THE GREAT CREDIT CRASH THE GREAT CREDIT CRASH EDITED BY MARTIJN KONINGS First published by Verso 2010 © the collection Verso 2010 © individual contributions the contributors All rights reserved The moral rights of the authors have been asserted 1 3 5 7 9 10 8 6 4 2 Verso UK: 6 Meard Street, London W1F 0EG US: 20 Jay Street, Suite 1010, Brooklyn, NY 11201 www.versobooks.com Verso is the imprint of New Left Books ISBN-13: 978-1-84467-433-6 (hbk) ISBN-13: 978-1-84467-431-2 (pbk) British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress Typeset in Sabon by Hewer Text UK Ltd, Edinburgh Printed in the US by Maple Vail CONTENTS Acknowledgements vii Introduction ix Origins and Causes 1. Martijn Konings Rethinking Neoliberalism and the Crisis: Beyond the Re-regulation Agenda 3 2. James Livingston Their Great Depression and Ours 31 3. Peter Gowan The Crisis in the Heartland 47 4. Gary A. Dymski From Financial Exploitation to Global Banking Instability: Two Overlooked Roots of the Subprime Crisis 72 5. Johnna Montgomerie Neoliberalism and the Making of Subprime Borrowers 103 6. Thomas Ferguson and Robert Johnson Too Big To Bail: The “Paulson Put,” US Presidential Politics, and the Global Financial Meltdown 119 vi CONTENTS Global Dimensions 7. Herman Schwartz Structured Finance for Financed Structures: American Economic Power Before and After the Global Financial Crisis 173 8. Anastasia Nesvetailova and Ronen Palan A Very North Atlantic Credit Crunch: Geopolitical Implications of the Global Liquidity Crisis 198 9. Susanne Soederberg The Politics of Smoke and Mirrors: The G-20 London Summit and the Restoration of Neoliberal Development 222 10. Michael Hudson and Jeffrey Sommers How Neoliberals Bankrupted “New Europe”: Latvia in the Global Credit Crisis 244 11. Henry Veltmeyer The Global Crisis and Latin America 264 12. Walden Bello Will China Save the World from Depression? 276 13. William I. Robinson The Crisis of Global Capitalism: Cyclical, Structural, or Systemic? 289 Politics 14. Steve Fraser The Great Silence: Their Gilded Age and Ours 313 15. Stanley Aronowitz Facing the Economic Crisis 326 16. William Greider Dismantling the Temple 343 17. Dick Bryan, Michael Rafferty and Scott MacWilliam The Global Financial Crisis: Foreclosing or Leveraging Labor’s Future? 353 18. Leo Panitch and Sam Gindin The Current Crisis: A Socialist Perspective 370 Contributors 395 ACKNOWLEDGEMENTS I would like to thank Gavin Fridell for helpful discussions; David Primrose for excellent research assistance; and Bhavani for letting me edit this book as we were relocating halfway across the globe. Several chapters in this book draw on previously published material: Martijn Konings, “Rethinking Neoliberalism and the Subprime Crisis: Beyond the Re-regulation Agenda,” Competition and Change, 2009, 13(2) (Maney Publishing); James Livingston, “Their Great Depression and Ours,” Challenge, 2009, 52(3) (M. E. Sharpe); Peter Gowan, “Crisis in the Heartland,” New Left Review, 2009, II/55; Thomas Ferguson and Robert Johnson, “Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown: Part I: From Shadow Financial System to Shadow Bailout,” International Journal of Political Economy, 2009, 38(1), and “Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown: Part II: Fatal Reversal—Single Payer and Back,” International Journal of Political Economy, 2009, 38(2) (M. E. Sharpe); Anastasia Nesvetailova and Ronen Palan, “A Very North Atlantic Credit Crunch: Geopolitical Implications of the Crisis,” International Affairs, 2008, 62(1); William Greider, “Dismantling the Temple,” The Nation, 15 July 2009; Leo Panitch and Sam Gindin, “The Current Crisis: A Socialist Perspective,” Socialist Project e-bulletin, No. 142, and Studies in Political Economy, 2009, 83 (Spring). Permission is gratefully acknowledged in all these cases. viii ACKNOWLEDGEMENTS Sadly, as this volume was being prepared, Peter Gowan passed away. Peter was a Professor of International Relations at London Metropolitan University and a longtime contributor to as well as editorial board member of New Left Review. His book The Global Gamble, which appeared in 1999, stands as one of the most profound analyses of American power that we have. But Peter was known for being more than just an incisive political observer. In the words of his close friend Tariq Ali, he was “the most generous and steadfast of comrades. Peter was a socialist intellectual of the highest calibre, combining enormous energy and independence of mind with a truly collective spirit.” The piece that is printed in this volume presents a uniquely penetrating analysis of the fi nancial crisis and demonstrates how much Peter's insight will be missed in the years to come. INTRODUCTION The Great Credit Crash will go into history as the most serious crisis of global capitalism since the Crash of 1929 and the Great Depression of the 1930s. Even if the crisis has bottomed out— which at the time of writing is far from clear—it has already fundamentally changed the contours of American and global capitalism. Moreover, it will continue to wreak havoc on the lives of people around the globe long after the pundits declare the world economy to have emerged from its protracted slump. They have lost houses, jobs and pension savings; they have seen their opportunities for advancement dwindle and their children’s life chances reduced to levels unknown for more than half a century. It took some time for the full dimensions of the Credit Crash to become apparent. For the fi rst six months, most observers were not quite sure what they were dealing with. While there was widespread agreement that a particularly profi table phase of fi nancial growth had come to an end, most comparisons were with the stock market crash of 1987 and the dot-com meltdown at the turn of the century—events whose effects, while dramatic, did not reverberate so far as to cause a wholesale freezing of the fi nancial system. Metaphors used to portray the situation were mostly pitched at the psychological level, emphasizing the lack of confi dence and collective anxiety that had gripped markets as the major obstacles to recovery. During the fi rst half of 2008, the crisis began to take on entirely new dimensions. It gradually appeared that, rather than merely having to weather a period of illiquid markets, some of the world’s x INTRODUCTION most venerable fi nancial institutions were heading for full-blown insolvency. Many commentators began to consider the possibility that we were witnessing not a relatively localized fi nancial meltdown, but the onset of a drawn-out economic depression that could well end up threatening the very foundations of capitalist order. Financial journalists increasingly resorted to the language of natural catastrophe (with “perfect storm,” “tsunami” and “hurricane” featuring prominently), as if to suggest that the forces of disintegration had begun to overpower society’s control over economic life. The Great Credit Crash—a.k.a. the Credit Crunch, the Subprime Crisis or the Global Financial Crisis—was now born, and the search for answers and solutions began. Comparisons with the Great Depression of the 1930s became commonplace. Indeed, the experience of early twentieth-century capitalism has emerged as a key point of reference in public debate, serving not only as a source of causal analogies but equally as a mirror in which to examine and diagnose the moral and social warts of our age. But if public debate was now forced to go beyond the technicalities of fi nancial markets to encompass the social, political and moral aspects of what had gone wrong, the dominant assessments of our subprime predicament have remained rather superfi cial. At the heart of these discourses is the notion that an era of political irresponsibility has come to an end: the Crisis is widely viewed as representing the breakdown of an economic model characterized by the abdication of public control over fi nancial life—i.e. the regulatory indifference that allowed brokers to foist expensive mortgages on underprivileged Americans and investment managers to recklessly pour massive amounts of “other people’s money” into markets for lemons. We are all Keynesians again, aware of the need for government to regulate the unruly dynamics of free markets—so is the message. After three decades in which the mantra of “less state, more market” reigned supreme, advocating for the proper regulation of economic activities has become respectable again. The shallowness of this new Keynesian discourse should have been apparent from the very ease with which an ideological climate shaped so profoundly by decades of neoliberal hegemony gave way to a new common sense concerning the benefi ts of prudent regulation. Almost overnight, heterodox economists such as Joseph Stiglitz and Paul Krugman, who for years had been portrayed as brilliant theoreticians who should be kept [...]... logic was evident in the aftermath of the Dot-com Crash at the start of the twenty-first century When companies such as Enron and WorldCom were revealed to have engaged in elaborate fraud schemes, the public outcry in the US was enormous Yet the resulting legislation (the Sarbanes-Oxley Act) did little more than provide the American public with a minimal degree of protection from the most flagrant abuses... the 1970s and so enhanced rather than reduced state capacity.39 This was, of course, not the assessment that emerged in the 1980s themselves The instability that followed the financial explosion (the debt crisis, the failure of several major banks, the Savings and Loan Crisis, and ultimately the stock market crash of 1987) all served to instill widespread doubt concerning the fundamental health of the. .. to the notion that the lives and capacities of elites in fact were adequately covered in official history, as if their lives resembled their self-rendered versions But, of course, hegemonic narratives obscure as much about their heroes and their authors as about the downtrodden, the grey masses or the altogether unacknowledged Thus, this essay explores the possibility that we might be misreading the. .. recognized that the implementation of neoliberal policies has not involved a straightforward retreat of the state but is rather a complex process of re-regulation; but what persists is the notion that the significance of the neoliberal era resides in the decline of political capacities vis-à-vis the expansion of markets It is the claim of this essay that financial life does not correspond to the model of... the basis for a steady expansion of mortgage and consumer credit that was a significant factor in the expansionary financial dynamics before the Crash and the Depression The New Deal found considerable support among business interests that had grown deeply hostile to the way the Republican 13 G Esping-Andersen, The Three Worlds of Welfare Capitalism, Princeton: Princeton University Press, 1990 14 M Konings, ... the American financial system – the highly securitized nature of credit relations – and gave it public backing The most prominent among these was Fannie Mae, which laid the foundation for the modern American mortgage market By buying, pooling and standardizing mortgage loans, they enhanced the liquidity of banks’ asset portfolios, increasing not only their ability to extend new mortgages but their credit- creating... permitted the securities industry to regulate itself, and a Treasury keen on monetizing the public debts incurred during the New Deal and the war.22 Total private debt between 1949 and 1954 increased nearly three times as fast as during the five-year period preceding the Crash. 23 But the social integration of American workers and the improvement of their material conditions did not by any means come at the. .. on the conditions and parameters of financial growth and reaped the bulk of the benefits Indeed, the years from 1949 through the late 1960s became the twentieth century’s second great wealth explosion,”24 a development that compensated sufficiently for steadily rising manufacturing wages as to considerably blunt the egalitarian impact of the post-war order, particularly when compared to the 21 M Konings. .. of socio-economic conditions in the socialdemocratic welfare states of Northern Europe Post-Fordist Reconfigurations From the late 1950s, various developments combined to put a great deal of pressure on the New Deal order The economic revival of Europe intensified competition in the manufacturing sector and put a squeeze on profitability,25 while the growth of cross-border financial flows added to the deterioration... although these processes of commercialization and hegemonic integration had not been set in motion through the intentional machinations of American elites, they were nevertheless the ones who benefited from them and often promoted them But, while these trends were instrumental in neutralizing the more serious challenges to American capitalism, they generated their own contradictions For Lasch, these were . 1010, Brooklyn, NY 11201 www.versobooks.com Verso is the imprint of New Left Books ISBN-13: 97 8-1 -8 446 7-4 3 3-6 (hbk) ISBN-13: 97 8-1 -8 446 7-4 3 1-2 (pbk) British Library Cataloguing in Publication Data A. THE GREAT CREDIT CRASH THE GREAT CREDIT CRASH EDITED BY MARTIJN KONINGS First published by Verso 2010 © the collection Verso 2010 © individual contributions the contributors All. INTRODUCTION The Great Credit Crash will go into history as the most serious crisis of global capitalism since the Crash of 1929 and the Great Depression of the 1930s. Even if the crisis has