The Myth of the “Sub-Prime Crisis”

CAPITALISM, like the proverbial horse, kicks even when in decline. Even as the current crisis hit it, it gave an ideological kick by attributing the crisis to “sub-prime” lending; and so well-directed was its kick that the whole world ended up calling it the “sub-prime crisis”, argues Prabhat Patnaik.

The idea, bought even in progressive circles, was that in the euphoria of the boom that had preceded the crisis, financial institutions in the US had given loans even to sections of the population who were not really “credit-worthy”, i.e. who were poor and had few assets of their own.

They would normally not get loans from banks; they were not “prime borrowers”. They got loans only because the boom had lowered guards everywhere and banks had started underestimating risks. But if you give loans to people who are not “creditworthy”, who are not “true blue”, then you inevitably come to grief, which is what ultimately happened, precipitating the crisis.

Remarkably, the idea appealed not only to the Right but even to sections of the Left. Sections of the Left liked it because they read into this explanation a basic contradiction of the system: to keep the boom going the capitalist system needs to give more and more loans, and therefore to bring an ever larger number of people into the ambit of borrowing, so that the level of aggregate demand is kept suitably up. This necessarily means that “sub-prime” borrowers have to be brought in more and more for the sustenance of the boom, which therefore must eventually lead to a collapse.

The Right saw in it an opportunity to argue that the crisis arose because capitalism had become “too soft”: people who should not be touched by financial institutions with a barge-pole had actually been given huge loans. The problem therefore lay not with the system as such, since it normally would never do such silly things, but with an aberration it had suddenly got afflicted with.

Some even saw in this aberration a muddle-headed humaneness which the system had suddenly developed. And they used the crisis as an illustration of the fact that all such humaneness is fundamentally misplaced, that there is, as they had always maintained, no scope for sentiment in the harsh world of economics.

In India, apologists of neo-liberalism worked overtime to use the fact of the crisis itself to discredit policies of “social banking”, such as priority sector lending and differential interest rates, that the country had embarked on after bank nationalization. All such policies, they argued, saddle banks with the responsibility of lending to “sub-prime” borrowers, and hence put on their shoulders an unbearable burden of “non-performing assets”. This ultimately makes them unviable and in need of substantial doses of government assistance to survive, as had happened in the US and elsewhere.

The moral of the story therefore was that in countries like India the markets should be left to work in their own pitiless manner without having to accommodate sentimental hogwash like “social banking” and “financial inclusion”. Hence by a curious irony, a crisis precipitated in the advanced capitalist world by the free functioning of the markets was used in the Indian context to argue for an unleashing of the free functioning of the markets.

The basic argument about “sub-prime” lending causing the crisis however was a flawed one. The banks had given loans to the so-called “sub-prime borrowers” against the security of the houses they had bought with these loans. If the values of the houses collapsed then banks’ asset values collapsed relative to their liabilities, precipitating a financial crisis.

The cause of the crisis therefore lay not in the identity of the borrowers, the fact of their being “sub-prime”, but in the collapse of the asset values, which in turn was because asset markets in a capitalist economy are dominated by speculators whose behaviour produces asset-price bubbles that are prone to collapse.

Indeed when the banks were giving loans against houses to the so-called “sub-prime borrowers”, they too were essentially speculating in the asset markets, using the “sub-prime borrowers” only as instruments, or as mere intermediaries in the process.

To attribute the crisis to sub-prime lending therefore amounted to shifting attention from the immanent nature of the system, the fact that it is characterized by asset markets, which are intrinsically prone to being dominated by speculators whose behaviour produces asset-price bubbles that necessarily must collapse, to a mere aberration, a misjudgement on the part of the financial institutions that made them lend to the “wrong people”.

It was a deft ideological manoeuvre. The identity of the people who borrowed, whether they were in rags or drove limousines, was actually irrelevant to the cause of the crisis, but it was presented as the cause. The blame for the crisis was put falsely on “sub-prime lending”; and a fabrication, a complete myth, called the “sub-prime crisis” was sold to the world, quite successfully.

Let us for a moment imagine that no loans were made to the so-called “sub-prime” borrowers, and that all loans were made only to “prime borrowers” against the security of the houses that were purchased through such loans. True, “prime borrowers” might not have been interested in taking more loans than they already had, in order to purchase houses, and that “sub-prime” borrowers had to be brought in. But, let us, just for a moment, assume that all the loans that the banks had actually made were made to “prime borrowers” rather than “sub-prime borrowers”.

With the collapse in house prices, which had to happen sooner or later, the “prime borrowers” would have found their balance sheets going into the red, and so would the banks who gave them the loans. The borrowers would have been hard put to keep to their payments commitments, and the same denouement that unfolded with “sub-prime borrowers” would have unfolded with “prime borrowers”.

The fact that the latter owned other assets would not have made any difference; they would not have easily or voluntarily liquidated those assets to pay the banks for the housing loans (and, besides, those other asset prices too would have collapsed if the “prime borrowers” had tried to liquidate them). And if such forced liquidation was insisted upon for paying off housing debt, then there would have been prolonged court battles to prevent it; the crisis certainly would not have been averted.

Hence the real reason for the crisis lies in the collapse of the house price-bubble (which was bound to happen no matter what the identity of the borrowers), and not the identity of the borrowers themselves.

Of course it may be argued that with consumer credit the matter is entirely different, since such credit has been given to large sections of the population without any security. In other words, it may be argued that consumer credit to “sub-prime borrowers” is necessarily crisis-causing, in a sense that consumer credit to “prime borrowers” is not, since it is given without any collateral. But the consumer credit bubble has not yet busted; so it is idle to speculate on this matter.

The fact remains that with regard to the bubble that has actually busted, namely the housing bubble, the identity of the borrowers, whether they are prime borrowers or sub-prime borrowers makes little difference.

To say this is not necessarily to deny that the sustenance of boom under capitalism may require bringing more and more people under the ambit of borrowing, including the so-called “sub-prime” borrowers who normally do not have access to credit. But this is not the cause of the crisis; the bringing in of “sub-prime” borrowers, the widening of the circle of borrowers, is merely the mechanism through which speculation may get sustained.

It may determine the size of the “bubble”, but the real cause of the crisis lies in these “bubbles” themselves, i.e. in the fundamental fact that in a modern capitalist economy, where fiscal deficits are sought to be restricted, booms are necessarily “bubbles-led” or at least “bubbles-sustained”; and the inevitable collapse of these “bubbles” necessarily produces crises.

Or putting it differently, if “sub-prime” lending had not happened, then the crisis would have occurred even earlier than it did, i.e. the bubble would have collapsed even earlier. This would of course have limited the size of the collapse relative to the top of the boom, since the bubble would have burst before it became too big; but by the same token it would also have limited the size of the boom itself that preceded the collapse, so that the unemployment rate, experienced with the crisis, would not have differed much between the two situations.

A modern capitalist economy is characterized by highly-developed and highly-complex asset markets, where it is not only the physical assets themselves, but, above all, financial assets, which represent claims on physical assets, that are bought and sold. Since the carrying costs of these financial assets are extremely low (rats do not eat them up as they eat up foodgrains for instance, and they do not need godowns for storage and for protection from the elements), they are particularly prone to speculation.

Their markets tend to be dominated by speculators who buy assets not “for keeps” but for selling at the opportune moment to realize capital gains. The prices of these financial assets therefore are determined largely by the behaviour of speculators. When there is a rise in their prices for whatever reason, speculators often rush in expecting a further rise and this pushes up prices even further. This process may go on for sometime, creating a “bubble”. But when, for whatever reason, the price rise comes to a halt, speculators start running away from this asset like rats deserting a sinking ship and the “bubble” collapses.

The real point however is this: the amount of the physical asset that is produced depends upon the price of the claims upon it, i.e. of the financial assets that represent claims upon this physical asset. If the price of these claims is high, then more of such physical assets are produced, and if the price is low then less. But while the price of these claims is determined by the behaviour of the speculators, the output and employment in the real economy is determined by the amount of physical assets that are produced.

Hence in a modern capitalist economy, it is the caprices of a bunch of speculators that determines the real living conditions of millions of people, their employment and incomes. When speculators are bidding up the prices of assets (or claims upon assets) employment and output start rising and we have a boom. When speculators leave assets like rats leaving a sinking ship and wish only to hold money (and in extreme cases, when confidence in banks gets impaired, only currency), we have a crisis.

John Maynard Keynes, acutely aware of the irrationality of this system that made the lives of millions of people dependent upon the caprices of a bunch of speculators, and yet extremely keen to prevent its transcendence by socialism, sought to alter this state of affairs by advocating “socialization of investment”. This would mean that how much of physical assets were produced depended not upon the whims of speculators but upon the decisions of the State, which made these decisions with the objective of keeping the economy close to full employment.

The Keynesian remedy was tried out for nearly two decades after the second world war; and the unemployment rate in the advanced capitalist countries was indeed kept at levels that were extremely low by the historical standards of capitalism. But with the ascendancy of international finance capital, and the consequent transformation in the nature of the nation-State, whose interventions now are meant exclusively for promoting the interests of finance capital, Keynesian “demand management” recedes to the background; and we are back to a regime of booms and busts associated with the formation and collapse of “bubbles”.

 

The current crisis is not caused by any aberration on the part of financial institutions; it is immanent to a regime of finance capital.

The Demise Of The Dollar

The Independent (published from London) in its front-page article on Tuesday (October 6) headlined The Demise of the Dollar, by its legendary Middle East correspondent Robert Fisk exposing a secret plot by international central banks to topple the US dollar, has rocked the world.

In the report Fisk says secret talks have been taking place between Arab states and China, France, Japan and Russia, to stop using the US currency for oil trading and to move to a basket of currencies.

The proposed new basket supposedly includes the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for the six-member Gulf Cooperation Council (comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE).

Finance ministers and central bank governors in Russia, China, Japan and Brazil have been working on the scheme, says Fisk, adding, the talks “may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years”.

He adds: “The Americans, who are aware the meetings have taken place — although they have not discovered the details — are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs.”
Denials have been coming out thick and fast from all the central banks involved, especially Saudi Arabia. But given Fisk's formidable reputation, the report moved markets declined against 14 of its 16 major counterparts, Bloomberg reported.

As the Financial Times (of London) stressed: “The article in The Independent becomes quite serious in that The Independent has not been given to such rumours in the past. This is not The Sun, nor the NY Post. The Independent is a reasonably credible news source and we suspect that the leaks made to the newspaper are to be taken quite seriously. Certainly the markets are taking it as such, and we should also.”

Not surprisingly, the Financial Times is distressed. “This is not new news of course, for such a change from dollar pricing to some other methodology has been discussed, rumoured, tossed about for months, but this time we note that Japan and France are involved in the meetings and that changes the tenor of the rumours entirely. Too, the addition of the Saudis and the Emirates AND Kuwait to the meetings adds further importance and seriousness to the threats.”

FT is not alone. A rather alarmed Dennis Gartman of the Gartman Letter wrote: “IT IS UNANIMOUS: “THEY” HATE THE US DOLLAR and it appears that a fully fledged attack is being made upon the US currency this morning (October 6), with money flowing anywhere and everywhere… but particularly to the non-US dollars, the Canadian, the Aussie and the New Zealand dollars. Fears of problems in the Middle East; fears that the world is turning away from the US dollar as the policies being followed by the left-of-centre Obama Administration; fears of fears.. it makes no difference at this point. The rout is on, and it is not a pretty sight to behold.”

BNY Mellon, meanwhile, did not make much of the central bank denials: “Given the enormity of events these past two years, it is entirely understandable that investors took to the sidelines ahead of meetings of the G20 and G7 whose contingent were seemingly armed with a greater will to effect change. Yet given that these meetings appear to have actually contributed to a reinforcement of the status quo, then there seems little reason to believe that investors will not resume their prior activities. As such, this continues to bode ill for the USD.”

The idea of replacing the dollar for oil trading is not new. Venezuelan President Hugo Chavez has been seeking Arab support for a proposed oil-backed currency for some time now. In fact another report today in TOI says: “UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said on Tuesday in a report.”

But as Fisk wryly concludes: “Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.”

Roger Alexander

Fareed Zakaria's 'Capitalist Manifesto': A Desperate Attempt At Reassurance

Fareed Zakaria, editor of Newsweek International, has written an essay entitled 'The Capitalist Manifesto: Greed is Good (To a point)', which is intended to express relief that the panic engendered by the global financial crisis is easing, and to offer reassurances that, for all its faults, capitalism is still “the most productive economic engine we have yet invented.”

The problem with this claim that all is, again, for the best in the best of all possible worlds, is that far from the crisis having ended, it is only just beginning to unfold. Zakaria begins by drawing comfort from the fact that the financial crises of the past 20 years were all overcome, leading to further economic growth.

The stock market crash of 1987 defied predictions of a return to the Great Depression and “turned out to be a blip on the way to an even bigger, longer boom.” The 1997 Asian financial crisis did not lead to a global slump. Instead, the Asian economies “rebounded within two years”.

The collapse of Long Term Capital Management in 1998, described by then US Treasury secretary Robert Rubin as “the worst financial crisis in 50 years”, did not result in the end of hedge funds. Rather they have “massively expanded” since then.

How were these earlier crises overcome? As Zakaria notes, US Federal Reserve chairman Alan Greenspan always advanced the same solution: cut interest rates and provide easy money, creating a series of asset bubbles.

When the subprime crisis developed in 2007, Fed chairman Ben Bernanke followed the same procedure. However, on this occasion, interest rate cuts failed to alleviate the crisis. The Fed initiated its injections of liquidity in August 2007, but the situation only worsened.

The investment bank Bear Stearns went under in March 2008, followed by the collapse of Lehman Brothers in September and, by the end of 2008, notwithstanding massive injections of liquidity, all five Wall Street investment banks had either collapsed or been forced to restructure. The global financial system was on the brink of a meltdown.

This alone demonstrates that, far from the happy scenario painted by Zakaria—this crisis is just like the others since 1987—the collapse that began in 2007 marked a qualitative turn in an ongoing process.

Zakaria is forced to acknowledge that the global financial system has been “crashing more frequently over the past 30 years than in any comparable period in history”. But he insists that the problem is not with the profit system itself. “What we are experiencing is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and ultimately of ethics.”

In the first place, the separation of capitalism from each of these phenomena is absurd—as if the capitalist mode of production could somehow be lifted out of the historical situation in which it is situated; as if it does not shape the socio-political environment in which it operates, including the prevailing ethics.

Let us examine each of Zakaria’s explanations of the crisis in turn.

He insists, along with many others, that the fault lies with the operations of the financial system. “Finance screwed up, or to be more precise, financiers did. In June 2007, when the financial crisis began, Coca-Cola, PepsiCo, IBM, Nike, Wal-Mart and Microsoft were all running their companies with strong balance sheets and sensible business models. Major American corporations were highly profitable, and they were spending prudently, holding on to cash to build a cushion for a downturn.”

The separation of finance (the bad side) from the rest of the capitalist economy (the good side) has a long history. It was taken up by Marx in his withering critique of the French petty-bourgeois anarchist Proudhon more than 150 years ago. As Marx explained then, the “bad” side cannot be separated from the “good”, especially as it turns out that, more often than not, the “bad” side is the driving force of historical development. And that is the case in the current situation.

The development of American capitalism—and the global economy—has been grounded on the vast changes associated with the processes of financialisation that began in the 1980s.

A few figures illustrate what has occurred. In 1980, financial firms accounted for about 5 per cent of total corporate profits. By 2006 this had risen to around 40 per cent. On a global scale, financial assets in 1980 were roughly equal in value to world gross domestic product.

Twenty-five years later they constituted 350 per cent of global GDP. At the heart of this transformation has been the accumulation of finance sector debt in the US economy. It rose from 63.8 per cent of GDP in 1997 to 113.8 per cent in 2007—a result of the banks and financial corporations plunging ever deeper into debt in order to fund their debt-based financial operations.

The rise and rise of financialisation was not simply a policy choice, but a response to a crisis in the capitalist accumulation process that had developed in the late 1960s and 1970s. Faced with a downturn in the rate of profit, American capitalism undertook a major restructuring program from the end of the 1970s onwards.

This involved the destruction of large swathes of manufacturing industry, a concerted assault on the social position of the working class, the development of off-shoring and outsourcing to take advantage of cheaper sources of labour, and a turn to financial manipulation, such as hostile takeovers and mergers, as the source of profit.

New Mode of Accumulation

The transformation of the American economy in the 1980s saw the emergence of a new mode of accumulation, in which profits were made through the appropriation, by financial methods, of already created wealth.

Historically, wealth had been accumulated in the US economy through investment, trade and manufacturing. Now the driving force of accumulation became rising asset prices. This has determined the shape of the US economy, and the accumulation of profit by all sections of capital—even for those not immediately connected to finance.

Back in the 1950s and 1960s, manufacturing firms based on assembly-line production were not the largest component of the American economy. But the vast increases in profitability that these methods made possible created the conditions where all sectors of capital could expand. This was a society dominated by what sociologists have called a “Fordist regime” in which, as former GM CEO Charles Wilson famously noted, “what was good for the country was good for General Motors and vice versa.”

In the past 25 years, the fundamental role once played by assembly-line manufacturing in the American economy has been assumed by finance capital. No matter how sound or well-run an individual capitalist firm may be, the accumulation of profit is a social process. Each firm depends for its expansion on the growth of the economy as a whole. And in the US, finance capital has been the driving force.

Any attempt to separate the “bad” side from the “good” collapses upon even a cursory review. Zakaria points to various corporations as part of the “good” side of American capital. One of them is Microsoft. But one of the chief sources of Microsoft’s profits has been the sales of the computers and software programs that have powered the finance sector.

Consider Nike and Wal-Mart. They have profited by exploiting cheap labour in China and other countries, under conditions of globalised production. But these operations, involving complex financial relationships, would have been impossible without the growth of financial derivatives.

At the same time, Nike and Wal-Mart could not have remained profitable without the rise in US consumer debt—much of it from housing finance—that has sustained American consumption spending in the face of stagnant or declining real incomes over the past quarter century. The essential significance of the global financial crisis is that it marks the breakdown of the mode of accumulation that has prevailed for the past 25 years.

Financial assets derive their value, in the final analysis, from their claim upon the production of real wealth. Shares are an obvious example. The share is a claim to a portion of a stream of income generated by a particular company. But this share can be bought and sold, and its value may increase in the market in excess of the value of the underlying asset.

The fact that financial assets have expanded almost four-fold in relation to global production over the past two and a half decades means that all their claims to real wealth cannot be met. This disparity is expressed in the emergence of so-called “toxic assets” on the books of the banks and finance houses—claims to income and wealth that are essentially worthless.

In other words, the crisis is not one of liquidity, i.e., lack of sufficient funds to ensure the functioning of an otherwise healthy system, but of insolvency. Its dimensions are indicated by the fact that to restore the parity that existed in 1980 between the value of financial assets and global GDP would mean wiping out financial asset values equivalent to twice global GDP.

These figures make clear the meaning of the bailout and stimulus packages launched by governments around the world. They have nothing to do with maintaining the jobs and living standards of the working class. Rather, they are aimed at transferring as much as possible of the massive debts and “toxic assets” amassed by the financial corporations and banks to the state.

It is precisely this state rescue operation that has boosted stock markets over the past three months and enabled Zakaria to breathe a sigh of relief. As a recent article in the Wall Street Journal noted, one of the main reasons for the more than 30 per cent rebound is “disarmingly simple”. Financial markets are “awash in government cash” as a result of the biggest combined financial stimulus the world has seen in modern times.

The US government has already pledged $12.7 trillion in support of the financial system, almost equivalent to America’s gross domestic product. Since the financial crisis intensified in September 2008, governments worldwide have committed $18 trillion in public funds, equivalent to almost 30 per cent of world GDP, to recapitalising the banks. This has led to a blowout in their fiscal position.

In Britain, government debt is expected to soon reach 100 per cent of GDP while Japan’s government debt is headed for 200 per cent by 2011 and government debt in the US is expected to reach 100 per cent of GDP by the same time. According to IMF economists, by 2014 public debt to GDP ratios in the G-20 economies, comprising some 85 per cent of the global economy, will have increased by 36 percentage points of GDP compared to the levels at the end of 2007.

A New Political Regime

Government finance, however, cannot go on indefinitely. The debts incurred by the state to finance the banks will be paid through slashing government spending and social services and forcibly impoverishing the working class. The scale of this assault on social conditions and living standards will be directly proportionate to the size of the sums of money involved. According to one estimate in Britain, consumption there will have to be reduced by at least 20 per cent from its level in 2006-2007 to make even a start on balancing the government’s books.

Zakaria points to the “terrifying” growth of government debt in America, especially when entitlements and pension commitments are included, and remarks that “no-one has tried seriously to close the gap, which can be done only by (1) raising taxes or (2) cutting expenditures.”

“This is the disease of modern democracy: the system cannot impose any short-term pain for long-term gain.” The political implications are clear: it is impossible to impose the massive spending cuts and rises in revenue needed to wipe off government debt within the present political order. Restructuring the US and other major capitalist economies requires a new, far more repressive regime.

Zakaria goes to extraordinary lengths in his attempt to claim that capitalism is not the cause of the crisis. The real problem, he insists, is not failure, but too much success. The world has been moving to “an extraordinary degree of political stability”; there is no major military competition among the great powers; political violence is on the decline.

Given the wars being conducted by the US in Iraq, Pakistan and Afghanistan, such an assertion can only be described as absurd. As for the subsidence of great power rivalry, one need only point to the constant and growing concern in US policy-making circles about the rise of China.

However, Zakaria is not going to let facts get in the way of the story he wants to tell. Political stability, he claims, has been accompanied by a reduction in inflation, economic growth and the establishment of a global economic system. It is these “good times” that made people complacent, and, as the cost of capital sank, more foolish.

“The world economy had become the equivalent of a race car—faster and more complex than any vehicle anyone had ever seen. But it turned out that no one had driven a car like this before, and no one really knew how. So it crashed.”

What of the future? “The real problem,” he continues, “is that we’re still driving this car. The global economy remains highly complex, interconnected and imbalanced. The Chinese still pile up their surpluses and need to put them somewhere. Washington and Beijing will have to work hard to slowly stabilize their mutual dependence so that the system is not being set up for another crash.”

In other words, while the crisis is over, all the conditions that produced it are still present, and nowhere nearer to being resolved.

Lenin once remarked that the power of Marxism is that it is true. Every so often, even conscious opponents of Marxism are forced, by the very logic of objective facts, to point to processes that form the centre of Marxist analysis. This is the case here.

According to Zakaria: “More broadly, the fundamental crisis we face is of globalisation itself. We have globalised the economies of nations. Trade, travel and tourism are bringing people together. Technology has created worldwide supply chains, companies and customers. But our politics remains resolutely national. This tension is at the heart of the many crashes of this era - a mismatch between interconnected economies that are producing global problems but no matching political process that can effect global solutions.”

The Marxist movement has long identified as one of the central contradictions of world capitalism that between the global development of the productive forces on the one hand, and the nation state system on which the legal and political superstructure is based, on the other. It is this contradiction that renders socialism, based on the development of an internationally planned economy, an historic necessity.

Just as the feudal political order had to be overthrown to make possible the growth of the productive forces under capitalism, so today the globalisation of production has made the capitalist nation-state system as reactionary and backward as the feudal principalities and kingdoms two and three centuries ago.

This contradiction erupted in the first decade of the last century in the form of World War I. It has now emerged once again, at an even higher level. It can only be resolved by the working class taking political power on a global scale; otherwise mankind faces being plunged into wars and economic crises potentially more devastating than those that characterised the first five decades of the twentieth century.

Zakaria calls for better international coordination. But the objective logic of the capitalist system itself drives events in the opposite direction. Capitalist production is carried out on a global scale. Its purpose is not to meet human needs, but to accumulate private profit.

When accumulation is expanding, the different sections of capital, as Marx noted, operate as a kind of fraternity, dividing up the spoils among themselves. When the system breaks down and it becomes no longer a question of sharing profits but of trying to avoid losses, a violent struggle breaks out.

Such a breakdown no longer simply involves intensified competitive struggles in the market, as it did in the nineteenth century, but, with the vast growth of capitalist industry and finance, economic crises inevitably bring the direct involvement of the capitalist state.

This is what occurred last year. After the collapse of Lehman Brothers in September, with the banking and financial system threatened with meltdown, every government around the world responded, not by working for globally coordinated action, but to protect its “own” banking system, leading to immediate conflicts.

In the months since, the differences have only widened. The Germans and French are hostile to the American government’s bailouts because they fear, rightly, that these will enable US banks to retain their dominant global position. The American government, for its part, opposes calls for greater regulation, because they are directed at US finance.

The British government, meanwhile, does not want to introduce tougher regulations fearing that they would endanger London’s position, described by Financial Times commentator John Plender as “the adventure playground of the global financial system.”

This brings opposition from the German government, which harboured hopes that the crisis would offer more opportunities for Frankfurt. The various industry interventions, likewise, have sharpened national rivalries. The German government’s bailout of Opel, for example, endangers operations in Belgium, even raising questions as to whether rules governing the operation of the single European market might have been breached.

As for co-ordination between the US and China to resolve international monetary imbalances, the Chinese central bank has twice called, within the past three months, for the international financial system to be restructured and the dollar replaced as the world reserve currency. Were that to take place, it would cause a rapid decline in the global position of American capitalism, which has enjoyed enormous advantages from the dollar’s role as world money.

Failing international co-operation, Zakaria warns, there will be “more crashes, and eventually there may be a retreat from globalization toward the safety—and slow growth—of protected national economies.” The development of just such a situation in the 1930s led directly to World War II. It would have even more devastating consequences today.

In the end, Zakaria concludes that a “moral crisis” may “lie at the heart of our problems”. Most of what happened over the past decade was legal but “very few people acted responsibly.” However, he continues, none of this happened because “business people have suddenly become more immoral. It is part of the opening up and growing competitiveness of the business world.”

Zakaria does not choose to develop this point, because to do so would make it all too clear that this “moral crisis” is itself an expression of the crisis of the capitalist economy.

The very processes associated with the rise of finance capital have made the dividing line between legality and illegality, not to speak of morality and immorality, ever-more blurred.

In a world of multi-million and multi-billion dollar financial transactions involving the use of complex derivatives, where the value of a financial asset can be altered by changing the value of one or other of the variables in the mathematical model on which it is based; where the more complex and obscure a financial derivative is, the greater the profit going to the seller; where vast fortunes can be made from financial gambling, and where a firm that does not employ the latest dubious methods to boost the bottom line faces being gobbled up by an asset stripper financed with junk bonds, what price ethics?

Moreover, the growth of a financial oligarchy, which dominates and controls the entire political system, means that any rational reform of the present order is impossible, even if a solution were available.

The productive forces of the global economy—the complex and powerful racing car, to use Zakaria’s analogy—created by the combined intellectual and physical labour of the world’s working class, have developed on an immense scale.

But they can no longer be left in the hands of a ruling elite that has lost the historical, political and moral right to remain at the wheel. That is why a socialist revolution, and the transfer of political power to the hands of the working class, has become a historical necessity.

Nick Beams