[OPE] The end of capitalism (I doubt it, JL)

From: <glevy@pratt.edu>
Date: Fri Jan 16 2009 - 19:02:44 EST

----- Original Message -----

From: Antonio Pagliarone

Sent: Friday, January 16, 2009 4:43 PM

Subject: Th
end of capitalismm

Tuesday, January 06, 2009

The End of Capitalism? Not quite, but nearly....


Originally published in Fourth
World Review - A Transition Journal

The Crash of 2008

In the summer of 2008, the Bank for International
Settlements (BIS) warned of the danger of another Great Depression
rivaling the economic crash of the 1930s. The problem supposedly began
with the US sub-prime mortgage crisis, whereby American banks increasingly
granted mortgages on less stringent conditions to consumers who could not
prove their ability to make repayments. This wasn't an idle mistake due to
insufficient regulation. Governments knew what was happening, and had
ample opportunity to stop it. But financial institutions lobbied
successfully for the power to lend at whatever multiples they wanted,
without restriction. According to former Governor of New York Elliot
Spitzer, when states realized the vast extent of corrupt lending practices
by banks and tried to intervene to regulate them around 2003, the US
Treasury Department unilaterally blocked their efforts.

On the basis of the proliferation of sub-prime mortgages, banks
innovated new 'financial products' such as derivatives, valued against
projected mortgage repayments. These are essentially contracts that gamble
on the future prices of assets, thus deriving their value from primary
assets, such as currency, commodities, stocks, and bonds. As more people
with lower incomes obtained subprime mortgages, increasing volumes of bad
debt were repackaged and re-sold globally, on the basis of which even
larger amounts of credit and thus new loans were flooded into worldwide

"Risk?... What Risk?"

Veteran derivatives trader Nassim Nicholas Taleb, Distinguished
Professor of Risk-Engineering at New York University's Polytechnic
Institute, confirms that banks routinely certified such transactions as
solid and risk-free using quantitative models which, in reality, simply
concealed the actual scope for risk and its potential consequences. This
allowed them to create extremely risky financial instruments, slap a
certification of safety over them, and sell them on for stupendous
profits. In turn, these products were fraudulently insured by other
financial companies, which used the opportunity to charge exorbitant fees.
But these 'insurance' firms simply did not have the assets to cover losses
in the event of a real default.

Consumers increased
their spending on the basis of the security of their houses, while
financial institutions accelerated their lending on the basis of rapidly
proliferating mortgages, together contributing to rising prices and a
mounting inflationary property and consumer bubble. This frenzy of
spending and lending created a veritable bonanza of debt-based 'virtual
growth'. It had nothing to do with a real surplus derived from increases
in productivity, but rather from a monetary system based on the ability to
continually borrow (and effectively create out of nothing) cash that in
real terms did not yet exist, except as the expectation of repayments on

Worldwide sales worth trillions of dollars of
these dodgy financial instruments distributed risks across multiple
financial markets. Moreover, the hierarchical structure of the global
financial system, dominated by New York and London, meant that debt-based
profiteering at the core of the system radiated outwards and downwards to
more peripheral countries tied into the system through their receipt of
loans from the core and/or purchases of derivatives.

Indeed, thanks to the monumental profits and concomitant phenomenal
growth accrued through this process, US and British financial institutions
jubilantly accelerated lending to Europe, Asia, and countries in the
South, creating an entrenched global web of debt, credit and financial
profits. Thus, when the defaults started in the US, the crisis radiated
outwards and downwards, and is still doing so.

'Structured Finance' Structurally Sound?

So the Crash of
2008 had multiple interwoven causes - but it's important to understand how
these were related. One major background cause is the nature of the
monetary system and the very existence of interest. All money is created
through governments borrowing from banks on interest. This means that
repayments of the debt are larger than the original size of the loan. For
the loan to be repaid, more money needs to be created which means more
lending on interest. The result is that over the long-term, as the money
supply increases, the value of the currency depreciates and thus costs of
living rise. There is therefore a long-term structural tendency toward
rising inflation. This contributes to the devastating nature of
capitalism's boom and bust crises - at some point the debt-bubble is
patently unrepayable and has to collapse.

Yet pre-Crash
inflation also had another specific cause in the 21st century, namely,
rocketing fuel prices; fuel prices rose from 2001 through to 2008
primarily due to supply-demand issues (not purely due to financial
speculation although this played a role), most likely as a consequence of
peak oil. According to an October 2007 oil market report by the Energy
Watch Group in Berlin, world oil production peaked in 2006. The excessive
energy costs fed directly into the entire system, raising cost of
transport, food, living and basically everything, which thus also placed
structural pressure on banks to increase interest rates to cover their own
costs. Experts like petroleum geologist Colin Campbell, who worked for
companies like Shell, BP, Esso and Texaco, confirm we are probably now on
what is known as the "undulating plateau".

plateau begins when peak oil induces massive price shocks contributing to
economic recession. The recession in turn reduces consumption, lessening
the strain on resources and precipitating a collapse in fuel prices. Lower
prices create new space for renewed consumption and economic recovery.
This "undulating plateau" is a period of major price
fluctuation, which could last from 5 to 10 years before oil capacity
limits are permanently breached and we arrive at the era of irreversibly
scarce oil supplies and high prices.

The corrupt lending
practices of banks interacted with the impact of rising inflation. While
sheer greed partly explains this behaviour, it's a bit more complicated
than that. The structural fragility of the global financial system had
been obvious since the dot com boom and bust in the late 1990s. The
capitalist imperative to keep growing by continually generating profits is
structural - i.e. capitalism systematizes human greed and makes it
necessary for economic survival. If the financial sector didn't find a new
outlet for investment to continue growing the economy, the economy would
contract. If the financial sector was to continue growing, it had to find
a new previously untapped market for debt-credit creation and the
associated milieu of 'financial products' - this new market consisted of
'low-income' people and even the struggling middle classes, namely, the
majority of the population. The very imperative to grow - simply to avoid
banks and corporations losing profits, contracting and then failing -
pushed banks into even more corrupt lending practices, which combined with
long-term structural energy and monetary constraints, creating a bubble of
virtual growth that was bound to implode at some point.

How to Create a Quadrillion Dollars 'Ex Nihilo'

So the
housing markets were only the underbelly of a much larger beast. So-called
"structured financial" products served as mechanisms to generate
massive profits for elite investors by deepening levels of debt. This
leads back to the structural issue of the monetary system, based on
fractional reserve banking - that is, the creation of money from nothing,
simply by entering numbers into a computer, as credit charged at interest.
Traditionally, banks could create credit or debt-money up to 12 times what
they held in reserve.

But this changed with the
worldwide brokering of the New Capital Accord in 2000 by the Bank for
International Settlements. The Accord effectively allowed banks to obtain
unlimited leverage - the ability to create debt-money at any multiple
whatsoever, with no meaningful regulation. Financial institutions
exploited this new found power to subjugate the population to an enlarging
and unrepayable debt that was the basis of self-multiplying profits for
financial institutions.

According to the Bank for
International Settlements, by late 2008 total derivatives trades exceeded
one quadrillion dollars, that is, 1,000 trillion dollars. This is an
insane quantity that has no relation to the real economy - the total GDP
of all the countries in the world is only about 60 trillion dollars. It is
a quantity generated by the creation of money out of nothing as credit -
that is as debt-money requiring repayment on interest.

Worse, no one, not even in the leading financial institutions, really
understood exactly how this situation had come about. As of 2004, for
instance, 90 per cent of financial transactions in the US were not
properly recorded. This was, in effect, a giant, globalized casino through
which financiers generated stupendous profits out of thin air, all on the
basis of the proliferation of massive debts that inherently could never be
repaid. This 'house of cards' was therefore uniquely vulnerable to
collapse. The housing crisis was just the trigger, threatening to unravel
the entire edifice of debt-driven profiteering.

the "Triple Crunch"

Ultimately, the global
financial crisis of 2008 signifies the deep-seated failure of our
conventional socio-economic, ethical and political models. But the 'credit
crunch' is only one face of global crisis. We also face two other
interrelated major 'crunches' this century - 1) oil and energy depletion,
with evidence that world oil production already peaked in 2006; and 2)
dangerous global warming, with evidence that current rates of increase of
fossil fuel emissions will lead to a rise of 2-4 degrees Celsius,
permanently disrupting Earth's ecosystems.

The mantra
that 'there is no alternative' is untenable: neoliberal capitalism
encourages forms of unthinking consumerism and unrestrained corporate
empowerment that are together destroying the Earth's ecosystems and
depleting our energy resources beyond repair. The unprecedented
convergence of global economic, ecological and energy crises threatens the
viability of industrial civilization, and proves the urgency of immediate
social structural reforms.

Such reforms will have to deal with
the following structural features of the current global system, among many

1) Global inequalities in ownership of
productive resources: Currently around 5 per cent of the world population
owns the world's productive resources. The rest of the population are
separated from the means of production, and are forced into various forms
of wage labour or servitude to survive. This requires extensive new
thinking on how to increase access to, and ownership of, productive
resources on the part of the majority of the world population, while
respecting individual liberties and private enterprise.

2) The ideal of unlimited growth: As Nobel Prize-winning economist
Amartya Sen argues, economic development should be directed not at
unlimited growth for its own sake, but at sustainable growth specifically
for the purpose of catering for the needs and well-being of the majority
of people. The IMF's own data proves that neoliberal capitalism has led to
increasing concentrations of ever-larger profits among a smaller minority
of the world's population, with the percentage of benefits from growth to
the poor shrinking, creating greater poverty and inequality all round.

3) Fractional reserve banking and the New Capital Accord
(2000): The interest-based monetary system subjugates the real economy to
a form of unrestrained financial plunder that intensifies debt in order to
grow. This means not only monetary reform, but a fundamental
decentralization of the economic and financial system based on the
principle that the Earth's resources belong to everyone, and that people
everywhere should participate in economic and financial policymaking.
This, of course, also means that political power must be increasingly
distributed among communities.

4) Materialist
fundamentalism: Underlying neoliberal capitalism are philosophical
assumptions about life and human nature that reduce the world to nothing
more than a collection of physical, disconnected, atomistic,
self-interested and thus inherently conflictual units. This reductionist
worldview rationalizes unlimited consumption based on the equation of
personal happiness with accumulation of material possessions and
fulfillment of material desires. There is no room for objective ethical
values because such values cannot be readily identified as material
objects. Yet clearly these ideological assumptions of capitalism are false
- because if they were right, then they would work! Rather, we see that
the manifestation of materialism in the global political economy is
leading to massive destruction of life, rather than prosperity for all.
This means that ideals like social justice and compassion are actually,
objectively, more in tune with nature than neoliberals would have us

Civilizational Renewal?

The urgent need for a global alternative is therefore not up for debate.
But we should hold no illusions. Things will get far, far worse, before
they get better. This is not yet the end of capitalism. On the contrary,
the biggest financial players, like Goldman Sachs, JP Morgan, and others,
have used their power over states to secure massive bailouts using public
funds, allowing them to prevail while hundreds of other financial
institutions have fallen like dominos. As the collapse of the financial
system pulls down the real economy, shares in giant corporations which
actually produce tangible goods and services have plummeted as consumers
are clinging to their increasingly empty wallets. Taking advantage of
their supreme position, financiers have moved in fast, buying up the
cheaper shares and consolidating ownership of production. We are
witnessing an unprecedented re-structuring and centralization of economic
and financial power.

Yet the system has perhaps another
10-15 years before irreversible collapse as the impact of peak oil kicks
in. In this time-frame, as working people are increasingly upset, confused
and angry about the acceleration of socio-economic injustice, activists
and researchers have unprecedented opportunity to work harder than ever to
develop a vision for the future that is just, inclusive and holistic. The
time to prove that there are meaningful alternatives is now.

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Received on Fri Jan 16 19:07:47 2009

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