The Sub-prime Crisis Shakes the World Economy

An August Bank Holiday Explosion on the Stock Exchange but Its Nothing to do with the Weather - From Battaglia Comunista 9, 2007

Last month’s crisis shook the stock exchanges and the whole world financial system, though according to international monetary authorities, governments, and the majority of economic analysts, the crisis should be over in a few months without too many hold-ups.

Thanks to the supply of abundant liquidity by the world’s most important central banks, headed by the US Fed and the European Central bank (ECB), the markets, famous for their presumed extraordinary capacity for bringing order back to the system, should not have to work too hard to find the right balance especially because there is a widespread conviction that the fundamentals of the so-called real economy are very sound. In short, they talk of this turbulence as a midsummer storm which announces itself with menacing thunder and flashing lightening and then, after a few drops of more or less heavy rain, calms down, leaving clear blue sky and the warm heat of the sun once again. Probably, in the medium term, the issue of fresh liquidity by the central banks will give a certain respite, and this will confirm that the crisis they are dealing with is a result of immediate factors, stemming from an anomaly in the operation of a particular sector of the financial market and excessive speculation.

However, if we analyse the mechanisms which have sustained the housing bubble we can see that they are substantially the same as those in the past which sustained the speculative bubble of the New Economy, and even before that, the crises which brought down, one after another, the economies of Mexico, the so-called Asian tigers, Russia and Argentina, all with serious consequences for the real economy. In all these cases in fact, the crises stemmed from the bursting of a speculative bubble generated by the excessive production of fictitious capital. They were a product of financial capital which started as another financial capital, not based on commodity production or, at best, representing the value of possible future production, but therefore, nonetheless, virtual capital. In the final instance we are dealing with a form of financial capital based on debt. In the particular case of sub-prime mortgages (see the accompanying article The Effects of Financial Speculation: Profits, Desperation and Misery) for example, for the purchase of a house of the value of 100, a mortgage has been granted at a rather high interest rate. The bank which granted the mortgage then divides this credit into so many shares, and hands them on to specialised funds, which in their turn, give to the lender of last resort shares representing the whole value of their investment portfolio so that from an initial value of 100 for the house a capital a hundred thousand times greater has been produced. Added to all this, thanks to their financial power, through timely interventions in the housing market, these property funds, with the support of the most important international financial institutions have succeeded in setting in train a steep rise in property revenues on an international scale, so that if we take the house in our example, it doubled its value within a few years. It was thus possible to grant further mortgages on the same house from which have been produced new financial instruments (derivatives) leading to a dizzying process of accumulation based on the production of fictitious capital and which seemed to be endless. Indeed the more these financial instruments increased in value the more the demand for them increased and this drew in more capital.

As with the speculative bubble of the New Economy, and in all the other speculative bubbles which followed it in the subsequent decade, we are witnessing a spectacular process of accumulation based entirely on the production of an abstraction from value (the various derivatives) starting from another abstraction (the financial instruments representing the debt). This abstraction, however which if we can use an oxymoron can be defined as a concrete abstraction in the sense that, being derived from an expression of value acquires from it in full all the rights and the power which goes with these rights. From the point of view of society’s general interests it is pure madness, but not from a capitalist point of view since the only thing that counts is profit. And so, as long as the show goes on, and fat profits are also made, the idea that it is possible to produce wealth starting from one established abstraction (derivatives) seems to find confirmation in reality.

The dream evaporates however when the primary debtor, for various reasons, is no longer capable of honouring his/her debt and/or when in the market, in our case the housing market, the prices of both houses and their financial derivatives become so high that it is difficult to find new buyers. At this point the bubble was ready to explode. In short, it was written into the nature of things that the sub-prime market also could not last forever. Indeed it would only need the Fed to increase the basic interest rate by a few points for many mortgage payers to be unable to honour their debts. On the other hand the Fed had no alternative, since for some time the flow of capital from abroad had weakened, as investors preferred to buy Treasury bonds and government debt in Euros rather than in dollars. In the absence of a rise in interest rates inward capital flows risk drying up completely, thus compromising the financing of the budget and trade deficits. And the Fed has chosen the lesser of two evils.

In the immediate term, the small banks and building societies and especially the small savers, those that look after their savings or put something away for a pension, have been the first to recover, as they are forced to invest in safer mutual funds. Those who will have to pay in the near future will be people on fixed incomes and those that live on pensions or fixed incomes. On them will fall the costs needed to reabsorb the immense excess liquidity on the markets by the central banks to avoid the immediate aggravation of the crisis. The winners, as usual, have been the huge trans-national monopoly groups who have a greater capacity to influence price movements and thus can abandon their prey at the most opportune moment or can benefit from the storm by making acquisitions at knock down prices.

From this point of view we could say that there is nothing new under the sun! Financial speculation has always existed and the market for financial instruments has always been like a casino. What’s new however is that, until a few decades ago, this was a marginal activity in relation to the general accumulation process of capital based on the transformation of financial capital into industrial capital and vice-versa (M-C-M’). But from the first half of the Eighties the relationship has been inverted. Because of the fall in the average rate of industrial profit the capitalist metropoles led by the USA and Britain have deregulated financial markets and gave a green light for the production of these new financial instruments with the aim of profiting from the dollar’s supremacy (and to a lesser extent sterling’s too) to integrate the low rate of profit coming from the commodities with the growing returns from financial revenue. Over time, however, the financial sector has developed in unimaginable ways and especially in the capitalist metropoles. The profits derived from the production of fictitious capital have become the real motor of capitalist accumulation. The borderline between the so-called real economy and the world of finance has become so narrow that only Harvard professors, and the like, can think that we are dealing with two distinct and separate worlds. In reality they are intertwined as never before. This is demonstrated by the fact that the USA remains the greatest power in the world, though living on war, debts and imports, to the point where - as F. Rampini wrote in La Repubblica on August 15

When an American journalist tried to live for a year without anything “Made in China” he realised that it was impossible without returning to the archaic existence of Robinson Crusoe.

What this implies is the need for the intensification of exploitation and a constant lowering of the value of labour power in order that the production of surplus value can keep pace with production and accumulation of all forms of capital, in other words, the chinesisation of the labour market on an international scale. But even having a theoretical working day of 24 hours with a speed of work at the limits of human capacity, the time for the production of fictitious capital are always, as we are dealing with production on paper, faster than the production of commodities. The result of this is the intensification and rapid acceleration of the drive to overproduction. For all these reasons, for anyone to imagine that under modern capitalist conditions a crisis can be contained in the sector in which is arises is pure nonsense.

In reality it is inevitably destined to flow over from one sphere to another and to produce devastating systemic crises. This is even more true of this latest crisis. If we take into account the enormous amount of excess capital that has been produced, that the epicentre is in the USA and the links between the US economy and those of the whole world, even the Great Crash of 1929 will look like a mere squall in comparison with the present crisis.