Its Southern borders are
permanently unstable. Chechnya remains under occupation there. The Russian
elite took the opportunity to raise its standing among one section of the
population in that area and warn off the rest. No doubt the Russian elite
harbours expansionist tendencies but that does not mean that they are
about to invade former Soviet countries. Russia's military forces and
thermo-nuclear weapons are not those of the USSR. They have been run down
and the military personnel remain demoralised.

The strong
stand taken against Russia directly conflicted with Western aims in the
area of the former Soviet Union. Hitherto their aim has been one of
helping to remove the remnants of Stalinist forms and replacing them with
the market. Since that has turned out to be an elongated and possibly
unsuccessful process, Western governments, or the capitalist class, have
every interest in encouraging Russian governments to participate in global
market forms. Instead, there were demands that Russia not be admitted to
the World Trade Organisation. Since the dominant section of the Russian
elite does not want to join the WTO, and is being pushed by the more
liberal section of the Russian elite as well as by the West that demand
seemed absurd.

The Western campaign did lead to a massive
outflow of money from Russia. When the financial crisis emerged Russian
finance capital was badly hit. With the continuing decline in prices of
raw materials, the Russian economy will be in more trouble than most
countries, other than Iceland, to which it is, paradoxically, giving a
loan. There is every probability that at the end of the downturn Russia
will have achieved a more substantial return to state control of the

Depression or Recession

What the downturn
will now be called is a question of economists' vanity. For some time,
downturn was used rather than recession. Then recession became acceptable.
Today the question is whether one can call this downturn a depression. In
any reasonable discussion, it would be called a depression, since the word
recession was invented to avoid the odious associations of a depression,
of unemployment, hunger and suicides but did not add any more meaning to
the discussion. After all one can have a shallow depression and a deep
depression. Today there are discussions whether the recession will be
shallow or deep, with many opting for the latter. As Paul Krugman noted:

" Just this week, we learned that retail sales have
fallen off a cliff, and so has industrial production. Unemployment claims
are at steep-recession levels, and the Philadelphia Fed's manufacturing
index is falling at the fastest pace in almost 20 years. All signs point
to an economic slump that will be nasty, brutish - and long"17

One may add that the upturn, when it comes, is likely to weak.

As there is no comparison with any other downturn other than the
1929 depression it is clear that we are in a classic depression, with
somewhat more spectacular fireworks but with much more government
intervention. Whereas the downturns in the last century after the last
World War were largely a result of anti-inflationary measures, the
downturns of March 2000 and August 2007 are a result of surplus capital
not finding a profitable outlet.


1 One
of many instances is that of John Plender: "Shut Out" in the
Financial Times, 18-10-2008, p.11, in which cites a very pertinent
paragraph from Marx: "Karl Marx was wrong about many things, but in
1893 he provided as good an account of today's financial implosion as any
living commentator. "To the possessor of money capital, the process
of production appears merely as an unavoidable intermediate link, as a
necessary evil for the sake of money- making. All nations with a
capitalist mode of production are therefore seized periodically by a
feverish attempt to make money without the intervention of the process of

That passage from Das Kapital is a fine
description of the financialisation of the economies of the
English-speaking countries in recent years and of the resulting credit
bubble." Das Kapital first appeared in 1867, as is well known, and
Marx died in 1883.

2 Eye on the Market - A commentary written
for JPMorgan clients by its Global Chief Investment Officer Michael
Cembalest and Private Wealth Management Chief Investment Officer Hans
Olsen, New York: JPMorgan, 7 October 2008, Paragraph 6. "How will we
ever get out of this mess?"

"Most of our
professional careers were spent watching global central banks fight (and
then win) a battle against inflation. The tragic irony is that if nothing
is done to prevent this credit spiral, those inflation gains will be for
naught, with economic activity crumbling in a deflationary spiral. The
stakes are high, with each region having its own visceral memories of what
it's like to get it wrong. For the U.S., the Depression of the 1930's. For
Japan, the 15-year deflation of the 1990s. Instead of history, the
greatest fear for Europe might be that Karl Marx was right: that
capitalism is a system doomed to destroy itself through its own internal
contradictions. So to answer the question, I think that global
consciousness has been rudely awakened: while the decision to build a
market economy based on massive amounts of debt was left to the private
sector (see second chart below), the consequences of unwinding it cannot
be. The flurry of public sector activity in the last 12 months and 12 days
suggests to me that by the end of the year, we will see more explicit
plans to safeguard the surviving banks, which will mark the beginning of
the long road back."

3 The Guardian, London, 20th
September, 2008. Tristram Hunt.

4 Simon Jenkins: "The end
of capitalism? No, just another burst bubble.Those drooling over the free
market's collapse are wrong: this passing crisis is down to lax regulation
and craven ministers" Guardian, 15 October 2008, p.29.

A short history of modern finance, Link by Link, Economist, 16 October
2008, p.96-98

6 Critique Notes, Critique 44, p;1-4.

7 Andrew Graham, 'If China spends its trillions, recession could be
averted', Guardian, London, 15 October 2008, p.28:

8 A short
history of modern finance, Link by Link, Economist, 16 October 2008, p.96.

9 Critique Notes, Critique 45, p.172.

10 A short
history of modern finance: Link by Link, Economist, 16 October 2008, p.

11 This report refers to the July 11th 2008 decision to
support Fanny Mae and Freddy Mac.

According to Mr. Coxe, the
Fed's ultimate goal was to trigger a rally in financial stocks, which
would, in theory, help banks hammered by the credit crisis raise fresh
capital and repair their balance sheets. To accomplish this, the decision
to support Fannie and Freddie was deliberately announced on a Sunday,
which had the effect of maximizing the reaction from thinly traded
financial stocks on overseas markets.

Because many hedge funds
were using massive leverage to short financials and go long on
commodities, when North American markets opened and banks initially
rallied, the funds were forced to cover their short positions.

At the same time, the U.S. dollar was rallying because the risk of
holding Fannie and Freddie paper had diminished. The rising dollar, in
turn, made commodities less attractive, giving funds that were already
scrambling to cover their financial shorts another reason to dump oil,
grains and other commodities.

The losses were swift and
dramatic. On the Friday before the July 11 announcement, crude oil closed
at $145.18 a barrel. Over the following five days, it plunged 11 percent.
"Leverage was being unwound dramatically," Mr. Coxe said on a
conference call last week. "We had a true panic."

oil and other commodities were tumbling, fears about the slowing global
economy were mounting, giving resources another push downhill. This was
also in keeping with the Fed's wishes, because lower commodity prices
would help quell fears about inflation.
Accessed 11 September 2008.

12 Martin Wolff: Financial Times,
10 September 2008, p.2.

13 'Capitalism and the credit crunch'
By Samuel Brittan, Financial Times, 11 September 2008 18:33, Last updated:
September 11 2008 18:33 Accessed:

14New York Daily News,
, accessed 5 October 2008.

15 Will Hutton, Observer, 19
October 2008, p. 29.

16 Op. Cit.

17 Paul Krugman:
'Let's Get Fiscal', New York Times, 17 October 2008.

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