The Financial Crisis of 2008
Financial crises are closely correlated to conjunctures within the
long wave cycle – 1962, 1974, 1987, 2000. These crises are a function of changes in
the rate of interest. Falling rates of interest cause asset price bubbles to inflate, which burst. Rising rates of interest cause existing bubbles to burst, or cause a revaluation of asset prices in a downwards direction. But, on this basis, why then did the 2008 global financial crisis occur in 2008, which was not such a conjuncture? A simple answer would be that not all financial crises occur at these conjunctures. Interest rates can spike higher, within a secular downward trend for interest rates, and cause a flash crash of asset prices. Such crashes are usually quickly reversed, because the short-term causes of the spike in rates, reverses itself, and asset prices continue upwards, unless some other factor intervenes. But, this picture has been distorted since 1987, because of the intervention of central banks.
The price:earnings, or p/e, ratio for shares, as its name suggests, comprises two components, the price of the share, and the earnings, or
profit, per share. In other words, if a company makes £1 million of profit, and there are 1 million shares, the earnings per share is £1. If the price of a share is £10, then the p/e ratio is 10:1. So, the price of the share can be affected by one of two things. Either the earnings per share might change, or the p/e ratio might change. If profits rise, and the p/e ratio remains the same, the price of the share will rise proportionate to the rise in profit per share, and vice versa. If profit per share remains constant, but the p/e ratio rises, then the share price will rise proportionate to the change in the p/e ratio. In reality, the p/e ratio can change for a variety of reasons, but the underlying factor is the rate of interest. If the rate of interest falls, the
capitalised value of the earnings per share rises, causing the share price to rise, and vice versa. The same is true with bonds. If share prices did not rise, when interest rates fall, then the yield from shares would rise relative to bonds, causing speculators to sell bonds and buy shares, which would then cause share prices to rise. This is why, often, when there is bad economic news, share prices rise, because speculators anticipate that interest rates will fall.
In a period of a secular fall in interest rates, this encourages an expansion of this p/e multiple, and also causes bubbles to form. The larger the bubble, the bigger the crash, when any short-term spike in interest rates occurs, but, as the secular trend resumes, prices can again start to rise. In a period when there is a secular rise in interest rates, it is not a question of asset prices rising rapidly, or bubbles forming – as seen earlier, between 1965-1985, when interest rates are rising, asset prices fell in inflation adjusted terms – that causes financial crises, but the fact that the secular trend in rates is recognised as having reversed, so that all asset prices are re-rated accordingly.
As I pointed out in my book,
Marx and Engels' Theories of Crisis; comparing the 1847 financial crisis with the 2008 crisis, in 1847, the Bank of England intervened by suspending the 1844 Bank Act, which had created a credit crunch, which had led to the crisis. That financial crisis had had effects on the real economy too. According to Marx, it led to a 37% fall in UK economic activity. However, Marx and Engels point out that simply by suspending the Act, the credit crunch was ended, those hoarding cash stopped doing so, and it flowed into general circulation. Interest rates fell, and economic activity resumed. Indeed, the boom that had begun in 1843, quickly re-established itself in 1848. The manifestation of the crisis had come from the bubble in railway shares. But, once the financial crisis was over, and the economic boom resumed, it did not result in the bubble in asset prices resuming along with it.
Similarly, in 1929, when Wall Street crashed, the deflated bubbles did not reflate. It took until the 1950's for the Dow Jones to get back to its pre-crash level, even in nominal terms. After the crash, US property prices also crashed. The New York mansions of tycoons were sold off for ten cents on the Dollar, and these prices did not quickly recover either. What is common to these two events, and different in 2008, is that no additional
money is put into circulation. In 1847, the Bank Act is suspended, and liquidity, already in existence, is released, bringing the credit crunch to an end. In 1929, the Federal Reserve actually tightened monetary policy. The consequence is that the asset price bubbles are burst. Those that had speculated in these assets got their fingers very badly burned, but, as Marx points out, this is really just a matter of one group of speculators losing money to another group of speculators. It has no real relation to what is happening in the real economy. Indeed, as Engels described in relation to 1847, the very fact of the speculation in railway shares was diverting profits, in other companies, that could have been productively invested, into gambling in the stock market. When the bubble in share prices burst, the spur to the gambling was removed, so that funds could once again be used in the real economy, to finance real
capital accumulation.
1929 is the equivalent of the crash of 1987. Both come at the conjuncture between the end of the
crisis phase of the long wave, and start of the
stagnation phase. But, after 1929, following a sharp Depression, economic activity began to increase again from around 1933. This increase in economic activity is not rapid, because this is a period of stagnation within the long wave cycle. It is marked by
intensive accumulation within all of the old spheres of activity, and a slow accumulation of capital in new high
value, high profit spheres of the economy, such as motor cars, petrochemicals, domestic appliances, and so on. This creates the conditions for the new
upswing in 1949.
But, when asset prices crashed in 1987, the authorities panicked. Not surprisingly. Even compared to 1929, the amount of
fictitious capital had expanded massively, as the post-war boom saw an explosion of
socialised capital, and a corresponding rise in the quantity of shares and bonds issued to finance it. A much greater proportion of the ruling class now consisted of those who lived as coupon clippers living from the
interest on their bonds, and dividends on their shares, even than in 1929. For more than thirty years, they had been able to rely on a steady stream of
revenue, and the slow appreciation in the value of their assets. Moreover, the economic model, by the late 1980's, was one which now relied on these rising asset prices, as the means to provide the collateral for further borrowing by households, to sustain consumption. Households had just been convinced to buy privatisation shares, to borrow money to buy council houses, or to buy houses that were quickly rising in price, to put money into private pension schemes, and to invest in mutual funds of various kinds. Allowing all of these things to go down the pan would have put a large dent into the ideology of a share owning and property owning democracy that Thatcher and Reagan were promoting. In reality, 1987, like 1929, was a reaction to the blowing up of a bubble in the previous period. But, in 1987, the authorities responded by cutting official interest rates, and putting additional liquidity into the system.
It worked. The financial crisis came to an end, and as stated earlier, stock markets ended up 50% higher from their lows. But, this success only created a precedent which was followed on every subsequent occasion that this rapid upward trajectory seemed to be faltering. And, so, when central banks came to try to withdraw their monetary stimulus, as the Federal Reserve did in 1994, it immediately sparked a negative reaction in the bond markets, and usually, from there the stock markets too. In
1994, the bond market sell-off quickly resulted in a reversal of course. Further shocks to the system, such as the
Asian currency crisis of 1997, the
Rouble crisis of 1998, prompted further monetary stimulus, and, as seen earlier, monetary stimulus was injected even as a precaution to possible negative shocks, such as any shock resulting from Y2K.
All of this stimulus enhanced the blowing up of asset price bubbles that would, in any case, have been expected in such a period of stagnation within the long wave cycle. That is why the Dow Jones rises by 1300% between 1980-2000 compared to a 250% rise in US GDP over the same period. It is why, in the 1990's we see technology shares rise at an even more rapid rate, and why property prices go into a similar hyperinflation. Comparing 1929 with 1987, after 1929, asset prices remain deflated, but available
money-capital goes into real productive investment that lays the basis for the long wave postwar boom. After 1987, money is printed to reflate asset prices, and every time the resultant bubbles burst, more money is printed to reflate them. Its not that lots of
new value and
surplus value is not created after 1987, it is, and the
rate and mass of profit expands significantly, itself pushing interest rates downwards, which creates the normal, corresponding rise in asset prices, but, by not allowing bubbles in asset prices to burst as they occur, the central banks necessarily inflate asset prices artificially, and act increasingly to divert available money-capital into such speculation, and away from productive investment.
This is part of the answer to the question that Paul Mason posed in
Postcapitalism as to why the expansion of new industries, in the
fifth long wave cycle, has not been as great as might have been expected, given the high rates of profit that these new industries offer. The other reason,
as I described back in 2010, was that, the existence of very large oligopolies in the old industries, meant that there were frictions of capital leaving these old spheres to enter new ones, and these old conglomerates were able to survive low rates of profit on their productive activity, by living off their huge balance sheets, as well as leveraging those balance sheets to turn themselves into financial companies themselves. General Motors, for example, created GMAC as its financial arm which provided credit in a range of forms besides just car finance. It entered the mortgage market, in the US and Europe. Its UK mortgage arm was bought by Bradford and Bingley, in 2008, just before the latter itself itself had to be rescued, as the global financial crisis unfolded.
At the end of every period of stagnation, in the long wave cycle, there is a financial crisis as bubbles in asset prices, caused by falling interest rates are burst. Such a financial crisis was normal for 2000, therefore, as a new long wave uptrend began in 1999. But, the inflation of asset prices in 2000, was not the normal inflation of such bubbles, as seen in previous long wave cycles. It was one that had been significantly enhanced by repeated doses of liquidity to reflate burst bubbles over the previous 13 years. The response of authorities, in 2000, was to repeat the same prescription. This was similar to the way that, in the post-war period, the
social-democratic state had responded to every recession by using the traditional Keynesian prescription of fiscal stimulus. Again, that reflects the fact that, during that period, it was the interests of this
real socialised capital that dominated. In 2000, it was the interests of
fictitious capital that dominated, and the prescription was one that responded not to any problem in the real economy, but which only existed within the realm of fictitious capital. It was monetary stimulus to promote a
reflation of asset prices, even if such reflation acted against the best interests of the real economy, which it did.
After 2000, this injection of liquidity is enhanced, as central banks injected additional liquidity in response to the attacks of 9/11. As seen earlier, it had taken until 1996 for UK house prices to recover their 1990 levels, as interest rates had remained high during the first half of that period. But, after 1996, they once again soared, increasing 150% by 2007. The Dow Jones, hit new highs in 2006 and 2007, and apart from Japan, similar rises in stock markets could be seen across the globe, including now, in the new financial markets established in China.
The next conjuncture when such a financial crisis would be expected should have been around 2012-13. At that point, the long wave cycle turns from the
Spring Phase to the
Summer Phase. In this
Summer Phase, the period when
intensive accumulation of capital predominates comes to an end. All of the old technology has been mostly replaced with new technologies. Any additional capital accumulation then consists of adding more of this new technology, and adding additional
labour along with it, accordingly. That naturally means that the rise in social productivity slows. Moreover, the
relative surplus population that exists at the start of the
Spring Phase, has been used up. The ability to add women workers, and migrants has come to an end, overtime, increased in the previous period, has reached its limits, and, in fact, begins to decline as workers hourly
wages rise, so they feel less need to work additional overtime.
As hourly wages rise, and proportionally more labour is employed, as a result of less rapidly rising productivity, so the wage share rises. This means that the demand for wage goods rises, encouraging firms to expand production, to retain or increase their market share of this increased market. Firms are forced, by competition, to increase output, to meet this rising demand, whilst, simultaneously, their profits are squeezed, because
absolute surplus value cannot now be increased so rapidly, and rising wages start to squeeze
the rate of surplus value. They have proportionally less profit to finance their expansion from internal resources, and similarly less profits get thrown into the money markets to be loaned out at interest. The demand for money-capital rises, relative to its supply, and consequently interest rates rise, and asset prices decline, marked by an initial financial crash as this change in conditions manifests itself.
But, this crash did not happen in 2012-13. It happened in 2008, five years early. Why? Quite simply because all of the liquidity injections of the previous period had created artificial conditions. Asset prices were already at astronomical levels in 2000. They crashed, but instead of those bubbles staying burst, the authorities blew them up again, sending prices to even higher levels. This created a hyper-sensitivity to any changes which might then cause these bubbles to burst. The new long wave upswing that began in 1999 was very powerful, as I have set out previously.
In 2007, I pointed out that the global economy was booming, inflation was rising, and so were interest rates.
As I pointed out there, Bridgewater Associates had noted,
“that for the first time since 1969, there is not one single economy in the world in recession. The IMF has just increased its forecast for world economic growth yet again. China where the Government has been trying to slow economic growth for fear of overheating has just put in economic growth yet again of over 10%, but that is put in the shade by the world’s fastest growing economies. Azerbaijan is forecast to grow by 26% this year, as is Angola as a result of the current high price of oil, Mauritania which does not have oil, but has gold and other raw materials is forecast to grow by 18%.”
It can be seen in the increase in global trade etc.
Between 1980 and 1990 global trade rose from around $4,000 billion to around $6,000 billion, remaining flat until around 1994. Between 1994 and 2000 it rose from around $6,000 billion to $12,000 billion. But, the sharpest rise was most notably after 2002 where it rose from around $12,000 billion to around $28,000 billion by 2007. (Source: WTO Thomson Datastream)
25% of all goods and services produced in Man's entire history, were produced in the first decade of the 21st century. And, along with this powerful global economic boom went growth of the working-class, which became the largest class on the planet for the first time. The global working-class doubled between 1980-2010, and rose by 30% in the first decade of the 21st century alone. It led to rapidly rising wages and living standards for millions of workers in developing economies rescued from the idiocy of rural life, and with a consequent effect on the demand for food and other wage goods. The diet in China improved significantly.
In 2005, Chinese consumption of meat was 2.4 times what it was in 1990, milk 3 times, fruit 3.5 times, vegetables 2.9 times, fish 2.3 times, whilst its consumption of cereals, mostly rice, fell by 20%. The large rise in demand from China, and other developing economies, was part of the reason for the spike in global food prices, at the end of 2007 and beginning of 2008. Demand for food rose so sharply that shortages began to appear, which, along with the price spikes, caused riots in a number of countries in 2008.
The increasing production of China, and other rapidly growing economies, also sucked in larger and larger quantities of raw materials, as well as food. Global GDP rose from around $41 trillion in 2000, to nearly $72 trillion in 2012. Between 2002 and 2010, global
fixed capital formation rose from $7 trillion to $14 trillion. From 1999 on, commodity markets turned sharply upwards, as demand for all raw materials, and foodstuff increased sharply as the new long wave boom began. It saw steady increases in the prices of copper, oil, corn and almost every other commodity, as global demand, fuelled by rising economic activity in China, and other BRIC economies, as well as the rising demand of millions of new consumers, in those economies, rose sharply.
And, this was now a global economic boom, in which economies on every continent now participated, unlike the previous boom from 1949, which was focused on the US, Western Europe and Japan. The consequence was that wages in certain sectors began to rise quickly. In June 2008, I noted that this was already being seen, and
conservative social-democratic politicians, like Alistair darling, were concerned about it, as
oil tanker drivers quickly won a 14% pay rise. German workers were also winning similarly large pay rises at the time.
As a consequence, this caused market rates of interest to begin to rise, and this rise in market rates of interest, has a dramatic effect. It means that financial models like that of
Northern Rock, based on very tight margins between short-term borrowing costs, and longer term mortgage rates, blow up. Lenders start to go bust, which means that all of those finance houses that have provided this short-term lending become reluctant to lend, as they do not know what counter-party risk they are taking on.
Northern Rock goes bust, and a whole series of US financial houses, and mortgage providers follow suit, particularly those involved in providing sub-prime mortgages. This quickly extends to those financial institutions that have bought derivative products based upon these mortgages, i.e. mortgage backed securities, and then extends to those financial institutions that provided insurance to the former financial institutions against the credit risk they were taking on going bad, i.e. the monoline insurers.
The crisis breaks out in the housing/mortgage sector first, only because the property market had become the symbol of the financial speculation in general, the mass market for that speculation, and the foundation upon which the associated borrowing to finance household debt collateralised upon fictional, highly inflated property prices had itself been based. Even without the sub-prime crisis,
the financial crisis itself would have happened eventually, because of the astronomical bubble in financial markets in total, which had to burst, as soon as increased economic activity, and demand for capital caused interest rates to rise.
2008 occurs five years early because of the continual artificial reflation of burst bubbles, which creates a level of hyper-sensitivity in financial markets to interest rate rises. Interest rates fall to such low absolute levels that even the tiniest absolute rise in rates represents a large proportional rise, and leads to a market sell-off. And, this same solution of printing even more money has been applied as a solution to the financial crisis of 2008. It means that we now have the ridiculous spectacle in which lenders are paying to lend money to borrowers, i.e. we have negative rates of interest!
By the same token that this brings forward the financial crisis by five years, the measures undertaken to resolve it have dampened the normal cyclical pattern. 2008 did not occur five years early because the conjunctural shift from the
Spring to
Summer Phase of the long wave came early, but because
the Greenspan Put, and continual reflation of bubbles since 1987 had created a hypersensitivity to any upward move in interest rates, and interest rates themselves had become so low that any rise, appeared as a large relative rise, likely to spark off a crash. In 2014, I still expected the normal conjunctural shift to occur, but did not appreciate the extent to which the monetary response to 2008, combined with the imposition of
austerity to dampen economic activity, thereby dampened the nature of the
Spring Phase of the Cycle, and by dampening it,
extended it. If 2008 came five years early, because of these factors, it is not unreasonable to think that this dampening and extending effect of the combination of QE, draining money and money-capital from the real economy, on an unprecedented scale, resulting in around
$15 trillion of global bonds now having negative yields, with austerity, reducing aggregate demand in major economies, particularly its largest economy, the EU, as well as Britain, would push out the conjuncture between the
Spring Phase and
Summer Phase, by at least five years too.
The extent of this monetary stimulus, and the effect of draining money-capital from the real economy into speculation is shown by the fact that, the Dow Jones that fell to around 7,500 in 2008, now stands at around 26,000, and that is slightly down from its peak. In other words, in ten years, financial markets have again more or less quadrupled. None of this can change the underlying laws of the long wave cycle, however, The fact remains that employment continues to grow, and productivity continues to slow. The demand for wage goods rises simply on the back of a growing workforce, whether or not hourly wages rise, and this increased demand for wage goods means the demand for labour again rises, particularly as 80% of the economy is now covered by service industry, which is relatively labour intensive. The unemployment rate is down to around 4%, which is still high compared to the 1960's, when it was down to between 1-2%. But, it is low enough that it has started to create labour shortages in specific spheres, and to cause wages to rise.
That started to manifest in 2018, and again interest rates began to rise. The rise in interest rates in 2018, caused US stock markets to sell off by around 20%. But, as they did so, another political factor intervened. In Europe, Brexit created uncertainty that increased the closer the March 29th 2019 deadline date approached. Alongside it, Trump began a global trade war. In addition to sanctions on Russia, Iran, Venezuela and elsewhere, he imposed significant tariffs on imports from China and the EU. China and the EU responded in like manner. This trade war has ramped up in the intervening period, causing global trade and investment to slow accordingly. The result is a corresponding fall in interest rates, and rise in asset prices. However, this is simply a short-term disturbance, even if a significant one, for now. Despite these obstructions, global growth has continued. Trade tends to readjust, and find alternative routes. Brexit, though it might seem never ending, is likely to have a resolution one way or another, and, when it does, it is likely to unlock a series of investment projects, whether they occur in the UK or in Europe. The process that the trade war interrupted in 2018, is likely then to continue. The conjuncture between the Spring and Summer Phase of the long wave will occur, the secular decline in interest rates will be reversed, and asset prices will fall. Rather like predicting the next major earthquake, it may not be possible to say exactly when it will occur, but we know it will occur, because the movement of tectonic plates makes it inevitable.
This is the material foundation upon which the era of conservative social democracy founders. The rise in asset prices, as the delusional basis of rising wealth, which existed from the 1980's until 2008, has hit its limits. The reflation of the 2008 bubble, and beyond has been possible only at the expense of the most grotesque distortions of the monetary system, reflected in that $15 trillions of negative yielding debt, which requires that lenders pay borrowers to take their money from them! It cannot last, and that is why the conditions for conservative social-democracy, what has euphemistically been called the political centre, no longer exist. That is what brings us to the condition now, in which the material foundation for conservative social-democracy has been destroyed. The fraction of the ruling class that rests upon its ownership of fictitious capital, is in any case too numerically weak to be able to rule politically on its own, without the support of either the working-class, or the plethora of small capitalists.
But, the interests of the latter are hostile to those of the owners of fictitious capital, which itself rests upon the fortunes of large-scale socialised capital. This is the division that exists in the US between Trump and the political establishment, particularly the Democrats, and in Britain is represented by Brexit. But, the dominant section of the ruling class, whilst needing to defeat the forces of reaction represented by Trump, and by the Brexiteers, is also wary of unleashing the power of the working-class. In the US, they are keen to get Clinton into office rather than Sanders; in Britain, they baulk at the progressive social-democrat Corbyn. They hanker after a return of conservative social-democracy, but it is not possible as a solution from the right or from the left. From the right, the forces of reaction are in the ascendancy, from the left, the forces of progressive social-democracy.
The dominant section of the ruling class must steer a middle course, but with no effective political party to represent it. Its not that centrist voters have no party to vote for, but that centrist voters themselves are now in a small minority, society having divided into
two great class camps, one moving in the direction of
reaction, the other in the direction of
progressive social-democracy and
socialism. In such situations where such a division exists, and a stalemate arises, the state itself rises above society. It is the conditions in which
Bonapartism arises.
In the final part of this series, I will examine these conditions, and the way this Bonapartism has taken the form of the rule of ruling class judges, under the guise of The Rule of Law.
