VIII. The collapse of capitalism, Minsky and the Great Financial Crisis
The idea that Marx’s prediction of a complete breakdown of capitalism could be triggered by something as innocuous as a recession may seem far-fetched. After all, recessions are as ubiquitous to post-war capitalism as inflation, bubbles, and military interventions by Washington. Indeed, most recessions in the post-war period were deliberately triggered by Washington to slow growth by cutting off the availability of credit — the mother’s milk of superfluous economic expansion.
But, this is precisely the significance of the writings of Hyman P. Minsky and his Financial Instability Hypothesis. No follower of Minsky could witness recent events without realizing how accurately he predicted them. In a speech at a meeting of the American Economic Association in New Orleans, in 1992, Minsky warned that:
Financial fragility now poses a clear and present danger to the continued prosperity of well nigh all financially sophisticated capitalist economies. In many economies financial fragility can now induce attempts, simultaneous or sequential, by banks and other financing institutions to “make position by selling out position”. A collapse of asset values, which forces the price of capital assets below the cost of production of investment output, could occur in many countries. This would assure that a deep an[d] long world wide depression will take place.
Whether or not such a debt depression takes place depends on whether lender of last resort interventions, which abort the need to make position by selling out position are effective and whether aggregate profits are sustained in the face of a credit crunch, which can follow even successful lender of last resort interventions.
Minsky argued that post-war capitalist economies, with their heavy dependence on debt-fueled economic growth increasingly committed present income to debt service based on their estimation of future business conditions — conditions that were at best uncertain. Since economic growth required the continuous expansion of spending beyond present income, the increasing accumulation of debt was built into the economy. Unknowingly, this dependence on debt to fund present spending was leading to an entanglement of past commitments, present spending, and future prospects for servicing old and new debt, leading to a systemic increase in the risk of a major financial meltdown.
Says Minsky, the global economy, since the Great Depression,
… is characterized by a financial structure which leads to the prior commitment of cash flows received, by households, businesses, governments, banks and non-bank financial institutions, to validate their liabilities. These cash flows are received either from the distribution of the value of output among the participants in producing and financing output or from the fulfillment of financial contracts. Liability structures, which link yesterdays and tomorrows to today, introduce a degree of intertemporal complexity into the economic process beyond that due to the different expected lives of capital assets, the gestation period for investment output and the time it takes to transform a labor force. Such complexity renders suspect the basic neoclassical presupposition that the behavior of the capitalist economy can be understood by assuming that the economy is a system that seeks and sustains equilibrium. Once the equilibrium assumption is abandoned all economic theory can tell us is,
1. economies need to reconcile a variety of dynamic processes,
2. the reconciliation process is a multidimensional, intertemporal and non-linear system and,
3. from time to time such processes generate time series that are not nice. These not nice time series can be characterized as incoherent, chaotic or ones that exhibit hysteresis [lagging effects — Charley].
An example of “not nice time series” might be found in the commitment a working class family takes on when they assume a thirty year house mortgage. Implicit in their assumptions about their ability to pay off the mortgage is that they will go thirty years without suffering a devastating collapse of family wages. Such a collapse of income would leave them unable to meet their monthly mortgage payment and could render them homeless. With recessions occurring about every ten years, the chance that they might be unable to meet their mortgage payment because of a layoff (which, even if it did not last long, might result in a new job at considerably lower wages) may be much greater than they initially estimate. Throw in the fact that, unlike the past, few people work thirty years in the same job today, and the persistent drag on wages produced by off-shoring manufacturing jobs — not to mention borrowing against home equity to make up for declining real wages, or to increase present consumption — and you have the recipe for disaster.
Now multiply this personal financial risk by tens of millions of home owners; then throw in a major credit crunch and a follow on attempt by companies to shore up their profits by eviscerating their work forces, and you have the Great Financial Crisis as millions of homes suddenly are thrown on the market in foreclosures, sending the housing market into a tailspin. Suddenly at risk of catastrophic collapse are the values of thousands of mortgaged backed securities that were sold to pension funds, mutual funds, insurance companies and international holders — “patsies” for Wall Street bankers who offloaded toxic mortgage securities on them and then “walked away from the deal with a net income and no recourse from the holders.”
The extent to which Minsky’s hypothesis dovetails with Marx’s prediction of capitalism’s demise can be seen in the statement by economist Steve Keen, a follower of Minsky, who observed, “if Minsky had looked deeply into the historical soul of the Financial Instability Hypothesis, he would have seen Marx staring out.”
Marx anticipated Minsky’s model of financial crisis and a credit crunch like the one we are experiencing; and wove it into his theory of capitalist breakdown. As described by Steve Keen, Marx,
… starts his analysis at a time of prosperity and full employment. This leads to the money supply growing faster than prices, and to a dramatic expansion in credit — “As concerns the circulation between capitalists, a period of brisk business is simultaneously, a period of most elastic and easy credit.” However with easy credit goes rising indebtedness, rising interest rates, and eventually a crisis in which “prices fall, similarly wages; the number of employed labourers is reduced, the mass of transactions decreases” (Marx 1894: 448). During the slump money is needed more than ever in order to repay debts, but none is forthcoming. Marx puts this brilliantly:
“It is by no means the strong demand for loans which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties it meets in times of depression.” (Marx 1894: 450)
When the financiers takes the upper hand, a Depression almost inevitably ensues, as Marx decries as he rises to his polemical best:
“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner– and this gang knows nothing about production and has nothing to do with it.” (Marx 1894: 544-45).
Thus for Marx, as with Fisher and Minsky after him, the essential element giving rise to a Depression is the accumulation of private debt.
Keen is correct on this, but he interprets Marx’s insight far too narrowly. If we broaden the term industry to include useful labor that produces something of value, Marx’s argument takes on a broader meaning. While the despoiling of industry may occur in every depression, it is only after the Great Depression, when the temporary overproduction that characterizes capitalism becomes a permanent feature of global economic activity, and the constraint imposed on profits by a permanent insufficiency of consumption engenders the cancerous growth of superfluous economic activity, that the fabulous power of this class of parasites really comes into its own, bringing in its train not just the continuous expansion of debt, but precisely the kind of Ponzi debt of which Minsky warned:
Ponzi financing decreases equity for debt … without any increase in assets. It therefore has a limit for any private unit. It ends when equity goes to zero. For a national state habitual recourse to Ponzi finance may well put the economy on the “Road to Argentina”.
Ponzi financing is not simply an increase in debt beyond some ill-defined limit, it is the increase in debts that result in no productive activity — in debts accumulated for the unproductive consumption of existing output. Minsky, therefore, leads us back to Marx’s insight, provided by Moishe Postone in the previous section, that, capitalism posits superfluous labor as the condition in growing measure for necessary labor.
But, perhaps, he gives us something more — he explains how this condition itself is negated by its inherent contradictions: as capital becomes increasingly dependent on debt accumulated for superfluous economic activity, this superfluous activity, since it increasingly displaces productive activity, implies the accumulation of new debt without creating new productive assets to pay for it.
It, therefore, must collapse as the necessary labor time of society approaches zero — and its initial expression will be a recession brought on by a financial crisis.
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