The financial meltdown: Roots of the economic crisis in overaccumulation, financialisation and ‘global apartheid’

October 3, 2008 — The global economy’s vast financial sector expansion – in the context of productive sector stagnation tendencies – has increased the leading powerbrokers’ capacity to devalue large parts of the Third World (including major emerging market sites), as well as to write down selected financially volatile and vulnerable markets in the North (e.g. dot.com and real estate bubbles). In contrast to the 1930s, this set of partial write-downs of overaccumulated financial capital has not yet created such generalised panic and crisis contagion as to threaten the entire system’s integrity. Shifting and stalling the necessary devalorisation of overaccumulated capital, particularly as it bubbles up via financial sectors into speculative markets, entailed spatial and temporal fixes. 

In addition, extra-economic coercion has intensified, including gendered and environmental stresses. The result is a world economy that concentrates wealth and poverty in more extreme ways, geographically, and brings markets and the non-market spheres of society and nature together in a manner adverse to the latter. Reform of the system is long overdue, and the post-Keynesian political economist Jane D’Arista’s ideas for revitalised multilateral financial institutions, following Keynes’ International Clearing Union proposal, are worth revisiting. However, the context remains one of top-down inability to reform: severe bias in multilateral financial and development agencies amounting to a neoliberal-neoconservative fusion.
Moreover, there is constrained space and political will at national level in most states. These factors compel us to consider – in a future paper – the exercise of social power from below, against the worst depredations of oppression, which are often experienced through the financial circuit of capital.
The crash of a variety of US financial institutions – at this writing on 3 October, the five main investments banks, the two main home mortgage guarantors, the largest insurance company, the largest-ever bank to collapse and the Dow Jones itself (which on 29 September had the biggest-ever fall in share prices) – is being superficially explained by mainstream commentators. Many mention deregulation, corruption, greed, feckless borrowing by debt-addicted consumers, or a combination. Joseph Stiglitz adds ‘ideology, special-interest pressure, populist politics, and sheer incompetence’. Here is US political commentator Thomas Edsall describing the banal mainstream discourse:
The Huffington Post, October 2, 2008
Conservatives Seek To Shift Blame For Crisis Onto Minority Housing Law
by Thomas B. Edsall
Blame for the current economic crisis has been laid on many doorsteps, including the Gramm-Leach-Bliley Financial Services Modernisation Act of 1999; credit default swaps; hedge funds; the Commodity Futures Modernisation Act of 2000; Alan Greenspan; and Phil and Wendy Gramm. But it has fallen to right-wing pundit Ann Coulter to blaze a truly simple path through the maze of credit derivatives, collateralised loan obligations, tranches, securitisation transactions, and Thomson Financial League Tables. This gentle lady spells out the source and origin of the current economic crisis: "THEY GAVE YOUR MORTGAGE TO A LESS QUALIFIED MINORITY!"
Amidst the cacophony, we really need to consider structural roots and shoots of this crisis now – especially in a South African economy that suffers many of the same features of US financial capitalism (the subject of the next paper in this series). After all, there is no doubt that financial volatility remains central to the way global markets are developing, and that such volatility constrains economic, social, political and environmental progress in the Third World. The grounding of volatility as a symptom of deeper economic tensions also requires setting the stage politically. These are the main objectives of the second section.
Having done so, the third section allows us to consider two half-hearted and one visionary approach to global financial reform, from above. Time constraints do not permit me to dissect the various reform proposals for the immediate symptoms of the crisis, in the US financial institution collapses. Instead, let us retrace several global financial reform proposals to give global context. First, the status quo processes of the Monterrey Financing for Development agenda in 2002 led in 2005 to G7 finance ministers offering sufficient debt relief as to keep borrowers – especially in Africa – paying both large downpayments and high rates of export earnings. However, the experience of such extreme Northern domination through the International Monetary Fund was the main reason for Latin American countries (and a few others) repaying the IMF early, threatening its own revenue streams. With these divergent forces at work, there was very little on offer in multilateral reform. Second, at least one country, Norway, made some tentative steps forward (e.g. to defunding the World Bank due to its water privatisation fetish, and to canceling earlier corrupt shipping loans), but these were half-hearted and contradictory. Third, we can turn to a much clearer agenda for reform, by post-Keynesian financial economist Jane D’Arista in 1999. But no constituency for this project was built during the crucial early 2000s, as the Jubilee movement’s weak Northern base and militant but strong Southern group found themselves marginalised, and as the rest of the global justice movement addressed issues not immediately concerned with finance – the topic of the third paper in this series.
So, with nothing breaking the deadlock and no enlightened capitalists ready to address the root causes, as witnessed by the limits of financial architecture debates, it is crucial to nurture an approach more respectful of deep-seated popular challenges to commodification and corporate globalisation. Cases to be explored in a later paper include the challenge to multinational corporate power in the sphere of AIDS medicines patents and reparations for past ‘Odious Debts’ to regimes like apartheid. In the sphere of consumer finance, we will turn to experiences as diverse yet interrelated as the SA township ‘bond boycott’ and Mexico’s ‘El Barzon’ movements. Finally, aiming again at global financial governance, activists’ World Bank Bonds Boycott strategy, especially powerful during the early 2000s, is another way to disempower some of the most dysfunctional aspects of global finance (the Bretton Woods Institutions), and instead empowering investors to do something more useful with their resources.
Before setting out the case for enhanced, and more radical, internationalist civil society activism, the roots of the crisis should be explained.
2. The crisis: roots and shoots, and stalls and shifts

About a dozen key moments mark the onset of systemic global financial volatility and its policy companion, namely the imposition of neoliberalism across the world:
• in 1973, the Bretton Woods agreement on Western countries’ fixed exchange rates – by which from 1944-71, an ounce of gold was valued at US$35 and served to anchor other major currencies – disintegrated when the US unilaterally ended its payment obligations, representing a default of approximately $80 billion, leading the price of gold to rise to $850/ounce within a decade, and at the same time, several Arab countries led the formation of the Oil Producing Exporting Countries (OPEC) cartel, which raised the price of petroleum dramatically and in the process transferred and centralised inflows from world oil consumers to their New York bank accounts (‘petrodollars’);
• from 1973, ‘los Chicago Boys’ of Milton Friedman – the young Chilean bureaucrats with doctorates in economics from the University of Chicago – began to reshape Chile in the wake of Augusto Pinochet’s coup against the democratically-elected Salvador Allende, representing the birth pangs of neoliberalism;
• in 1976, the International Monetary Fund signalled its growing power by forcing austerity on Britain at a point where the ruling labour Party was desperate for a loan, even prior to Margaret Thatcher’s ascent to power in 1979;

• in 1979 the US Federal Reserve addressed the dollar’s decline and US inflation by dramatically raising interest rates, in turn catalyzing a severe recession and the Third World debt crisis, especially in Mexico and Poland in 1982, Argentina in 1984, South Africa in 1985 and Brazil in 1987 (in the latter case leading to a default that lasted only six months due to intense pressure on the Sarnoy government to repay);
• at the same time, the World Bank shifted from project funding to the imposition of structural adjustment and sectoral adjustment (supported by the IMF and the ‘Paris Club’ cartel of donors), in order to assure surpluses would be drawn for the purpose of debt repayment, and in the name of making countries more competitive and efficient;
• the overvaluation of the US dollar associated with the Fed’s high real interest rates was addressed by formal agreements between five leading governments that devalued the dollar in 1985 (Louvre Accord), but with a 51 percent fall against the yen, required a revaluation in 1987 (Plaza Accord);
• once the Japanese economy overheated during the late 1980s, a stock market crash of 40 percent and a serious real estate downturn followed from 1990, and indeed not even negative real interest rates could shake Japan from a long-term series of recessions;
• during the late 1980s and early 1990s, Washington adopted a series of financial crisis-management techniques – such as the US Treasury’s Baker and Brady Plans – so as to write off (with tax breaks) part of the $1.3 trillion in potentially dangerous Third World debt due to the New York, London, Frankfurt, Zurich and Tokyo banks which were exposed in Latin America, Asia, Africa and Eastern Europe (although notwithstanding the socialisation of the banks’ losses, debt relief was denied the borrowers);
• in late 1987, crashes in the New York and Chicago financial markets (unprecedented since 1929) were immediately averted with a promise of unlimited liquidity by Alan Greenspan’s Federal Reserve, a philosophy which in turn allowed the bailout of the Savings and Loan industry and various large commercial banks (including Citibank) in the late 1980s notwithstanding a recession and serious real estate crash during the early 1990s;
• likewise in 1998, when a New York hedge fund – Long Term Capital Management (founded by Nobel Prize-winning financial economists) – was losing billions in bad investments in Russia, the New York Fed arranged a bailout, on grounds the world’s financial system was potentially at high risk;
• starting with Mexico in late 1994, the US Treasury’s management of the mid- and late 1990s ‘emerging markets’ crises again imposed austerity on the Third World while offering further bailouts for investment bankers exposed in various regions and countries – Eastern Europe (1996), Thailand (1997), Indonesia (1997), Malaysia (1997), Korea (1998), Russia (1998), South Africa (1998, 2001), Brazil (1999), Turkey (2001) and Argentina (2001) – whose hard currency reserves were suddenly emptied by runs; and

• in addition to a vastly overinflated US economy (with record trade, capital and budget deficits) whose various excesses have occasionally unraveled – as with the dot.com stock market (2000) and real estate (2007) bubbles – the two largest Asian societies, China and India, picked up the slack in global materials and consumer demand during the 2000s, but not without extreme stresses and contradictions that in coming years threaten world finances, geopolitical arrangements and environmental sustainability.
This is merely a list of major events that reflect tensions and occasional eruptions. Crucial to this story line is that treatment of the problems never amounted to genuine resolutions to the overall volatility. One reason for this is the adverse balance of forces that emerged from several political processes in train during the same period. A catalogue of geopolitical changes since the 1970s would emphasize at least four major developments:
• the 1975 US defeat by the Vietnamese guerrilla army, which reduced the US public’s willingness to use its own troops to maintain overseas interests;
• the demise of the Soviet bloc in the early 1990s, as a result of economic paralysis, foreign debt, bureaucratic illegitimacy and burgeoning democracy movements;
• Middle East wars throughout the period, with Israel generally dominant as a regional power from the 1973 war with Egypt (notwithstanding its 2006 defeat in Lebanon); and
• the rise of China as a potent competitor to the West (in political as well as economic terms) during the 1990s-2000s.
These were merely the highest-profile of crucial geopolitical developments, leaving a sole superpower in their wake, yet one with much lower levels of legitimacy, dubious military and cultural dominance, slower economic growth, higher poverty and inequality, and vastly reduced financial stability over the past third of a century. One critical aspect of the struggle between classes associated with these developments was the waning of the Third World nationalist project and a dramatic shift in class power, away from working-class movements that had peaked during the late 1960s, towards capital and the upper classes.
Chronologically, other crucial moments that helped define the splintered, polarised political sphere since the 1970s included the following:
• formal democratisation arrived in large parts of the world – Southern Europe during the mid-1970s, the Cone of Latin America during the 1980s and the rest of Latin America during the 1990s, and many areas of Eastern Europe, East Asia and Africa during the early 1990s – partly through human/civil rights and mass democratic struggles and partly through top-down reform – yet because this occurred against a backdrop of economic crisis in Latin America, Africa, Eastern Europe, the Philippines and Indonesia, the subsequent period was often characterised by instability, in which ‘dictators passed debt to democrats’ (as the Jubilee South movement termed the problem) who were compelled to impose austerity on their subjects, leading to persistent unrest;
• the ebbing of Third World revolutionary movements – in the wake of transformations in Nicaragua, Iran and Zimbabwe in 1979-80 – was hastened by the US government’s explicit attacks during the 1980s on Granada, Nicaragua, Angola and Mozambique (sometimes directly but often by proxy), as well as on liberation movements in El Salvador, Palestine (via Israel) and Colombia, as well as former CIA client regimes in Panama and Iraq, hence sending signals to Third World governments and their citizenries not to stray from Washington’s mandates;
• after Vietnam, the US’s subsequent ground force losses in Lebanon during the early 1980s and in Somalia during the early 1990s (followed by Afghanistan and Iraq in the mid-late 2000s) shifted the tactical emphasis of the Pentagon and NATO to high-altitude bombing, which proved momentarily effective in situations such as the 1991 Gulf War (decisively won by the US in the wake of Iraq’s invasion of Kuwait), the Balkans during the late 1990s, the overthrow of Afganistan’s Taliban regime in 2001 and the initial ouster of Saddam Hussein in Iraq in 2003;
• the 1989-90 demise of the Soviet Union had major consequences for global power relations and North-South processes, as Western aid payments to Africa, for example, quickly dropped by 40 percent given the evaporation of formerly Cold War patronage competition (until the resurgence of Chinese interest in Latin America and Africa during the 2000s);
• the consolidation of European political unity followed corporate centralisation within the European Economic Community, as the 1992 Maastricht treaty ensured a common currency (excepting the British pound which was battered by speculators prior to joining the euro zone), and as subsequent agreements established stronger political interrelationships, at a time most European social democratic parties turned neoliberal in orientation and voters swung between conservative and centre-right rule, in the context of slow growth, high unemployment and rising reflections of citizen dissatisfaction;
• persistent 1990s conflicts in ‘Fourth World’ failed states gave rise to Western ‘humanitarian interventions’ with varying degrees of success, in Somalia (early 1990s), the Balkans (1990s), Haiti (1994), Sierra Leone (2000), Cote d’Ivoire (2002) and Liberia (2003), although other sites in central Africa – Rwanda in 1994 and since then Burundi, northern Uganda, the eastern part of the Democratic Republic of the Congo, Somalia and Sudan’s Darfur region – have witnessed several million deaths, with only (rather ineffectual) regional not Western interventions;
• the 2001 attack on the World Trade Center in New York City and the Pentagon near Washington (followed by attacks in Indonesia, Madrid and London) signaled an increase in conflict between Western powers and Islamic extremists, and followed earlier bombings of US targets in Kenya, Tanzania and Yemen which in turn received US reprisals against Islamic targets in Sudan (actually, a medicines factory) and Afghanistan in 1998 and Yemen in 2002; and
• the early-mid 2000s rise of left political parties in Latin America included major swings in Venezuela (1999), Bolivia (2004) and Ecuador (2006), as well as turns away from pure neoliberal economic policies in Brazil, Argentina, Uruguay and Chile, and were joined during the mid-2000s in Europe by left coalitions in Norway and Italy.
This list of seminal political moments should not obscure other important trends that seem to have accompanied them:
  • social and cultural change, including postmodernism, the ‘network society’, demographic polarisations and family restructurings;
  • new technologies brought about by the transport, communication and computing revolutions;
  • major environmental stresses including climate change, natural disasters, depletion of fisheries and worsening water scarcity; and
  • health epidemics, such as AIDS, Bovine Spongiform Encephalopathy, anthrax, drug-resistant tuberculosis and malaria, severe acute respiratory syndrome and avian flu.

In the realm of ideology the importance of these polarising events and processes cannot be overstated. Moreover, given the rise of neoliberal and neoconservative philosophies (formerly ‘modernisation’ and colonialism), there have been sometimes spectacular counterreactions ranging from Islamic fundamentalism and resurgent Third World Nationalism, to Post-Washington Consensus and ‘global governance’ reform proposals, to global justice movement protests.
If we accept this catalogue of moments and power relations associated with the unfolding of economic crises and political realignments, as spelled out above, then we might consider a further step in contextual work, namely mapping an ‘array of forces’ configured in a snapshot matrix of contending ideologies in the Appendix, highlighting positionalities, internal contradictions, key institutions and exemplary personalities. That then allows us to ask whether the most reasonable of D’Arista’s visions, namely the evolution of the current chaos in global political economy and geopolitics back to a more stable, predictable, prosperous and evenly-distributed set of political-economic relations, such as existed during the immediate post-War quarter-century (1945-70). It is with the hope of restoring such balance that D’Arista has provided three proposals for restructuring, in a 1999 Financial Markets Center article.
Before addressing these, I would only add a story line about the underlying cause of the financial crises currently afflicting the world economy, which I take to be associated with worsening conditions of overaccumulation. The main reason a neoliberal-neoconservative fusion has continued, even as tensions in economic relations have worsened, is the success of bailouts, as we are seeing at present in the wake of the subprime mortgage market’s contagion. Crisis displacement techniques became much more sophisticated since the 1930s freeze of financial markets, crash of trade, Great Depression and by 1939 interimperial turn to armed aggression. By 1936, these conditions had compelled John Maynard Keynes to write his General Theory, which advocated much greater state intervention so as to boost purchasing power. The difference today is that such drastic problems have been averted, largely through moving devaluation – what Joseph Schumpeter called ‘creative destruction’ – across both time (via the credit system) and space, and also through ‘accumulation by dispossession’. Of course, new institutions emerged to facilitate this, namely the IMF and World Bank which were able to turn what in earlier times (1830s, 1870s, 1930s) were defaults, into reschedulings (Figure 1).
Figure 1: Sovereign debt defaults, 1820-1999

Source: Barry Eichengren in the World Bank’s Global Finance Tables, Washington DC, 2000.
Thus in relation to Third World debt (one of many financial bubbles since the early 1970s), the key innovation from global capitalist managers is the Bretton Woods Institutions’ capacity to reschedule debt, so as to delay the necessary clearing away of the economic deadwood associated with fictitious capital formation. Hence the disempowerment and financial disruption of the Bretton Woods Institutions will necessarily be one component of the broader strategy of dealing with debt. More generally, beyond the simple illustration of debt default mitigation, we might make four arguments regarding financial volatility and social power, considered ‘from above’.
1. the durable late 20th century condition of overaccumulation of capital – as witnessed in huge gluts in many markets, declining increases in per capita GDP growth, and falling corporate profit rates – was displaced and mitigated (‘shifted and stalled’ geographically and temporally) at the cost of much more severe tensions and potential market volatility in months and years ahead;
2. the temporary dampening of crisis conditions through increased credit and financial market activity has resulted in the expansion of ‘fictitious capital’ – especially in real estate but other speculative markets based upon trading paper representations of capital (‘derivatives’) – far beyond the ability of production to meet the paper values;
3. geographical shifts in production and finance continue to generate economic volatility and regional geopolitical tensions, contributing to unevenness in currencies and markets as well as pressure to ‘combine’ market and non-market spheres of society and nature in search of restored profitability; and
4. capital uses power associated with the two stalling and shifting (temporal and spatial displacement) tools above to draw additional surpluses from non-market spheres (environmental commons, women’s unpaid labour, indigenous economies), via extra-economic kinds of coercions ranging from biopiracy and privatisation to deepened reliance on unpaid women’s labour for household reproduction in an ever-expanding process of long-distance labour migrancy.
Having set the stage, then, what is to be done? In the next section, three different approaches are considered: those of the existing powerbrokers; those of Norway (the North’s most leftwing and internationally-activist government in financial reform), and those of Jane D’Arista in her important 1999 Financial Markets Center report.
3. Whose reforms – Monterrey, Norway, D’Arista?
The past decade, since the East Asian crisis, has witnessed renewed elite debate about reforming the world financial system. Naturally, the establishment institutions are contemplating marginal changes largely for the sake of relegitimisation and recapitalisation, rather than for genuine problem-solving. However, one country, Norway, has suggested deeper reforms for North-South financial relations, and begun them on a piece-meal basis. Finally, Jane D’Arista’s own ideas about new institutions that can melded onto the world financial system should be considered.[1]
In the Mexican city of Monterrey in March 2002, the United Nations’ Financing for Development (FFD) Conference was the first major international opportunity to correct global capital markets since the spectacular late 1990s emerging markets crises. South African finance minister Trever Manuel and former International Monetary Fund managing director Michael Camdessus[2] were UN secretary general Kofi Annan’s special envoys at the conference. Mexico’s ex-president Ernesto Zedillo effectively managed the process, even though the Yale-trained neoliberal economist’s five-year term in Mexico City was notable for repression, failed economic crisis-management, and the end of his notoriously corrupt party’s 85-year rule. Zedillo appointed as his main advisor (and document author) John Williamson of the Washington-based Institute for International Finance, a think-tank primarily funded by the world’s largest commercial banks.
It was, in short, a site for preaching to the converted, as reflected in Manuel’s endorsement of privatisation during his high-profile address to business elites who had gathered on the conference sidelines: ‘Public-private partnerships are important win-win tools for governments and the private sector, as they provide an innovative way of delivering public services in a cost-effective manner.’[3] Back in South Africa, such PPPs were nearly universally failing, from the standpoint of workers and consumers, and sometimes also businesses, in water, sanitation, electricity, telecommunications, the postal system, forestry, air and road transport, ports and road construction.[4] In August 2001 and October 2002, the main trade union federation, Cosatu, held two-day mass stayaways against private parternships involving essential public services. They targeted Manuel, though at Monterrey he didn’t mention these problems, even as caveats, nor did he concede his government’s repeated failure to reach revenue targets from state asset sales.
While the Monterrey final report that Manuel helped steer through the conference contained some pleasing rhetoric, it promotes only orthodox strategies. ODA shortfalls and external debt were considered the main constraints, whereas global financial volatility, while recognised as a problem, was not explicitly linked to development goals. Achieving the Millennium Development Goal targets would cost $54 billion per year, according to IMF and World Bank estimates.[5]The report observed ‘dramatic shortfalls in resources required to achieve the internationally agreed development goals.’[6] But it endorsed the Highly Indebted Poor Countries (HIPC) initiative, as ‘an opportunity to strengthen the economic prospects and poverty reduction efforts of beneficiary countries.’ The New Partnership for Africa’s Development carries a similarly worded endorsement of HIPC.[7] Manuel suggested that, ‘the HIPC Trust Fund be fully funded, and that provision is made for topping-up when exogenous shocks impact on countries’ debt sustainability,’ as if the programme was otherwise satisfactory.[8]
Within a year of Monterrey, the World Bank admitted some of HIPC’s mistakes. The Bank was forced to accept longstanding criticisms that its staff ‘had been too optimistic’ about the ability of countries to repay under HIPC, and that projections of export earnings were extremely inaccurate, leading to failure by half the HIPC countries to reach their completion points.[9]Although HIPC had been endorsed by NGO campaigners such as Jubilee Plus, it was a mirage from the outset. The London lobby group conceded, ‘According to the original HIPC schedule, 21 countries should have fully passed through the HIPC initiative and received total debt cancellation of approximately $34.7 billion in net present value terms. In fact, only eight countries have passed Completion Point, between them receiving debt cancellation of $11.8 billion.’[10]
Add a few other countries’ partial relief via the Paris Club ($14 billion) and the grand total of debt relief thanks to the 1996-2003 exercise was just $26.13 billion. There remained more than $2 trillion of Third World debt that should have been canceled, including not just HIPC countries but also Nigeria, Argentina, Brazil, South Africa and other major debtors not considered highly-indebted or poor in the mainstream discourse. The lack of financial provision for HIPC in western capitals reflects deep resistance to debt relief and, probably, the realisation that there are merits to using debt as a means of maintaining control over Third World economies. HIPC began in 1996, and in late 1999 was accompanied by a renaming of the structural adjustment philosophy: Poverty Reduction Strategy Papers (PRSPs). More than two years later, at Monterrey, Manuel told fellow finance ministers that PRSPs were ‘an important tool for developing countries to reduce their debt burdens… a thorough and useful PRSP requires time, resources and technical capacity.’ He suggested the Bretton Woods Institutions increase their role, to ‘provide more technical assistance to meet those particular challenges.’[11]
Civil society activists saw things differently. Resistance to structural adjustment increased across the Third World, sometimes in the form of ‘IMF riots.’ Annual reports in the World Development Movement’s States of Unrest series include dozens of countries and hundreds of IMF riots. In Africa, as an example, anti-neoliberal protests were called by students, lecturers and nurses in Angola; public sector workers in Benin; farmers, electricity workers and teachers in Kenya; municipal workers in Morocco; healthworkers in Niger; the main trade union federation, including police and municipal workers, in Nigeria; community groups and organised labour in South Africa; and bank customers and trade unionists in Zambia. As the World Development Movement found, the new version of structural adjustment did not fool the victims: ‘PRSPs have failed to deviate from the IMF’s free market orthodoxy.’ The report covering 2002 showed that:

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