1. Was, Not Was
What it never was was a “credit crunch,” a “refusal to lend” by banks and financial institutions to and into a market. What it never was, not ever, was a “hoarding” by bankers and financiers of cash. Not from that moment in 2006, the peak of the housing market in the US, when HSBC and other banks reported a growing number of mortgage delinquencies; not in 2007 when the Bear Stearns’ structured investment hedge funds imploded with a gravitational force that swallowed the entire company; not in 2008 when the Fed and the Treasury, performing triage in the emergency room at Maiden Lane, welded the defibrillator paddles to AIG’s sunken chest while placing a pillow over the faces of the Lehman Brothers; not in 2009 when 140 banks in the US failed; not in 2010 when 10 percent of all the residential mortgages in the US were delinquent; not in 2011, 2012– not today, not ever was it, is it, will it be, a credit crunch.
The credit markets froze, to be sure, but they froze because of a lack of solvency. The financial institutions were insolvent, bankrupt. They were empty-pocketed, not tight-fisted. There is a difference, and the difference is not cyclical, it is structural.
2. Only Yesterday
…or maybe tomorrow. Suffering mightily from the capital overhang, a product of seven years of intensive capital spending, the bourgeoisie staggered through the recession of 2001-2003 swearing off the stuff. Controlling capital spending was almost as important to our bourgeoisie as driving wages down from the high reached in 2000. “We’re never doing that again,” swore the capitalists, fear and trembling, a sickness unto near death punctuating every word. And they meant it. Almost. Meant it so much, and for so long, that banks in the United States had to find new customers, new assets, because industrial and commercial enterprises simply weren’t borrowing from them. So going into the 2001-2003 recession, the asset mix of banks, the proportion of consumer loans and commercial loans was an even fifty-fifty. And coming out? The mix was 70 percent consumer loans (including mortgages) and 30 percent commercial loans.
Industry kept off the stuff, that is to say capital investment, for as long as it could, but only for so long as it could. Sooner or later, capital has to be replaced; capital has to expand or it isn’t capital any longer. So in 2005, capital expenditures ticked up. And ticked up wages with it. Not back to the 2000 level, but up nonetheless. And in 2006? Another tick, or ticks. The history of capitalism might be described as nothing but a series of ticks– timers, parasites, bombs, take your pick, or pick all three.
3. Structure and Decomposition
The de-structural engineers of finance had plenty of experience utilizing debt, packaging debt, structuring debt as a corrosive material. During the 1980s, the leveraged buy-out had been perfected as one of the deadly arts. The buyer would issue massive levels of low-grade, “junk,” debt to sweep enough cash into hand to propose a buy-out of the stock of the target enterprise. Once obtaining control, the buyer would then avail itself of the target’s cash resources to a) pay itself hard-earned and well-deserved fees and dividends, retiring its debt in the process and/or b) transferring the debt to the target corporation while collecting the fees and dividends. If this brings to mind images of a parasitic wasp laying its eggs inside the body of a paralyzed spider, well at least the wasp wasn’t bragging about the service it was performing on behalf of the spider.
Still, the point is that the structure of the investment was that of decomposition, of liquidating the host.
The asset-back securities, collateralized debt obligations, collateralized loan obligations, etc. etc. ad nauseum were in essence similar vehicles with the difference that the issuers were at one and the same time laying their eggs of decomposition both into the bodies of their customers, and into their own bodies.
The structure investment vehicles based on asset-backed-securities were designed to channel millions of small revenue streams into a torrent of cash. By making the pools of securities large enough, that is to say, by increasing the number of assets, mortgaged homes, at the base of the structure, it was calculated that the risk of significant default, defaults in such quantity as to threaten the vehicle itself, were……impossible, or the next best thing to impossible, unlikely. Algorithms were developed by mathematicians and scientist to prove the salesman’s spiel. VAR– value at risk– was supposed to tell the financiers how much of the portfolio might be in jeopardy….under normal circumstances, normal circumstances being when the sucker in the suit isn’t you.
The mortgage backed securities had been issued for years under US government auspices by the two major government sponsored mortgage guarantors, FNMA and FMAC. The mortgages behind the instruments issued by both agencies had a certain level of credit-worthiness. These mortgages could not be “sub-prime.” The mortgages had to be assessed as viable, not as or in a pool of mortgages, but individually. The risk of default always existed, but the frequency and volume of the risk was modulated by credit requirements. With MBS based on sub-prime, ARM, Alt-A mortgages, the frequency and volume of possible defaults were not only compounded, they were synchronized.
These debt instruments, of course, created no value. That was the point, after all, to not create value, but to liquidate it, literally, to turn value into a flow that could be distributed, apportioned, allocated, in and by the process of exchange. “Play on,” sang the traders in electronic voices reverberating in electronic marketplaces. The band struck up yet another chorus of its sub-prime rag.
Then the music stopped, everywhere and pretty much in sequence. Finance, being the representation of the material that is a symbol of the relations of value (get that?), of the realization of symbols, of money, took the fall. Between July and November of 2007, asset-backed securities trading in markets lost 29 percent of their value.
Then in the first quarter 2008 profits of the S&P 500 corporations declined 26 percent, year over year. Profits for the largest financial corporations declined 71 percent; without the financials, corporate profits actually advanced 7.1 percent year over year; without finance and energy, profits were up only 2.6 percent. The energy sector captured 25 percent of the total earnings of the S&P 500. The horrible truth was out. Cash flow which had fed into, and been leveraged by, asset securitization, was turning illiquid, was becoming tar, heavy oil, sludge.
Once again, petroleum was claiming its due; that is to say claiming a portion of the total profit equivalent to the size of the capital invested, even if that due could only be claimed by market prices ten to fifty times the cost of production of the product itself. “I’m hungry,” said petroleum to the rest of its hostile brothers scrambling for a bit of the all right, “and you don’t need to eat.”
By October 2008, the US government and its agencies had injected $250 billion into nine banks– Goldman Sachs, JP Morgan Chase, Bank of America, Citibank, Wells Fargo, Bank of New York, and State Street. The government of the United Kingdom was guaranteeing $434 billion of bank debt; France was guaranteeing $435 billion; Germany $544 billion. The faux radical demand “Nationalize the banks!” finally had been realized; manifesting itself as it always had been, a plan to rescue rather than overthrow capital.
4. Interlude… Some Contributions to the Critique of Political Economy
( from journals, experts, and those who always think they know better)
In 2007, the equivalent of an additional 80 percent of the capacity of the maritime shipping industry was scheduled for delivery within 5 years:
“Nobody in the industry can survive with capacity nearly doubling in such a short time.”
In January 2008, high yield corporate bond prices plummeted and the number of deals fell toward zero.
“The market is in total disarray. There is a complete buyer’s strike.”
During a meeting between the Fed, the US Treasury and executives of Lehman Brothers, the executives announced:
“We have no idea of the details of our derivative exposure, and neither do you.”
Said the head of leveraged finance for Deutsche Bank:
“October  was the equivalent of the 1929 crash for debt markets.”
Said another expert with a shorter view of history:
“It’s like 1973, or 1974 all over again.”
In January 2009:
“Nobody has any idea how much permanent damage may have been done to the structural underpinning of US and global capitalism.”
And in March:
“The government in essence is trying to save the economy by turning to the very financial engineering that spun out of control during the credit boon.”
To some, that amounts to dialectic.
Meanwhile, during the Great Contraction, those enduring, and miserable, themes of our century, racism, xenophobia, chauvinism, bigotry, would find stronger voices. What were at one and multiple times in the cycles of capitalist ideology, illness, pathology would reprise as normal discourse, as analysis, as news, as common sense, and finally, as policy.
The mayor of Rome unleashed an attack on immigrants as criminals robbing the real Italians of their rights to the fruits of……..someone else’s labor.
Never one not to magnify ignorance when it might serve his need for power, or a date with an underage female, Berlusconi followed up by allying his Forza Italia with the delusional, paranoid party of Italian capitalism, the Northern League, which would morph from its previous neo-fascist secessionist incarnation– “We want out of Italy. No union with dirty Southerners”– to an ultra-nationalist, anti-immigrant incarnation– “We want them out of Italy. Ignore the law of the sea. No to saving the dark-skinned from drowning.” Berlusconi awarded his fascist allies the Ministry of the Interior. Then, in March 2009, Mussolini’s heir merged the fascist National Alliance into the Forza Italia.
Spain, which had built more housing in 2006 than France, Germany, and the UK combined, invited those migrants who had done much of the building to leave Spain as quickly and quietly as possible.
Meanwhile, as the real estate, housing, and mortgage markets collapsed in countries of Central and Eastern Europe, those newcomers to, but always on the periphery of the EU, the Union simply couldn’t be bothered. Hungary’s government appealed to the EU for a rescue package for its citizens, and Angela Merkel offered sage advice. She told Hungary to make its own arrangements with its own central bank and own local banks, ignoring or ignorant that the loans taken on by its citizens were denominated in either euros or dollars and almost all banking in the country was done by branches of the big EU banks.
In 2008, the Hungarian government had increased its obligations to foreign banks by 60 percent. What followed was the same old, same old. Ignored by the EU, the government appealed to the International Monetary Fund and the same stabilization practices which cost Latin America a decade in time, and a generation in population, were instituted. Interest rates were raised, pensions were reduced, the public sector wage was cut. “We’re hoping for a miracle,” said one government official. What they got was the IMF, and Orban.
Indeed, the EU, and the ECB couldn’t be bothered with Hungary, or Bulgaria, or Latvia, or Lithuania, or Estonia. They had bigger fish, and people, to fry in Portugal, Ireland, Italy, Greece, Spain.
Meanwhile in China, despite, or because (take your pick) of the governments stimulus plan– a mere $586 billion supposedly for infrastructural renewal– an estimated sixty-seven thousand (67,000) factories closed. Estimates are that 70 million migrant (possessing only rural hukou) workers initially lost their jobs and returned to their villages, with 47 million eventually returning to cities and finding some sort of new employment.
Meanwhile…in black 2009, back in the US of A, both General Motors and Chrysler declared bankruptcy. Now since money is everything to the bourgeoisie, it is convenient to think that “banks,” that finance is the leading indicator and summation to the bourgeois economy. But the truth of the capitalist economy, globally and locally, is that it is what it is because it produces automobiles or more accurately, because it produces SUVs. Everything capital hopes to be exists in the interconnections of the SIV, the structured investment vehicle, and the SUV.
Auto purchases, after all, had to be financed, and if they were financed they could be securitized, and the securities packaged, and sold in tranches, and…..enough, it’s an old story.
Chrysler had been bankrupt before, “saved” before, sold before, spun off before. General Motors had not.
While the banks had been the beneficiaries of the government’s capital injections, when it came to GM and Chrysler, the same banks lobbied against a government bailout. A government bailout would make the government the senior creditor in the company’s debt structure and reduce the security, and the payout, on the pre-existing debt held by any, and all, institutions.
The toll the bankruptcy took on black workers was staggering. Twenty thousand black workers were furloughed, amounting to a 14 percent decline in employment of African-Americans in the industry, as opposed to a 4.4 percent decline in the rest of the manufacturing sector.
The “hollowing” out of rural, and small town, USA began in the 1980s, when the Volcker double-dip recession dropped the hammer on smaller agricultural producers who had invested heavily in new machinery, accumulating new debt, knowing they had to “get big” or “get out.” When Volcker raised rates, there was no option of getting out. The devastation was not confined to the small agricultural producer, but expanded to include the small town based industries and shops, as well as commercial enterprises, the stores, restaurants, that are always part of capital circulation. The decline in the “social-ability” of rural life, the loss of small agricultural producers and the rural industries that subsidized those producers through providing employment in the off-season; that provided the cash so the small agricultural producer could make it between crops, deprived the stores of revenue, creating an opening for the Wal-Mart big box stores, located outside towns.
The tax base for small towns crumbled. Hospitals and schools closed. Left behind was…resentment, the politics of resentment, which proves that when there is no working class movement that dares confront the impact capitalism has had on the lives of all others, that questions all the relations of capitalism, then there is no working class movement at all.
This politics of resentment absorbs the paranoia that grips the bourgeoisie with its fear of “government” “taxes” “social welfare” and reflects it back as antisemitism, chauvinism, racism etc.
That loss of social-ability in the rural areas has not abated, nor has it been mitigated since the 1980s. Increases in farm income have increased the concentration of earnings in the largest enterprises. Advances in cultivation technologies come with a price, and that price is the attrition of small producers. Advances in technology reduce the cost of the product. Farm income in 2018 was half the income in 2013. Foreclosures are the bumper crop this year.
But wait, we’re getting ahead of ourselves. We have so far to go–2010, 2011, 2012….and more.
February 25, 2019