By Michael Roberts
It is coming up to ten years this September since the US investment bank Lehman Brothers was allowed to go bust in the depth of the Great Recession of 2008-9. Actually, the financial crisis really began in August 2007, when the first losses for investment banks in Europe took place. But the fall of Lehmans is the usual marker for Americans. To commemorate this unedifying event, former employees of Lehmans are apparently holding a reunion party to see how they have all got on since!
Several writers have published accounts of why Lehmans went under and what caused the greatest global financial crash in the history of capitalism so far. The most comprehensive is Crashed by Adam Tooze, which I recently reviewed. But there have been other accounts by financial journalists like Gillian Tett at the Financial Times, a close observer of the run-up to the disaster, as investment banks expanded their ‘financial engineering’ with new and exotic forms of securities and ‘derivatives’.
For her, financial crises like that of Lehmans share two things. “First, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks. Second, when the crisis hits, there is a sudden loss of trust, among investors, governments, institutions or all three.” Hubris turns into its opposite; or what Keynes called, “animal spirits’” suddenly disappears.
Tett quotes Paul Tucker, a former deputy at the Bank of England, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again.” So, for Tett, financial crises occur over and over again because of recklessness and greed and presumably lack of regulation. But she offers no deeper reason why this is a recurring flaw in finance capital; or why ‘animal spirits’ suddenly turn into their opposite. It just does. And it will happen again, says Tett, casually. And she echoes this blog, when pointing out that “between 2007 and 2017, the ratio of global debt to GDP jumped from 179 per cent to 217 per cent”. But this time, the “borrowing binge has not occurred in the areas of finance that caused the last crisis, such as subprime loans. Instead, the debt boom is among risky companies and governments, ranging from Turkey (which already faces a financial crunch) to America (where borrowing has accelerated under the administration of Donald Trump.)”
Tett offers no underlying cause of crises. But then that is the story of all mainstream explanations, including Keynesian ones, as I have outlined before in various posts and papers. We get an even more superficial account from Keynesian economic journalist, Larry Elliott, in the UK’s Guardian. Rather than explain the crash (for which he has no other explanation than the usual Keynesian one), he tells us that the real tragedy was that the ‘progressive left’ failed to explain it or do anything about it. For him, the ”progressives” appear to be Obama in the US and Blair/Brown in the UK – hardly ‘progressive’, in my opinion. But Elliott reckons that ‘progressive’ Obama “deserves a bit of sympathy” because he had no clear ‘narrative’ or theory to turn to, Keynesian or Marxian, unlike, say Roosevelt in the 1930s. Actually, history shows that Roosevelt also rejected both of those ‘narratives’.
‘Progressives’ who never threaten finance capital
Elliott’s complaint is that the progressives have since failed to ‘break up the banks’, tax financial speculation or do anything about climate change. Leaving aside the dubious premise that these ‘progressives’ would ever do anything to threaten the interests of finance capital, Elliott’s progressive ‘solutions’ anyway fall well short of what would be needed to stop future financial crashes. Why break up the banks instead of bringing them under public control and ownership? Why just tax speculative investment rather than ending it and turning banks into a public service like other essential services?
Such alternative policy actions (from the ‘Marxist narrative’) that I have discussed in this blog on numerous occasions are obviously ‘too progressive’ for the likes of Keynesians like Elliott. As for another thing that Elliott wants, namely ‘winning the battle of ideas’ and ‘taking back control of how economics is taught’; that will prove just as inadequate (see my posts here).
Also interesting are views on what has happened to the major capitalist economies since the end of the Great Recession and Lehman’s collapse. In my last post, I outlined how, finally after ten years, the US economy in 2017-18 has made a relative recovery (if only from the near-recession of 2015-6), with real GDP growth reaching nearly 3% a year-on-year, while the official unemployment rate at a record low, and with corporate profits rocketing up from Trump’s tax cuts, leading to a modest revival in business investment. I argued that this won’t last. But others are unsure which way it will go.
Noah Smith, a Keynesian economist, who writes for Bloomberg, reckons that the US economy is definitely having a boom, but he is not sure why. He reckoned that there were “no definitive answers”. You see “Fundamentally, economists don’t know why booms happen.” But he had a go at guessing. It could be due to a credit boom fuelled by low interest rates “which tends to juice investment.” Or it could be “Donald Trump’s tax cuts”. Or it could be “what John Maynard Keynes called animal spirits, and what modern-day economists call sentiment — potentially random fluctuations (crises are random apparently!- MR) in the optimism and confidence of business people and consumers.”
Smith is worried that all these possible causes of the current ‘boom’ are set to dissipate and “the current boom is simply the tail end of the long recovery from the Great Recession…If loose monetary and/or fiscal policy is driving up demand, then it will likely eventually cause inflation to accelerate, prompting a clampdown by the Fed. If animal spirits are responsible, it could lead to over-borrowing and an eventual debt crisis and crash — indeed, corporate debt is looking worrisome, as levels of risky debt rise and credit spreads narrow.”
He concludes by going for the usual mystic Keynesian explanation : “If I were forced to pick one leading explanation for the boom, I would go with animal spirits. Exuberant business sentiment and the build-up of risky corporate debt seem indicative of good times that won’t last.”
The good Keynesian that he is, Smith generally rejects ‘supply-side’ explanations of the apparent boom, like technical innovation delivering higher productivity; or rising profits being the result not only of tax cuts but also the suppression of real wages by anti-trade union laws and wage caps (Trump has just announced that he wants to block the planned wage rise for federal government employees).
And yet one of the interesting contributions made at last week’s summer symposium of central bank governors at Jackson Hole, Wyoming was by Alan Krueger, the Princeton economist. Like Jerome Powell, the Federal Reserve Chair, did in his speech, Kreuger pointed out that usually in ‘booms’, wages rise as the labour market tightens. But not this time: mainstream economic laws like the Phillips curve (falling unemployment comes with rising inflation) are just not operating. Profits have risen, but not wages – instead, in Marxist terms, the rate of exploitation or surplus value has jumped.
Kreuger pointed out that one factor causing this has been the destruction of trade union power in the labour market. According to Krueger, a quarter of the work force in 1980 belonged to unions. That’s when income inequality in the US was at its lowest. Today, union membership in the US is down to 10.7% and if you subtract the public-sector unions, it’s more like 6.5%.
Unending struggle for monopoly power
The Jackson Hole symposium also heard papers from various economists on the rise of ‘market power’ (ie the concentration and centralisation of capital) in the hands of a few mega corporations. These mega corporations like the FANGS, Facebook, Amazon, Netflix, Google, Microsoft etc control their markets, keep out rivals and mop up all the profits. Thus we have weak unions on the one hand and thus ‘monopsony’ (buyers monopoly) in the labour market and strong ‘monopoly’ companies in commodity markets. That is a recipe for high profits for the ‘winners’ in capitalist competition and for high rates of surplus value (eg. hundreds of thousands of Amazon workers on minimum wages while CEO Jeff Bezos ‘earns’ more than anybody else in the world).
But what one paper by John Van Reenen showed was that the huge profits of the FANGS are not really the product of ‘monopoly’ due to de-regulation or lack of anti-trust laws, as many leftist economists claim, but just the result of ‘globalisation and new technologies’ – a conclusion that I have offered in previous posts. It is not ‘imperfect’ competition under capitalism that is the cause of inequality of incomes and high profits, but what Anwar Shaikh has called ‘real competition’. The capitalist economy should not be viewed as a ‘perfect’ market economy with accompanying ‘imperfections’. Real competition is a struggle to lower costs per unit of output in order to gain more profit and market share. In the real world, there are capitals with varying degrees of monopoly power competing and continually changing as monopoly power is lost with new entrants to the market and new technology that cuts costs. Real competition is an unending struggle for monopoly power (dominant market share) that never succeeds in total or forever.
The policy conclusions from all this are that more regulation or the breaking-up of banks or big corporations and the removal of anti-labour legislation may help to reverse somewhat the trends of rising inequality and ‘monopoly’ power. But, as the global financial crash and the Great Recession showed, and the subsequent Long Depression has confirmed, such measures will not stop another crash and recession, when ‘animal spirits’ disappear and boom turns into slump again. And anyway, there are no ‘progressives’ around to implement such ‘reforms’.
September 3, 2018
For the original article with all links and references, see Michael Robert’s blogsite:
