The financial crisis: A socialist perspective

The financial crisis: A socialist perspective

By Leo Panitch and Sam Gindin

Markets, states and US empire

The fundamental relationship between capitalist states and financial markets cannot be understood in terms of how much or little regulation the former puts upon the latter. It needs to be understood in terms of the guarantee the state provides to property, above all in the form of the promise not to default on its bonds – which are themselves the foundation of financial markets' role in capital accumulation. But not all states are equally able, or trusted as willing (especially since the Russian Revolution), to honour this guarantee. The US state emerged in the 20th century as an entirely new kind of imperial state precisely because it took utmost responsibility for honouring this guarantee itself, while promoting a world order of independent nation states which the new empire would expect to behave as capitalist states. Since World War Two, the US state has been not just the dominant state in the capitalist world but the state responsible for overseeing the expansion of capitalism to its current global dimensions and for organising the management of its economic contradictions. It has done this not through the displacement but through the penetration and integration of other states. This included their internationalisation in the sense of their cooperation in taking responsibility for global accumulation within their borders and their cooperation in setting the international rules for trade and investment.

It was the credibility of the US state's guarantee to property which ensured that, even amidst the Great Depression and business hostility to the New Deal's union and welfare reforms, private funds were readily available as loans to all the new public agencies created in that era. This was also why whatever liquid foreign funds that could escape the capital controls of other states in that decade made their way to New York, and so much of the world's gold filled the vaults of Fort Knox. And it is this which helps explain why it fell to the US state to take responsibility for making international capitalism viable again after 1945, with the fixed exchange rate for its dollar established at Bretton Woods providing the sole global currency intermediary for gold. When it proved by the 1960s that those who held US dollar would have to suffer a devaluation of their funds through inflation, the fiction of a continuing gold standard was abandoned. The world's financial system was now explicitly based on the dollar as US-made 'fiat money', backed by an iron clad guarantee against default of US Treasury bonds which were now treated as 'good as gold'. Today's global financial order has been founded on this; and this is why US Treasury bonds are the fundamental basis from which calculations of value of all forms of financial instruments begin.

To be sure, the end of fixed exchange rates and a dollar nominally tied to gold now meant that it had to be accepted internationally that the returns to those who held US assets would reflect the fluctuating value of US dollars in currency markets. But the commitment by the Federal Reserve and Treasury to an anti-inflation priority via the founding act of neoliberalism – the 'Volcker shock' of 1979 – assuaged that problem. (This 'defining-moment' of US state intervention, like the current one, came in the run-up to a presidential election – i.e. before Reagan's election, and with bipartisan support and the support of industrial and well as financial capital in the US and abroad.) As the US state took the lead, by its example and its pressure on other states around the world, to give priority to low inflation as a much stronger and ongoing commitment than before, this bolstered finance capital's confidence in the substantive value of lending; and after the initial astronomical interest rates produced by the Volcker shock, this soon made an era of low interest rates possible. Throughout the neoliberal era, the enormous demand for US bonds and the low interest paid on them has rested on this foundation. This was reinforced by the defeat of US trade unionism; by the intense competition in financial markets domestically and internationally; by financial capital's pressures on firms to lower costs through restructuring if they are to justify more capital investment; by the reallocation of capital across sectors and especially the provision of venture capital to support new technologies in new leading sectors of capital accumulation; and by the 'Americanisation of finance' in other states and the consequent access this provided the US state to global savings.

Deregulation was more a consequence than the main cause of the intense competition in financial markets and its attendant effects. By 1990, this competition had already led to banks scheming to escape the reserve requirements of the Basel bank regulations by creating 'Structured Investment Vehicles' to hold these and other risky derivative assets. It also led to the increased blurring of the lines between commercial and investment banking, insurance and real estate in the FIRE (finance, insurane, real estate) sector of the US economy. Competition in the financial sector fostered all kinds of innovations in financial instruments which allowed for high leveraging of the funds that could be accessed via low interest rates. This meant that there was an explosion in the effective money supply (this was highly ironic in terms of the monetarist theories that are usually thought to have founded neoliberalism). The competition to purchase assets with these funds replaced price inflation with the asset inflation that characterised the whole era. This was reinforced by the US state's readiness to throw further liquidity into the financial system whenever a specific asset bubble burst (while imposing austerity on economies in the South as the condition for the liquidity the IMF and World Bank provided to their financial markets at moments of crisis). All this was central to the uneven and often chaotic making of global capitalism over the past quarter century, to the crises that have punctuated it, and to the active role of the US state in containing them.

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