Before his untimely demise, Lee Harvey Oswald made the claim that he was a patsy, framed by conspirators.
Interestingly, Oswald was a self proclaimed Marxist. Since this financial crisis I have wondered more than once about whether Karl Marx was right, whether capitalism would fall of its own internal tensions. So this interesting piece hooked my attention. David Harvey is a Distinguished Professor at City University New York. He teaches a full course on reading Karl Marx, but prepared this paper for presentation to the American Sociological Meetings in Atlanta a few weeks ago.
Given the financial crisis, Harvey wanted to revisit material he has taught for a long time. Some of the material is highlighted here and is chilling in its applicability. Which raises the question of financiers, are they unwitting patsies for the wearing down of a plundered economic system? I would submit, and those who have followed my blog know well, that while at some date in the future such financiers may claim “Patsy” status, it is by many individual actions that such outcomes come to be collectively accepted. Individuals are responsible, despite the camouflage provided by massive corporations.
So here are some highlights of the selected paper.
Continuous financial innovation has been crucial to the survival of capitalism. But finance and money capitalists also demand their cut of the surplus value produced. Excessive power within the financial system can itself then become a problem, generating a conflict between finance and production capital. Financial institutions, furthermore, have always integrated with the state apparatus to form what I call a “state-finance nexus.”5 This usually stays in the background except in a crisis, as happened in the United States in the wake of the Lehman collapse: the Secretary of the Treasury (Henry Paulson) and the Chair of the Federal Reserve (Ben Bernanke) were making all the key decisions (President Bush was rarely seen).
Two key points to note here. First, the conflict between Finance and Production Capital. For Marx, Production Capital was that segment of the economy that combined capital with labor to produce goods and services for profit. Perhaps it is stating the obvious to note that Finance has now come into conflict with the goods producing sectors. It is oft noted that Finance has grown to an outsized portion of public company profit and market capitalization. It is also commonly noted that the function of the allocation of capital has been heavily distorted by the self-serving nature of Finance at this stage in our history. Be it the profanity laced cynicism of internal Goldman memos, the prevalence of front running on the trading platforms, the complicity in the hiding of public finances in Greece, the privatizing of profit and socializing of risk, or the nonchalant acceptance of a financial crisis every 5 to 7 years, Finance no longer even maintains an illusion of serving the economy. Unemployment and under employment render grim testimony to decades of profiteering with callous disregard to the welfare of the greater populace in the home country or abroad. Second, the state-finance nexus, or what I have referred to as the first and second estates, work in tandem, particularly evident in crisis. To say that the government did not sell out to Wall Street is to deny reality.
A low profit-margin regime arose in almost all lines of conventional production in the 1980s even as real wages stagnated. With the dismantling of capital controls over international movement, uneven geographical development and inter-territorial competition became key features in capitalist development, further undermining the fiscal autonomy of nation states. This also marked the beginnings of a shift of power towards East Asia. But it also led capital to invest more and more in control over assets – capturing rents and capital gains – rather than in production. The speculative asset bubbles that formed from the 1980s onwards were the price that was paid for unleashing the coercive laws of competition world-wide as a disciplinary force over the powers of labor and over the previously autonomous powers of the nation state with respect to fiscal and social policies.
Deregulating and empowering the most fluid and highly mobile form of capital – money capital – to reallocate capital resources globally (eventually through electronic markets and a “shadow” unregulated banking system) facilitated the deindustrialization in traditional core regions. Capital then accelerated its reliance on a series of “spatial fixes” to absorb overaccumulating capital….
…Two corollaries then followed. One was to enhance the profitability of financial corporations relative to industrial capital and to find new ways to globalize and supposedly absorb risks through the creation of fictitious capital markets (the leveraging ratio of banks in the US rose from around three to thirty). Non-financial corporations (such as auto companies) often made more money from financial manipulations than from making things.
Harvey loses me a bit at this point as he implies a deliberate class power grab with specific and intentional dispossessing of populations prone to exploitation historically (overseas) as well as the bankrupting of the middle class here in America. But I am forced to realize that my repugnance for the language is based on my presumptions. I instinctively want to cut the elites some slack here. But the only slack I can muster is to suggest that they have acted in individual capacities rather than as conspirators. Or is that being to generous?
The other impact was heightened reliance on “accumulation by dispossession” as a means to augment capitalist class power. The new rounds of primitive accumulation against indigenous and peasant populations (particularly in Asia and Latin America) were augmented by asset losses of the lower classes in the core economies, as witnessed by losses of pension and welfare rights as well as, eventually, huge asset losses in the sub-prime housing market in the US. Intensifying global competition translated into lower non-financial corporate profits.
There is much more in the paper but I think you get the drift. I return from time to time to the idea that a new banking model may be possible and that new capital is needed in the business. Perhaps some recall the older “ownership conundrum” posts. I still stand by the hope that a new kind of owner will create a possibility of a new kind of institution. Just two days ago a more famous blogger made just that point. John Hempton was linked to Naked Capitalism and he says the following:
I mention this because of my perverse view that re-regulation – opposed by most bankers – might be surprisingly good for banks over the long run.
The real winners and losers of deregulation
Competition – I argue – removed any real benefit of deregulation for bank shareholders. (The benefits for bank management created by the sudden need to cope with this brave-new-world however were obvious. They saw the opportunity and need to grow to maintain ROEs – and they lent with gay-abandon – taking all sorts of fees, commissions and bonuses along the way…)
The benefit for borrowers of competition however were dissipated in higher home prices and hence larger mortgages. The real winners were people selling homes – not people buying them. Even quite modest houses became valuable – and the elderly (the classic group moving to less expensive homes) did quite well. I haven’t heard the expression “old and poor” quite as much as I used to. More generally you can see the relatively affluence of the elderly in the sell-the-home and go cruising set. Carnival Cruises was – for a very long time – a better stock than you might ever have imagined.
The other supposed beneficiary was suffering an illusion. Plenty of people – especially in their children’s teenage years – had an-in-the-end-illusory wealth effect – where they thought their home was worth much more than it was – and felt confidence in spending some of that money – or in saving less for their retirement – because after all they could downsize and they might inherit part of Grandma’s (housing) fortune.
Net-net the losers out of excessive bank leverage were (a) the shareholders because they got lower spreads and took more risk, (b) taxpayers because they partly bore the risk and (c) younger home buyers because they got royally-rogered by the elderly people they bought from.
I am waiting for some bank management – particularly a stronger incumbent – to see it that way and advocate sweeping bank re-regulation which will (a) reduce taxpayer risk (b) increase spreads and (c) reduce leverage. This will allow the strong incumbent to earn a good ROE at little risk on a lot more capital and will make the bank’s shares a surprisingly good investment.
So with John I will wait to see if any banking leader wakes up to these realities and puts aside the mantle of “Patsy” to Karl Marx’ prophesy.