Capitalism in an Apocalyptic Mood
by Walden Bello, Foreign Policy
Skyrocketing oil prices, a falling dollar,
and collapsing financial markets are the key ingredients in an
economic brew that could end up in more than just an ordinary
recession. The falling dollar and rising oil prices have been
rattling the global economy for sometime. But it is the dramatic
implosion of financial markets that is driving the financial elite
And panic there is. Even as it characterized
Federal Reserve Board Chairman Ben Bernanke's deep cuts amounting
to a 1.25 points off the prime rate in late January as a sign
of panic, the Economist admitted that "there is no doubt
that this is a frightening moment." The losses stemming from
bad securities tied up with defaulted mortgage loans by "subprime"
borrowers are now estimated to be in the range of about $400 billion.
But as the Financial Times warned, "the big question is what
else is out there" at a time that the global financial system
"is wide open to a catastrophic failure." In the last
few weeks, for instance, several Swiss, Japanese, and Korean banks
have owned up to billions of dollars in subprime-related losses.
The globalization of finance was, from the beginning, the cutting
edge of the globalization process, and it was always an illusion
to think that the subprime crisis could be confined to U.S. financial
institutions, as some analysts had thought.
Some key movers and shakers sounded less
panicky than resigned to some sort of apocalypse. At the global
elite's annual week-long party at Davos in late January, George
Soros sounded positively necrological, declaring to one and all
that the world was witnessing "the end of an era." World
Economic Forum host Klaus Schwab spoke of capitalism getting its
just desserts, saying, "We have to pay for the sins of the
past." He told the press, "It's not that the pendulum
is now swinging back to Marxist socialism, but people are asking
themselves, 'What are the boundaries of the capitalist system?'
They think the market may not always be the best mechanism for
Ruined Reputations and Policy Failures
While some appear to have lost their nerve,
others have seen the financial collapse diminish their stature.
As chairman of President Bush's Council
of Economic Advisers in 2005, Ben Bernanke attributed the rise
in U.S. housing prices to "strong economic fundamentals"
instead of speculative activity. So is it any wonder why, as Federal
Reserve chairman, he failed to anticipate the housing market's
collapse stemming from the subprime mortgage crisis? His predecessor,
Alan Greenspan, however, has suffered a bigger hit, moving from
iconic status to villain in the eyes of some. They blame the bubble
on his aggressively cutting the prime rate to get the United States
out of recession in 2003 and restraining it at low levels for
over a year. Others say he ignored warnings about aggressive and
unscrupulous mortgage originators enticing "subprime"
borrowers with mortgage deals they could never afford.
The scrutiny of Greenspan's record and
the failure of Bernanke's rate cuts so far to reignite bank lending
has raised serious doubts about the effectiveness of monetary
policy in warding off a recession that is now seen as all but
inevitable. Nor will fiscal policy or putting money into the hands
of consumers do the trick, according to some weighty voices. The
$156 billion stimulus package recently approved by the White House
and Congress consists largely of tax rebates, and most of these,
according to New York Times columnist Paul Krugman, will go to
those who don't really need them. The tendency will thus be to
save rather than spend the rebates in a period of uncertainty,
defeating their purpose of stimulating the economy. The specter
that now haunts the U.S. economy is Japan's experience of virtually
zero annual growth and deflation despite a succession of stimulus
packages after Tokyo's great housing bubble deflated in the late
The Inevitable Bubble
Even with the finger-pointing in progress,
many analysts remind us that if anything, the housing crisis should
have been expected all along. The only question was when it would
break. As progressive economist Dean Baker of the Center for Economic
Policy Research noted in an analysis several years ago, "Like
the stock bubble, the housing bubble will burst. Eventually, it
must. When it does, the economy will be thrown into a severe recession,
and tens of millions of homeowners, who never imagined that house
prices could fall, likely will face serious hardship."
The subprime mortgage crisis was not a
case of supply outrunning real demand. The "demand"
was largely fabricated by speculative mania on the part of developers
and financiers that wanted to make great profits from their access
to foreign money that flooded the United States in the last decade.
Big ticket mortgages were aggressively sold to millions who could
not normally afford them by offering low "teaser" interest
rates that would later be readjusted to jack up payments from
the new homeowners. These assets were then "securitized"
with other assets into complex derivative products called "collateralized
debt obligations" (CDOs) by the mortgage originators working
with different layers of middlemen who understated risk so as
to offload them as quickly as possible to other banks and institutional
investors. The shooting up of interest rates triggered a wave
of defaults, and many of the big name banks and investors - including
Merrill Lynch, Citigroup, and Wells Fargo - found themselves with
billions of dollars worth of bad assets that had been given the
green light by their risk assessment systems.
The Failure of Self-Regulation
The housing bubble is only the latest
of some 100 financial crises that have swiftly followed one another
ever since the lifting of Depression-era capital controls at the
onset of the neoliberal era in the early 1980s. The calls now
coming from some quarters for curbs on speculative capital have
an air of déjà vu. After the Asian Financial Crisis
of 1997, in particular, there was a strong clamor for capital
controls, for a "new global financial architecture."
The more radical of these called for currency transactions taxes
such as the famed Tobin Tax, which would have slowed down capital
movements, or for the creation of some kind of global financial
authority that would, among other things, regulate relations between
northern creditors and indebted developing countries.
Global finance capital, however, resisted
any return to state regulation. Nothing came of the proposals
for Tobin taxes. The banks killed even a relatively weak "sovereign
debt restructuring mechanism" akin to the U.S. Chapter Eleven
to provide some maneuvering room to developing countries undergoing
debt repayment problems, even though the proposal came from Ann
Krueger, the conservative American deputy managing director of
the IMF. Instead, finance capital promoted what came to be known
as the Basel II process, described by political economist Robert
Wade as steps toward global economic standardization that "maximize
[global financial firms'] freedom of geographical and sectoral
maneuver while setting collective constraints on their competitive
strategies." The emphasis was on private sector self-surveillance
and self-policing aimed at greater transparency of financial operations
and new standards for capital. Despite the fact that it was finance
capital from the industrialized countries that triggered the Asian
crisis, the Basel process focused on making developing country
financial institutions and processes transparent and standardized
along the lines of what Wade calls the "Anglo-American"
Calls to regulate the proliferation of
these new, sophisticated financial instruments, such as derivatives
placed on the market by developed country financial institutions,
went nowhere. Assessment and regulation of derivatives were left
to market players who had access to sophisticated quantitative
"risk assessment" models.
Focused on disciplining developing countries,
the Basel II process accomplished so little in the way of self-regulation
of global financial from the North that even Wall Street banker
Robert Rubin, former secretary of treasury under President Clinton,
warned in 2003 that "future financial crises are almost surely
inevitable and could be even more severe."
As for risk assessment of derivatives
such as the "collaterized debt obligations" (CDOs) and
"structured investment vehicles" (SIVs) - the cutting
edge of what the Financial Times has described as "the vastly
increased complexity of hyperfinance" - the process collapsed
almost completely. The most sophisticated quantitative risk models
were left in the dust. The sellers of securities priced risk by
one rule only: underestimate the real risk and pass it on to the
suckers down the line. In the end, it was difficult to distinguish
what was fraudulent, what was poor judgment, what was plain foolish,
and what was out of anybody's control. "The U.S. subprime
mortgage market was marked by poor underwriting standards and
'some fraudulent practices,'" as one report on the conclusions
of a recent meeting of the Group of Seven's Financial Stability
Forum put it. "Investors didn't carry out sufficient due
diligence when they bought mortgage-backed securities. Banks and
other firms managed their financial risks poorly and failed to
disclose to the public the dangers on and off their balance sheets.
Credit-rating companies did an inadequate job of evaluating the
risk of complex securities. And the financial institutions compensated
their employees in ways that encouraged excessive risk-taking
and insufficient regard to long-term risks."
The Specter of Overproduction
It is not surprising that the G-7 report
sounded very much like the post-mortems of the Asian financial
crisis and the dot.com bubble. One financial corporation chief
writing in the Financial Times captured the basic problem running
through these speculative manias, perhaps unwittingly, when he
claimed that "there has been an increasing disconnection
between the real and financial economies in the past few years.
The real economy has grownbut nothing like that of the financial
economy, which grew even more rapidly - until it imploded."
What his statement does not tell us is that the disconnect between
the real and the financial is not accidental, that the financial
economy expanded precisely to make up for the stagnation of the
The stagnation of the real economy stems
is related to the condition of overproduction or over-accumulation
that has plagued the international economy since the mid-1970s.
Stemming from global productive capacity outstripping global demand
as a result of deep inequalities, this condition has eroded profitability
in the industrial sector. One escape route from this crisis has
been "financialization," or the channeling of investment
toward financial speculation, where greater profits could be had.
This was, however, illusory in the long run since, unlike industry,
speculative finance boiled down to an effort to squeeze out more
"value" from already created value instead of creating
The disconnect between the real economy
and the virtual economy of finance was evident in the dot.com
bubble of the 1990s. With profits in the real economy stagnating,
the smart money flocked to the financial sector. The workings
of this virtual economy were exemplified by the rapid rise in
the stock values of Internet firms that, like Amazon.com, had
yet to turn a profit. The dot.com phenomenon probably extended
the boom of the 1990s by about two years. "Never before in
U.S. history," Robert Brenner wrote, "had the stock
market played such a direct, and decisive, role in financing non-financial
corporations, thereby powering the growth of capital expenditures
and in this way the real economy. Never before had a US economic
expansion become so dependent upon the stock market's ascent."
But the divergence between momentary financial indicators like
stock prices and real values could only proceed to a point before
reality bit back and enforced a "correction." And the
correction came savagely in the dot.com collapse of 2002, which
wiped out $7 trillion in investor wealth.
A long recession was avoided, but only
because another bubble, the housing bubble, took the place of
the dot.com bubble. Here, Greenspan played a key role by cutting
the prime rate to a 45-year low of one percent in June 2003, holding
it there for a year, then raising it only gradually, in quarter-percentage-increments.
As Dean Baker put it, "an unprecedented run-up in the stock
market propelled the U.S. economy in the late nineties and now
an unprecedented run-up in house prices is propelling the current
The result was that real estate prices
rose by 50% in real terms, with the run-ups, according to Baker,
being close to 80% in the key bubble areas of the West Coast,
the East Coast north of Washington, DC, and Florida. Baker estimates
that the run-up in house prices "created more than $5 trillion
in real estate wealth compared to a scenario where prices follow
their normal trend growth path. The wealth effect from house prices
is conventionally estimated at five cents to the dollar, which
means that annual consumption is approximately $250 billion (2
per cent of gross domestic product [GDP]) higher than it would
be in the absence of the housing bubble."
The China Factor
The housing bubble fueled U.S. growth,
which was exceptional given the stagnation that has gripped most
of the global economy in the last few years. During this period,
the global economy has been marked by underinvestment and persistent
tendencies toward stagnation in most key economic regions apart
from the United States, China, India, and a few other places.
Weak growth has marked most other regions, notably Japan, which
was locked until very recently into a one percent GDP growth rate,
and Europe, which grew annually by 1.45% in the last few years.
With stagnation in most other areas, the
United States has pulled in some 70% of all global capital flows.
A great deal of this has come from China. Indeed, what marks this
current bubble period is the role of China as a source not only
of goods for the U.S. market but also capital for speculation.
The relationship between the United States and Chinese economies
is what I have characterized elsewhere as chain-gang economics.
On the one hand, China's economic growth has increasingly depended
on the ability of American consumers to continue their debt-financed
spending spree to absorb much of the output of China's production.
On the other hand, this relationship depends on a massive financial
reality: the dependence of U.S. consumption on China's lending
the U.S. Treasury and private sector dollars from the reserves
it accumulated from its yawning trade surplus with the United
States: one trillion dollars so far, according to some estimates.
Indeed, a great deal of the tremendous sums China - and other
Asian countries - lent to American institutions went to finance
middle-class spending on housing and other goods and services,
prolonging the fragile U.S. economic growth but only by raising
consumer indebtedness to dangerous, record heights.
The China-U.S. coupling has had major
consequences for the global economy. The massive new productive
capacity by American and other foreign investors moving to China
has aggravated the persistent problem of overcapacity and overproduction.
One indicator of persistent stagnation in the real economy is
the aggregate annual global growth rate, which averaged 1.4% in
the 1980s and 1.1% in the 1990s, compared to 3.5% in the 1960s
and 2.4% in the 1970s. Moving to China to take advantage of low
wages may shore up profit rates in the short term. But as it adds
to overcapacity in a world where a rise in global purchasing power
is constrained by growing inequalities, such capital flight erodes
profits in the long term. And indeed, the profit rate of the largest
500 U.S. transnational corporations fell drastically from 4.9%
from 1954-59, to 2.04% from 1960-69, to -5.30% from 1989-89, to
-2.64% from 1990-92, and to -1.92% from 2000-2002. Behind these
figures, notes Philip O'Hara, was the specter of overproduction:
"Oversupply of commodities and inadequate demand are the
principal corporate anomalies inhibiting performance in the global
The succession of speculative manias in
the United States has had the function of absorbing investment
that did not find profitable returns in the real economy and thus
not only artificially propping up the U.S. economy but also "holding
up the world economy," as one IMF document put it. Thus,
with the bursting of the housing bubble and the seizing up of
credit in almost the whole financial sector, the threat of a global
downturn is very real.
Decoupling Chain-Gang Economics?
In this regard, talk about a process of
"decoupling" regional economies, especially the Asian
economic region, from the United States has been without substance.
True, most of the other economies in East and Southeast Asia have
been pulled along by the Chinese locomotive. In the case of Japan,
for instance, a decade-long stagnation was broken in 2003 by the
country's first sustained recovery, fueled by exports to slake
China's thirst for capital and technology-intensive goods. Exports
shot up by a record 44%, or $60 billion. Indeed, China became
the main destination for Asia's exports, accounting for 31% while
Japan's share dropped from 20 to 10%. As one account in the Strait
Times in 2004 pointed out, "In country-by-country profiles,
China is now the overwhelming driver of export growth in Taiwan
and the Philippines, and the majority buyer of products from Japan,
South Korea, Malaysia, and Australia."
However, as research by C.P. Chandrasekhar
and Jayati Ghosh and has underlined, China is indeed importing
intermediate goods and parts from these countries but only to
put them together mainly for export as finished goods to the United
States and Europe, not for its domestic market. Thus, "if
demand for Chinese exports from the United States and the EU slow
down, as will be likely with a U.S. recession, this will not only
affect Chinese manufacturing production, but also Chinese demand
for imports from these Asian developing countries." Perhaps
the more accurate image is that of a chain gang linking not only
China and the United States but a host of other satellite economies
whose fates are all tied up with the now-deflating balloon of
debt-financed middle-class spending in the United States.
New Bubbles to the Rescue?
Do not overestimate the resiliency of
capitalism. After the collapse of the dot.com boom and the housing
boom, a third line of defense against stagnation owing to overcapacity
may yet emerge. For instance, the U.S. government might pull the
economy out of the jaws of recession through military spending.
And, indeed, the military economy did play a role in bringing
the United States out of the 2002 recession, with defense spending
in 2003 accounting for 14% of GDP growth while representing only
4% of the overall U.S. GDP. According to estimates cited by Chalmers
Johnson, defense-related expenditures will exceed $1 trillion
for the first time in history in 2008.
Stimulus could also come from the related
"disaster capitalism complex" so well studied by Naomi
Klein: the "full fledged new economy in home land security,
privatized war and disaster reconstruction tasked with nothing
less than building and running a privatized security state both
at home and abroad." Klein says that, in fact, "the
economic stimulus of this sweeping initiative proved enough to
pick up the slack where globalization and the dot.com booms had
left off. Just as the Internet had launched the dot.-com bubble,
9/11 launched the disaster capitalism bubble." This subsidiary
bubble to the real-estate bubble appears to have been relatively
unharmed so far by the collapse of the latter.
It is not easy to track the sums circulating
in the disaster capitalism complex. But one indication of the
sums involved is that InVision, a General Electric affiliate producing
high-tech bomb-detection devises used in airports and other public
spaces, received an astounding $15 billion in Homeland Security
contracts between 2001 and 2006.
Whether or not "military Keynesianism"
and the disaster capitalism complex can in fact fill the role
played by financial bubbles is open to question. To feed them,
at least during the Republican administrations, has meant reducing
social expenditures. A Dean Baker study cited by Johnson found
that after an initial demand stimulus, by about the sixth year,
the effect of increased military spending turns negative. After
10 years of increased defense spending, there would be 464,000
fewer jobs than in a scenario of lower defense spending.
An more important limit to military Keynesianism
and disaster capitalism is that the military engagements to which
they are bound to lead are likely to create quagmires such as
Iraq and Afghanistan. And these disasters could trigger a backlash
both abroad and at home. Such a backlash would eventually erode
the legitimacy of these enterprises, reduce their access to tax
dollars, and erode their viability as sources of economic expansion
in a contracting economy._Yes, global capitalism may be resilient.
But it looks like its options are increasingly limited. The forces
making for the long-term stagnation of the global capitalist economy
are now too heavy to be easily shaken off by the economic equivalent
of mouth-to-mouth resuscitation.
Walden Bello is president of the Freedom
from Debt Coalition, a senior analyst at Focus on the Global South,
and a columnist for Foreign Policy In Focus (www.fpif.org).
Dean Baker, "The Menace of an Unchecked
Housing Bubble," in Joseph Stiglitz, Aaron Edlin, and J.
Bradford DeLong, eds., The Economists' Voice (New York: Columbia
University Press, 2008)
Robert Brenner, The Boom and the Bubble
(New York: Verso, 2002.)
"China: the Locomotive," Strait
Times, February 23, 2004.
Naomi Klein, The Shock Doctrine (New York:
Metropolitan Books, 2007).
Philip Anthony O'Hara, "The Contradictory
Dynamics of Globalization," in B.N. Ghosh and Halil Guven,
eds., Globalization and the Third World (Basingstoke: Palgrave
Robert Rubin and Jacob Weisberg, In an
Uncertain World (New York: Random House, 2003).
Robert Wade, "The Aftermath of the
Asian Financial Crisis," in Bhumika Muchhala, ed., Ten Years
After: Revisiting the Asian Financial Crisis (Washington, DC:
Woodrow Wilson International Center for Scholars, 2007)