1. The current economic crisis has to be understood in terms of the historical dynamics and contradictions of capitalist finance in the second half of the 20th century. Even though the spheres of capitalist finance and production are obviously intertwined (in significant ways today more than ever before), the origins of today’s US-based financial crisis are not rooted in a profitability crisis in the sphere of production, as was the case with the crisis of the 1970s, nor in the global trade imbalances that have emerged since. Although the growing significance of finance in the major capitalist economies was already strongly registered by the 1960s, it was the role finance played in resolving the economic crisis of the 1970s that explains the central place it came to occupy in the making of global capitalism. The inflation that was the main symptom of that crisis had a strong negative impact on those holding financial assets and destabilized the international role of the dollar. Under the guidance of the US Federal Reserve, financial markets used very high interest rates to drive up unemployment, defeat trade union militancy and restrict public welfare expenditures in the early 1980s – all of which had come to be seen as the source of the intractable profitability and inflation problems of the previous decade. Yet it was precisely the contradictory ways finance contributed to global capitalism’s successes in the closing decades of the 20th century that laid the foundation for the massive capitalist crisis that now closes the first decade of the 21st century.
2. The spatial expansion and social deepening of capitalism in the last quarter century could not have occurred without innovations in finance. The development of securitized financial markets and the internationalization of American finance allowed for the hedging and spreading of the risks associated with the global integration of investment, production and trade. This provided risk insurance in a complex global economy without which capital accumulation would otherwise have been significantly restricted. At the same time, finance penetrated more and more deeply into society, integrating subordinate classes as debtors, savers, and even investors through private pensions, consumer credit and mortgages for private housing. This became especially important in facilitating the maintenance of consumer demand in a period of wage stagnation and growing inequality. In terms of directly fostering capital accumulation, finance was not only an important site of technological innovation in computerization and information systems, but also facilitated innovation more generally in high tech sectors through venture capital, especially in the US. The central role of the US dollar and Treasury bonds in the global economy as the key store of value and the basis for all other calculations of value, alongside the global institutional predominance of US financial institutions, acted as a vortex for drawing the global surplus to American financial markets and instruments. This allowed for the mobilization of cheap global credit for the
3. The competitive volatility of global finance produced a series of financial crises whose containment required repeated state intervention. Global financial competition for higher yields led to institutional and market innovations that allowed greater leveraging and therefore more credit relative to the capital base. This in fact amounted to a vast increase in the effective money supply, but rather than yielding the price inflation that monetarists predicted, the defeat of labour and the increased corporate ability to fund investments with internal funds meant that increased liquidity translated into asset inflation. This asset inflation was uneven across sectors, producing financial bubbles from stock markets to real estate at various times, while the size of these bubbles was expanded by virtue of the material expansions in the real economy related to each of these areas. The bursting of these bubbles became a common feature of capitalism and the state interventions required to contain them reinforced the confidence that supported future bubbles. The alleged withdrawal of states from markets amidst the globalization of capitalism was a neoliberal ideological illusion: states in the developed capitalist countries pumped more liquidity into the banks in the face of financial crises, while they ensuring that crises in the developing countries were generally used to impose financial discipline. The neoliberal American state played the most active role as the imperial guarantor, coordinator and fire-fighter-in-chief for global capitalism.
4. Both finance’s central role in the making of global capitalism and the American state’s role in sustaining it produced the bubble that emerged inside the
5. The inevitable bursting of the housing bubble had such a profound impact because of its centrality to sustaining both
6. The crisis reinforced the centrality of the American state in the global capitalist economy while multiplying the difficulties entailed in managing it. The rise of the US dollar in currency markets and the enormous demand for US Treasury bonds as the crisis unfolded reflected the extent to which the world remained on the dollar standard and the American state continued to be regarded as the ultimate guarantor of value. Treasury bonds are in demand because they remain the most stable store of value in a highly volatile capitalist world: illusions that foreign states were previously doing the
7. The scale of the crisis today is such that nationalization of the financial system cannot be kept off the political agenda. It is increasingly apparent, that monetary and fiscal stimulation alone are unlikely to succeed in ending the crisis since the banking system’s dysfunctionality today undermines the multiplier effect, just as new regulations are supposed to make finance more cautious and prudent in their lending. Indeed, there has been an increasing realization that it may not be possible to keep off the political agenda much longer the issue of bringing large portions of the financial system into public ownership. This is advanced today along the lines of the temporary nationalizations that took place in
8. The call for nationalization of the banks provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism. The severity of today’s economic crisis once again exposes the old irrationality of the basic logic of capitalist markets. As each firm (and indeed state agency) lays off workers and tries to pay less to those kept on, this has the effect of further undercutting overall demand in the economy. At the same time, the financial crisis exposes new irrationalities, not least those contained in the widespread proposals for trading in carbon credits as a solution to the climate crisis, which involve depending on volatile derivatives markets that are inherently open to the manipulation of accounts and to credit crashes. In the context of such readily visible irrationalities, a strong case can be made that – to save jobs and the communities that depend on them in a way that converts production to ecologically-sustainable priorities during the course of this crisis – we need to break with the logics of capitalist markets rather than use state institutions to reinforce them. We need to put on the public agenda the need to change our economic and political institutions so as to allow for democratic planning to collectively decide how and where we produce what we need to sustain our lives and our relationship to our environment. However deep the crisis, however confused and demoralized are capitalist elites both inside and outside the state, and however widespread the popular outrage against them, making this case will certainly require hard and committed work by a great many activists, many of whom will see the need for building new movements and parties to this end. This is what is really needed if this crisis is not to go to waste.
Leo Panitch is Canada Research Chair in Comparative Political Economy at