Mapping the Great Recession

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Mapping

the Great Recession:

A Reader's Guide to the First Crisis of 21st Century Capitalism

David Norman Smith a , Brock Ternes b , James P. Ordner c , Russell Schloemer d , Gabriela Moran e , Chris Goode f , Joshua Homan g , Anna Kern h , Lucas Keefer i , Nathan Moser j , Kevin McCannon k , Kaela Byers l , Daniel Sullivan m & Rachel Craft n

a University of Kansas, USA

b University of Kansas, USA

c University of Kansas, USA

d University of Kansas, USA

e University of Kansas, USA

f University of Kansas, USA

g University of Kansas, USA

h University of Kansas, USA

i University of Kansas, USA

j University of Kansas, USA

k University of Kansas, USA

l University of Kansas, USA

m University of Kansas, USA

n University of Kansas, USA

Available online: 09 Nov 2011

To cite this article: David Norman Smith, Brock Ternes, James P. Ordner, Russell Schloemer, Gabriela Moran, Chris Goode, Joshua Homan, Anna Kern, Lucas Keefer, Nathan Moser, Kevin McCannon, Kaela Byers, Daniel Sullivan & Rachel Craft (2011): Mapping the Great Recession: A Reader's Guide to the First Crisis of 21st Century Capitalism, New Political Science, 33:4, 577-601

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NewPoliticalScience, Volume33,Number4,December2011

REVIEWESSAY

MappingtheGreatRecession:AReader’sGuide totheFirstCrisisof21stCenturyCapitalism1

Abstract Commentatorsagreethatthecrisisthatboiledtoabubbleinthefallof2008 (“theGreatRecession”)isthegravestdownturnsincethedepressionofthe1930s.That makesitoneofthetwogreatestcrisesinthehistoryofcapitalism.Andplainly,thecrisis continues,yieldingseverejoblessnessandagrowingdangerofgovernmentdefaults, bankfailures,andstockmarketcrashes.Hundredsofcommentatorshavesoughtto explainthecrisis.Yetmuchremainsmurky,evenparadoxical.Thisessayattemptsto putthecrisisinperspectivebymappingtheuniverseofcrisisliterature.Itbeginsby framingsomeofthekeyquestionsposedinthisliterature.Nextitofferssharplyetched reviewsofthirteenkeybooks.Theresultisamulti-facetedportraitofacrisisthatisstill unfolding.

ManyaspectsoftheGreatRecessionarewidelyunderstood—thevastscaleofthe crisis,thestubbornpersistenceofmassjoblessness,thedevastatingcutsthat governmentshavenowembraced.Theantecedentsofthecrisisarealsofamiliar: predatorylendingtolow-incomeborrowers,theexplosionofexoticdebt-based securities,unhingedspeculationbyinvestmentbanks.Butmuchelseremains obscure.

Analystsoftenstressthattheglobaleconomycametotheverybrinkoffailure inSeptember2008.Butwhywasworldcapitalismsovulnerable?Howcoulda fewyearsofrecklessnessputglobalfinanceatriskofoutrightcollapse?

Otherpuzzlespresentthemselvesaswell.Whydidamassive stimulusprogramyieldonlyalimping,nominalrecovery?Whyhavepoliticians turnedtoausteritypoliciesthatcanonlyworsenjoblessnessandstrangledemand? Theaimofthispaperistoreviewthecrisisliteraturewiththesequestionsinmind. Iopenwithasurveyofthefieldofdiscourse,followedbyasuiteofbookreviews.

TheQueen’sQuery

Justsixyearsago,itseemedthatthesunmightneversetonworldcapitalism. ChinawasthenewvanguardofindustrialproductionandWesternfinancehad

1 Thisessay,andthethirteenreviewsthatfollow,originatedinagraduateseminar taughtbyDavidSmithattheUniversityofKansasinspring2011.Smithwrotetheopening essay.Thebookreviews,writtenbytheauthorswhosenamesappearinthetext,were editedandcondensedbySmith.QueriescanbesenttoDavidNormanSmith,716Fraser Hall,DepartmentofSociology,UniversityofKansas;email:emerald@ku.edu

ISSN0739-3148print/ISSN1469-9931on-line/11/040577-25 q 2011CaucusforaNewPoliticalScience http://dx.doi.org/10.1080/07393148.2011.619829

DavidNormanSmithetal.

soaredtoimprobableheights.Butnow,afterrecentshocks,itseemsincreasingly likelythatdeclinewillprovelasting,perhapsevenirreversible—thatcrisismight become“thenewnormal”andthatwemight,indeed,haveenteredaneweraof plummetingdemand,lending,production,employment,andgovernmenttax revenues.Alongnightofcrisisisfearedbyinvestorsandthepublicalike.2

AfamousquestionaboutthisdisturbingshiftcamefromtheQueenof Englandwhen,inlate2008,shemetwithaconclaveofexpertsattheLondon SchoolofEconomics(LSE):“Why,”sheaskedratherplaintively,“didnoonesee thiscoming?”Thereply,solemnlygivenbytheQueen’sinterlocutorsinJuly 2009,wasthatmosteconomistsandinvestorshadbeenblindedbyhubris.They hadfallenvictimtobubblepsychology,acceptingthecoretenetsofAlan Greenspan’sversionofmarketfundamentalism,namely,thatcapitalismisselfregulatingandmarketsareefficient.Thesetenetshadprovenfalse,aseven Greenspan,fleetinglycontrite,wasforcedtoadmit.Butquestionslingered:Why hadspeculativehubrisrunrampant?Whyhadbubblefeverdominatedthe discourse?

Aweeklater,aneconomistwhohadnotattendedtheLSEconclavestressed thatmanypeoplehad,indeed,foreseenthecrisis.Hetoowasright.3 Hubrishad beenrifebutnoteveryonehadbeenfooled.Post-crisis,afewearlyskeptics becameiconsofforesight:aboveallBrooksleyBorn,whohadresistedunregulated derivativestradinginthelate1990s;andRaghuramRajan,who,aschief InternationalMonetaryFund(IMF)economistin2005,hadpubliclywarned Greenspanthatderegulationhadgonetoofar.Othershadseendeeper.Clinically exactwarningshadcomefrompractitionerslikeStephenRoach,RichardDuncan, MichaelHudsonandthe PrudentBear bloggers.4 Stillotherswhosoundedthe alarmrangedfromcriticsofcapitalism(includingMarxistsandfollowersofcrisis theoristHymanMinsky)tospeculatorswhosoughttowringprofitfromthe bubble(includinghedgefundmanagersandtradersatinvestmentbankslike GoldmanSachsandDeutscheBank).5

Whatdidthesecriticssee?AglobalbubbleinwhichChina,theUnitedStates andtheEuropeanUnionfoundthemselvesawashinmoneythankstoan unsustainablenexusofartificiallystimulatedconsumption(intheUSandEU) andexportproduction(inChinaandelsewhere).Thisbubblewasbuoyedbyan

2 AsIwritetheselines,inearlyAugust2011,theeconomyisrackedwithworsening problems:governmentdefaultfears;persistentsteepunemployment;andplungingstock markets.Atthismomentthecrisisappearstobefarfromover.

3 ThomasPalley,“LettertotheQueen,”July29,2009, ,http://www.thomaspalley. com/?p ¼ 148.

4 ManyofRoach’swarningsareavailableonline.Foraconvenientcollection,with outstandingmaterialonChinaaswell,seeStephenS.Roach, TheNextAsia (Hoboken,NJ: Wiley,2009).SeealsoRichardDuncan, TheDollarCrisis (Hoboken,NJ:Wiley,2003);and StandardSchaeffer,“AnInterviewwithEconomistMichaelHudson:TheComingFinancial Reality,” Counterpunch,July11,2003. PrudentBear ismainlyDougNoland’sbrainchild.

5 ForarichreviewofMarxistaccounts,seeChrisHarman, ZombieCapitalism:GlobalCrisis andtheRelevanceofMarx (London:Bookmarks,2009).Minskyananalysisisprovidedby manyeconomistsassociatedwiththeLevyEconomicsInstituteofBardCollege(,http:// www.levyinstitute.org/.).ForcopiousdetailonDeutscheBankandGoldmanSachsin particular,seetheUSSenatePermanentSubcommitteeonInvestigation, WallStreetandthe FinancialCrisis—AnatomyofaFinancialCollapse,April13,2011, ,http://hsgac.senate.gov/pu blic/_files/Financial_Crisis/FinancialCrisisReport.pdf..

opportunitytopractice“globallaborarbitrage”onanhistoricallyextremescale,6 producinggoodsinlow-wagezonesforsaleinhigh-wagezones.Thesurpluses accumulatedinthiswayhadrevivedcapitalismaftertherecessionof2000–2001. Chinahadextractedvastprofitsfromlow-wageexportssoldabroad.Muchofthis profitwasparkedinforeignbonds.Thisenabledcentralbanks,intheUSand partsoftheEU,tosuperheatdemand,especiallyforhousing,bykeepinginterest rateslow.Lendersfunneledriskyloanstomillionsofsubprime(low-income) homebuyers,manyofwhomunwiselyacceptedvariablerateloans.Debtrather thanincomefueledhouseholdconsumption,aswagesremainedstaticinthe joblessrecoveryafter2001.Wal-Martrosetoglobalretailpreeminenceby importingacascadeofChinesegoods,includingmanyitemssuchaswashing machineswhichtheysold,notleast,tonewhomeowners.Westerninvestors, doubtingtheprofitabilityofdomesticmanufacturingindustry,pouredmoney intospeculativepurchasesofdebt,whichthey“securitized”andresoldwithever greateringenuity—andrecklessness.

Thisbubble,fueledbyborrowingandspeculation,couldlastonlyuntilthe chainofbadloanscamedue.Whenhomebuyersbegantodefaultontheirloans, thespeculativespiralbecameavortexofdecline.Soon,theunheededskepticsof theboomyearswerejoinedbyachorusof post-festum critics.

AftertheDeluge—Analysis

ByJanuary2011,over200booksonthecrisishadappearedinEnglish;manymore haveappearedsince.Whatarewetomakeofthisoutpouring?Anearlyreview camefromAndrewGamble,whohadparticipatedinthedialogwiththeQueen andlaterwroteafull-lengthanalysis.Gamblepositsfivetrends,rangingfrom unabashedmarketfundamentalismtoprotectionismandanti-capitalism.7 Thisis coherent,butIwouldarguethattheliteratureislesseasilypigeonholed,since almosteveryonenowfavorssomekindofregulation.Thisistrueevenofthemost woundedandbellicosedefendersofthegospelofefficientmarkets,whoseldom remainentirelyanti-regulatory.Mostconflictsofopinionnowcenteronthedetails ofprojectedregulations,notontheirlegitimacy perse.

LiberalstendtoblameWallStreetandconservativestendtoblame Washington;butotherwise,joltedbythecrisis,traditionaldivisionshavebeen blurred.Thisisespeciallyclearontheright,wheremarketideologueshavebeen shakenbyhigh-profiledefections:mostnotably,inthecaseofRichardPosner,to full-boreKeynesianism.Othershaveposedsharpchallengestobanksdeemed “TooBigtoFail”(forexample,SimonJohnson,whowasRajan’ssuccessorasIMF chiefeconomist).Rajan,whoisnowhighlyinfluential,hasstakedoutamiddle groundinwhichmodestlypro-regulatoryviewsarevoicedinfreemarketidioms. Manyliberaleconomiststakesubstantivelysimilarpositions.

Investors,however,remainstubbornlyengrossedin“thehuntforyield.”They wantprofitsbythefastestroutepossible,withthefewesthindrances.This discouragestheeconomists,whosebookshavealargelypessimistic,elegiactone. Theyknowthatspeculationthrives,eveninsubprimemarkets,andthatmoneyis

6 Roach, TheNextAsia,isaparticularlygoodsourceonthissubject.

7 AndrewGamble, TheSpectreattheFeast:CapitalistCrisisandthePoliticsofRecession (NewYork:PalgraveMacmillan,2009).

stillbeingdivertedfromindustrytofinanceonanepicscale.Manyauthorsare alsokeenlyanddisconsolatelyawarethatpoliticiansseemtotakepositive pleasureinignoringdisinterestedcounsel.When,notlongaftertakingoffice, BarackObamawasaskedwhomhewouldconsultabouttheeconomy,hesaid that,althoughheknewhisbasewantedhimtoappointreform-mindedfigures likeJosephStiglitzandPaulKrugmanashisadvisors,hewouldinsteadrelyon “ruthlesspragmatists.”8 Theseruthlesspragmatistsprovedtobetheverysame figures,associatedwithCitibankandGoldmanSachs,whohadunleashedand enabledthespeculativeboominthefirstplace.9

Thisdistinction,betweenruthlessenablersanddisinterestedcritics,isperhaps thebrightestdividinglineinthediscourse.Buttheenablersseldomwrite;they simplyforgeahead,andleaveittothecriticstoobject.Hencetheliteratureisrich incogentcritiquesofthe“pragmatism”thatbroughtusbankbailouts,atoothless stimulusprogram,soaringprofitswithoutjobs,spiralinghomeforeclosures,and sky-highgovernmentdeficits.Thecriticismsofthesepoliciesareoftenjudicious andcompelling,buttheyseldomrisefarenoughabovethedetailsofeventsand personalitiestoconveyasenseofthelargerdynamicsatwork.

What,inthedeepestsense,iswrongwiththe21st-centuryeconomy?Whatcan weoffer,positively,toreplacetheflawedtheoriesthatfedinvestorhubris?If capitalismisnowenteringunchartedterritory,whatcompasspointscanwe establishtoreorientourthinking?

Fewcurrentbooksprobequestionsliketheseveryclosely.Manyareexcellent inotherways.Thebestbooks,byacademicsandjournalists,critiquetheflawed “financialarchitecture”oftheglobaleconomyanddocumentthecrisisandits background.Manyfine-grainedstorieshavealsobeentoldabouttraders, regulators,bankers,andothers.Butthedeepestquestionsseldomappearinsuch accounts.HowardDavies,whothendirectedtheLondonSchoolofEconomics, publishedabookinlate2010inwhichhedividesthecrisisliteratureintonearly40 topicareas.Ofthese,onestandsout—whathecalls“BigPicture”accounts.Davies couldplacejustafewtitlesunderthisrubric.10 Butthesebooksraisecriticalissues, whichdeserveafewwords.

TheBigPicture

Asaframinghypothesis,Iwouldsuggestthatthe“GreatRecession”maybethe secondacutephaseofasustainedcrisisthatfirstbecamevisibleintheturbulence oftheyears1997–2001.Ratesofindustrialinvestmentintheadvancedeconomies hadfallensosteeplythatmanypeoplefeltadecisivelynewphaseofcapitalism hadbegun—anageof“financialization,”inwhichmoneyflowedfromindustryto finance.Investorswereincreasinglyreluctanttofunctionascapitalistsinthe classicalsense.Insteadofbuyinglaborpowerandcapitalgoods,theyturnedto equitiesandderivatives.(Andwhentheydidhireworkers,theytendedtodothis abroad,inplaceswithoutunions.)Thisshiftedthebalanceofclasspower,

8 DavidLeonhardt,“AftertheGreatRecession,” NewYorkTimes,May3,2009.

9 MichaelHirshexplainsthishistorywellin CapitalOffense:HowWashington’sWiseMen TurnedAmerica’sFutureOvertoWallStreet (Hoboken,NJ:Wiley,2010).

10 HowardDavies, TheFinancialCrisis:WhoistoBlame? (Cambridge:Polity,2010).

weakeninglaboranderodingwagesandjobsecurity.This,inturn,softened consumerdemandanderodedthetaxbase.

Theresultwasaviciouscircle.Fallingdemandforindustriallaborledto fallingwages,reducingthedemandforindustrialgoods,whichfurtherreduced demandforlabor,yieldingstilllowerwages.

Thepuzzlingly“jobless”natureoftherecoveryafterthe2000–2001crisis shouldhavemadeitclearthatsomethingwasgravelywrong.Butdoubtswere dispelledwhentherecessionreceded.Themanicspeculationoftheensuing halfdecadewasconstruedasareturntonormalcy;inactuality,itwas almostentirelybubble-driven.ChinaandtheUSfoundthemselvessuspended inahistoricallyuniquesituation,inwhichChinacapitalizedonthestunningwagedifferentialbetweenUSandChineseworkerstoaccumulatethe surplusneededtofueladebtbubble(intheUS)andanexportbubble (inChina).

USwages,momentarilyproppedupbycheapcreditandlowinterest,hadnot yetplungeddecisivelybelowthehistoricheightstheyhadattainedintheearly postwardecades,andChinesewages,suppressedbyaradicallyanti-laborregime, remainedhistoricallylow.ThisenabledtheChinesegovernmenttoprofitmightily fromproductionwhileUSinvestorschasedpaperwealthintheformof securitizeddebt.Commoditiesproducedbyworkerswhosewageshadnotyet ascendedfromhistoricdepthsweresoldtoworkerswhosewageshadnotyet fallenfromhistoricheights.

Theresultwasauniquecombinationofrealandapparentaccumulation. Itisaccurate,Ibelieve,todescribetheglobalsurgeinthehalf-decadeafter 2001asbubble-driven,sinceChineseexportswouldnothaveflourished withoutdebt-enabledspendingbyUSconsumers.Now,withthedeflationof theUSdebtbubble,China’sexportbubbleisdeflatingaswell.Butthefelt dynamismofthebubbleyearswasnotsimplyanillusion.Onthe contrary,theaccumulationofcapitalbytheChineseregimewasreal, howevershort-liveditmayultimatelyappearinretrospect.Itsprangfromthe classicalsourceofprofitincapitalistsociety—thesaleofgoodsproducedby workerswhoseinputtothevalueoftheirproductsoutpacedthevalueoftheir wages. 11

Chineseaccumulation,andthebubbleofpseudo-accumulationinthedebtor nations,liftedtheworldoutoftheinitialphaseofthe21st-centurycrisis.Chinese workersandNorthAtlanticconsumersgavecapitalismrenewedhope.Butthat phasehasended.The“GreatRecession,”whichsupposedlyconcludedinlate 2009,nowappearstohavebeenareturntounderlyingpre-bubbletrends.Worries agitatemarkets,governmentsandcitizens:Candemandrevive?Canaccumulationbesustained?Canstatesremainfiscallyviable?

Theoutlookisbleak.Withthehistoricdeclineofemployerandconsumer demandinthe(decreasingly)high-wageeconomies,globaldemandisclearlyin peril.Chinahaslongpledged,andlongfailed,toboostdomesticdemand.Witha horizonofdwindlingexportprofits,thatwindowofopportunitymaynotstay openlong.AndifChinafailstospurdomesticdemandandbuoytheeconomyfor anotherinterval,wherewilldemandcomefrom?Consumers?Thatseemslikely

11 Seldom,indeed,hasthisclassicalcriterionbeenmoreamplyrealizedthaninthe Chinesecase!

onlyifwagesrevive,whichwouldrequirerevivedmanufacturing.That,inturn, dependsoninvestors,whowouldhavetogamblethatindustrycanbesustainably profitableagain.Suchagambleseemsunlikelygiventhat,eveninthepre-crisis decades,investorsdiverted$20trillionfromindustryintootherchannels—junk bonds,currencies,techstocks,hedgefunds,derivativesand,ultimately, securitizeddebt.12 Increasingly,ithascometoseemnaturalthatinvestorschase profitineveryrealm except production.

Cangovernmentstakeuptheslack?Thattooseemshighlyunlikely.Currently, governmentsaresufferingfromadeepdemandcrisisoftheirown.Sincethey dependforrevenueontaxesandbonds,theirsolvencydependsonthefinancial capacitiesoftaxpayersandbondmarkets—capacitieswhichhavebeenchanging dramatically.Once,taxeswerethemainfoundationofrevenues.Buttaxbases haveerodedsharply,aswage-andjob-challengedworkershaveincreasing troublepayingtaxesandglobalizedbusinessespayreducedtaxes.Thisputs governmentsatthemercyofbondmarkets—afactwithstunningconsequences.

Manypeoplehavefrettedoverthefollyoftherecentrushtoausterity,but,folly aside,austeritynowhasdeepstructuralroots.Bondholdersdemandpayment, andgovernmentsmustpayiftheyhopetosecurefuturebondfunding.Thisputs theminacriticalbind.Topaytheircreditors,theyhavetwoperennialoptions: eithertosqueezemorerevenuefromworkersandbusinessesortocutspending. Neithersolutionisviableinthelongrununlesstaxableincomefromproduction revives;sincespendingcanbecutonlyonce,newrevenuesourcesarethebest hopeforfutureexpansion.But,intheshortterm,acutepressuresconvergetoforce budgetcuts.

Sincetaxhikesareeffectivelyopposedbythewealthy,spendingcutsaimedat workersandthepoorseemtobetheonlyoption.Bondholderspressforsuchcuts, andpoliticians(whoincreasinglyactasonbehalfofbondholdersratherthan taxpayers)comply.Andtheapparentfailureofstimulusprogramsalsoplayedarole, onceitbecameclear,forexample,thatcorporatebailoutsandtaxcutshadfueled speculation,hoarding,andforeignspendingratherthandomesticjobcreation.

Governments,inshort,demand less ratherthanmore.Deprivedoftaxrevenue bythecontractionofcorporatedemandforworkers,governmentsturnto bondholders,whopressurethemtoslashbudgetsandregulations—evenintimes, likethepresent,whenestablishedRooseveltiantenetswoulddictatetheopposite. Ratherthanreversingthedownwardspiralofaggregatedemand,governments accentuatethisspiral.

Giventheseobduraterealities,thebesthopeforreneweddemandprobably liesinthe“emergingmarkets,”ofwhichChinaremainstheprimeinstance.But fordemandtogrowinsuchmarkets,manynon-wageearnerswouldhavetobe drawnintowagelaborandwagerateswouldhavetorise—andthatwouldhave severalproblematiceffects:inflation,whichwouldlimitexports;pressureon demand-challengeddomesticmarkets;andaninvestmentshiftfrombond markets(whereChina,forexample,nowhas$1.2trillionparkedinUSbonds)to domesticindustry.

12 CharlesRoxburgh etal., DebtandDeleveraging:TheGlobalCreditBubbleandItsEconomic Consequences (Beijing,Brussels,Delhi,London,SanFrancisco,andWashington,DC: McKinseyGlobalInstitute,2010), ,http://www.mckinsey.com/mgi/publications/debt_a nd_deleveraging/index.asp..

Allthatisentirelypossible.Butwouldthisyieldthesamekindofgrowththat Chinaachievedrecently?Thatseemsdoubtful,sincethekeytothatgrowthwas thedisparitybetweenChineseandUSwages.Unlessasimilardiscrepancycould beexploited(perhapsbetweenlow-wagelaborintheChineseinteriorandhighwagelaboronthecoast,orbetweenlow-wageIndianorIndonesianlaborandthe upscaleChinesemarket)thechancethatChina’snewdomesticdemandwouldlift theglobaleconomyforverylongisslim.Accumulationwouldproceed,butmore slowlyand,quitepossibly,withdiminishingreturns.

ThirteenBooks

Severalkeyaspectsandimplicationsofthecrisisremainobscure,andothersare becomingplainonlynow.Stillotherswillsurfaceonlyinthefuture,asthecrisis unfoldsfurther.Butthefirstwaveofanalysts(partlyrepresentedbythebooks reviewedbelow)offersmanyinsightsintoBigPicturequestions.Thesebooksare reviewedinroughlytheorderinwhichtheyappeared,beginningwithtwobooks thatprobedthecrisisinitsearlydays(byMorrisandFoster&Magdoff)and closingwithtwobooksthatappearedtwoyearsafterthezenithoflate2008(by Dume´nil-LevyandMcNally).Manyperspectives,clashingandconverging, appearinthesebooks.Theresultisafracturedmosaicofanalysis,withmany strengthsandmanypersistingobscurities.Herearereviewsofthirteenofthese books.

DAVIDNORMANSMITH

UniversityofKansas,USA

CharlesR.Morris, TheTrillionDollarMeltdown:EasyMoney,HighRollers, andtheGreatCreditCrash,NewYork:PublicAffairs,2008,224pp. Morriswasamongthefirsttoexplainhowthemeltdownbegan.Unregulatedrisktakingisacentraltheme:“ ... attheveryepicenterofAmericanfinance,atiny groupofpeoplewereabletoborrowhundredsofbillionsofdollarsfrombanks, and ... neitherthebanksortheirregulatorshadanyideaofhowmuchtheyhad borrowedorwhattheyweredoingwithit”(p.53).Heshowsthecausesand consequencesofthisrisk-taking,especiallyinthehousingmarket.

Byearly2005,theUSwasexperiencingthegreatesthousingboominhistory. Halfofallgrossdomesticproduct(GDP)growthwasdrivenbyfrenzied constructionorhomerefinancing.Withsoaringprices,peoplecouldbuyhomes, sellthemataprofit,andrepeattheprocess.Theyalsousedtheirhomesas collateralforborrowing.Housingappearedtobeaninexhaustiblesourceof consumerincome.

Capitalizingontheboomwereinvestmentbankers,whoborrowedprodigally tobuymortgages.Theydividedthesemortgagesinto“tranches”(low-risk, medium-riskandhigh-risk)whichtheypackagedforresale.Thiscreatedanew kindofsecurity,theCDO,or“collateralizeddebtobligation”(obligations,thatis, withrealassetsascollateral).Bythemselves,thelow-risktrancheswerefairlysafe investments.Buttheywerebundledwithhigh-yieldtrancheswhichwereathigh riskofdefault.

584 DavidNormanSmithetal.

Toenhanceprofits,financialmathematiciansultimatelydicedCDOsinto125 tranches.Thisyieldedcomplexitytoogreattobereadilyunderstood.But investorstrustedthemath,andbankstriedtoprotectsecuritizedmortgageswith creditdefaultswaps,whichemergedas“oneofthefaster-growingnewfinancial instrumentsever Theyareaformofinsurancecontract.IfIownacompanyor CDObond,Icanprotectmyself ... byenteringintoacreditdefaultswapwitha counterpartywhopromisestomakegoodmylossesintheeventofadefault”(p. 130).“Thenotionalvalueofcreditdefaultswaps—thatis,thesizeofportfolios coveredbycreditdefaultswaps—grewfrom$1trillionin2001to$45trillionin mid2007”(p.75).

Riskiertrancheswerepopularwithhedgefunds,whose“persistentdemand forhigher-yieldproductsispushingtheindustryuptheriskladder ”(p.117). Thiswasespeciallydangerousbecausetheriskysecuritieswerelargelypurchased withborrowedmoney.Yetthedemandfornewmortgagestosecuritizewassoon intense.Sincequalifiedbuyerswerenowscarce,lendersbeganlendingto “subprime”borrowerswhohadlittleprospectofrepayingtheirloans.Overa thirdofallsubprimeloanswentto“Ninjas”—peoplewithnoincomes,nojobs, andnoassets.Subprimelendingquadrupledinfouryears,reaching$625billion, aboutaquarterofthetotal,in2005.Withinsurancecoveringtherisksandthe FederalReserveBoardkeepinginterestrateslow,investorsrushedin:“When moneyisfree,andlendingiscostlessandriskless,therationallenderwillkeepon lendinguntilthereisnooneelsetolendto”(p.61).Butwhatappearedrationalfor investorswashardlysafefortheeconomy.

Worseningtheproblemwasthefactthatthecreditratingsystembecame distorted:“ vintageCDOswerepricedasiftheywerealmostassafeasUS Treasuries.They’renot”(pp.121–123).Whenthedefaultsbegan,thesystemfroze, andbanks,lenders,andinvestorsallteeteredatthebrink,asMorrisdescribesin hischapter“TheGreatUnwinding.”Thecrisiswaslikearollercoasterracing downward;noonecouldgetoff.Thedot-combustofthepreviousdecadehad beenmitigatedbythepeakproductivityachievedinthe1990sbythebabyboom generation.Thatwasn’tthecasenow.“Allbubblespop,andthelongerthey expand,theworsetheimplosion.Bylatefall2007,thehissofescapinggashad turnedintoaroar”(p.61).

ForthisMorrisblamesthemarketfundamentalismthattriumphedinthe Reaganera—themyththatmarketscangovernthemselves,amythinternalized byirresponsibleregulators.“Theirresponsibilityofthefinancialsectorwas matchedbythatofitsregulators ensuringthattaxpayerswouldeventually reapthewhirlwind”(pp.xviii–xix).

BROCKTERNES

UniversityofKansas,USA

JohnBellamyFosterandFredMagdoff, TheGreatFinancialCrisis:Causes andConsequences,NewYork:MonthlyReviewPress,2009,144pp.

Theauthors,whoseopeningchaptersfirstappearedin MonthlyReview inearly 2006,seelong-termstagnationastheultimatecauseofthecrisis.Theunderlying

problemisthat realwages havestagnatedsincethe1970sthoughconsumption, basedonmassivedebt,hasgrownsteadily.

Howdiddebtbecomesocrucial?Therootproblemisthatproductive investmentcratered:“Withdecliningexpectationsofprofitonnewinvestment, corporationshavebeensittingonvastundistributedcorporateprofits ... [and] withoutastep-upinbusinessinvestmenttheUSeconomywillstagnate—areality thatspeculativebubblescanholdoffanddisguiseinvariousways,thoughnot entirelyovercome”(p.37).

Thedeclineofproductiveinvestmentdoesnotstopgrowth,butslowsit significantly.Theconsequenceis“over-accumulation,”thatis,theaccumulation ofmoremoneythancanbeprofitablyinvested,givenlimitationsinconsumer demand.Formerly,outletsforexcesscapitalwerefoundinprojectslikerailways andhighways,buttoday’sinvestorsandpoliticiansshowlittleinterestingrowthstimulatinginfrastructureprojects.

Wheninvestmentlags,growthdependsondebtspending.By2005,debtmade upalmost350%oftotalUSGDP.Theauthorscontrast consumer debtand corporate debt,which(soonerorlater)spurproduction,with speculative borrowing,which tendsto decouplecapitalfromproductionaltogether.Financialinstitutionsborrowto liftprofitmarginsdespitesluggishgrowth.Thisbifurcationofinvestmentfrom productionwasamajorcauseofthe2008crisis.

Theauthorsnotethatby2005,productiveprofitshadfallenfrom50%tojust 15%ofdomesticprofitwhilefinancialprofitshadrisenfrom15%to40%. Corporations,dissatisfiedwithindustrialprofitrates,pouredmoneyintofinance. Thiswasabettedbybanks,whichpursuedlow-ratelendinginordertosellvast poolsofconsumerandcorporatedebt,re-packaged,toinstitutionalinvestors, includinghedgefunds.

Theconsequencesincludeserialdebtbubbles;artificiallyelevatedconsumer demand(despitefallingwages);wideningclassdivisions;theideological hegemonyofneoliberalism;thedependencyofemergingeconomiesonthe InternationalMonetaryFund(IMF)andWorldBank;andincreasingglobal instability.Theauthorsseethe2008crisisasdramaticevidenceofthelatter,in particular.Hence,inthesecondhalfofthebook,theyturntothespeculative bubblethatsparkedthehousingcrisis.

Theauthorsexplainhow securitizedmortgageloans werebundledintopackages ofsecuritizedloanswhichpooled“tranches”oflow-risk,medium-risk,andhighriskmortgages.CreditagenciesgavethesebundlesAAAratings,despitethe presenceofmanyBBBsub-primemortgagesinthemix.Thehousingbubble inflatedrapidlyaftertheFederalReserveBoard(theFed)loweredinterestratesto just1%in2003.Withcheapfinancingmillionsofpeoplewhocouldnotreally affordhomestookouthomeloans,eggedonbypredatorylenders.Oncemortgage lendingbegantosoarinthisway,realestate“hyperspeculators”beganbuying housesinordertoflipthemathigherprices.ByDecember2005,theoutstanding USmortgagedebthadreached8.66trilliondollars,equivalentto69.4%oftotal GDP.

Whenthecrisishit,taxpayerspaidtheprice—andcommentatorsblamed eitherthepoororthepredators.Buttheauthorstracethecrisis,ultimately,tothe financializationoftheeconomy.Hence,theyclosebydiscussingtheprospectof definancialization.Conventionally,theFedissupposedtoactlikeatrainengineer, regulatingliquiditythroughcashinfusionsorratehikes.Butthesearemonetary

solutionstomonetaryproblemsanddonotaddresstheunderlyingproblemof stagnation.

Manypreviousundertakings—rebuildingdestroyedeconomiesafterWWII, pursuingthespaceraceandarmsrace,buildinginterstatehighways—comprised massiveinvestmentsthatstavedoffstagnation.Buttheseprovedtobestop-gap measures,andultimatelyaturntowardsthespeculativeeconomybeganinthe 1970s.Currentcallsforinvestmentinenergy,technology,andtransportationhave wononlyatepidresponseaslegislatorscutbudgetsandbankshoardratherthan lend.Buttheneedremains.Withoutrealproductiveinvestment,crisiswill becomenormal,andperhapsterminal.

JAMESP.ORDNER UniversityofKansas,USA

PaulKrugman, TheReturnofDepressionEconomicsandtheCrisisof2008, NewYork:W.W.Norton,2008,224pp.

PaulKrugmanwontheNobeleconomicsprizeinthecrisisyear—2008.Thisbook, hesays,is“ananalyticaltract.Itisnotsomuchabout what happenedas why it happened ... ”(p.6).WithChinaandtherestoftheworldnowfirmlyintheprofitmakingcamp,capitalismstandsunopposed:“ whocannowusetheword socialismwithastraightface?”(p.14).Yetcapitalismstillfacesregularcrises.To explainthisapparentparadox,Krugmanoffersahomelyanalogy—thecollapseof ababysittingco-opinWashington,DC.

Families,hesays,caredforeachother’schildreninreturnforcoupons,which theycouldredeemforbabysittinghelpfromotherfamilies.Thissparkeddemand fortherelativelyscarcecoupons,leadingmanypeopletowantbabysittingwork, whileonlyafewwantedbabysitters.Thiscreatedasortofcreditcrisisinwhich familieswithcouponshoardedthemeventhoughotherswantedtoearnthem. Theco-opbrokedown.

ForKrugmantheproblemwasthatnogroupoversawthecouponsor managedthesystem.Hadsuchabodyexisted,thecrisiscouldhavebeenaverted. Ultimately,itwasonlywhenaKrugman-likeeconomistconvincedtheco-opto printmorecouponsthattheproblemwassolved.Thisisakintotheroleheassigns government.

Governmentfailurewasalsoakeyfactorinprecipitatingthecrisis.Krugman notesthattheFederalReserveBoardunderGreenspanopenlypreferredtolet bubblesburstandcleanupafter,ratherthananticipatinganddeflatingthem responsibly.Healsostressesthatlaxoversightofriskytradingpermittedtherise of“shadowbanking.”Fromthe1930suntilthe1990s,theGlass-SteagallActhad separatedcommercialbanks,whichhelddepositsandwerebarredfromrisky investment,frominvestmentbanks,whichwerebarredfromholdingdepositsbut werepermittedhigherrisk.Butnebulousquasi-banksaroseinthe1980sasthe regulationofthefinancialsystemweakened.Theseshadowbanks,manyofwhich weregiantinstitutions,routedvastsumsofmoneytoinstitutionalborrowerswho pursuedriskyhigh-yieldinvestments,ofteninhousing.Whenthemarket imploded,theshadowbanksfoundthemselves“illiquid.”Theysoldshortfor

quickcashtoavoiddefaults.Thissparkeddepreciationsandsell-offs.Thepanic wason.

Othermistakesworsenedthesituation.TheBushadministrationdeclinedto confirmthattheywouldbackloansmadebyFannieMaeandFreddieMac, underminingtheirvalue.Other,similarfailureshelpedmattersspiraloutof control.Andultimatelythegovernmentbailedouttheverybanks,including quasi-banks,whichhadtriggeredthecrisis.

Duringtheboomyears,manypeoplehadthoughtcapitalismwasnowbulletproof.Recessionsnowonlyamountedtohiccups.Butthescaleofthecrisis,andof thebailout,provesthatisnottrue.Andeventheunprecedentedscopeofthe interventionbarelyscratchedthesurface.Krugmanarguesthat,toforestall furthercrises,thegovernmentwillhavetoactmuchmoredecisively,either nationalizingorleashingthefinancialsector—andinjectingfarmoremoneyinto theeconomy,afigureKrugmanpegsataround$4trilliondollars.

Asa NewYorkTimes columnist,Krugmanoftenlamentsthehesitancyof Obama’sinterventionism.HearguesherethattheUScannotsolveitsproblemsif itgoesonlyhalfway.“Iwon’ttrytolayoutthedetailsofanewregulatoryregime, butthebasicprincipleshouldbeclear;anythingthathastoberescuedduringa financialcrisis,becauseitplaysanessentialroleinthefinancialmechanism, shouldberegulatedwhenthere isn’t acrisissothatitdoesn’ttakeexcessiverisks” (p.190).

RUSSELLSCHLOEMER

UniversityofKansas,USA

RichardA.Posner, AFailureofCapitalism:TheCrisisof’08andtheDescent intoDepression,Cambridge,MAandLondon:HarvardUniversity,2009, 368pp.

Thisbookwascompletedearlyin2009.Atthattime,Congresshadnotyetpassed theTroubledAssetsRecoveryandReinvestmentActof2009andtheworst unemploymentfigureswerestillahead.Itwasalsobeforetheterm“Great Recession”hadbeenpopularized.Infact,Posnercallsthebankingcollapseand subsequentslumpa“depression”—themostsignificantdownturnsincethe1930s, withconsumerdemandprojectedtofallasmuchas12%in2009.

Posnerstressesthatbankingderegulationwasabasiccauseofthehousing bubble.Financialintermediarieshadbeenallowedtoprovidebank-likeservices butwithoutthesamerestrictions.Astheythrived,banksborrowedtokeepup, pursuingincreasinglyriskyloanswithhighinterest.Thesystemicdangersthis posedwerenotfactoredintoriskassessmentsbythebanks.Iftheoddsofa catastrophearelow,itisunlikelytobetakenveryseriouslybyanyoneinstitution. So,thoughrisksofthiskindmaybeveryrelevantforthesystemasawhole,they arenotverysignificantforonespecificactor.ThisisthemainjustificationPosner offersforgovernmentregulation.

Posner’sanalysisofthestimuluswaslargelypredictive,sinceitwas formulatedbeforethestimulusplanhadbecomeoperational.Significantly,he arguedthatastimulusfocusedontaxcutswouldstumblebecausepeopleoften choosetosaveratherthanspendextraincome:“Afederaltaxcutwilldonothing

588 DavidNormanSmithetal.

toalleviatetheacutefinancialproblemsofthestates”(p.169).Infusingmoneyinto bankingwouldstumbleforsimilarreasons,sinceinsolventbankscouldeasily refrainfromlending,hoardingratherthanspending.

Whatwouldworkbetter?Posner’sanswerincludestransferpayments,suchas increasesinunemploymentinsurance,whichgivemoneytopeoplewhoaremore likelytospendthantosave.Posneralsomakesacasefordeficitspendinginpublic works,whichhesaysstimulatesdemandmoreeffectivelythantaxcutsbecauseit createsjobs(andbecausepeoplearemorelikelytospendfromasteadystreamof revenuethanfromaone-timecashgift).An“optimaldepressionfighting program,”hesays,wouldtarget“industriesorareasofthecountrywherethereis highunemploymentorotherunemployedresources.Itshouldbeexecutableon shortnotice Itshouldbeterminablewhenthedepressionends”(p.188).

Posnerblamesderegulationforthedescentfromcrisisintofull-blown depression.Deregulationspurredriskylending,therepealofGlass-Steagall,and uncheckedderivativestrading.TheFederalReserveBoard(theFed)failedin manyways,andtheBushadministrationranuphugedeficits.

Inmanyrecessions,theFedhasstimulatedconsumerspendingwithreduced interestrates,whichpromptbankstolendtoconsumers.However,thistimethe gravecapitalshortagemadebanksveryhesitanttolend,evenaftertheFedrefreshed theircapitalization.ButPosnersaystheFedcouldstillhavehandledthecrisis.He censurestheFedchairsforfailingtodothis.Greenspanallowedthehousingbubble toexpandratherthanpoppingit.Bernankecouldhavepoppedthebubbleafterthe fallofBearStearns.ButtheFedchairsweretoopreoccupiedwithinflationtoworry aboutthecreditbingeandderegulation.Theywereoverconfidentaboutthe“selfcorrecting”powersofmarkets—anoverconfidencethatPosnerattributesinpartto theinfluenceoflibertarianacademics,amongwhomhewashimself(beforethecrisis andhisconversiontoquasi-Keynesianism)aneminentfigure.

Interestingly,Posnerdoes not blamethegroupthatmostcriticsnamefirst: “ ... althoughthefinanciersbeartheprimary responsibility forthedepression,Ido notthinkthattheycanbe blamed forit—implyingmoralcensure—anymorethan onecanblamealionforeatingazebra”(p.284).ThisconformstooneofPosner’s mainclaims:thatstructuralandinstitutionalproblems,ratherthansimplegreed, werethesourceofthedepression.Thisiswhyhespeaksof afailureofcapitalism, whichheexplainsinthisway:“depressionistheresultofnormalbusinessactivity ina laissez-faire economicregime ”(p.235).Capitalisminunregulatedform normallyresultsindeepdepressions.Thatisbecauseindividualrationality andrationalcollectivechoiceseldomcoincide,andthat’swhyself-regulation ininsufficient:“Rationalindifferencetotheindirectconsequencesofone’s behavioristhereasonthegovernmenthasaduty,inregulatingfinancialbehavior, todomorethanpreventfraud”(p.107).

GABRIELAMORAN UniversityofKansas,USA

HaroldJames, TheCreationandDestructionofValue:TheGlobalizationCycle, Cambridge,MAandLondon:HarvardUniversity,2009,336pp.

James,anhistorianwhohaswrittenaboutDeutscheBank’sassociationwith Nazism,viewstherecentcrisisthroughthelensofaconcernwith(andcommitment to)globalization.Agreeingthatthecrisisarosefromglobalization,heworriesthat thepublicwillcallfortradeprotectiontocreatejobs—thusunderminingglobal interconnectedness.Buthenotes,too,thatelitesoftenresistthesecalls.Heobserves thatObama’s“BuyAmerican”clausesinthestimuluspackageincurredsuch legislativewraththattheywerescaledback.Sothedebatecontinues.

Capitalism,asJamesseesit,thrivesby“creativedestruction.”Inthisspirithe offersakindofapologyforjoblossduringtheGreatDepression:“Intheshortrunit lookeddevastating,andgovernmentscontemplatedasmanymeasuresasthey couldforincreasingmanufacturingemployment But[this]eventuallypushed workersintonewoccupations,andunderlinedtheimportanceoftheskills andeducationthatprovedvitalforthedevelopmentoftheserviceeconomy ” (p.159).Unlikeanalystswhosaythatjoblessnessandfallingwagescutdemandand puttheglobaleconomyinperil,JamesprojectsavisionofanIT-enabledeconomyin whichjoblosscomportswellwithprosperity.“Raisingproductivity ... throughthe useofnewtechniquesandnewequipmentmeantthattheseactivitiescouldbecome muchmoreproductive,whileemployingfewerpeopleandgeneratingless macroeconomicvulnerability”(p.169).Howtheunemployedwillfindnewjobs, andhowthesystemwillrebalanceandevenbenefitinthemeantime,isa conundrumhedoesnotfullyclarify.

Jamessaysthatmostcrisesoriginateintheglobalperiphery,givingthecore nationstimetobufferthemselves.Butthecurrentcrisis,liketheGreatDepression, originatedinthefinancialcenteroftheglobaleconomy.Groundzerowasthe housingdebacle,inwhichsubprimeloansweresweetenedwithultra-lowdown paymentsandrepaymentschedules:“ ... theoverwhelmingmajorityofsubprime mortgages(80to90%)werere-packagedintopools[and]splitupaccordingto theirlikelihoodofdefault”(p.153).Thesepoolschangedhandsrepeatedly,and wereoftenrepackaged:from2005–2007,“some$540billionofcollateralizeddebt obligationsandasset-backedsecuritieswerecreated”(p.153).Theerrorofthis practicesoonbecameclear.

InApril2007,atopsubprimelenderfiledforbankruptcy.Soontwosmall EuropeanbanksneededhelpbecausetheywereexposedtoUSdebt.Several nationstriedtostemthetideoflikelybankfailureswithliquidityinfusions.But thisprovedunsuccessful.InFebruary2008theSwissbankUBSannouncedan$11 billionlossduetoUSmortgageinvestments.Thenextmonth,thegiant investmentbankBearStearnscametothebrinkoffailure.Tomanyinsiders,this wasthesignalthatWallStreethadfailedand FinancialTimes writerMartinWolf statedthiswas“thedaythatthedreamofglobalfree-marketcapitalismdied” (p.106).Majorbanks,bothintheUSandabroad,wereshakenandultimately becameessentiallyorliterallynationalized.

Jamesisclearabout“what”happened,butlesscompellingabout“why”it happened.Whydidsubprimelendingboomatthatprecisemoment?Whywas exoticfinanceembracedsoardently?Whowaschieflyresponsibleforthistrend? Whogainedandwholost?Othersdwellonthesetopics;Jamestouchesuponthem lightly.HegivessomeweighttoWhiteHouseinitiatives,underClintonandBush, toexpandhomeownership.Hecitesweakriskmanagementatinvestmentbanks; thefastpaceoffinancialinnovation;thedispersalofdebtamongnations;the relaxationofbankruptcylawsforfinancialinstitutionsin2005;and,aboveall,“the

mostobviousculpritofthecreditboom, theFederalReserveSystem’spolicyof rapidinterest-ratecutsinordertodealwiththerecessionof2001”(pp.156–157). Buttheunderlyingreasonsforthecrisis,thethreadswhichbindthedetails together,remainbeyondhispurview.

CHRISGOODE UniversityofKansas,USA

GrahamTurner, NoWaytoRunanEconomy:WhytheSystemFailedandHow toPutitRight,LondonandNewYork:PlutoPress,2009,240pp.

ForTurner,aneconomicconsultantintheUK,thecrisisisprimarilystructural andmacroeconomicinorigin.Heindictsmanyoftheusualsuspects(deregulation, lowtaxeswithhighspending,irresponsibleinvestmentbanks,andthefactthat centralbankersallowedcredittogrowcancerously).Buthealsopositsan overarchingtrendrevolvingaroundcyclicalprofitfailures,compoundedbyhigh unemployment,risingprices,andfallingdemand.

Duringthebubbleyears,profit-hungrycapitalistsscouredtheworldnotonly forcheaperlaborpower,meansofproduction,andmarketsbutalsoforcredit,that is,foreigncapital.Thisglobalizationdynamicdrovematerialgrowth,including construction,butatthesametimeitspurredexcessivecreditgrowthaswell.The resultingrecessiongavebusinessanincentivetoreversegrowthstillfurtherby slashinglaborcosts,especiallybyfiringworkersathomeandseeking replacementsoverseas.Thelattertrend(“outsourcing”)wasalreadyvisibleas thehousingcrisisgrew,showingthatnegativerealgrowthwasoneofthecentral underlyingfeaturesofthespeculativeexpansion.Hourswerealsoforciblycut back—yielding“involuntarypart-timeworkers,”the“marginallyattached.” Turnerconcludesthat,withfallingwagesandincomeinthralltocredit,“debtwas thenewslavery”(p.17).

InChapter5,Turnerprovidesanin-depthMarxistanalysisofthecrisis. Hedefinescapitalismasasystemofaccumulationinwhichinvestors push“profitstotheirlimits.”Overtime,productiontendstobecomeprogressively lessprofitable,leadinginvestorstoseekprofitsintherealmof“fictitiouscapital” (thatis,financialspeculation).Itwastheconcentrationofexcessfundsintheform ofspeculativeorfictitiouscapitalthatprovidedthe“triggerforacollapseofthe creditcycle,takingtheeconomyintorecession”(p.115).

AccordingtoMarx,counter-trends(includingwar,creditextensions,faster production,betterinventory,cheaperlabor,globalization)canslowor temporarilyreversethefallofprofits,butthesetrendsareoftenfragile.Inthe bubbleyears,thetrendswentinthereversedirection. Laissez-faire policy(most notablyderegulation)allowedbankstotakeonexcessivelyriskydebt.Cutting taxes, a ´ la BushandObama,istheoppositeofwhatweneed.Here TurneremergesasaKeynesianloyalist.Hecontendsthatcrisis,nowasinthe GreatDepression,requiresswiftanddecisiveinterventionthroughfiscal policytoavoidcollapse.Keyneshadunderstoodthat.But,ignoringKeynes,the centralbankershavereliedmainlyuponthemonetaristmanipulationofinterest ratestoengineerahoped-forrecovery—anapproachTurnersayscannot succeed.

ForTurner,Obama’spoliciesarean“intensificationoftheveryworstfeatures oftheBushadministration”(p.148).Whatisofferedas“recovery”isactuallya returntothebubble—taxcuts,revivedspeculation,unsustainabledebt, unaccountablebanks,passivecentralbanks,andminimalregulation.Withbanks weighteddownwithdelinquentaccounts,Turnerarguesthatfar-reaching reformsareneeded—includingthenationalizationofthebanks(tomitigatedebt inflation)andeconomicdemocratizationto“attackthevestedinterestsofbig business”(p.170)thatledtothecrisis,moving“awayfromshareholdervalue towardscommunitygoals”(p.173).

Aresuchchangeslikely?Turnerisn’toptimistic.Buttheymaybenecessary.

JOSHUAHOMAN UniversityofKansas,USA

RossGarnaut,withDavidLlewellyn-Smith, TheGreatCrashof2008, Melbourne:MelbourneUniversity,2009,256pp.

Garnautblamesthecrisisongreed,“clevermoney,”andglobalimbalancesin savinginvestment,supplyanddemand:“ ... agreatfloodofsurplussavings founditswayfromEastAsiaandresourceexportingcountriestotheUnited StatesandtherestoftheAnglosphere ... ”ThisfueledgreedandMachiavellian finance,allowingconsumersandinvestorsin“thedeficitcountries ... toincrease expenditureonhousing,consumptionandgovernment,aswellastoreduce taxation,beyondwhatwouldoncehavebeenregardedasprudentlimits.”When thebubbleburst,investorsretreated.Unabletorelyonsuddenlyshakybanks, theytransferredlesscapitalacrossborders.Theconsequencewasthattheshiftof savingsfrom“surplus”to“deficit”nationscollapsed,transformingthe“Great CrashintotheGreatRecession”(pp.25,37).

“Clevermoney”(forexample,derivatives)gavebanksandothers“accessto credittheycouldneverrepay”(p.39).Shadowbanks—lightlyregulated investmentbanks,moneymarketfunds,hedgefundsandothers—played starringrolesintheriseofclevermoneyandthefalloftheeconomy.Akey shadowbankingpracticeissecuritization,inwhich“anilliquidbutincomeproducingasset ... isconvertedintoasecuritythatismoreeasilytradedby investors”(p.41).Securitizationoriginatedintheearly1980sandbecameknown as“asset-backedfinance.”

ShiftsinglobalandUSregulatorypoliciesopenedthedoortoasset-backed finance.TheBaselIaccordin1988specifiedthatinvestmentbanksmusthold capitalreservesatlevelshigherthanmanyofthemliked.Securitizationwasone waytheygotaroundthisrequirement,byremovingloansfromtheirinstitutional balancesheets.TherepealoftheGlass-SteagallActalloweddepositorybanksto enterthesecuritiesgame,raisingthepercentageofrevenuesthatcouldbe underwrittenbysecuritiesto25%,thusexpandingthesecuritiesmarket enormously.Manyoftheinvestorswereotherwiserisk-aversegroupslike pensionfundswhich,whenthebubblecollapsed,lostvastsums.

ForGarnaut,derivativesandshadowbankswerethe“HeartofDarkness”in thecrash.Yetheaffirmstheirpeculiarbeautyaswell:“Theglobalshadow bankingsystemisasintricate,swiftandbeautifulasthechemicaltransmissions

592 DavidNormanSmithetal.

withinalivingorganism.Itisthecirculatorysystemofglobalcapitalism.Itexists beyondtheunderstandingandcontrolofanyregulatorornation.Thesystemcan inundatechosenassets,markets,evencountrieswithcapital,orstarvethemona whim.Itcantransmitshocksaroundtheglobeinaninstant.Itisthelifebloodof theGreatCrashelephant”(pp.64,71).

GarnautdecriesthelinksbetweenWallStreetandtheFederalReserveBoard andTreasuryDepartment,whichled,hesays,tothe“regulatorycapture”of governmentbodiesbyfinancialinterests.HenamesGreenspan,Rubin,and Paulsoninparticular.Thesewerethemen,hesays,whoderegulatedand rewardedspeculatorswithbailoutswhilegivingthemvirtualimpunityfortheir misdeeds.

Ultimately,though,Garnautblamesthegamemorethantheplayers:“ ... the USsecuritizationprocess ... stretchedtherulesgoverningtransactionspastthe breakingpoint.Theborrowerwasseparatedfromthelender,thelenderfrom ownership,AAAguaranteesfromcapitalprovisions,profitcentersfrombalance sheets,riskfromreward,and creditcreationfromoversight.”Thiswasa systembasedontheillusionthatnotionalderivativevalueswereasgoodas moneyinthebank,thatcleverfinancialinstrumentswouldalwaysattractbuyers: “Whenthetestcame,[thesystem]collapseduponitselflikeadyingstar”(p.54).

GarnautcontraststhewaysinwhichAsiaandtheAnglosphererespondedto theAsiancrisisofthelate1990s.WhentheAsiandebtornationssought InternationalMonetaryFundhelp,“theywereforcedtoaccepthumiliating conditionsandcounterproductiveeconomicpolicies.”Determinednottorepeat this,theyprivilegedproductionoverconsumption(pp.26–27).InChina,excess savingoverspendingledtosurplusesthatrosefromto1.3%ofGDPin2001to 11%by2007.Thisfueleddestabilizingglobalimbalancesandnowloomsasa majorthreattoglobaldemand,butitalsopreventedChinafromexperiencingthe worstofthefinancialcrisis.

ThislessonwasplainlylostontheWest.

Inclosing,Garnautwaxeslyricalaboutcapitalismanditstendencytoreward meritwithwealth.Thecrashcame,hesays,whenfinancierswerecompensated beyond“thelimitsuponwhichthemodernmarketeconomyhadbeenbuilt” (p.219).Theimplicationisthatthesystemcanbesavedbyreturningtocapitalist firstprinciples,withregulationtoensurebalance.

ANNAKERN

UniversityofKansas,USA

JosephE.Stiglitz, Freefall:America,FreeMarkets,andtheSinkingoftheWorld Economy,NewYork:W.W.Norton,2010,361pp.

ForNobel-winnerStiglitz,theGreatRecessionismarkedbyacuteresourceunderutilization,inwhich“thecumulativegapbetweentheeconomy’sactualoutput andpotentialoutputisinthetrillions”(pp.17–18).Intwenty-onemonthsthe economylosteightmillionjobs,andsomegroupswereveryhardhit.Stiglitz reports15.7%joblessnessamongAfrican-Americansandawhopping27.6% amongteens(p.65).

Whatexplainsthiscrisis?Stiglitzcondemnstheincentivestructurein particular:“Bankersactedgreedilybecausetheyhadincentivesandopportunities todoso,andthatiswhathastobechanged”(p.6).Arguingforregulationto revisetheincentives,hedevotesmuchofthebooktoexplaininghowderegulation createdthecrisis.

Bankstraditionallywantedborrowerstorepaytheirloans,withinterest.But financialinnovationsallowedbankstoprofit,aboveall,byearningfees.This invertedtheirprioritiesandpractices.Consider,forexample,theinnovationof 100-pluspercentagemortgages.Homeownerswereinvitedtorefinancetheir homesformorethantheywereworth,ontheassumptionthathousingprices wouldcontinuetorise.Sincefatterloansmeantfatterfees,bankersweregladto ignorethefactthat,downtheroad,pricesmightplummet.Toworsenmatters, mortgageswereoftensecuritizedandtraded.

Theproblemliesintheincentivestructure.Commercialbanks,designedto lendtosmallbusinessesandhomeowners,begantakingriskslikeinvestment bankstomaximizeprofits.Unlikeinvestmentbanks,commercialbanksare backedbytheFDIC;theyknowthateveniftheyloseoutintheirgamblingwith securities,theystillwillnotgounder.Thisiswhatled“TooBigtoFail”banksto committhe“GreatAmericanRobbery”oftaxpayermoneytopaytheirdebts (p.109).

Stiglitzwantstoseebanksrewardedforservingthepublicinterestand punishedwhentheydothecontrary.Thisrequireschangingpaystructuressothat bankersarepaidforlong-termperformanceandpenalized,likeshareholders, whenlossesaccrue.Commercialbanksshouldbebarredfromtakingriskslike investmentbanks.Banksthataredeemed“toobigtofail”shouldbebrokeninto moremanageableunits,andpredatorylendingshouldbestoppedimmediately bythecreationofafinancialconsumerprotectionbureau.Stiglitzalsosaysthat derivativesshouldbefullytransparent—althoughhesaystheyaretoousefulto banoutright.

Ultimately,forStiglitz,thecoreproblemisregulatory,notsystemic(inthe Marxistsense).Inessence,thestatehasfailedtoregulatefinanceproperly.The triumphofmarketderegulationisminthe1980swasthusaturningpoint,anda furtherkeysteponthepathwastheGramm–Leach–Blileybillin1999.TheGlassSteagallActof1933haddistinguishedFDIC-backedcommercialbanksfrom investmentbanks.ButtheGrammbillallowedcommercialbankstocircumvent theserestrictions.Consequentlythefivelargestbanksgrewfrom8%marketshare in1995to30%today.Thisiswhytheyarenow,indeed,“toobigtofail.”

Otherscontributedaswell.StiglitzexplainsRonaldReagan’sculpabilityin detail.WithregardtoReagan’sappointeeAlanGreenspan,Stiglitzwrites: “GreenspanandtheFedwerejustwrong.TheFedwascreated,inpart,toprevent accidentsofthissort.Itwasnotcreatedjusttohelpcleanup”(p.271).Hesaysthe Fedfailedtodiscouragepredatoryandirresponsiblelendingbyallowing100-plus percentloans,variable-ratemortgages,andlow-documentationloans.Hadthe Fedbehavedmoreresponsibly,therecessioncouldhavebeenprevented.

StiglitzalsocriticizestheTroubledAssetReliefProgram(TARP).Heagrees thatTARPallowedthegovernmenttobuythetoxicmortgages,effectivelysaving thebanks.Butwithoutincreasingbankregulation,orotherwisechanging incentives,TARPultimatelydidlittlemorethanrewardthebanksforrisky mortgagesandrisk-taking.

“Manycountriesmayconcludenotsimplythatunfetteredcapitalism, American-style,hasfailed,butthattheveryconceptofamarketeconomyitself hasfailed ”Stiglitzdisagrees,sayingthat“nosuccessfuleconomy hasnot reliedheavilyonmarkets ... Old-stylecommunismwon’tbeback,but,”hewarns, “avarietyofformsofexcessivemarketinterventionwillreturn.Andthesewill fail”(p.225).Heisequallyimplacableaboutmarketfundamentalism:“September 15,2008,thedatethatLehmanBrotherscollapsed,maybetomarket fundamentalismwhatthefalloftheBerlinWallwastocommunism”(p.219).

There-regulatedcapitalismthatStiglitzfavorsshouldseektoensurefull employment,promoteinnovation,providesocialprotectionfromrisk,andensure thatmarketparticipantsarenotvictimized(forexample,byalackof transparency).

LUCASKEEFER UniversityofKansas,USA

RaghuramG.Rajan, FaultLines:HowHiddenFracturesStillThreatenthe WorldEconomy,Princeton,NJandOxford:PrincetonUniversity,2010, 260pp.

Rajan,whoteachesattheUniversityofChicago,wastheInternationalMonetary Fund(IMF)’schiefeconomistfrom2003–2006.ChicagoandtheIMFareboth bastionsoffreemarketideology,butRajandepartsfromthattradition.He attributestheeconomicquaketoaconcurrenceoftectonic faultlines.Myopic financierscreatedriskyproducts;firmsmanagedriskpoorly;ratingagencies evaluatedriskbadly;Washingtonsabotagedmarketdiscipline;USworkers becamedependentoncredit;andglobaltradeimbalancesledexportingnations (especiallyChina)todependoncredit-drivenUSdemand.Whenthecrashcame, theUScouldnotfunctionastheconsumeroflastresortandguarantorofforeign investments.Rajanconcludesthatregulationisneededtostabilizemarketswhich cannotself-stabilize.

TheassetbubbleisRajan’sstartingpoint.Hesaysthat,pre-crisis,theUS governmenthadusurpedthemarket’sroleincreditprovision,offeringeasycredit andlowinterestinlieuofwage-baseddemand.TheFederalReserveBoard(the Fed)hadabdicateditsregulatoryrole,allowingfinancierstotakeill-advisedrisk inthechaseafterprofit.Theconsequencewasthat,againstabackdropoffalling consumerdemand,dilutedbythejoblessrecoveryfromthelastrecession,the governmentinflatedanassetbubbleinsteadofrevivingincome-baseddemand.

Jobshadreboundedfairlyquicklyaftermostearlierdownturns.Butittook nearlytwoyearsforjobstorecoverafterthe1990–1991recession,eventhough productionrevivedinjustthreequarters.Afterthe2001downturn,production reachedprerecessionlevelsinasinglequarter,butjobswerenotreplacedforover threeyears;andthenextcrisiscamejustafewyearslater.

Whyhaverecessionsbeensohardonjobs?Onereasonisthattheygive employersanexcusetoshedunneededorinefficientworkers;whenprosperity returns,thefirmisleanerandmeaner.Web-basedproceduresalsoenable companiestohire“justintime.”Thisgivesthemleverageoverworkers,asdoes theriseintempwork.Giventhesetrends,Rajansuggeststhatfuturerecoveries

(includingthepresentone)arelikelytofollowthispattern,anditislikelythat benefitswillexpirebeforeworkersfindnewjobs.

Theoutlookwillremainbleakaslongasthedominant“arm’s-length economics”(p.89)prizesefficiencyoverpersonaltiesandshort-termgainover long-termloyalty.Asanexamplehecitesinterventionsintheautoindustryinthe USandFrance.TheUSforcedGMtocloselaggingplants,whileFrance,in contrast,aidedPeugeotinreturnforapledgetoclosenoplants.Arm’s-length economicsalsowidensthe faultline ofincomeinequality,whichRajanblameson unbridledfinancialprofit-takingcompoundedbyadecliningeducationalsystem.

Rajanalsoindictsthearm’s-lengtheconomistsoftheFedforsayingthatthey wouldnotthwartpricebubblesinadvance,but,rather,thattheywould(in Greenspan’swords)“mitigatethefalloutwhenitoccursand,hopefullyeasethe transitiontothenextexpansion”(p.113).ForRajan,thistoldspeculatorsthat “ iftheygambled,theFedwouldnotlimittheirgains,butiftheirbetsturned sour,theFedwouldlimittheconsequences.”RajanalsoblamestheFedfor keepinginterestrateslow,arguingthatrockbottomrateshurtsaversandinvite banksto“plungethesystemintotroubleandgetagreatdealoninterestrates” (p.115).

AninterestingtensioninRajan’sownthinking—afaultline?—ishis simultaneousendorsementandcriticismofcapitalism.“Althoughsystemic failuredoesimplytheneedforseriousreform,itdoesnotmeanthataradically differentsystemwouldbebetter.Ibelievewehavetoworktofixthesystem,but thereisalotworthkeeping”(p.155).Onewonders:Canweexoneratecapitalism incasesof“systemic”failure?Rajanwalksafineline.Hispremiseisthat faultlines intheeconomydonotnecessarilyderivefromtheimperativesofcapital;that crisesspringfromconjuncturalratherthandefiningstructuralfeaturesofthe system.Hefrequentlyandfirmlyrejectsanti-capitalism.Yetheagreesthat capitalismcannotbewhollyunfettered:“Thecentralproblemoffree-enterprise capitalisminamoderndemocracyhasalwaysbeenhowtobalancetheroleof governmentandthatofthemarket ... [The]government ... simplycannotallow ordinarypeopletosuffercollateraldamageastheharshlogicofthemarketis allowedtoplayout”(p.18).

Giventhisconviction,andtoreviveincome-basedconsumption,Rajanfavors improvedsupportforschools,immigrants,workers,healthcareandunemploymentinsurance.Ifthisisstillmarketeconomics,itisverydistinctly21stcentury marketeconomics.

NATHANMOSER UniversityofKansas,USA

NourielRoubiniandStephenMihm, CrisisEconomics:ACrashCourseinthe FutureofFinance,NewYork:ThePenguinPress,2010,368pp.

Unlikesomeeconomists,whoconsideronlyequilibriumnormal,theauthors arguethatcrises“havealwaysbeen”and“willalways”bewithus:“Thoughthey arguablypredatetheriseofcapitalism,theyhaveaparticularrelationshiptoit. Indeed,inmanyimportantways,crisesarehardwiredintothecapitalistgenome” (p.4).Roubini,afamedanalystwhosebearishviewsledmanytocallhim

“Dr.Doom”inthebubbleyears,joinsMihmtopropose“crisiseconomics”—that is,thestudyofwhymarketsfail.Theypronouncethemselvesobserverswho “checkideologyatthedoor”(p.6).

RoubiniandMihmidentifymanyfactorsthatcombinedtoprecipitatethe crisis.Theysaythattoxicpoliciesfacilitatedtheriseof“shadowbanks”;that abstrusefinancialinstrumentsobscuredsystemicrisk;andthatindulgentcentral bankersfueled“moralhazard”byencouraginginvestorstothinkthateven extremegamblescouldbepursuedwithimpunity,since,iftheyfailed,the governmentwouldbailthemout.Theyalsofault laissez-faire economicsforits inabilitytorecognizethecrisis-pronenatureofunbridledcapitalism.Froma Keynesianviewpoint,theysuggestreformswhichcould,intheory,preventcrises fromrecurring.

Thecrisisbeganwhenfinanciersfoundthemselves“paralyzed”byalossof confidence,unabletotellwhichbankswereinsolventandwhichweremerely illiquid.RoubiniandMihmarguethat,hadtheFederalReserveBoard(theFed) actedswiftly,thisparalysisandthepanicthatensuedcouldhavebeenaverted. Butthatdidnothappen.NextcamethefailureoftwohedgefundsownedbyBear Stearns,which,likeothers,hadpouredmoneyintofinancialinstrumentsthat weresoopaquethatinvestors“couldn’tanddidn’tknowhowmuchexposure” theyhadtotoxicassets(p.92).Manyinvestorswithdrewfromthehedgefund marketentirely.

Theproblem,asRoubiniandMihmseeit,wasthatrisk,whichhadbeen predictablemorphedintouncertainty,whichcouldnotberationallypredicted, giveninformationfailures.Inshort,riskswhichhadbeenrationalbecame irrational—mandatingregulationtokeepriskwithinrationalbounds.Inthis spirit,theauthorsproposereformsintheareasofsecuritization,derivatives,the creditratingsystem,compensation,andriskassessment.Theyurgereformssuch asbreakingup“Too-Big-To-Fail”banks,reinstatingGlass-Steagall,blocking “capture”oftheregulatoryagendabyvestedinterests,andadaptingmonetary policytolimitirrationalexuberanceandpreventbubbles.

RoubiniandMihmsaythatcrisesarenot“blackswans,”thatis,rareand unpredictable,butrather“creaturesofhabit,”inherentincapitalism(p.15).But theauthorsdonotexplain,indepth,whycapitalismisunstable.Theycriticize unfetteredcapitalism,butotherwisetheyhavelittletosayaboutthesystem perse. TheycreditMarxforpioneeringinsightintocapitalism’scrisis-riddennature,but theydistancethemselvesfromMarx’s“darkervision”ofeconomiccrises(p.45). Nordotheysayverymuchaboutmundanerealitiesatthelevelofwagesandjobs. That,itseems,wouldrequireamorecomplete“crisiseconomics.”

KEVINMCCANNON UniversityofKansas,USA

RobertReich, Aftershock:TheNextEconomyandAmerica’sFuture,NewYork: Knopf,2010,192pp.

Thisisabrisk,practicalbook.ForReich,BillClinton’sSecretaryofLabor,thecrisis canbetracedtocompetitionandlabor-replacingtechnologiesofthe1980s.Rather thanenhancingthesafetynetandcreatingjobs,politicianspromotedderegulation

andprivatization;theycutwages,welfare,andtaxesfortherich.Thiscausedthe workingmiddleclasstorelyonseveralcopingmechanisms:growingfemale employment(the“two-paycheckhousehold”);longerworkhours;thedepletion ofsavings;andheavyborrowingviamortgagesandcreditcards.Asthese mechanismsbecamelesseffective,duetojoblossandwagereductions,workers lackedthebuyingpowertosustaintheeconomy.Thisbrokethe“basicbargain” whichhadsustainedtheeconomyfordecades.

Reichwarnsagainstdemonizingtheusualsuspects:consumersborrowingtoo much;bankslendingcarelessly;theFederalReserveBoard(theFed)forkeeping interestratestoolow;Chinafortheinfluxofcreditanddebt-fundedgoodsintothe US;andregulatorybodiesforfailingtocontainsubprimelending.Ofcourse,these factorsplayedmajorroles.ButReichsaysthatultimatelytheyaresymptomsofa largerissue—thatworkers’buyingpowerwassiphonedoffandconcentratedas increasingwealthamongtherich.

Giventhisperspective,Reicharguesthatthecrisiscanonlybedefinitively reversedbyreformsthatrebalancethedistributionofsocialandeconomic benefits.Wages,benefits,thesafetynet,andjobsmustreviveiftheeconomyisto beresuscitated.

Interestingly,Reicharguesthat,whilethegovernment’sresponsetothecrisis avertedafree-fallintodepression,itwasformulatedsoquicklyandunilaterally thatpeoplewerenotinspiredwithasenseof“beinginthistogether,”asinthe GreatDepression.Thatsolidaristicsensibilityhadspurredaresolvetorestore prosperitybymeansofanequitableredistributionofwealthandpower.But recentemergencymeasures,bystavingoffdepressionwithoutunitingthepublic moregenerally,addressonlysymptomsofthelargerproblemwithoutredressing thecoreissueofwealthinequality.Thisallowstheboomandbustcycletopersist unchecked.

Historically,Reichconnectstheboomandbustcycletopendulumswings betweenphasesofconcentratedwealthandperiodsofgreaterequality:1870–1929,theageofRockefellerandCarnegie,whenmonopolisticconcentrationof wealthbecamenotorious;1947–1975,the“GreatProsperity”oftheearlypostwar years,whenbusinessandthepublicsharedaffluencemorebroadly;and1980–2010,areturntothebadolddays.Inthefuture,Reichsays,“broad-based prosperity”mustagainbecomethenorm.

Reichsuggestsaplatformofreformstorestorethe“basicbargain”and inaugurateaneweraincapitalism.Thesesuggestedreformsincludethe following:areverseincometaxthatwouldprovideawagesupplementforlow wageworkers(thiswoulddiminishaswagesincreaseand,whenwagesrisehigh enough,wouldconvertintoanincometax);acarbontaxcalculatedonthebasisof thequantityofcarbondioxideaparticularfossilfuelcontains;highermarginaltax ratesforthewealthytorealigntaxratestomatchthoseinplaceduringperiodsof historicalprosperity;areemploymentsystem(insteadofanunemployment system)thatwouldprovidewageinsuranceandincomesupportforre-education andtraining;aseverancetaxonprofitablecorporationsthatlayoffworkers; schoolvouchers(forpublicschools)basedonfamilyincome;collegeloanslinked tosubsequentearnings;Medicareforall;increasedsupplyandfreeaccessto publicgoodssuchasparksandrecreation,libraries,andpublictransportation; andcampaignfinancereform.

ReichconsidersfreemarketideologytohavebeenatriggeroftheGreat Recession—andanobstacletoovercomingitseffects.Healsoholdsoutlittlehope foramarket-basedrecoverythatrequiresrebalancedglobalproductionand consumption.HeknowsthatmanypeoplethinkthatrebalancingtheUS-China relationshipisthecureforwhatailstheglobaleconomy,butheexpresses skepticism.China’sexportaddictionandtheUSpreferenceforfinanceanddebt overproductionmakerebalancinganunlikelyprospect.AndChina,too,suffers fromacutewealthandincomedisparitiesand“adisconnectbetweenproduction andconsumption”(p.74).Tosolveitsproblems,Chinamustgetitsownhousein order.ThatwillentailreformsakintothosenecessaryintheUS.Neithercountry,it seems,willsolvetheother’sproblems.

KAELABYERS

UniversityofKansas,USA

Ge´rardDume´nilandDominiqueLe ´ vy, TheCrisisofNeoliberalism, Cambridge,MAandLondon:HarvardUniversity,2011,400pp.

Thisbookdividesintotwohalves,focusingfirstontheneoliberalhistoricaltrends thatsparkedthecrisisandthenonthemorefamiliarimmediatecausesofthe crisis.Ifocusmainlyonthehistoricalargument.

Theauthorsseeneoliberalismasanaspectofmoderncapitalism,whichthey datetotheearly20thcentury.Thiscapitalismissimultaneouslymanagerialand financial: managerial inthesensethatcorporateownershipandmanagementare separated,andinthesensethatsocietypivotsaroundatrioofclasses,managerial aswellascapitalistand“popular”; financial inthesensethatthewealthiestclass dependsheavilyonfinancialinstitutions.

Dume´nilandLe´vysaythatwearenowinthemidstofthe“secondfinancial hegemony,”andthatfinanceentereditsfirsthegemonicphaseinthelate19th century(p.17).Theysaythateachsuchphaseleadstocrisis:initiallytheGreat Depression,andnowtheGreatRecession.Inthecurrentphase,markedbythe recentexplosionandimplosionofhouseholddebt,Dume´nilandLe´vyseetwo convergenttrendsinneoliberalism: class hegemony,whichentailsacompromise “totheRight”betweencapitalistsandmanagers;andUS global hegemony, atrajectorythatcoupledshrinkingdomesticaccumulationwithexpandingglobal trade.ForDume´nilandLe´vy,thesetrendsyieldedunsustainableUShousehold debtbecause,ontheonehand,risingdebtwasmadepossiblebythehegemonic pursuitofeverhigherincomeandevermorecomplexmechanismsoffinancial deregulation,andbecause,simultaneously,debtwasrequiredtomaintain capacityutilizationdespitegrowingtradedeficitsandindebtedness.

Theauthorssee“thedizzyingquestforincome”asanotherkeyfeatureof neoliberalism,pairedwithfreemarketideology(p.22).Theysaythatthecapitalist class—which,descriptively,theyequatetotheupperfivepercentoftheincome bracket—hasbeenincreasinglyuncheckedinthiswealthquestsincethe1980s, withtheresultthat,bythe2000s,thepurchasingpowerofthetoponepercenthad eclipsedthetotalpurchasingpowerofthelower99%.

Theauthorsbelievethatthehegemonyofcapitalistsandtopmanagersis securedthroughfinancializationandglobalization.Deregulationencourages

increasinglyetherealfinancialmechanismsandovervaluedprofits,and“deterritorialized”productionpermitsexploitationofdisparitiesbetweentheUSand peripheralzones.

Thusneoliberalismfacilitatedtheincredibleriseofconsumptionandfallof savingsamongUShouseholdsafterthe1980s.Interestingly,andincontrastto mostotheranalysts,theauthorsinsistthatbothspendingandindebtedness(inthe formofmortgageloans)havebeengreatestintheupperquintileofincome; indebtednessamonglowerquintileswasnot,intheireyes,akeycontributortothe crisis(pp.151,178–180).

Internationally,theauthorsseetwoprimaryshifts:a distributional shift, wherebytheproductivityofcapitalshiftedfromthenonfinancialtothefinancial sectorandincomeshiftedupwards;anda trade shift,wherebytradebecamea majorengineoftheglobaleconomy.Thenetresultwasamajordeclineindomestic investmentinfixedcapital,accompaniedbyatradedeficitandgeneral dependenceonforeigninvestment.Foratime,thankstothemomentumof priortrends,productivitywaskeptabreastofconsumptionanddebt.Butwiththe collapseofUSmortgagemarkets,beginninginearnestin2007,thiscouldno longerbesustained,andtheensuingdownfalloffinancialinstitutionsinitiateda crisiswhichspreadrapidlybeyondtheUnitedStatesasadirectresultof globalization.

Neoliberalism,courtesyofderegulationandglobalization,leftthestatewitha diminishedcapacitytostabilizetheeconomy.Monetarypolicywasineffective. Whatisneeded,theysay,isre-regulation,redistribution,andareformofthe financialsectortoservenonfinancialaccumulationandlimitrisk-takinganddebt. Obviously,thiswouldreversebasicneoliberaltenets.Curiously,Dume´niland Le´vyfindhopeintheprospectofa“neomanagerialcapitalism”inwhichthe managerialclasswouldleadthewaybacktononfinancialaccumulationand innovation(pp.326–334).

DANIELSULLIVAN

UniversityofKansas,USA

DavidMcNally, GlobalSlump:TheEconomicsandPoliticsofCrisisand Resistance,Oakland,CA:PMPress,2010,176pp.

Theauthorcharacterizestheimmediatepostwarperiod(1948–1973)asastageof unsustainablegrowth,characterizedbyover-accumulationandover-investment. Efficientmachineryandintensifiedlaborraisedproductivity,loweringthe absolutedemandforlabor.Asaresultofover-investmentandover-production— “over,”thatis,relativetoincome-drivendemand,notabsoluteneed—profits steeplydeclined.Yetcapitalwasstillrelativelycapableofemployingandpaying workers.Nonetheless,toconsumetheover-supplyofnewlyavailable commodities,workersalsoincreasedtheirrelianceuponcredit.

Over-accumulationcriseshavebeenfrequentsincetheGreatDepression(for example,1970,1974,1982,1997,2000–2001,2007–2009).Capitalistsprofitfrom risingproductivitywhilecountingonworkerstobuythegrowingmassof commodities.Buttheypaylessasmachinerybecomesmorecentraltoproduction

andastheproportionaldemandforlabor-powerfallsperproduct.Soworkers becomerelativelywage-poorandcapitalistsfacesalesandprofitcrunches.

From1971–1982,theUSstockmarketlosthalfitsvalue,bankswentunder, statedeficitsrose,andlayoffsandcutbacksbecamecommonplace.Asearlyas 1979,FederalReserveBoardchairPaulVolckerwasmovedtodeclarethat“the Americanstandardoflivingmustdecline.”Reagan’spresidency,beginningin 1980,wasthestartofwhatMcNallycalls“Volckershock”(p.36).

Theneoliberalascendancyfrom1982–2007witnessedstaticandfallingwages andbenefits,jobloss,and“flexible”(precariousorpart-time)employment,as productionwenteverhighertech.Freetradeagreements(forexample,with Mexico)allowedfactoryrelocationtotheSouth.WhileUSbusinessesreapthe benefits,theytakenoresponsibilityfortheconsequencs,whichincludeuntoward effectsonothercountries’resources,environmentalsystems,healthcare,wages, benefits,andpensions.

Emboldenedbygrowinglaborreserves(owingtotheglobalexpropriationof farmers)andlabor’sdecliningbargainingpower,multinationalcorporationsand theirneoliberalalliesattackedunionsandlaborparties;akeyearlyvictoryinthis campaignwasthe1981defeatoftheUSairtrafficcontrollersunion.From1990to 2005,GeneralMotorslostjust10%ofitssalesbutdownsizedfullytwo-thirdsofits workforce.

Attheculturallevel,McNallystressesthatdependenceon“themarket”(that is,capital’swillingnesstohireworkers)inculcatesanethic—obedienceand industryatwork,competitivenessinthelabormarket—thatrenderslaborfitfor exploitation.Asworkersareincreasinglyseparatedfrom(andreplacedby)means ofproduction,theyarecompelledtocompetewithoneanotherevenmorebitterly. Anyonewhocannotcompeteiscastout.

McNallyalsostressesthe“decommodification”ofmoneythatcameabout withthecollapseofthegoldstandardin1971.Thisallowedmoneytofloatfreely withoutananchorinproduction.Asaresultgovernmentsweretemptedtospend theirwayoutofcrisesandcapitalwastemptedtopursuefinancialratherthan industrialprofits.Governments,whichhadbeenrestrainedbygoldsupplies, couldnowsimplyprintmoneywhentheyneededaneconomicjump-start.This escalatedthesupplyofmoneyand,specifically,ofUSdollarsinglobalcirculation. Inbusiness,meanwhile,asprofitsdeclinedperunitofproductioncapitalists borrowedtomanagerisks.Increasingly,workersalsoborrowed—tomakeends meet.

After1972,derivativeswereusedtohedgeagainsttherisksofspeculative currencytrading—tradingthathadmushroomedoncemoneyhadbeen decommodified.Largescalesecuritization,meanwhile,requirednewdebtto trade.Solow-interestsubprimemortgageswereaggressivelyofferedtoclienteles whopreviouslywereunabletoattainsuchloans—lowwageworkersand minorityborrowers,whowerethusdrawnintothelogicofassetinflationand encouragedtorisktheirpensionsandhomestofinancedebt.

After2000,subprimemortgagebondsregisteredatenfoldincrease.Relatively stableformanydecades,housingpricesrose70%fasterthantheConsumerPrice Indexfrom1995to2007.Thenewcomputerprogramsdevelopedtoassessrisk failedtoforeseethegrowingcreditbubble.Inessence,theperiodfrom2000–2007 wascharacterizedbytheascendancyoffictitiouscapital:derivatives,and

derivativesofderivatives,spiralinginaloopofimaginaryprosperity.Soon,lowincomeAmericanswerenolongerabletomanagemortgagepayments.

Historically,capitalhassurvivedboutsofover-accumulationbydestroying excesscapital—allowingbankruptfirmstofail.Butnow,creditisextendedto bankruptbanksandcompaniestobolstertheeconomy.Massivebailoutsonly servetopreserveexcesscapitalandtherebyprolongtherecession.Andpublic debthasincreasedsincethestartofthecrisisinmanycountriessuchastheUS, Britain,Spain,Ireland,Portugal,Italy,andGreece.

Asprivatedebtbecomespublicdebtandneoliberalismshiftsfrommarket idolatrytoworshipofausterity,workersincreasinglybearthebruntandblamefor theglobalslump.Joblosswastheleadingcauseofover60%ofhousing foreclosuresby2009.Associalprogramsarecut,workersareforcedtodependon themarket(oftenvainly)fortheseservices.Insum,theyareexpectedtoconsume whilelackingthemeanstoconsume.

Debtisnowaweaponofglobaldispossession.Between1980and2002, developingcountriespaid$4.6trillionindebtservicesonlytoendup400%as indebtedasbefore(owing$2.4trillion,upfrom$560billion).Anddispossession proceedsapaceinChina,whichalsopaysrecordlowwages—just4.9%ofthe wagespaidtotheirAmericancounterparts.Nowonderthatover400ofthe500 largestcorporationshavesetupshopinChina!

Whatcanbedone?McNallywantsworkerstopushforuniversalhealthcare, publicpensions,publichousing,progressiveincomeandwealthtaxes,public infrastructure,andbanknationalization.Hehopestoseereductionsinworking hourssothatworkerswillhavetimetopursuesustainedorganizingin communitiesandworkplacesanddevelopnewpoliticalparties.Thiscouldseem likepainfullywishfulthinking,butMcNallygivescredibleexamplesofthekind ofmovementheenvisions:the2000upsurgeagainstwaterprivatizationin Bolivia,the2006uprisinginOaxaca,andthegeneralstrikesinGuadeloupeand Martiniquein2009.IimaginethathewouldfindsimilarinspirationintheArab spring.

RACHELCRAFT

UniversityofKansas,USA