Jun 28, 2012
The following article is translated from the July 2012 issue of Lutte de Classe [Class Struggle] magazine published by Lutte Ouvrière.
Four years after the 2008 financial crisis, the world banking system seems about to collapse again. The speculation on state debt plays the same role today as the speculation on U.S. real estate did in 2008, as a source of quick profits and at the same time a time bomb for the whole financial system. But there is an important difference from the situation in 2008: this time the states which helped the financial sector four years ago are no longer able to do it because of their own debt.
The main feature of the present stage of the crisis is the debt of the European states, which are linked together by a single currency, the euro. For two and a half years, periods of panic in the financial sector and among the political leaders have followed one another, each time threatening to make the euro zone implode. Each time the outcome has been but a short-lived respite before the next outburst of panic. And there was an acceleration in the last episodes.
First of all, in June, with the Spanish banking system on the edge of bankruptcy, Europe announced a 100-billon-euro rescue plan. The Spanish banks have been crippled with debt since the 2008 crisis of the Spanish real estate bubble, which burst out following the U.S. crisis. Almost 184 billion euros of these “bad debts” are sitting in their books.
As usual, with each new rescue plan, the heads of states proudly issued reassuring statements. Beyond this bragging, they made a ridiculous attempt to fool the speculators about the states’ ability to control the situation. But this whole little world knows very well that the European states came to the rescue of the Spanish banks only because the Spanish state is no longer able to do so, because it is about to be swept into the turmoil of hyper-indebtedness, as Greece was.
In Greece, the situation is still as risky, as was shown by the world leaders’ anxiety before the Greek parliamentary election in June. They were not worried so much about the label of the new government that would come out of the elections. What they feared and what they still fear is that the smallest statement can spark a financial panic. The banking system is really in very bad shape, as the recent downgrading of the big international banks by the rating agencies shows.
On the world scale, and it is even more true in Europe, the economy is pulled along into a vicious circle where the austerity plans imposed by the states to pay their debts result automatically in a worsening of the economic crisis, which in turn prevents them from reducing their debts and frightens the financial markets.
To understand how this slipknot was put in place and tightened little by little, it is necessary to go back to the 2008 financial crisis and even, at least quickly, to the main feature of the capitalist economy during the last several decades, that is, its growing financialization.
Since the economic slowdown at the beginning of the 1970s and the end of the period called the “30 glorious years,” the weakness of investments in production is a main feature of the world capitalist economy. An ever growing share of the profit that is made in production has not been re-invested in production and has been seeking other investments.
Profit has been used to buy rival companies, and to buy enterprises that were sold by the state to the private sector. Profits were lent to the states or driven toward other types of financial investment. But there was very little investment in production, very little compared to the total amount of profit generated by production. In turn, this contributed to slowing down the economy itself, because it is through production that wealth is created.
Thus, a growing amount of capital has flowed toward the financial sphere and has fed speculation.
Banking activities are as old as capitalism itself and as necessary for it. It is essential that capital be always available to soften the inevitable ups and downs of production and distribution, in order to enable the growth of production or simply the daily functioning of the economy.
When a company has to pay its suppliers or workers, it needs to have access to capital. And as it sells its goods, it entrusts the banks with the capital that it collects so that capital be available for other capitalists, in exchange for interest, of course. The banking system thus manages the flow of capital that irrigates the whole economy according to the needs of the economy and the profitability of investments.
In an anarchic economy, dominated by the pursuit of maximum individual profit, the banking system appears to “socialize” the use of capital. It concentrates the management of capital in the hands of a few big banks without interfering, of course, with the private ownership of capital, which each capitalist can at any time withdraw and deposit in another banking institution. As Marx put it: “The banks create, on a social scale, the form, but only the form, of a general accounting and allocating of the means of production.”
The banking system serves the free circulation of capital in the economy. And it is precisely this “free flow” or “liquidity” of one part of capital that makes financial speculation possible.
From a certain point of view, even investments in production are speculative, because any investment is a bet on the future. A capitalist recovers his capital invested in production plus a profit only if he succeeds in selling his products. Financial speculation, which consists in buying a product in order to sell it, betting only on the evolution of its price, follows the same logic. But there is an important difference: it is in production that wealth is created. And in the end the profits gained in speculation are nothing but a part of the profit generated by production.
Globally, speculation does not create any wealth. But it can generate quick fortunes. Under the pressure of big demand, the price of certain products may skyrocket, and then buying to resell becomes a source of immediate and seemingly endless profit.
Speculation may target company stock or raw materials, but it can also target insurance contracts on financial investment and also contracts which are bundled under the name of “financial derivative products.”
There has been a real explosion of these “financial products” in the last decades. Since the amount of capital seeking profitable investment has been growing constantly, the banks and other financial institutions kept inventing new “products” to respond to the demand. Today, George Soros, a well-known financier in the 1990s, admits that he no longer understands all the new derivative products offered in the financial markets.
Those “derivative products” are bets on the evolution of this or that product or even on the evolution of one currency against another. They can be ultra-sophisticated mathematical scaffolds and even can become incomprehensible to those who intend to invest their capital. After all, to bet in the horse races (and to win), it is not necessary to have a full understanding of the anatomy of the horse.
Besides, as complicated as contracts are, many capital investments are made without all the terms of the contract being really understood. In reality what serves as a guaranty is the confidence that the investors place in the institution. The confidence that a bank or an investment fund inspires is crucial for its survival: if there is confidence, capital flows in without a problem; if there is distrust, capital is withdrawn very quickly, which may result in the failure of the bank.
A few years ago, American financier Bernard Madoff succeeded in attracting tens of billions of dollars only thanks to his reputation as a very successful speculator. In reality, as soon as new money came in, he distributed it, helping himself in the process. For example, two big French banks, BNP and Société Générale, were “clients” of Madoff and gave him money to invest. In 2009, the U.S. justice system sentenced him to 150 years in prison for fraud.
In the end, speculative bubbles are the most visible expression of speculation. They are a result of the herd-like behavior of investors: if a product has become popular for one reason or another, they all descend on it, which pushes its price up. Until, for one reason or another, the product is no longer popular. Then the herd-like behavior results in the collapse of the price that had just skyrocketed: the same people now rush to sell the product before its price drops even more, but in so doing, they accelerate the fall of the price of the product that they hold.
Speculative bubbles constantly inflate and deflate in relation to economic events, such as a temporary lack of some foodstuffs after a bad crop on the world scale, or shortages in the supply of oil or natural gas after a military conflict. There are even very short-lived waves of speculation, like the speculation on the price of numerous foodstuffs that rise shortly before the harvest and fall after it.
Huge masses of capital spend their time seeking the most profitable investment. The smallest capitalist thus contributes to speculation in one way or another as soon as one part of his capital is not tied up in production. Speculators and industrialists are not separate: all of the profits of the capitalist class make up the fuel for finance and speculation.
The basic functioning of capitalism requires that bank credit plays the part of additional oxygen for the capital invested in production, according to the needs of production. But the growing financialisation that the world economy has experienced for almost 40 years, on the contrary, has contributed more and more to stifle production. In a manner of speaking we could say that capitalism is suffocating more and more in the fat of its own capital.
The example of oil is significant – all the more so because, historically, it is there that the first phase of this financialization developed.
When at the end of the 1960s it became more and more obvious that the capitalist economy would enter a period of crisis, the oil multinationals, thanks to the monopoly of their position, chose to reduce their investment in production and boost their profits by reducing supply and betting on the ballooning of the price of oil. It was the first “oil crisis,” which triggered a brutal crisis of the whole world economy.
These oil “majors” gobbled up huge profits. This capital, so-called “petro-dollars,” required investments. But the multinationals refused to invest most of it in production, and that was the first expression of the tendency toward financialization.
Today the capacity of the refineries is still almost the same as it was at the beginning of the 1980s. Capital abandoned the refinery sector while it was attracted by the juicy speculation on the price of oil, making the price of gas at the pump climb and, for example, making the transportation of goods more expensive.
For almost 40 years, the bourgeoisie has been increasing its profits not by substantially developing production, but by squeezing society and the working class more and more. Thus the bourgeoisie has kept the whole society in this situation of permanent economic crisis. Marx’s general characterization of the crises of capitalism applies more than ever: “The ultimate cause of all real crises still remains poverty and the limit imposed on the consumption of the masses, contrary to the tendency of capitalist production to develop productive forces as if their limit lay in an unlimited capacity of society’s consumption.”
Financialization and lifeless industrial production, which feed off each other, are both characteristic of the capitalist economy. Speculation stifles production and that, in turn, pushes more and more capital toward finance.
World finance has experienced numerous periods of euphoria followed by a financial crash. Without going back too far, one can mention the crash of October 1987 after a speculation on the shares of American companies whose profits had been boosted by the dollar’s very low exchange rate. There was the crisis of the “tigers” and the “dragons” of South-East Asia – countries like South Korea, Thailand, Singapore, Indonesia or even Hong Kong, whose stock markets had attracted capital following investment in that region. And there was the crisis of the internet bubble in 2001.
Each time, some capitalists took losses, and others raked in profits. And each time states intervened to prevent the financial crash from translating into a chain of failures.
But in this succession of financial booms and crashes, the last crisis – the U.S. real estate crisis in 2007 and 2008, the “subprime crisis” – has had dire consequences of a magnitude not seen since the crisis of 1929.
The real estate market in the U.S. had experienced unbridled speculation since the beginning of the 2000s: the rise in real estate prices pulled after it new construction, and all this together attracted huge amounts of money. As prices continued to increase, the number of potential buyers decreased and the already realized construction ended up surpassing the capacity of the market to absorb it.
Thus when the real estate market gave signs of a downturn, banks and other financial institutions sought to prolong the speculative bubble by lending to buyers who had the least means. This is what was called the “subprime loans.” Those loans attracted significant capital: almost 640 billion dollars in 2006. For an investor, putting his money in subprimes certainly carried some risk, because it was a loan to a buyer who had little means and who might default, but it was a very profitable loan. So, confronted by the risk of default, the investors insured themselves through specialized institutions (by the way, these insurance contracts on real estate loans themselves became a source of speculation). Finally, the guarantee for the lenders was the high price of real estate in the U.S.
All that relied on the assumption that the real estate prices would rise forever. When this belief was abandoned, the whole financial scaffold collapsed. And all those investors, not only in the U.S. but all around the world, who had put their money into the U.S. real estate market saw the value of their investments collapse.
Given the position of this market at the heart of the most powerful economy in the world, this collapse had worldwide economic consequences. And each new collapse of a part of the scaffold triggered a financial shock wave.
The bursting of the bubble, in one blow, transformed a big part of the banks’ holdings on the scale of the world into mere pieces of paper with no value. It even led to the failure of Lehman Brothers, which had been one of the most powerful banks on Wall Street.
For the daily functioning of the capitalist economy, interbank exchanges of value are like the circulation of blood in a living organism: they are vital. Depending on the size of the banks, the role of the exchanges becomes more or less crucial.
The fall of a giant like Lehman Brothers amplified the shock wave that followed the crash. The failure of this bank had a “systemic” consequence, to use a word that has become very fashionable. The large amount of toxic assets, which infested the accounts of the banks, and the fact that a giant like Lehman Brothers could fail, literally paralyzed the global banking system. Exchange practically stopped as the banks no longer had any way to have confidence in one another. The world’s stock markets, thermometers of the capitalist economy, collapsed. In Paris the CAC 40, which represents the value of the biggest French companies, dropped by 22% within five days. In the six days following Lehman Brothers’ bankruptcy, the Dow Jones was down 34%.
To put an end to this bank panic, the states intervened, claiming that from now on they would not let another bank of a “systemic” size fail. In other words, they announced they would bail out all the big banks with state money. Then all the states went through their own pockets to bring capital to their private banks. They borrowed money from one bank to lend to the others, acting as guarantors for the relations between banks.
They also intervened through the central banks, injecting fresh money to replace toxic assets. The central banks issued loans, which were guaranteed by the states in exchange for collateral that the bankers themselves considered worthless.
Huge amounts of money have been lent to the banks at interest rates so low they were almost unheard of. By the end of 2008, right after the bursting out of the financial crisis, the Fed had already given 1.2 trillion dollars to the banks at an interest rate of 0.01%. And the Central European Bank followed suit, carrying out a similar policy of easy and almost unlimited credit.
On the one hand, politicians like Obama or Sarkozy made speeches about making finance more ethical. And on the other hand, the central banks, that is, in the end, the states, were giving the banks ammunition to prepare the next wave of speculation.
With their policies of easy credit, the central banks took the risk of destroying the credit their currency had among the financiers. Even if it is the U.S. central bank that opened the credit gate the most, the dollar, backed by the most powerful economy in the world, remains the most reliable currency for all those who seek to invest their capital. Besides, all the central banks, following the Fed, carried out this same policy of easy credit. And this is the reason why, up to now, no currency has gone into free fall in relation to others.
The bursting out of the crisis in the financial sector obviously had consequences on production: companies faced increasing difficulties to get credit through the banks, construction projects were stopped and unemployment skyrocketed.
Then the states got even more into debt to bail out profits.
States tried to boost the demand for big industrial companies, such as the auto companies. They gave tax breaks and subsidies to corporations. The states have financed those gifts through borrowing more money from the very banks they had saved from failure in 2008, thus increasing their own debt.
This did not at all relaunch the economy, but it has considerably increased the debt of the states. And this ballooning of debt then became the new target for speculation.
Speculation on the debt of states and on the various currencies is nothing new. Let us remember the unending speculation in European currencies before the creation of the euro. Speculators would play the deutsche mark against the franc, the British pound against the deutsche mark, etc. In 1992, while Great Britain was hit by an economic crisis, George Soros, financier at the head of an enormous speculative fund, even succeeded, with “one blow,” to oblige the Bank of England to devalue the pound.
When the euro was launched, it was presented as a means to end speculation between the currencies of the various European states. And this was the case when it was implemented. But another type of speculation, which was not foreseen at the time, was to interfere in the finances of the European states.
At the beginning of the euro, all the states of the euro zone could borrow money with roughly the same interest rate. Be it Greece or Germany, when a state borrowed money from a private bank, it gave the bank a debt certificate in euro. The capacity of the states to pay back their debts was not put in question at that time, and banks had no reason to treat the debts of the various states differently. Capital was then allocated more or less evenly among the various states.
But after the 2008 crash, the aggravated indebtedness of the states brought into question their ability to pay back: would they really be able to reimburse all their loans? And the economic crisis quickly shed a light on the fact that even if the countries had the same currency, they did not have the same economy, nor the same strength to resist the crisis, nor the same state with the same economic and fiscal policies.
Germany and Greece, for example, were soon treated differently when they went to the banks to borrow. And the free circulation of capital made it easier for countries like Germany or even France to get credit, while Greece and other countries, such as Spain or Italy, found it more difficult.
Although all the capitalist states got deeper in debt, the ones which were somewhat better off got better treatment. And the gap between the interest rates of the various European countries very rapidly became a playground for speculation.
At the end of 2009, when the new government of the Socialist Papandreou, which had just been elected, revealed that the budget deficit was not 6% of the GDP, as the previous government had pretended, but 12.7%, he set up his country as the favorite target for those who speculate on debt.
Then, betting on how the interest rate on the loans to Greece would evolve, and speculation on the insurance contracts on these loans automatically pushed up the interest rate. All that spun Greece into a spiral of super-indebtedness.
In this situation, downgradings announced by the rating agencies were understood as calls for speculators to lynch the most indebted countries. The grades that the rating agencies give to the various states are supposed to reflect their ability to pay back their debts. Although the agencies are supposed to predict and anticipate, they often trail the speculators. For instance, they had not anticipated the crash of U.S. real estate, nor had they foreseen the financial problems of the Greek state. Above all, they only target the future victims of speculation, but they are not the cause of this speculation, far from it.
Since 2009, Greece’s debt has been the most targeted by speculators. But the diabolical spiral of super-indebtedness is not only reserved for Greece.
Speculation has already found other targets: Portugal, Ireland, Spain, Italy. Even France is in its sight. As a French economist recently put it: “The question is not to know if we will be hit, but when.” All the more so because the single currency, the euro, links all the European countries together.
Indeed, each fit of speculation on Greece’s debt resulted in a fall of the value of the euro in relationship to other international currencies, such as the U.S. dollar and the Japanese yen. This compelled the big European powers, like Germany and France, to intervene and, within limits, to guarantee Greece’s debts because the value of their own currency was at stake.
Moreover, a number of the banks that had lent money to the Greek state were French and German. A default by Greece would have had an impact on these banks. These so-called rescue plans for Greece were, above all, rescue plans for the banks, and in particular for French and German banks. The main part of each payment required by these rescue plans – 58 to 70% according to economists – immediately lands in the foreign banks. The last communiqué of the European Financial Stability Fund, which is in charge of payments, is very revealing. It specified that 4.2 billion euros the fund gave were to be put in “an account specially reserved for the servicing of the Greek debt,” that is, for the interest payments to the lending banks.
The intervention by other European countries gives speculation an even bigger playing field. Behind Greece, there are more powerful states that have an interest in preventing its failure. And that increases the possibilities for the usurers to put pressure on Greece. A usurer pressuring a poor person to pay will be all the more eager if he knows the poor person has a rich uncle.
At each fit of fever of the Greek debt crisis, there is a real trial of strength between the banks and the European states. The banks demand that the other European states provide Greece with the means to make its payments. On the other hand, the states know that this means getting more and more into debt, with the risk that speculation could tighten its grip on their own debt.
At the end of 2011, the banks agreed to reduce Greece’s debt. Even the most vicious usurer knows that he must keep his prey alive to be able to continue to collect money. Moreover, because of the real risk of default by Greece, the value of the Greek debt itself had plummeted in the financial markets. In giving a discount on Greece’s debt, the banks only acknowledge its real value.
But the banking system is fragile. Numerous banks are in bad shape and cannot take important losses without risking bankruptcy – as the disastrous situation of the Spanish banks shows, for example. If Greece or other countries like Spain or Italy default on their debts, it would no doubt have consequences similar to those of the 2008 crash.
Faced with speculative attacks, the European governments have up until now sought solutions that are more akin to bluff and poker than anything else. Each time, while putting huge amounts of money on the table, they insisted that the community of European states wouldn’t let Greece go bankrupt. They hope to persuade speculators not to bet on the failure of Greece or any other European state. But each time, this worked only for a short while. Every announcement about economic or political problems in Greece, Spain, or another country within the sight of speculators provoked a new wave of speculation. Speculation on the debt of the states acts like a powerful acid on the links between European states, putting the strength of the euro to an increasingly tougher test.
In reality, behind the trial of strength between the banks and the states, there is a profound impotence of both to manage this debt crisis and, beyond that, to master their own economy.
For now, the richest countries, starting with Germany, choose to maintain the cohesion of the euro and to keep all the countries in the euro zone. They give the banks the money they demand of their debtors, then impose vicious austerity plans on populations to pay the banks. To accept the failure of Greece would risk spreading speculation on the debt to the other most-indebted states, which would lead to the explosion of the euro zone. This would be one more step toward the worsening of the crisis and a very important one, since it would go along with a return to an exacerbated protectionism between the European countries.
But austerity policies really raise a problem for the capitalist economy because they only worsen the crisis. The bourgeoisie is facing a real dilemma. For the part of its capital that is deposited in the banks, it wants to be paid with high interest rates. But for the part of its capital that is invested in the plants, it needs to sell its goods. The French auto company PSA-Peugeot-Citroën, for example, would like the state to facilitate the sale of its cars, but the same company boasted to have 11 billion euros in liquidities. This sum does not sleep under a mattress and thus contributes to speculation, one way or another.
To divert speculation away from the euro zone, some economists and political leaders propose to mutualize the debts of the European states by issuing, for example, “euro-bonds.” It would no longer be this or that state borrowing from a bank, but all the countries of the euro zone together. It would amount to putting behind each loan the guarantee, in advance, of all the states of the euro zone.
Confronted with the catastrophe that is in sight, the states are pushed rapidly to overcome the fundamental shortcoming that the single European currency has had since its inception, that is, the lack of political unity of the countries of the euro zone. But the problem is that this mutualisation amounts to making the richest states, especially Germany, pay systematically. And one cannot imagine that Germany would accept this without a counterpart – such as an increasing authority over the budgets of the other European states. On their part, would the other states accept to be under the thumb of Germany? Nothing is less certain.
With this accumulation of austerity plans, economists and politicians would talk more and more about setting up “plans for economic growth.” It is what the new French president Hollande claimed during his entire presidential campaign.
It was essentially only electoral propaganda. The whole capitalist class, and of course all the politicians at its service, would like the economy to grow, that is, for production to develop. But neither the capitalists nor the politicians can accomplish this. Their economy is basically unpredictable and uncontrollable because the laws of profit and competition prevail.
In reality, these “plans for economic growth” are nothing but new subsidies – tax breaks or state orders – for the bosses. British Prime Minister David Cameron let it slip: “Austerity and economic growth do not exclude each other,” – which means austerity for workers and growth of profit for capitalists.
Confronted with racing speculation, there are political currents which pose as doctors for the capitalist economy, putting forward would-be solutions to care for the capitalist economy and even to cure it from this stifling spiral of speculation.
Obviously, finance does not care. See how big banks treat even governments: they devastate and plunder and let governments go hang. Those big banks are French, German, Italian and even Greek. They are the ones that speculate on the debt of the states, taking the risk of making the European Union implode, even though it is the framework for their own economy.
In order to attract the left-wing voters, the Left Front of Melanchon and the French Communist Party campaigned on the idea that the states should be allowed to get loans directly through the European Central Bank, thus bypassing the private banks which make a juicy profit as intermediaries.
This cut taken by the banks for acting as the middle men is really shocking and it sheds a light on the hold of financial capital over the whole economy. But to put an end to it, much more than electoral speeches will be necessary. This possibility offered to the banks is only one of the many features of the parasitism of financial capital on society.
Besides, what would it mean to let the states borrow directly from the European Central Bank, other than to allow them to wipe out their debts with inflation? And what consequences would that have for the workers?
By the way, it is quite possible that the bourgeoisie and its bankers choose inflation, at one point or another in the evolution of the crisis. It would give the banks the means to preserve their assets to the maximum. On the contrary, for the workers and the poor layers of the population, inflation would result in the purchasing power plummeting and impoverishment accelerating. For the working class, this comes down to choosing to be crushed through unemployment or being crushed by destitution as purchasing power melts like snow in the sun.
Those kinds of propositions are but a smoke screen. The workers need to put forward vital measures for their own survival, that is, their own demands that encompass their collective interests.
In the present situation, the bourgeoisie will not let even crumbs from their profits slip away. On the contrary it will seek to maintain, even to increase its profits by crushing the workers more and more. Whatever their political labels, governments will push this offensive of the bourgeoisie even further. The bourgeoisie will tolerate only governments that are at war with the workers.
How will they extort more and more from the workers? Will they add new austerity plans? Will they launch a policy of galloping inflation? Will they do both? The problem is certainly not to choose the sauce with which the bourgeoisie is going to roast us; but, on the contrary, whatever are the attacks, the working class must fight for its survival.
Confronted with the austerity plans that increase the number of the unemployed, it is necessary to impose a ban on lay-offs and the sharing of the work among everyone, with full pay. It is necessary to impose on the state the creation of all necessary jobs in the public services such as healthcare, education, and public transportation; and that it creates new public services such as building affordable houses or public facilities for infants.
To confront the threat of inflation, and the fact that unemployment weighs on the wages, a general increase of wages and pensions must be imposed, with both wages and pensions linked to price increases.
These measures are the only ones that can protect the workers from the consequences of the crisis, whatever its evolution. And they are also the only ones that can prevent the economy from collapsing – their goal is that profit be used to help the population to live properly, rather than be used to speculate.
These measures will not be carried out by a government coming out of an election. They will be implemented under the pressure of a general and explosive mobilization of the workers, putting into question the bourgeoisie’s hold over the functioning of the economy. In other words, through direct control by the workers over the work places, a revolutionary pressure calling into question the bourgeoisie’s social order.