A perspective on the financial crisis

By Chase Mechanick

That we are in the throes of one of the most serious economic depressions in decades is no longer in serious dispute. Even the free-market ideologues who apologized for the peril that an untamed financial structure necessarily introduces are now coming to terms with their fatal error. The crisis finally marks the induction of laissez-faire finance (and, more generally, the neoliberal brand of capitalism) into the list of "tried-and-failed" theories of social organization. Like Soviet (big-C) Communism, or "Fordist" or Keynesian economics, it has followed a familiar historical arc. It was created in the midst of a crisis of faith in the existing social order, baptized by profound social transformation, adopted as policy by many cockeyed national governments, and then finally discredited by a disaster of its own making. What the tragedy of Stalin was for Communism, or the inability of the national governments to adapt to the mammoth scale of capitalist rapacity was for Fordism, the current financial eruption is for the idea of neoliberalism. 

Capitalism is plagued by an endemic propensity to crisis. The specific mechanisms that precipitated the current collapse - Mortgage-Backed Securities (MBS), Collateralized Debt Obligations (CDO), credit default swaps and other complex derivatives, etc. - are indeed unique to our era. But the basic cause of the collapse - the over-expansion of capital beyond what the forces of consumption and exchange are capable of sustaining - remains the same. 

To be sure, private industry often causes these over-expansions, and almost always encourages them. But they are also frequently the end-result of a feverish policy of state investment. Consider the British economic crisis of 1825, attributed to frantic investments by the government of Britain in railroads, canals, and other infrastructure beyond what the system was able to bear. An easy monetary policy by the Bank of England is also blamed. Some may look at the roots of the present crisis in quasi-government institutions (like this one, this one, and most of all, this one) and claim that government, and not capitalism, is the culprit - as if the two were somehow dialectically contraposed. In fact, the crisis is portrayed as a deviation from capitalism. Ignoring for a moment the glaring problems with this claim (in fact, it was the deregulation movement and the emergence of shadow banking that exaggerated the problem), the historical record tells us that crises caused by government intervention within a capitalist context are nothing new. On the contrary, they are a fundamental, systemic part of capitalism.

Rosa Luxemburg, ☭, wrote more than a hundred years ago on the unsustainable nature of the financial system in her pamphlet, Reform or Revolution. Her remarks prove quite prescient today: 

"To begin with, [credit] increases disproportionately the capacity of the extension of production and thus constitutes an inner motive force that is constantly pushing production to exceed the limits of the market. But credit strikes from two sides. After having (as a factor of the process of production) provoked overproduction, credit (as a factor of exchange) destroys, during the crisis, the very productive forces it itself created. At the first symptom of the crisis, credit melts away. It abandons exchange where it would still be found indispensable, and appearing instead, ineffective and useless, there where some exchange still continues, it reduces to a minimum the consumption capacity of the market."

More from Mrs. Luxemburg:

"[Credit] constitutes the technical means of making available to an entrepreneur the capital of other owners. It stimulates at the same time the bold and unscrupulous utilisation of the property of others. That is, it leads to speculation. Credit not only aggravates the crisis in its capacity as a dissembled means of exchange, it also helps to bring and extend the crisis by transforming all exchange into an extremely complex and artificial mechanism that, having a minimum of metallic money as a real base, is easily disarranged at the slightest occasion."

And finally, a remark that is extremely a propos to our present situation:

"...[Credit] aggravates the antagonism existing between social character of production and private capitalist ownership by rendering necessary the intervention of the State in production."

Some liberal economists claim that Obama's injection of $819 billion (yes, with a "B") into a hodgepodge of social projects will be enough to "beat the system." Some even think that the stimulus is too small. The plan may stave off the crisis for awhile, or prolong its trough so as to insulate us from a steep landing. But printing money is not the panacea that it is made out to be; history tells us that we need to rethink the way finance is conducted.