An apocalyptic mood has seized the
highest levels of global capital as the global financial system
continues to implode. This implosion is but the latest financial
crisis to wrack global capitalism. Financial crises are inevitable
since capitalist growth has increasingly been driven by speculative
bubbles such as the housing bubble in the United States. The
increasingly uncontrolled financial gyrations stem from the
increasing divergence between an expansive financial economy and a
stagnant real economy. This "disconnect" stems from the
persistent stagnationist trends in the real economy owing to
overproduction or overcapacity. The search for profitability is
capitalism's driving force, and increasingly, significant profits
can only be obtained from financial speculation rather than
investment in industry. This is, however, a volatile and unstable
process since the divergence between momentary financial indicators
like stock and real estate prices and real values can proceed only up
to a point before reality bites back and enforces a "correction."
The bursting of the US housing bubble is one such correction, and it
is leading not only to a recession in the US but to a global downturn
owing to the unprecedented level of integration fostered by
corporate-led globalization. It will not be easy to restore dynamism
by fostering another speculative bubble, for instance, by resorting
to "military Keynesianism."


                                We have to pay for the sins of the past.                                                                                                                                

Klaus Schwab, key organizer of the Davos elite jamboree


Francisco, Feb. 17, 2008). Skyrocketing oil prices, a falling dollar,
and collapsing financial markets are the key ingredients in an
economic brew that could end up in more than just an ordinary
recession. The falling dollar and rising oil prices have been
rattling the global economy for sometime, but it is the dramatic
implosion of financial markets that is driving the financial elite to


panic there is. Even as it characterized Federal Reserve Board
Chairman Ben Bernanke's deep cuts amounting to a 1.25 points off
the prime rate in late January as a sign of panic, the Economist
admitted that "there is no doubt that this is a frightening
moment." The losses stemming from bad securities tied up with
defaulted mortgage loans by "subprime" borrowers are now
estimated to be in the range of about $400 billion, but, as the
Financial Times warned, "the big question is what else is
out there" at a time that the global financial system "is wide
open to a catastrophic failure." What is "out there" is
suggested by the fact that it has only been in the last few weeks
that a series of Swiss, Japanese, and Korean banks have owned up to
billions of subprime-related losses. The globalization of finance
was, from the beginning, the cutting edge of the globalization
process, and it was always an illusion to think that the subprime
crisis could be confined to US financial institutions, as some
analysts had thought.

key movers and shakers sounded less panicky than resigned to some
sort of apocalypse. At the global elite's annual weeklong party at
Davos in late January, George Soros sounded positively necrological,
declaring to one and all that the world was witnessing "the end of
an era." World Economic Forum host Klaus Schwab spoke of
capitalism getting its just desserts, saying, "We have to pay for
the sins of the past." "It's not that the pendulum is now
swinging back to Marxist socialism," he told the press, "but
people are asking themselves, 'What are the boundaries of the
capitalist system?' They think the market may not always be the
best mechanism for providing solutions."

Reputations and Policy Failures

some appear to have lost their nerve, others have seen the financial
collapse diminish their stature.

chairman of President's Bush's Council of Economic Advisers in
2005, Ben Bernanke attributed the rise in US housing prices to
"strong economic fundamentals" instead of speculative activity,
so is it any wonder, ask critics, why, as Fed Chairman, he failed to
anticipate the housing market's collapse stemming from the subprime
mortgage crisis? His predecessor, Alan Greenspan, however, has
suffered a bigger hit, moving from iconic status to villain of the
piece in the eyes of some. They blame the bubble on his aggressively
cutting the prime rate to get the US out of recession in 2003 and
restraining it at low levels for over a year. Others say he ignored
warnings about aggressive and unscrupulous mortgage originators
enticing "subprime" borrowers with mortgage deals they could
never afford.

scrutiny of Greenspan's record and the failure of Bernanke's rate
cuts so far to reignite bank lending has raised serious doubts about
the effectiveness of monetary policy in warding off a recession that
is now seen as all but inevitable. Nor will fiscal policy or putting
money into the hands of consumers do the trick, according to some
weighty voices. The $156 billion stimulus package recently approved
by the White House and Congress consists largely of tax rebates, and
most of these, according to New York Times columnist Paul
Krugman, will go to those who don't really need it. The tendency
will thus be to save rather than spend the rebates in a period of
uncertainty, defeating their purpose of stimulating the economy. The
specter that now haunts the US economy is Japan's experience of
virtually zero growth per annum and deflation in the nineties and
early part of this decade despite one stimulus package after another
after Tokyo's great housing bubble deflated in the late 1980's.

Inevitable Bubble

as the finger-pointing is in progress, many analysts remind us that
if anything, the housing crisis should have been expected all along.
The only question was when it would break. As progressive economist
Dean Baker of the Center for Economic Policy Research noted in an
analysis several years ago, "Like the stock bubble, the housing
bubble will burst. Eventually, it must. When it does, the economy
will be thrown into a severe recession, and tens of millions of
homeowners, who never imagined that house prices could fall, likely
will face serious hardship."

subprime mortgage crisis was not a case of supply outrunning real
demand. The "demand" was largely fabricated by speculative mania
on the part of developers and financiers that wanted to make great
profits from their access to foreign money that flooded the US in the
last decade. Big ticket mortgages were aggressively sold to
millions who could not normally afford them by offering low "teaser"
interest rates that would later be readjusted to jack up payments
from the new homeowners. These assets were then "securitized"with
other assets into complex derivative products called "collateralized
debt obligations" (CDO's) by the mortgage originators working
with different layers of middlemen who understated risk so as to
offload them as quickly as possible to other banks and institutional
investors. The shooting up of interest rates triggered a wave of
defaults and many of the big name banks and investors– including
Merrill Lynch, Citigroup, and Wells Fargo–found themselves with
billions of dollars worth of bad assets that had been given the green
light by their risk assessment systems.

Failure of Self Regulation

housing bubble is but the latest of some 100 financial crises that
have swiftly followed one another ever since Depression-era capital
controls began being lifted at the onset of the neoliberal era in the
early 1980's. The calls now coming from some quarters for curbs on
speculative capital have an air of déjà vu to many
observers. After the Asian Financial Crisis of 1997, in particular,
there was a strong clamor for capital controls, for a "new global
financial architecture." The more radical of these called for
currency transactions taxes such as the famed Tobin Tax that would
slow down capital movements or for the creation of some kind of
global financial authority that would, among other things, regulate
relations between northern creditors and indebted developing

finance capital, however, resisted any return to state regulation.
Nothing came of the proposals for Tobin taxes. Even a relatively
weak "sovereign debt restructuring mechanism" akin to the US
Chapter Eleven to provide some maneuvering room to developing
countries undergoing debt repayment problems was killed by the banks
despite its being proposed by Ann Krueger, the conservative American
deputy managing director of the IMF. Instead, finance capital
promoted what came to be known as the Basel II process, described by
political economist Robert Wade as steps toward global economic
standardization that "maximize [global financial firms'] freedom
of geographical and sectoral maneuver while setting collective
constraints on their competitive strategies." The emphasis was on
private sector self surveillance and self policing aiming at greater
transparency of financial operations and new standards for capital.
Despite the fact that it was Northern finance capital that triggered
the Asian crisis, the Basel process focused on making developing
country financial institutions and processes transparent and
standardized along the lines of what Wade calls the "Anglo-American"
financial model.

there were calls for regulation of the proliferation of many of the
new, sophisticated financial instruments such as derivatives being
placed on the market by developed country financial institutions,
these got nowhere. Assessment and regulation of derivatives were to
be left to market players who had access to sophisticated
quantitative "risk assessment" models that were being developed.

on disciplining developing countries, the Basel II process
accomplished so little in the way of self regulation of global
financial from the North that even Wall Streeter Robert Rubin,
formerly Secretary of the Treasury under President Clinton, warned in
2003 that "future financial crises are almost surely inevitable and
could be even more severe."

for risk assessment of derivatives such as the "collaterized debt
obligations" (CDOs) and "structured investment vehicles"
(SIVs)-the cutting edge of what the Financial Times has
described as "the vastly increased complexity of hyperfinance"–the
process collapsed almost completely, with the most sophisticated
quantitative risk models left in the dust as risk was priced
according to one rule by the sellers of securities: Underestimate
the real risk and pass it on to the suckers down the line. In the
end, it was difficult to distinguish what was fraudulent, what was
poor judgment, what was plain foolish, and what was out of anybody's
control. As one report on the conclusions of a recent meeting of the
Group of Seven's Financial Stability Forum put it:

is plenty of blame to go around for the financial chaos: The US
subprime mortgage market was marked by poor underwriting standards
and ‘some fraudulent practices.' Investors didn't carry out
sufficient due diligence when they bought mortgage-backed securities.
Banks and other firms managed their financial risks poorly and
failed to disclose to the public the dangers on and off their balance
sheets. Credit-rating companies did an inadequate job of evaluating
the risk of complex securities. And the financial institutions
compensated their employees in ways that encouraged excessive
risk-taking and insufficient regard to long-term risks.

Specter of Overproduction

is not surprising that the G 7 report sounded very much like the
post-mortems of the Asian financial crisis and the bubble.
One chieftain of a financial corporation chief writing in the
Financial Times captured the basic problem running through
these speculative manias, perhaps unwittingly, when he claimed that
"there has been an increasing disconnection between the real and
financial economies in the past few years. The real economy has
grown…but nothing like that of the financial economy, which grew
even more rapidly-until it imploded." What his statement does
not tell us is that the disconnect between the real and the financial
is not accidental, that the financial economy expanded precisely to
make up for the stagnation of the real economy.

growing gap between the financial and the real cannot be
comprehensively understood without referring to the crisis of
overaccumulation that overtook the center economies in the late
seventies and 1980's, a phenomenon that is also referred to as
overproduction or overcapacity.

golden period of postwar growth globally that skirted major crises
for nearly 25 years was due to the massive creation of effective
demand via rising wages for labor in the North, the reconstruction of
Europe and Japan, and the import-substituting industrialization in
Latin America and other parts of the South. This was done
principally via state intervention in the economy. This dynamic
period came to a close in the mid-seventies, with stagnation setting
in, owing to global productive capacity outrunning global demand,
which was constrained by continuing deep inequalities in income
distribution. According to the calculations of Angus Maddison, the
premier expert on historical statistical trends, the annual rate of
growth of global gross domestic product (GDP) fell from 4.9 per cent
in what is now regarded as the golden age of the post-World War II
Bretton Woods system, 1950-73, to 3 per cent in 1973-89, a drop of 39
per cent. These figures reflected the wrenching combination of
stagnation and inflation in the North, the crisis of import
substitution industrialization in the South, and erosion of profit
margins all around.

the eighties and nineties, global capital blazed three escape routes
from the specter of stagnation. One was neoliberal restructuring,
which included redistribution of income towards the top via tax cuts
for the rich, deregulation, and an assault on organized labor.
Neoliberalism took the form of Thatcherism and Reaganism in the
developed North and World Bank and International Monetary Fund
(IMF)-imposed structural adjustment in the global South.

was corporate-driven globalization or "extensive accumulation,"
which opened up markets in the developing world and moved capital
from high-wage to low-wage areas. As Rosa Luxemburg long ago
pointed out in her classic The Accumulation of Capital,
capital needs to constantly integrate precapitalist societies to the
capitalist system to shore up the fall in the rate of profit. In
the last two decades, the most spectacular case of incorporating a
precapitalist society into the global capitalist system was China,
which became both the world's second biggest exporter and the
primary destination of foreign investment. This was, however, a
double edged sword for capitalism, as we shall later see.

third was the process we are mainly concerned with here: "intensive
accumulation or "financialization," that is, the channeling of
investment towards financial speculation, where much greater returns
were to be derived than in industry, where profits were largely
stagnant. Finance capital forced the elimination of capital
controls, the result being the rapid globalization of speculative
capital to take advantage of differentials in interest and foreign
exchange rates in different capital markets. These volatile
movements, the result of capital's liberation from the fetters of
the post-war Bretton Woods financial system, was one source of
instability. Another was the proliferation of novel sophisticated
speculative instruments like derivatives that escaped monitoring and
regulation. Instability derived ultimately from the fact that
speculative finance boiled down to an effort to squeeze more "value"
out of already created value instead of creating new value since the
latter option was precluded by the problem of overproduction in the
real economy.

disconnect between the real economy and the virtual economy of
finance was evident in bubble of the 1990's. With profits
in the real economy stagnating, the smart money flocked to the
financial sector. The workings of this virtual economy were
exemplified by the rapid rise in the stock values of Internet firms
which, like, still had to turn a profit. The
phenomenon probably extended the boom of the 1990's by about two
years. "Never before in US history," Robert Brenner wrote, "had
the stock market played such a direct, and decisive, role in
financing non-financial corporations, thereby powering the growth of
capital expenditures and in this way the real economy. Never before
had a US economic expansion become so dependent upon the stock
market's ascent." But the divergence between momentary financial
indicators like stock prices and real values could only proceed to a
point before reality bit back and enforced a "correction." And
the correction came savagely in the collapse of 2002, in the
form of the wiping out of $7 trillion in investor wealth.

long recession was avoided, but it was only by encouraging another
bubble, the housing bubble, and here, as noted earlier, Greenspan
played a key role by cutting the prime rate to a 45-year low of 1 per
cent in June 2003, holding it there for a year, then raising it only
gradually, in quarter-percentage-increments. As Dean Baker put it,
"an unprecedented run-up in the stock market propelled the US
economy in the late nineties and now an unprecedented run-up in house
prices is propelling the current recovery."

result was that real estate prices rose by 50 per cent in real terms,
with the run-ups, according to Baker, being close to 80 per cent in
the key bubble areas of the West Coast, the East Coast, North of
Washington, DC, and Florida. How big was the bubble created? It is
estimated by Baker that the run-up in house prices "created more
than $5 trillion in real estate wealth compared to a scenario where
prices follow their normal trend growth path. The wealth effect from
house prices is conventionally estimated at five cents to the dollar,
which means that annual consumption is approximately $250 billion (2
per cent of gross domestic product [GDP]) higher than it would be in
the absence of the housing bubble."

China Factor

housing bubble fueled US growth, which was exceptional given the
stagnation that has gripped most of the global economy in the last
few years. During this period, the global economy has been marked by
underinvestment and persistent tendencies toward stagnation in most
key economic regions apart from the US, China, India, and a few other
places. Weak growth has marked most other regions, notably Japan,
which was locked until very recently into a one per cent GDP growth
rate, and Europe, which grew annually by 1.45 per cent in the last
few years.

stagnation in most other areas, the US has pulled in some 70 per cent
of all global capital flows. A great deal of this has come from
China. Indeed, what marks this current bubble period is the role of
China as a source not only of goods for the US market but also
capital for speculation. The relationship between the US and Chinese
economies is what I have characterized elsewhere as "chain-gang
economics": On the one hand, China's economic growth has
increasingly depended on the ability of American consumers to
continue their debt financed spending spree to absorb much of the
output of China's production. On the other hand, this relationship
in depends on a massive financial reality: the dependence of US
consumption on China's lending the US Treasury and private sector
dollars from the reserves it accumulated from its yawning trade
surplus with the US-some one trillion so far, according to some
estimates. Indeed, a great deal of the tremendous sums China-and
other Asian countries–lent to American institutions went to finance
middle class spending on housing and other goods and services,
prolonging the US's fragile economic growth but only by raising
consumer indebtedness to dangerous, record heights.

China-US coupling has had massive consequences for the global
economy. One has to do with the addition of massive new productive
capacity by American and other foreign investors moving to China.
This has aggravated the persistent problem of overcapacity and
overproduction. One indicator of persistent stagnation in the real
economy is the aggregate annual global growth rate, which averaged
1.4 per cent in the 1980's and 1.1 per cent in the 1990's,
compared to 3.5 per cent in the 1960's and 2.4 per cent in the
1970's. Moving to China to take advantage of low wages may shore
up profit rates in the short term but, as it adds to overcapacity in
a world where a rise in global purchasing power is limited owing to
growing inequalities, it erodes profits in the long term. And
indeed, the profit rate of the largest 500 US transnational
corporations, which fell drastically from +4.9 per cent in the
1954-59, to +2.04 in 1960-69, to -5.30 in 1989-89, -2.64 in 1990-92,
and -1.92 in 2000-2002. Behind these figures, notes Philip O'Hara,
was the specter of overproduction: "Oversupply of commodities and
inadequate demand are the principal corporate anomalies inhibiting
performance in the global economy."

succession of speculative manias in the US have had the function of
absorbing investment that did not find profitable returns in the real
economy and thus not only artificially propping up the US economy but
also "holding up the world economy," as one IMF document put it.
Thus, with the bursting of the housing bubble and the seizing up of
credit in almost the whole financial sector, the threat of a global
downturn is very real.

or Chain-Gang Economics?

this regard, talk about a process of "decoupling" of regional
economies, especially the Asian economic region, from the United
States has been without substance. True, most of the other economies
in East and Southeast Asia have been pulled along by the Chinese
locomotive. In the case of Japan, for instance, a decade-long
stagnation was broken in 2003 by the country's first sustained
recovery, fueled by exports to slake China's thirst for capital and
technology-intensive goods; exports shot up by a record 44 per cent,
or $60 billion. Indeed, China became the main destination for Asia's
exports, accounting for 31 per cent while Japan's share dropped
from 20 to 10 per cent. As one account pointed out, "In
country-by-country profiles, China is now the overwhelming driver of
export growth in Taiwan and the Philippines, and the majority buyer
of products from Japan, South Korea, Malaysia, and Australia."

as research by Jayati Ghosh and C.P. Chandrasekhar has underlined,
China is indeed importing intermediate goods and parts from these
countries but only to put them together mainly for export as finished
goods to the US and Europe, not for its domestic market. Thus, "if
demand for Chinese exports from the US and the EU slow down, as will
be likely with a US recession, this will not only affect Chinese
manufacturing production, but also Chinese demand for imports from
these Asian developing countries." Perhaps the more accurate image
is that of a chain gang linking not only China and the United States
but a host of other satellite economies whose fates are all tied up
with the now deflating balloon of debt-financed middle class spending
in the US.

Bubbles to the Rescue?

One must not,
however, overestimate the resiliency of capitalism. Many are now
asking: After the collapse of the boom and the housing boom,
is there a third line of defense against stagnation owing to
overcapacity? One theory is that military spending could be a way
that the government might pull the US out of the jaws of recession.
And, indeed, the military economy did play a role in bringing the US
out of the 2002 recession, with defense spending in 2003 accounting
for 14 per cent of GDP growth while representing only four per cent
of the GDP of the US. According to estimates cited by Chalmers
Johnson, defense-related expenditures will exceed $1 trillion for the
first time in history in 2008.

Stimulus could also
come from the related "disaster capitalism complex" so well
studied by Naomi Klein–that "full fledged new economy in home land
security, privatized war and disaster reconstruction tasked with
nothing less than building and running a privatized security state
both at home and abroad." Klein says that, in fact, "the economic
stimulus of this sweeping initiative proved enough to pick up the
slack where globalization and the booms had left off. Just
as the Internet had launched the dot.-com bubble, 9/11 launched the
disaster capitalism bubble." This subsidiary bubble to the real
estate bubble appears to have been relatively unharmed so far by the
collapse of the latter.

is not easy to track the sums circulating in the disaster capitalism
complex, but one indication is that InVision, a General Electric
affiliate, producing high tech bomb detection devises used in
airports and other public spaces received an astounding $15 billion
in Homeland Security contracts between 2001 and 2006.

Whether or not
"military Keynesianism" and the disaster capitalism complex can
in fact play the role played by financial bubbles is open to
question. For to feed them, at least during the Republican
administrations, has meant reducing social expenditures, resulting in
their positive employment effects being overwhelmed fairly quickly by
reductions in effective demand. A study Dean Baker cited by Johnson
found that after an initial demand stimulus, by about the sixth year,
the effect of increased military spending turns negative. After 10
years of increased defense spending, there would be 464,000 fewer
jobs than in a scenario of lower defense spending.

But even more
important as a limit to military Keynesianism and disaster capitalism
is that the military engagements to which they are bound to lead are
likely to create quagmires such as Iraq and Afghanistan that could
trigger a backlash both abroad and at home. This would eventually
erode the legitimacy of these enterprises, reduce their access to tax
dollars, and erode their viability as sources of economic expansion
in a contracting economy.

Yes, global
capitalism may be resilient, but it looks like its options are
increasingly limited. The forces making for the long term stagnation
of the global capitalist economy are now too heavy to be easily
shaken off by the economic equivalent of mouth-to-mouth