Global Instability and Challenges to the Dollar:
Assessing the Current Financial Crisis
By David McNally
We are living through financial turmoil so serious at the moment that
the International Monetary Fund calls it "the largest financial
crisis in the United States since the Great Depression." Already,
commercial banks have collapsed in both Britain and Germany, as has
the fifth-largest investment bank on Wall Street. A series of hedge
funds have gone under or are teetering on the brink of ruin. It is a
near certainty that more financial institutions will fail before the
crisis burns out.
It is clear that the Left needs serious analysis of just what is
happening to world capitalism at the moment. Too often, however, our
assessments are stuck in the past, revolving around debates as to
whether or not this crisis represents a repeat of 1929 and the Great
Depression.
Such debates detract from the hard work of analysis that is needed.
Ignoring the inherently dynamic and historical nature of capitalist
society and the continual transformations this involves, they take
one particular historical moment in the history of capitalism as the
norm against which all others will be measured. The end result is a
sterile exchange between, on the one hand, those who assume that
history tends to repeat itself and, on the other side, those critics
who so exaggerate what has changed (particularly the ability of
central banks to dampen tendencies to financial instability) that
they present a picture of a capitalism whose contradictions have been
effectively muted.
The real challenge for Marxist analysis, however, is to grasp both
the changes and the enduring economic contradictions within
capitalism, in order to understand how capitalist transformation
displaces and reorganizes crisis tendencies without eliminating them.
In the absence of such analysis, much of the radical commentary on
offer tends to focus on the blatant deceit and corruption of
financial players who have contributed to the market upheaval. This
has its purposes. But it runs the risk of downplaying the structural
features of late capitalism that breed financial meltdowns and in
so doing of suggesting that the Left should focus on issues like
financial regulation rather than class struggle against capital.
Trying to make sense of this crisis is one important step toward
developing both an analysis of late capitalism and some of the tasks
that confront the Left. To be sure, any assessment of unfolding
events will necessarily be partial and incomplete. Nonetheless, it is
possible to offer some crucial guidelines for making sense of this crisis.
A Banking Crisis, Not a Liquidity Crisis
It is critical to recognize at the outset that, contrary to the
claims of central banks, this is not a liquidity crisis, i.e.
financial turmoil caused by insufficient supplies of money flowing
through the financial system. Instead, we are dealing with an
insolvency crisis caused by the fact that many financial institutions
are effectively broke. The result is a trauma in the banking sector.
This trauma persists because a myriad of lending institutions hold
billions of dollars in massively depreciated paper that nobody is
interested in buying from them. There is a host of exotic names for
this paper Collaterallized Debt Obligations (CDOs), Asset Backed
Commercial Paper (ABCP) and so on but essentially it is an array of
debt obligations, or titles to payment of interest and principal on a
vast array of loans. Until the crisis broke, investors had been
treating such paper as a stock of assets that could at any time be
sold, i.e. as liquid wealth. Yet, the value of a debt rests in the
first instance on the capacity of the borrower to pay. If the
borrower cannot pay, the alternative is for the creditor to seize the
asset. But if the asset itself is losing value, then it may not cover
the loan and there might not be anyone out there who wants to buy
it. In short, it may not be convertible to cash.
And that is precisely what is happening on a larger and more complex
scale today. Economic reality is demonstrating that much of this
paper tied in the first instance to tens of millions of US
mortgages is worth billions of dollars less than what was paid for
it. So, much of it is being written off or written down (revalued at
amounts that involve enormous losses). It is as if you once had $1000
in the bank, against which you had borrowed many times that amount
(say, ten times that amount or $10,000), and you have now learned
that you only have $500. Once your creditors discover that, they will
scramble to collect in the knowledge that there's no way you will
ever pay off all that you owe. But your $500 will be gone pretty
fast. And since you owe $10,000, a lot of your creditors won't be
able to collect. And they won't be able to sell off your debts to
anyone else either.
full: http://www.newsocialist.org/index.php?id=1636
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