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The Christian Faith and the Financial Crisis
Part Two: The Financial Crisis (11)
A CRISIS OF OVERPRODUCTION
An analysis that I think is much more interesting and perceptive - indeed more in keeping with the intellectual rigour of Griffiths's own writings of the 1970s - is provided by an American Marxist historian, Robert Brenner, author of a paper entitled 'What's good for Goldman Sachs is good for America'. (16) One thing I like about Brenner's account is that he doesn't spend too much time on the details of the various financial manipulations that led to the crisis. At least, he doesn't see them as autonomous bits of badness on the part of rogue traders. He is interested in why people who may be assumed to be concerned with the well-being of the real economy, whether in government or in the financial services, were willing to tolerate and even encourage such activities.
(16 ) Robert Brenner: What is good for Goldman Sachs is Good for America - The Origins of the Present Crisis, Center for Social Theory and Comparative History, UCLA, 2009. Available on the internet - Google Brenner Goldman Sachs.
Brenner argues that underlying the collapse is a problem of overproduction - a perennial problem, indeed the perennial problem, of industrial capitalism - too many goods chasing too few buyers (we may note a difference from Griffiths's view, expressed in The Creation of Wealth, p.73, that 'the case for competitive markets is that in a world of scarcity they are superior to other practical forms of economic organisation in terms of allocating resources'):
'What happened was that, one-after-another, new manufacturing power entered the world market - Germany and Japan, the Northeast Asian NICs (Newly Industrializing Countries), the southeast Asian Tigers, and, finally, the Chinese Leviathan. These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and, in that way, profits.
...
They, therefore, had no choice but to slow down the growth of plants and equipment and employment. At the same time, in order to restore profitability, they held down employees' compensation, while governments reduced the growth of social expenditures. But the consequence of all these cutbacks in spending has been a long-term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy's long-term weakness.' (17)
(17) 'Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World' Robert Brenner interviewed by Jeong Seong-jin in the China Left Review, Issue no 2, 2009, available at http://chinaleftreview.org/index.php?id=64
Brenner understands the financial manipulations which finally led to the collapse as 'asset-price Keynesianism'. As we have seen, the traditional Keynesian argument is that in order to keep the economy going and hopefully generate full employment, the ability of consumers to buy the products of industry has to be stimulated. This in Keynes's view required government spending which in turn produced government debt, which was viable so long as the stimulus to the economy enabled the government to receive enough money to be able to service its debt. Hence the various manipulations of the banking system in the 1960s that Griffiths objected to in his Competition in Banking. What Brenner called 'asset-price Keynesianism' on the other hand is what he also calls, rather inelegantly, 'bubblenomics'. Spending power is stimulated by inflating the value of various assets, which may be different kinds of investment product or, most obviously and easily, housing and real estate (the number of assets that are widely owned and could be expected to increase in value are very limited). We may remember Griffiths saying that over the thirty years preceding the financial collapse the pattern of boom and bust had been overcome. In fact there had been in the late 1990s a quite classic boom and bust in the field of information technology followed by the housing bubble of the early 2000s. But there seems to have been a widespread notion that the bubbles could be managed in such a way as to prevent major crises. Hence Gordon Brown also declared famously that boom and bust had been overcome. The theory of it was laid out in a talk given in February 2004 by Ben Bernanke (at the time a member of the Federal Reserve Board of Governors - he was appointed chairman in 2006) under the title 'The Great Moderation', which he characterised as 'a substantial decline in macroeconomic volatility'.
This is how Brenner characterises the preceding twenty years which Bernanke called 'the great moderation':
'To respond to the fall in the rate of profit in the real economy, some governments, led by the U.S. [actually, as we have seen, the UK, in 1986 - PB], encouraged a turn to finance by deregulating the financial sector. But because the real economy continued to languish, the main result of deregulation was to intensify competition in the financial sector, which made profit-making more difficult and encouraged ever greater speculation and taking of risks. Leading executives in investment banks and hedge funds were able to make fabulous fortunes, because their salaries depended on short-run profits. They were able to secure temporarily high returns by expanding their firms' assets/lending and increasing risk. But this way of doing business, sooner or later, came at the expense of the executives own corporations' long-term financial health, leading, most spectacularly, to the fall of Wall Street's leading investment banks. Every so-called financial expansion since the 1970s very quickly ended in a disastrous financial crisis and required a massive bailout by the state. This was true of the third-world lending boom of the 1970s and early 1980s; the savings and loan run-up, the leveraged buyout mania, and the commercial real estate bubble of the 1980s; the stock market bubble of the second half of the 1990s; and, of course, the housing and credit market bubbles of the 2000s. The financial sector appeared dynamic only because governments were prepared to go to any lengths to support it.'
The sub-prime mortgage scandal was the result of deliberate policy to boost the economy by encouraging people to spend. The confidence to spend at a time when incomes were stagnant or declining, which is to say the willingness to incur debt in order to spend, was largely provided by confidence in continually rising house prices:
'The growth of consumption and residential investment, heavily dependent upon the housing price run-up, as well as the increase of government spending, mainly reliant on soaring military expenditures, were accounting for what little economic growth was taking place. Otherwise there was little that was powering the economy. In fact between 2000 and 2003, GDP growth averaged just 1.6 per cent; had it not been for housing, specifically the increase in mortgage equity withdrawals and expenditures on home construction and furnishings in that interval, it would have been a miniscule 1.1 per cent. Much as in 1998, the stimulative impact of the asset price bubble seemed to be reaching its limits. In the second half of 2003, large scale tax rebates plus further Iraq war spending gave the economy a major fillip, but these were obviously one-off affairs ...'
But as house prices increased so houses became less affordable, threatening to bring the bubble to an unpleasant end. In these circumstances it was desirable to open the housing market to new customers:
'It was no coincidence that by February 2004, Alan Greeenspan was making the pointed suggestion that "Americans might benefit if lenders provided greater mortgage alternatives to the traditional fixed rate mortgages." Just so that no one would miss the point, he went on to sing the praises of adjustable interest rates, which just happened to govern 80-90 per cent of subprime mortgage loans but less than 20 per cent of prime mortgage loans. Mortgage lenders hardly needed this encouragement. They had already begun to introduce a flood of shaky new "affordability products": "state income" loans, which did not require borrowers to document their incomes; interest only loans ... [there follows a long list of easy term loan offers - PB]. The all-too inevitable result was that, according to the Federal Reserve's own survey of bank lenders, there began from 2003-2004 a steep plunge in the standards for lending, which continued unchecked until the housing boom fizzled in 2006. Yet the Fed made no attempt to intervene, as this was clearly very much what Alan Greenspan and company wanted, and needed, to sustain the economic expansion' (18)
(18) 'What is good for Goldman Sachs is Good for America' pp.41-3
So the idea that the twenty or thirty years leading to the crisis of 2007/8 saw the operation of a pure market system regulated by the law of supply and demand is very fanciful. The distortions in the market mechanism may not have have been introduced by government initiatives aiming to sustain full employment, but distortions were being introduced just the same. Large sums of money were being pumped into the economy - without, apparently, generating either full employment or inflation - and large amounts of debt were being racked up apparently with a view to the classical Keynesian end of keeping us all shopping.