Sunday, 26 October 2008

An assessment from Nouriel Roubini

Here is a sober assessment of the present stage of the crisis by Nouriel Roubini:

Nouriel Roubini, 'Roubini sees crisis worsening, hurting emerging markets' (video), 23 October 2008

From 8:25 to 14:15 of the video Roubini talks about the causes of the crisis. He focuses again on the immediate causes that have been cited many times: the low-interest rate policy of the Fed from 2001 to 2004, the consequent take-off in increasingly risky consumer lending (not only mortages, but also car loans, credit cards etc.), the positive feedback between this lending and house price inflation, and the masking of its riskiness by repackaging and re-repackaging - all this leading to a gigantic and unsustainable credit/asset bubble that has now collapsed. He doesn't go any deeper into the causes.

On prognosis, one point he makes is that the present deleveraging process and accompanying destruction of the 'shadow banking system' can be expected to go on for a number of months yet.

Saturday, 18 October 2008

A comment from Andrew Kliman

As the author of the article that Andrew Chitty links to in his post of 7 October, let me say that I realize that it doesn’t provide a really theoretical explanation of the conditions (fundamental causes, etc.) that have led to this crisis. I have some thoughts about that (see below), but this article had a different purpose. (It was written on Aug. 23, when I still had to begin by trying to convince readers that the crisis is a very serious one. Unless and until that’s commonplace, as it is now, there isn’t much use exploring fundamental causes.)

I guess that whether one finds the article disappointing or not depends on the kind of explanation one wants. Over at Radical Perspectives on the Crisis, they seem to like the fact that the article “eschews long historical narratives and investigations of the complexity of contemporary finance in favor of clear description of how the crisis came about.” Personally, I think that both kinds of explanations are needed.

As for the longer-term conditions that have given rise to the crisis, my view is basically this: The world economy has never fully recovered from the crisis of the 1970s – not in the way in which the destruction of capital in and through the Great Depression and WWII led to a post-war boom. That’s largely because of an understandable fear of having a repeat of the Great Depression. So there’s been a partial recovery only, brought about largely through:

(1) declining real wages for most workers and other austerity measures, as well as exporting the crisis into the 3d world, and

(2) a mountain of debt – mortgage, consumer, government, corporate – to paper over the sluggishness and mitigate the effects of the declining real wages.

Thus there have been persistent debt crises, and these will continue until:

(a) sufficient capital is destroyed (in value terms and physically) to once again make investment truly profitable – the present crisis may well end up being this moment, or

(b) there’s such a panic (“liquidity lock,” as a Fed official recently called it) that lending stops and the economy crashes, ushering in chaos or fascism or warlordism or whatever, or

(c) capitalism is replaced by a new human, socialist society.

Bubbles are thus, according to the above, an inevitable result of efforts to “grow the economy” faster than is warranted by the underlying flow of new value generated in production. The more sophisticated and widespread the credit markets, the greater is the degree to which “forced expansion” (Marx) can take place, but also the greater the degree of ultimate contraction when the law of value eventually makes its presence felt. It’s like a rubber band stretching and snapping back.

A fuller theoretical treatment can be found in:

Andrew Kliman, 2003. “Value Production and Economic Crisis: A temporal analysis.” In Westra, Richard and Alan Zuege (eds.), Value and the World Economy Today, London and New York: Palgrave Macmillan, 119-36.

Andrew Kliman

Friday, 17 October 2008

An underconsumptionist explanation of the crisis

This article proposes an 'underconsumptionist' explanation of the crisis, in non-technical terms:

Rick Wolff, 'Capitalist crisis, Marx's shadow', MR Zine, September 2008

Wolff argues that the origins of the crisis go back to the 1970s when the success of American corporations in keep workers' wages down (mainly by outsourcing work to poor countries and bringing in low-wage immigrants) meant they were unable to find profitable outlets for investment in manufacturing, since the workers could not afford to buy any more goods. Their solution was to lend their profits back to workers (via banks), in the form of mortgages, car loans and so on. Competition between lenders led to an ever increasing bubble of lending to increasingly poor workers over the 1980s, 1990s and 200s, until finally it became apparent that a large proportion of these loans (specifically 'sub-prime' mortgages) could never be repaid, and the banks took fright.

Wolff makes a serious effort to trace the crisis back to the 'core components of capitalism', as he puts it, instead of focusing on specific events such as the Fed's low interest rate policies after 2000 or the development of sophisticated derivatives, or on vague assertions about the greed and irresponsibility of bankers. His explanation also goes a long way back, which is only right since he is trying to explain a crisis that is unprecedented the last 60 years.

Some specific criticisms could be made. He doesn't say much about the role of countries like China, Japan and oil-rich states in propping up US consumption in the last ten years through cheap products on the one hand and indirect loans to US workers on the other (though he could probably fit these into his basic account). And one of the comments argues that the massive increase in outsourcing and immigration in the US didn't begin until 10 years after US wages began to stagnate. But the real question is whether Wolff is right that 'underconsumption' in the US economy is the ultimate cause of this crisis.

PS (20 October): Rick Wolff has pointed me to a fuller exposition of his argument on the crisis in a lecture he gave on 7 October, Capitalism Hits the Fan: A Marxian View.

Wednesday, 8 October 2008

Article by Andrew Kliman

Here is an article on the crisis from a Marxist standpoint by Andrew Kliman:

Andrew Kliman, 'A crisis for the centre of the system', International Socialism 120, October 2008

Kliman argues persuasively that the actions of the Fed have not been oriented to 'bailing out the rich' but rather towards saving the financial system as such. However his section on 'Roots of the crisis' is disappointing. He says that the Fed deliberately kept interest rates very low for several years after 2001 in order to enable recovery from the bubble burst and subsequent recession, and from the economic effects of 9/11. This encouraged banks to land freely to workers which in turn drove house prices up to unsustainable levels. But there is nothing distinctively Marxist about this explanation, and it only pushes the question back a step, for what gave rise to the bubble in the first place?

Nouriel Roubini and the Bank of International Settlements on the crisis

A good (non-Marxist) place to start in trying to understand the present crisis is Nouriel Roubini's account of how it would unfold, published in February:

Roubini's predictions of how the credit bubble would implode have turned out very accurate. But he says hardly anything about what drove the expansion of the bubble in the first place, beyond mentioning 'reckless financial innovation and securitization'.

The Bank for International Settlements (obviously again non-Marxist) tried to explain the roots of the crisis in June:

Bank for International Settlements, 78th Annual Report, 'Introduction: the unsustainable has run its course', June 2008 (see pp. 7-9: 'What has been happening: an explanation')

The bank argues that the crisis was the result of a unsustainable global expansion in credit (i.e. a credit bubble) over the last few years. But its only explanation of what drove this bubble is 'unusually low' policy interest rates across the globe, and it gives no real explanation of why these rates were so low.

The acronyms and financial terms these two pieces use are defined in the Investopedia dictionary and explained more fully in Wikipedia.