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Graphic by Bromley According to our political and business leaders, as well as the main stream media, the Great Financial Crisis of 2009 is ending. Green shoots of recovery are seen everywhere. But by now we all know that the key to preventing a depression has been the bailout of the large financial institutions by taxpayers. The U.S. government will run a deficit of $1.4 trillion this fiscal year. Stephen Harper's government will have a deficit of around $55 billion.
But what is going to happen in 2010? How are governments going to pay for all this debt that they have created? Will there be rampant inflation? Governments can't just print money - except in Zimbabwe.
Economists and other defenders of the status quo insist that the crisis was caused by bad investment decisions by individuals, corporations and financial institutions. This was particularly true in the housing market. They insist that there is nothing really wrong with the free market and free trade economy. But others want to know why the British and American governments were so committed to defending the big banks and doing so little for main street. This requires a deeper look at the cause of the financial and economic crisis.
Deregulation and privatization
How could the financial crisis happen? The usual answer is that since the election of Margaret Thatcher in 1979 and Ronald Reagan in 1980 all governments have been following policies of privatization and deregulation. Tony Blair and Bill Clinton pushed this change of policy. They deregulated the banking industry and refused to introduce any government regulation of the new complex derivative markets. It was these pyramid or Ponzi schemes, built on highly leveraged debt (up to 50 to 1), which brought the system down. Moderate reformers now say we need to re-establish government regulation.
Financial euphoria and bubbles
A number of political economists, like Canada's John Kenneth Galbraith, have pointing out that "financial euphoria" or "irrational exuberance" by investors has been a consistent theme of capitalism since the founding of the first stock market in The Netherlands and 'tulipomania" in 1630. The recent housing bubble in the United States was just one of hundreds of examples. Land speculation has been particularly common in the United States.
Galbraith and his followers stress that the bubbles all have a common root, speculators trying to capture windfall profits. In recent years the process has often been accompanied by some new financial instrument, like the junk bond used for leveraged buyouts, hedge funds or the inscrutable derivatives of the most recent bubble. The key is that they are all highly leveraged. In 1929 anyone could gamble in the stock market casino with 10% down and the rest borrowed, paying 7 to 12 percent interest.
The housing bubble
The recent bubble in the U.S. housing market is a classic example. Robert Shiller, the Yale economist whose name is attached to the Case-Shiller Index on housing, points out that the 85% increase in the average price of a U.S. house over the boom period from 1997 to 2006 was far out of line with historic prices and well beyond the ability of mainstream Americans to finance. As with all financial bubbles, this balloon has to deflate back to the real world of affordable prices. In December 2009 the U.S. market was about half way there.
This adjustment has yet to happen in Canada. Historic low interest policies pursued by the Canadian government, and the decision by the Central Mortgage and Housing Corporation to guarantee all mortgages, and to sell mortgage bonds with 100% taxpayer backing, have helped keep the Canadian housing market at a high bubble status. Is it possible for Canada to be the only industrialized country where the housing bubble does not burst?
The broader picture of Monthly Review
But this crisis is not just a result of human greed, lack of government regulation, or the corruption of the people in the system. It is not just another business cycle.
During the recent boom the financial institutions made enormous profits. The financial system as a whole has grown significantly in relationship to the real or productive economy. As Paul Sweezy of Monthly Review projected in Monopoly Capital (1966), mature capitalism sees a dramatic increase in the role of finance, insurance and real estate (FIRE), a process called 'financialization."
The mature capitalist economy
John Bellamy Foster and Fred Magdoff, in The Great Financial Crisis (2009), provide us with the analysis of the Monthly Review school of political economy. When capitalist economies reach a mature stage, stagnation sets in. Capital accumulation is further accelerated as taxes on corporations and the rich are reduced. But at the same time profitable investment outlets for this capital are diminished.
In the expansion phase of capitalist economies, industry and urban economies are rapidly developed. But once modern industrialization has occurred, the economy is left with only the need to basically replace what has been built.
Mature capitalist societies are characterized by large corporations, monopoly and oligopoly, and the concentration and centralization of capital. Competition is not in the area of price but in the sales effort, the creation of the throw away economy, conspicuous consumption. Karl Marx called this "commodity fetishism."
Since the end of World War II the United States has to a large degree been able to offset this tendency towards stagnation by massive government spending in the military area, financed by large government deficits. But this has also reached a peak. The push since the 1980s for international free markets and free trade has been an attempt by big capital to find new investment opportunities in less developed countries.
Foster and Magdoff argue that the current bubbles could have been deflated by the U.S. Federal Reserve Board. But both Alan Greenspan and his colleague Ben Bernanke were against doing this as it could have brought down the whole U.S. system. Following the New Economy (or dot com) bubble and collapse in 2000, interest rates were steadily reduced and the bubble was transferred to the housing market. For the defenders of monopoly capitalism, there did not appear to be any acceptable alternative.
Where are we going now?
One of the central arguments of Foster and Magdoff is that the crisis of mature capitalism cannot be contained by new systems of regulation. Indeed, they point out that in all the economic and financial crisis over the last thirty years, the response of governments was further deregulation. The last hope for saving the present system has been the use of the central banks as the lenders of last resort, pouring taxpayers' money into the system to try to prevent a depression.
The Great Recession is a turning point. Despite the hope of the U.S. and Canadian political and economic establishments, we cannot go back to 2007 with its highly leveraged corporate, financial and household debt. For many basic industries, like steel and automobiles, there is world overcapacity. Thus the future for the mature capitalist economies is most likely to follow that of Japan after the collapse of their financial and real estate bubbles in 1989: long term deflation if not depression. As this trend develops on a world wide basis, it will be time for people to once again mobilize, as they did in the 1930s, to create a different political economy.
John W. Warnock is a Regina political economist.
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