THE AMERICAN PATIENT

Geo-politics – Financial crisis. The US is much too indebted to save the markets. The prescription: globalize the losses

By Elmar Altvater

[This article published in: Freitag 40, 10/3/2008 is translated from the German on the World Wide Web, www.freitag.de/2008/40/08400901.php. Elmar Altvater is an emeritus professor of political economy at the Free University of Berlin.]

The wonderful time of May 2003 when the US president with a proud swollen breast told the nation “mission accomplished” is over. At the end of his term in office, one sees on the television screen a Bush smitten with remorse, Treasury secretary Paulson on his knees and a headless squad of leaders. The mission of the American empire was fulfilled in 2008. The decline and fall has many names: Bush, Guantanamo, Falludsha, Abu Ghraib, Fannie and Freddie, AIG and Lehman Brothers, in short the century crisis. The power complex of the White House, the Texan oil industry and Wall Street crumbles. The world changes. Geo-political power is rediscovered.

The neo-conservative Bush entourage has always scorned reflective persons and unscrupulously expelled persons of action. With their power, the neocons can correct mistakes afterwards and let others take the rap for the costly consequences. However they must now learn what was (and is) the power base of US hegemony in the globalized world: “It’s the economy, stupid, not only the undeniably powerful military machine.

One must deal carefully with military power. Bush failed in this. He leaves behind a human tragedy and a political disaster in Iraq and Afghanistan. The constitutional state and a legal international order were buried in Guantanamo. Azerbaschen has already drawn the lessons from the incapacity of the US hegemonial power to protect compliant junior partners like Georgia. Its cool relations with Russia are warming up. “Anti-Americanism” spreads everywhere in the world. Many US citizens share a deep aversion against the brute neo-conservative policy of the Bush people.

The neocons grandiosely brought the economy into the most serious financial crisis in 100 years, to a deep and wide abyss. At first, it seemed they had found a wonder-weapon against the stagnation tendencies of monopoly capital. Monopoly capital is the title of an influential book by Paul Baran and Paul Sweezy from the 1960s. Financial markets were deregulated to catapult private profits to astronomical heights. This began in the 1970s when the exchange rates were released and speculation on price fluctuations was possible. Prices were no longer set politically by central banks, governments or the IMF but were “left” to the markets – literally private banks, funds, insurances and monetary divisions of transnational corporations.

Margaret Thatcher triumphantly inaugurated the neoliberal age with the “big bang” of liberalization of the finance markets. From that time, the formation of interests and profits on financial investments devolved to private corporations. Governments and central banks lost “interest sovereignty” which is so important for an independent jobs-oriented economic policy.

NO MENTAL DEFECT

On liberalized and increasingly globalized financial markets, banks and funds must trump one another in competition to entice or keep a rein on investors. They unscrupulously force up yields realizable in financial investments compared to real profits. Competition requires this. The deplored greed of managers that is spreading had systemic causes and was not merely a mental defect. Capitalism changed into “finance-driven” capitalism. The profit rate for industrial capital fell in the past decades as all empirical studies show while the profit on financial investments was high. Whoever realized less than 20 percent on his own capital from investments was regarded as a loser until the outbreak of the current crisis. In 2008, profits on average fell from 20.7 percent (2007) to 3.3 percent (first half of 2008), according to data of the German Bundesbank.

Financial investments are claims that must be served. The higher the profits and the more extensive the demands, the more profits must flow out of the globally produced social product to the financial sector.

Wall Street or – as some say today – “Fraud Street” lies at its center. Here new investment strategies were developed, complex structured securities invented (like conduits) and institutions unknown up to then founded to draw new customers into their financial spell and guide the highest possible profits into the financial sector with new methods. From where? From the real economy. The surpluses from the real economy do not match the high profits and therefore do not satisfy the “greed.”

No new assets (as in grandma’s sewing machine capitalism) are created with the investments financed from the banking sector. Rather assets produced with the help of structured financial products are redistributed. Thus “accumulation through expropriation” (Rosa Luxemburg) occurred as in the early industrial, colonial epoch.

Sometime or other, the substance is no longer enough to satisfy the ever-greater claims on the global financial markets. New investment fields are always sought and “plowed” into ever new instruments like “credit default swaps” (CDS) whose market is as mammoth as the whole global social product, $62 trillion.

BEYOND LAW AND ORDER

No one gladly and voluntarily endures loss in value, especially when more than “peanuts” is involved. Thus investors and neo-conservative governments now use state power to socialize losses. Even fundamentalist market worshippers discover a remnant of state socialism in their interiors.

No one knows exactly the imminent downward value corrections. The private clientele of owners of financial assets will probably be “bailed out” of the mess by the governments in Washington, London or Berlin – to the burden of those without financial assets.

Eight years ago the new economy crisis was overcome after writing off $1 trillion. Similar write-offs will occur in the present crash. The US state is much more heavily indebted than eight years ago. Any relief package with hundreds of billions of dollars entails new debts. The obligations of the US are still small measured by the European Maastricht criteria but this could change quickly. Washington could be paralyzed under the debt yoke like Japan in the early 1990s when the state had to bail out the Japanese banking system.

Secondly, many countries from the four corners of the earth are entangled in the crisis today and impacted by the consequences of the crisis. After decades of market idolization, the US has rediscovered political power and now intervenes in a regulatory way in the “free play of market forces.” The costs of the devaluation of capital should saddle American taxpayers and the rest of the world. This even infuriated the servile German minister of finance Steinbruck who pretends to be a populist in the expensive revitalization of German banks. He even admits Marx’ crisis theory was not entirely wrong.

At first, Treasury secretary Paulson wanted the $700 billion without any congressional or judicial control – following only the “logic of money” and power that he obviously internalized. Transferring the costs of the bailout package to taxpaying US citizens – without any protest of their representatives, should solve the crisis. This bank revitalization beyond law and order could be like a financial Guantanamo. But the Congress first gutted the draft of the ex-Goldman-Sachs manager Paulson whom Bush praises as his “financial general.” The representatives feared the anger of their voters. They wanted to spare the taxpayers as much as possible. That is understandable four weeks before the presidential election. Who will then bear the losses of the speculation bonanza? These losses could only be externalized or shifted to foreign countries by devaluing the US dollar. This will probably happen in the dreadful transition time to the assumption of office of the new president in January 2009, not before the election on November 4. Politics in time of financial crisis is geo-politics.

A dollar devaluation would partly devalue the considerable dollar assets in Asia, Europe, the Middle East, Russia and Latin America. Consequently governments with massive dollar assets will press for exchange of assets so their dollar reserves threatened with a loss of value can be transferred into real assets. The US prevented this when China sought to acquire the oil company Unocal and when the Dubai Port Authority bid for the New York and Miami harbors. This regimentation may not hold any more. China will do everything to secure its dollar reserves amounting to $1 trillion.

WHAT WILL FOLLOW THIS DEVASTATING CRISIS?

In its core, the grave crisis is a mechanism of the gigantic devaluation of capital, an enormous global potlatch so to speak as celebrated by the Indians or First Nations people in the Canadian Pacific for destruction of assets. They are determined that no one should become too rich and split the community with private wealth. Life continues after the potlatch. However the financial crisis is not a conscious social process. This crisis sweeps over Wall Street and its side streets all over the world as a “world market storm” (Marx).

What will follow this devastating crisis? The real estate boom with sub-prime guarantees and wildly adventurous financial products followed the flop with the New Economy in 2000. Fabulous businesses were made with these financial products for years – until the greatest economic collapse in 100 years. There is still fallow capital – despite the crisis. This capital leaps to investments that bring profits today and in the future. What are these investments?

Raw materials, oil, gas and bio-fuels are the first choices. Their prices may rise since they become scarce and the demand is great. Emission-certificates according to the Kyoto-protocol promise good profits or privatized public goods like the train and the military-industrial- and outer space complex. Investors have seen this for a long time. No crisis lasts forever. But the time of dream-profits of more than 20 percent may be over for a long while.