World credit spiral hits nemesis

Submitted by Anon on 14 November, 2007 - 8:26 Author: Martin Thomas

“You can expect”, writes US economist Nouriel Roubini, “that the ongoing credit crunch will get much worse in the year ahead and its fallout will spread from the US to Europe and throughout Asia and the globe.

"Trillions of dollars of securitised assets that were sliced and diced in the long food chain of securitisation are now at some risk. The first crisis of financial globalisation and securitisation is only at its beginning stage”.

At one end — the starting end of this crisis — two million poorer US households are likely to lose their homes in the coming months because, with interest rates higher and credit tighter, they can no longer meet the payments on their mortgages. At another end, the bosses of Merrill Lynch and Citigroup have lost their jobs (though they, unlike the people losing their homes, get huge pay-offs). Their companies have had to “write down” billions — admit that a lot of the financial paper they are holding is worth only a fraction of what they had previously valued it at. And the Government is still pouring billions into a big hole in Northern Rock's finances.

According to Roubini, and many others, that process of “writing down” has a long way to go yet. Karl Marx identified the core paradox here in Capital volume 3:

The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself... The self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production. The credit system... develops the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling...

The recent background is a strategic choice made by world capital in the late 1970s and early 1980s. We explained in Solidarity 3/118:

As a reaction to the crises of the 1930s, up to the 1970s credit and banking was quite closely regulated in the big capitalist economies. That was the era of “managed capitalism”, the era when social-democrats smugly imagined that capitalism was becoming more and more “socialistic” every year. The crises of the 1970s produced the opposite reaction to those of the 1930s. Economies were deregulated and privatised — initially, mostly, as a ploy to meet more intense global competition and to turn the blade of that competition against the working class. Those measures “worked”, as slicker credit set-up generally does for capital, to make the system more flexible and agile. But they also store up vast instabilities.

Financial crises like those of 1987, 1991-2, 1997, and 2001 made many experts demand re-regulation. But by then there were vast vested interests tied to deregulation, and vast amounts of brain and computer power being put by high finance into getting round what regulations did exist. The rich do a lot more trading of bits of paper representing (ultimately) entitlements to future profits or interest payments than they used to, and they do it more globally.

The ratio of global financial assets to annual world output rose from 109% in 1980 to 316% in 2005 (and 405% in the USA). The processes are more complicated and opaque — and have become still more complicated and opaque in recent years. A new sort of bit of paper, called “credit derivatives”,has expanded from zero ten years ago to $26 trillion today. The mortgage lenders do not just hold on to your mortgage agreement and wait for your repayments. They convert a bundle of mortgage agreements into a “financial asset” and sell it on, thus getting their cash quicker. This is the world, as journalist Martin Wolf puts it, of the “clever intermediaries, who persuaded [some people] to borrow what they could not afford, and [others] to invest in what they did not understand”. (Solidarity 3/118).

And who — and this is what matters for them — collect fat fees from the process. As a result, nobody knows today how much of the financial paper that financiers are holding is worthless, and where the worthless paper is. As a further result, the whole credit system tends to seize up. Pundits started talking about capital having miraculously developed a “Goldilocks economy” just after the 1991-2 crisis. Wrong, wrong, wrong!

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