The Great Financial Crisis

By John Bellamy Foster and Fred Magdoff

New York, Monthly Review Press, 2009

ISBN: 978-1-58367-184-9 paper

Review by Patrick Bond

Four decades ago, Monthly Review cofounder Paul Sweezy vigorously debated financialisation of the US economy with Robert Fitch and Mary Oppenheimer, whose article ``Who Rules the Corporations?'' in the journal Socialist Revolution proved most irritating. The central dispute was over whether debt relationships between banks and corporations – as well as interlocking directorships and other ruling-elite relationships -- translated into control by the former.

Asking ``The Resurgence of Financial Control: Fact or Fancy?'', Sweezy disdainfully answered ``fancy''. During the golden age era of financial stability, until the early 1970s, Sweezy's tracking of intracapitalist power relations allowed him to conclude that bankers were not in control, they were mainly facilitators.

This reminds of an earlier epoch. In his book Finanz Kapital, published in 1910, Austrian Marxist Rudolf Hilferding had projected that concentrated banking capital would merge with other capitals to become omnipotent: ``If you control the six Berlin banks, you control all of German industry.'' The first Frankfurt School economist, Henryk Grossman, used classical Marxist crisis theory to show Hilferding had overestimated that power, and Hilferding's two stints as finance minister for Germany's Social Democratic Party during the 1920s also proved the point.

As Grossman predicted in his book, Law of Accumulation and Breakdown of the Capitalist System, published in March 1929 (what timing!), matters would change radically. After the 1929-33 crash of finance in the US and Europe, the JP Morgan hold on industry was wrenched loose, and a wave of defaults froze large parts of the world financial system. After US President Franklin Delano Roosevelt briefly shut the US banks shortly after taking office, a stable fairly well-regulated system was established through a ban on interstate banking and passage of the 1933 Glass-Steagall Act, which delinked lending from investing. Deposit insurance was established by FDR to halt bank runs and panics.

This legacy meant that in the first big Monthly Review debate about the power and vulnerability of banking, Sweezy confidently rebuffed the financialisation thesis. To be sure, it wasn't long before he and Harry Magdoff grew concerned at rising debt levels and financial deregulation, from the mid-1980s.

Finance and production

Today, Monthly Review’s leading political economists, John Bellamy Foster and Fred Magdoff, help turn the older argument around entirely. It’s not power but vulnerability in the relationship between finance and production that should have alerted us to the underlying contradictions of capital, and the need for a socialist economy.

The easy centrist approach so popular for mainstream commentators is to consider financial vulnerability as a deviation from standard capitalism, as John Maynard Keynes himself argued: ``Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.'' In contrast, going far deeper, Foster and Magdoff reinforce the core concept that Sweezy, Magdoff and Paul Baran developed during the 1950s-1970s, but to ``monopoly capital'' they add finance: ``the crucial problem of modern monopoly-finance capital: the stagnation of production and the growth of financial bubbles in response.''

This brief book collects a series of the authors’ Monthly Review essays that spell out why a friendly amendment to Sweezy’s framework is appropriate. Though I mainly agree, some comradely semantic and conceptual points are worth making. And though the book is mainly a story of the US economy, and though this after all is where the most important processes in the world economy can be located, there is a whole world of financial explosions to investigate.

Stagnation to speculation

For Foster and Magdoff, the route from stagnation to speculation is logical. US corporate profits declined due to stagnation tendencies, but picked up after 1983. However, a vast part of the increase was due to financial profits, which amounted to 17% of total profits in the mid-1980s, and around 40% two decades later. The ``hollowing'' of corporations became more obvious with extreme cases such as General Motors becoming the largest holder of mortgages (through GMAC) by the late 1980s, Ford buying up Nationwide S&L’s portfolio at that time, and General Electric gaining a vast share of its profits from GE Finance.

The hollowing process picked up in earnest from the 1980s, as the high real rate of interest following the Volcker Shock –- the US Federal Reserve trebling US interest rates in 1979-80 -- attracted spare investment resources into financial markets. Those resources were not otherwise being deployed because of the worsening stagnation of the 1970s.

Some political economists would go deeper, establishing a longer-term story of overinvestment in capital-intensive plant and equipment (not inconsistent with Foster and Magdoff’s argument). Gerard Dumenil and Dominique Levy, Marxist economists based CEPREMAP (Paris), have documented how the core driver of profit generation under ``normal'' US capitalism, i.e. surplus value extraction from goods production within the national economy, fell steadily from the 1950s from levels of about 50% to the low 20% levels today. The international source of profits rose, as globalisation’s search for cheap labour and new markets rewarded US corporate capital, but most importantly, financial sources of profits rose dramatically.

Not only was there a renewed attraction for corporate treasurers to shift out of reinvestment in manufacturing, and into financial assets. Simultaneously, the US capitalist class defeated labour in numerous struggles, leading to a stagnant wage rate during most of the last 35 years. In order to keep up a semblance of the high consumer demand of the earlier ``Golden Age'', the system now required increasing doses of debt to make up for lost income, hence deregulation so as to permit exotic financial instruments to indebt poorer households.

Even the debt boost to effective demand did not, however, solve an underlying problem. Late last year, the Norwegian newspaper Klassekampen asked Foster straightforwardly: ``Is the credit crisis a symptom of overaccumulation of capital?'' His reply: ``I agree that this is due to what might be called an overaccumulation of capital in a number of senses: an overbuilding of productive capacity (physical capital) in relation to a demand constrained by monopoly within what economists call the `real' (as opposed to financial) economy, an overamassing of profits and wealth at the top of society, and a hypertrophy of financial claims to wealth. In terms of the financial crisis itself, there has been a massive, highly leveraged expansion of money claims to wealth, creating a huge debt overhang, and forcing, at this moment, a massive devaluation of capital. All of this is related, however, to the breakdown of the capital formation process, accumulation proper, in an increasingly stagnant real economy.''

This is consistent with Marx’s argument, from Das Kapital: ``The superficiality of political economy shows itself in the fact that it views the expansion and contraction of credit as the cause of the periodic alterations of the industrial cycle, while it is a mere symptom of them.'' (There are some Marxists, notably Leo Panitch and Sam Gindin of the Socialist Register, who would not agree with this, and who locate the crisis primarily in the financial system, for they argue that the earlier ``real'' crisis was resolved by the 1980s when labour was defeated. Given close Monthly Review/Socialist Register ties, it would be good if in the future Foster and Magdoff address such arguments head on.)

But the crash was delayed, until late 2008. Foster and Magdoff show how various crisis-displacement techniques were applied: ``In this worsening crisis, no sooner is one hole patched than a number of others appear.'' The patching of holes means that pressure on the financial bubble might be eased in one place, but then pops up somewhere else. As the authors joke at the beginning, the Onion is correct in surmising that ``America needs another bubble. At this point, bubbles are the only thing keeping us afloat''.

Comments

Written in accessible Monthly Review style, this is an extremely useful introductory text. Still, the book suffers from stitching together articles (at the risk of some repetition) rather than covering the topic as comprehensively as the authors have in seminal Marxist books they have given us on environment and food, amongst other topics.

The emphasis on structural processes and the book’s brevity together prevent us from learning more about key agents in the process: Paul Volcker, who put the interest rate up to extreme levels in 1979, and Larry Summers and Robert Rubin, who deregulated finance while treasury secretaries for President Bill Clinton and then went back to Wall Street for personal profit, are not mentioned. Financial dealmaker Tim Geithner gets one mention, a positive one, for acknowledging that shocks will be bigger and harder to control. Federal Reserve chairs Alan Greenspan and Ben Bernanke come in for passing criticism, for believing the financial bubble was well grounded in the real economy.

Just as importantly, although Foster and Magdoff touch on Marxist debates with Keynesians like Paul Krugman or post-Keynesians like Hyman Minsky and Thomas Palley, they do not treat their fellow Marxist political economists with the respect needed to drive debates forward, or to flesh out constructive differences. Quite a few important theorists and applied scholar-activists have done work in much the same classical Marxist tradition on overaccumulation, uneven development and financial crisis: Grossman and Ernest Mandel, and more recently Suzanne de Brunhoff, Simon Clarke, David Harvey, Neil Smith, Robert Brenner, Fred Mosely and Walden Bello, for example (none of whom are covered).

Finally, the book concludes with an interesting, hopeful sense of the future: ``a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.’

Maybe, but drawing upon the solid structuralist work Foster and Magdoff have done, it is logical to ask, from what impulses, consciousness, demands and hard organising will such a movement surface? After all, the new ``tea party'' politics of the populist right against US President Barack Obama’s weak Keynesian stimulus may out-organise the traditional left urban social movements, notwithstanding brave efforts by ACORN and anti-foreclosure campaigns. At a time of split, degenerating trade unions and with the distraction of so many other social activists into defensiveness about Obama, the need for more strategic options has never been greater.

Analytically, The Great Financial Crisis sets the stage for further works in this tradition, assisting activists to concretely exploit capital’s fatal flaws with socialist insights.

[Patrick Bond directs the Centre for Civil Society at the University of KwaZulu-Natal.]