Tracking The Crisis of 2008 - Introduction

Introduction 

It is the tenth anniversary of the collapse of Lehman Brothers.  In this series of posts, I set out how, from the start of this blog, in 2007, I tracked the conditions that were leading up to the financial crisis of 2008. In fact, I had been writing, elsewhere, from the early 2000's, about those conditions, and as a County Councillor, I had made numerous speeches, from 1997 onwards,  setting out why the apparent affluence of the 1990's and early 2000's, was a dangerous illusion that was leading towards a significant crisis that would align appearance with reality. In those speeches, and posts, I set out why that crisis would not be a consequence of any fundamental economic weakness, because, in fact, global capitalism had entered a new phase of dynamic expansion, but would, actually, be a consequence of that very expansion, in a climate, where the illusion of affluence was built upon vast amounts of debt, and its equivalent, the expansion of astronomical asset price bubbles, which acted as collateral for that debt. 

The illusory affluence came from the delusion that living standards can rise on the back of partial liquidation of capital gains, or borrowing against those capital gains, rather than the creation of new value, and surplus value. It was further enhanced by the fact that the greatest delusion of affluence, was manifest in those economies that were relatively declining, in the US, UK, and parts of Europe, and whose consumption had been sustained and enhanced via increasing borrowing, and therefore, indebtedness, to the relatively rising economies in the world, particularly in China, and other parts of Asia, which had led to a growing bifurcation of the world economy. The illusory capital gains, arising from the hyper-inflation of asset prices, had initially derived from a 30 year secular decline in global interest rates, starting in 1982, which was driven by a sharp rise in the global rate of profit, and an increasing excess supply of loanable money-capital relative to the demand for it, but it had been sustained by the actions of central banks, which, after the financial crisis of 1987, had sought to keep those asset prices inflated, for basically two reasons. 

Firstly, the main form of private wealth, today, is the ownership of this fictitious capital, i.e. shares, bonds, property and their derivatives. It is from that ownership that the dominant section of the ruling class, the top 0.01%, derive their power and influence, and, as yields on that fictitious capital progressively declined, as the prices of those assets rose, it was primarily on the basis of its price, and the capital gains, that it measured its wealth, and income. Maintenance and expansion of those capital gains, became its main concern, over and above the increase of revenues, resulting from the expansion of real capital. The state as the representative of that ruling class sought to represent the interests of its dominant section, by ensuring that asset prices were kept inflated, and reflated, every time reality imposed itself via a financial crisis. 

Secondly, from the 1980's onwards, conservative social-democratic governments like that of Thatcher and Reagan, or Clinton and Blair, came to power. They had to recognise the reality of the existence of a social-democratic state, whose ultimate role is to create the structures of long-term planning and regulation required by large-scale socialised capitals, operating on an international scale, but they simultaneously sought to protect the interests of that top 0.01%, by keeping asset prices inflated, which meant keeping interest rates low, or, at least, keeping those interest rates that could be manipulated by the state low, and even, where necessary, manipulating those asset prices, by the state directly buying them up. The state itself saw capital gains, on inflated asset prices, as the means of apparently obtaining money for nothing. It was rather like the delusion purveyed by Dr. Price, and accepted by Pitt, as described by Marx in Capital, that it was possible for the government to make money by borrowing at simple interest, and lending at compound interest!.  If asset prices magically rise year after year, a portion of assets can be liquidated to provide the money required to pay for current consumption, or can be taxed by the government for that purpose. If privately held assets, such as houses, rise in price, the state can encourage homeowners to borrow more against that rising price, to cover their current consumption rather than demand higher wages, or they can be expected to use those capital gains to cover their care in old age, and so on. It is the fundamental fraud upon which every such Ponzi Scheme is based. 

These two objectives are inherently contradictory. Socialised capital, like all real capital, is forced, by its nature as capital, to accumulate. The role of social-democracy is to ensure that the conditions for that accumulation are created by the social-democratic state, and the development of large-scale planning and regulation that creates the macro-economic framework, increasingly at an international level, for that to happen. However, inflating asset prices involves diverting potential money-capital away from real investment, and into the purchase of financial assets and property. But, as the process of real capital accumulation accelerates, as happens in a period of long-wave upswing, it necessarily means that the demand for money-capital begins to exceed the supply of that money-capital. The thirty year secular decline in interest rates that had provided the foundation for rising asset prices, first comes to a halt, and then begins to be reversed. Global interest rates begin to rise, and as interest rates rise, asset prices, which are only capitalised values of revenue, begin to fall. The lower interest rates have reached, and the higher asset prices have been driven, the smaller the absolute rise in interest rates required to cause asset prices to crash, and the bigger the crash. The illusion that the capital gains were money for nothing, is shattered. 

This series of posts, therefore, utilise the posts I have written since 2007, to describe how both, the long wave upswing was creating a new dynamic era of growth, and expansion of capital, after 1999, but, how this was increasingly coming into conflict with the needs of the top 0.01%, and of states, to maintain asset prices at astronomically elevated levels, which required interest rates to be low, and money-capital diverted into speculation rather than investment in real capital. Each time conditions led to even modestly rising interest rates, such as in 1987, or 1994, or 2000, or 2007/8, the consequence was a sharp crash in asset prices, which after 1987, led to central banks intervening to reflate those asset prices, and governments intervening to the same effect, with fiscal measures to artificially inflate demand for houses etc. 

As I set out in my book, Marx and Engels' Theories of Crisis – Understanding The Coming Storm, 2008 was simply the latest, necessarily biggest, example of this underlying conflict, which breaks out in these repeated speculative crises, every time reality imposes itself, and interest rates begin to rise. In 2008, once again, central banks and states, did not resolve the underlying contradiction, but by slashing official interest rates, and using QE as a means of manipulating selected asset prices, such as government bonds, have simply deferred the actual resolution of those contradictions, and driven the contradiction to an even more acute level.

The Dow Jones is today more than 50% higher than it was at at the height of the 2007 bubble, and is nearly 4 times the level it was at in 2009, after it had crashed. Meanwhile, global debt has been blown up to even greater levels, whilst central bank balance sheets have exploded in size, due to QE, collateralised on assets whose real value is only a fraction of their current, manipulated market values. Mark Carney caused shock when he announced that a hard Brexit could cause house prices to fall by 35%, in three years, as interest rates rose, and that the Bank of England's stress tests had modelled that the banking system could cope with such a fall. However, in the much more benign conditions of 1990, UK house prices collapsed by 40% in a matter of months, not years, and in 2008, house prices in the US, Ireland, Spain and elsewhere dropped by 60%; they fell by 20% in the UK, before the government stepped in to slash mortgage rates, and introduce other measures to stop the collapse. In Japan, in the early 1990's, when the bubble burst, it led to property prices falling by 54%, and some property in prime Tokyo locations fell by 99%! 

In order to, restrain the inevitable unfolding of the long wave upswing, and the inevitable increase in global economic activity, which, in 2007, had caused global interest rates to rise, central banks and states have also combined measures of fiscal austerity – that economically, at a time when official interest rates are at 5,000 year lows, according to Andy Haldane, is totally indefensible, i.e. why would you not borrow to finance infrastructure investment and so on, when lenders are essentially giving money away for almost free, or in the case of some European short dated bonds, paying you to borrow from them! - with QE, so as to further divert available money and money-capital away from consumption, and capital accumulation, into further speculation in assets, so as to keep the prices of those assets inflated. This is the extent to which the interests of fictitious capital are being prioritised over the interests of real capital, and real economic expansion. 

Despite those attempts to restrain economic growth, and capital accumulation, via austerity, and the attempts via QE and fiscal measures to subsidise and encourage speculation, economic reality continues to impose itself. Without an expansion of real capital, profit growth is restrained, and as profit growth is restrained, so the growth of interest and rent is restrained, (interest/dividends and rent can only then increase at the expense of retained profit), and it is these revenues that are the basis of capitalised asset prices. As asset prices continued to rise, therefore, dividend and rental yields progressively declined, even as a greater proportion of profits was diverted to dividends, and landlords raised rents, itself causing multiple distortions, and a requirement for state subsidies, like the £9 billion a year of Housing Benefit the British state pumps into the pockets of landlords.  It meant that retained profits available for accumulation were thereby reduced. 

As I set out in my book, the 2008 financial crash has effectively, therefore, not ended, it has simply been assuaged by direct manipulation of asset prices, and attempts to hold back the development of the long wave expansion, so as to restrain the rise in interest rates, which will inevitably lead to a completion of the crash, now, on a much larger and more dramatic scale. So, this series of posts also sets utilises the posts I have set out in the period after 2008, describing why the attempts to hold back the long wave have caused the recovery to be less robust than it would otherwise have been, but why those attempts to hold back the long wave must fail, and why we see that failure already manifesting itself, as global growth begins to pick up, global employment continues to rise, and interest rates are once again rising meaning that the next financial crisis is imminent.

Boom and Bust