From bubble to black hole: the neoliberal implosion

Issue: 122

Neil Faulkner

“Revolutionary socialists today should not be…pontificating on the degree of damage that capitalism has done to itself, on whether we are in 1929, 1992 or whatever… We do not have a crystal ball…but we can see all too clearly what is happening now and what our responsibilities are.” So argues Chris Harman in his article in the previous issue of this journal.1

Harman’s caution reflects a concern lest we cry wolf. We risk undermining the credibility of Marxist arguments and confounding political expectations if we get it wrong. We have done this before. In the wake of the 1987 Stock Exchange crash we announced that “the omens point toward the start of a new recession. The shock to credit delivered by the crash will deepen that recession. It is clear that capitalism is not on course for a return to the bright days of the post-war boom”.2 We were wrong. For at this very time, in the dark places of global finance capital, the mechanisms of the neoliberal boom were being forged.

But sometimes there is a wolf. And if we are not prepared, we can be taken unawares. The political and business elite still argues that we face a recession of limited duration. Indeed, they are banking on it—banking on a new boom enabling them to pay off the cost of state bailouts, and banking on the short-term quiescence of workers. Millions of workers buy that argument. Amid the fear and anger there is also a sense that the recession is like a natural calamity that comes, passes, and is gone. This perception encourages resignation and passivity, and Harman’s conclusion that “we do not have a crystal ball” does nothing to challenge the sense of powerlessness and paralysis that afflicts many workers, including many activists, in relation to the recession.

And the fear and anger remain. If the left does not direct them, other forces will. The slogan “British jobs for British workers” on recent protests is a warning. We need to see ahead, to be aware of what is coming, so that we can plan initiatives of appropriate form and scale. And we need to know why we fight. Knowing the stakes are high, we will fight harder, for longer, with greater determination. And the stakes are very high indeed.

This is the beginning of a new epoch of global slump. We need to understand that if we are to act with the speed, energy and decisiveness necessary to help direct history’s course. We need to remember that the choice last time was socialism or barbarism.

A short history of the permanent debt economy

The main purpose of this article is prognosis: it is our perspective on future developments that is in dispute. But this must build on diagnosis, so let us first summarise what seems to be agreed about what Harman has aptly dubbed “the permanent debt economy”.3

The long-term tendency for the rate of profit to fall has made late capitalism prone to under-investment, overproduction and sluggish, erratic, crisis-prone growth. Though profit rate comparisons are difficult, the evidence is compelling that a long-term tendency for the rate of profit to fall underlies the present crisis. Profit rates in key developed economies appear to have roughly halved between the 1960s and the 1990s.4 This has discouraged productive investment and slowed down the rate of growth of the “real economy” (defined as that in which surplus-value is actually produced).

The last major crisis—that of the 1970s—gave rise to a distinctive ruling class response. Faced with falling profits, over-accumulation, chronic inflation and a militant working class, a section of the bourgeoisie, led by Margaret Thatcher in Britain and Ronald Reagan in the US, promoted an anti-consensual “neoliberal” free-market ideology.

Its purpose was to legitimise a frontal assault on unions, wages and the welfare state in order to substantially redistribute wealth from labour to capital, that is, to restore the rate of profit at the expense of the working class. This project enjoyed some success. Welfare was cut. Wages stagnated. Profit rates improved. The rich got richer. US bosses earned around 30 times as much as their workers in 1970, and around 500 times as much by 2000.5

But the effects were limited and contradictory. Heavy damage was inflicted on the real economy, much of it in a deliberate effort to break working class resistance with mass unemployment. Profit rates recovered, but never to the levels of the great post-war boom.6 And while individual capitalists want low wages in their own firms, they want high wages elsewhere so that workers can buy the goods and services they produce. So the neoliberal economy has faced the intrinsic danger of being derailed by growing income inequality and inadequate demand.

The problem of a real economy afflicted by low profits, under-investment and inadequate demand were resolved in the neoliberal era by a vast growth in finance capital. Market deregulation, low interest rates (“cheap money”), financial “innovation” and rising household debt stoked this into the biggest bubble in the history of the system.

Loans were secured against assets that were rising in value only because of the availability of loans: a classic, self-feeding, speculative frenzy. Workers in many parts of the developed world became heavily indebted because of stagnant incomes, easy credit and rising house prices. And workers buying on tick then became the base of a vast inverted pyramid of financial “derivatives”, unsecured debts, and inflated asset values. Average US household debt more than doubled between the late 1970s and 2006. Total debt grew from about 1.5 times US national output in the early 1980s to nearly 3.5 in 2007. Consequently, the financial sector’s share of US profits increased from about 15 percent in the early 1950s to almost 50 percent in 2001.7

Precision is impossible, but one recent estimate of the total size of the global asset bubble is $290 trillion—more than five times the annual output of the world economy, and a figure which completely dwarfs the $1.9 trillion of state bailouts since the crisis began.8

The boom has been limited, uneven and unstable. Neoliberalism has failed to restore profits, investment and growth to the levels achieved in the immediate post-war period.9 The global economy has been characterised by huge, destabilising “imbalances” and a succession of bubbles and crashes.

The so-called “emerging market economies” had turned a collective current account deficit in 1999 into a surplus of $544 billion by 2006, accumulating some $2.65 trillion of foreign currency reserves. At the same time the US deficit soared until it accounted for three quarters of the global total.10 US dollars paid for Chinese goods were being recycled into US debts to pay for more Chinese goods.

Equally pathological was the recurring pattern of bubbles and crashes. Between 1945 and 1971 there were, on one estimate, 38 financial crises across the global economy; between 1973 and 1997 there were 139.11 Each time, however, the policy of finance ministers and central bankers in the leading capitalist states, especially in the US, was to pump liquidity into the system.12 The mega-bubble finally burst with devastating effect in September-October 2008.

The crash

The crash was preceded by a “credit crunch”. The crisis began when mounting distress in the US subprime mortgage market reached breaking point. Subprime loans had been repackaged with better-quality loans and sold on in the form of “collateralised debt obligations” (CDOs). It looked like a good way to spread risk. A slowdown in consumer demand and an easing of house prices triggered a “panic” in relation to subprime mortgages. This quickly mutated into a “contagion” sweeping across global financial markets on fears about the degree to which the banking system as a whole was infected by the ‘toxic’ debt of CDOs and other financial derivatives.13

The credit crunch prevented debts being rolled over, and this, in September-October 2008, brought a series of giant financial institutions to the brink of bankruptcy as losses and write-downs were announced and share prices plunged. The panic trigger this time was the collapse of US investment bank Lehman Brothers. The danger of global financial meltdown prompted the biggest nationalisations and bailouts in the history of capitalism. This crash, unprecedented in scale, shattered the confidence of both capitalists and consumers—and tipped the real economy, already slowing, into freefall.

The contradiction between regulation and profiteering has characterised capitalist banking since the 17th century.14 Each crash is followed by tighter regulation, gradual relaxation and then a fresh frenzy of speculation. The centralisation of capital means that crashes tend to get bigger. The first international crash, affecting both the US and Europe, did not come until 1857.15 The first Wall Street crash was that of 1907.16

Three crashes have been of exceptional significance, marking the beginning of depressions or slumps. The 1873 crash tipped the world economy into the long, shallow depression of 1873-96, feeding an intensification of imperial rivalries and an arms race that culminated in the First World War. The 1929 crash inaugurated the Great Depression, leading to fascism, rearmament and the Second World War. The series of 1973-5 price shocks and crashes was followed by a protracted slump which dragged on for a decade. The crash of 2008 looks like the biggest ever. Two questions present themselves. Can the state take the strain? And can the state engineer recovery?

Bailing into a black hole

Black holes are regions of space in which gravitational forces prevent matter and radiation escaping. This is a good analogy for the third phase of the neoliberal implosion: after the credit crunch and the crash we now have the black hole.

Capitalism’s leading finance ministers and central bankers have, since September-October 2008, prevented a global meltdown, but that is all they have done. Unprecedented amounts of state capital have been poured into the system: a global total of $1.9 trillion so far, two thirds of it direct spending, one third in the form of guarantees.17 The funds have been shovelled into the banks in tranches amid a chorus of injunctions to start lending again.

In October 2008 chancellor Alistair Darling gave the British banks £37 billion of taxpayers’ money. It vanished instantly with no apparent economic effect. So in January he gave them another £50 billion. This too seems to have vanished—amid a collapse in share prices. Breaking news is that Obama’s new treasury secretary, Tim Geithner, is injecting $2 trillion more into the US banks, almost three times as much as the original bailout in October. The Dow Jones index plunged 381 points on the news.18

Equally ineffective have been attempts to reflate consumer spending by cuts in taxes and interest rates. Neither Darling’s £12 billion cut in VAT nor the Bank of England’s reduction in interest rates to 1 percent has had any appreciable impact. Instead the British economy is dropping like a stone, with 70,000 to 80,000 losing their jobs every month, and predictions of 3 million or more out of work by the end of 2009.

The attempts to revive lending are a comprehensive failure because the bubble has been transformed into a black hole. Busted banks do not lend money: they hoard it. Workers who fear they may lose their jobs do not spend: they pay off debts and save.

The state handouts are dwarfed by the scale of private debt, and as the real economy dives, the debt gets bigger. The Bank of England has estimated total losses to global finance capital so far at $2.8 trillion.19 But Will Hutton has contrasted this with an estimated total of at least $55 trillion of financial derivatives held by the world’s banks.20 The shrinking real economy is feeding bad debt back into the banks. A gigantic negative feedback mechanism is swelling the black hole of bankrupt capital at the centre of the system.

Despite the scale of the financial disaster, Chris Harman has argued that there are two crucial differences between the present and 1929. First, the ruling class has moved exceptionally quickly to prevent a general banking collapse and, second, much higher levels of state spending constitute a “floor” limiting the depth of any downturn.21

How important are these factors? The 1929-33 Hoover administration’s management of the crisis in the US was uncertain and incompetent, but it was not wholly deflationary. There were attempts to bolster the economy before Roosevelt’s New Deal.22 And during its famous “First Hundred Days”, notwithstanding the limitations and contradictions, the new Roosevelt administration did take rapid and radical action.23

This, moreover, was in response to a financial crisis smaller in scale and slower to develop than that of 2008. No major banks collapsed in 1929,24 and back then finance capital was less centralised and globalised. In 2008 the ruling class faced an immediate meltdown of the entire global financial system. They acted as they did because they had to.

It is undoubtedly of real economic significance that in 1929 federal government expenditure represented only 2.5 percent of GNP whereas in 2007 it accounted for around 20 percent.25 Because state investment is determined by political decisions, as opposed to profit calculations, government spending can hold up in a downturn. And the more of it there is, the higher the “floor”. But this assumes the state itself is not bankrupted. The nationalisation of banking losses, debts and debt insurance comes at massive cost. The bailouts and guarantees have more than doubled Britain’s national debt. Add in the liabilities of the crippled, state-controlled Royal Bank of Scotland, and the total financial obligation of the British state now stands at £3 trillion—two and a half times annual national income.26

State debt has to be funded like any other. Private investors could “lose faith” in Britain’s ability to pay. There are already signs of that with a plummeting pound. In 1976 a combination of recession, inflation, a militant working class and high government spending triggered a sudden “loss of confidence” and a run on the pound. The subsequent International Monetary Fund (IMF) bailout came at massive cost—wages were cut, public services slashed and unemployment doubled.27

A string of states in Central and Eastern Europe are already at this point. The IMF has imposed austerity measures on Hungary and Ukraine as a condition of financial support, and collapsing economies are being further deflated by high interest rates and spending cuts.28 At the same time, the credit ratings of Greece, Spain, and Portugal have been downgraded, there is growing concern that Iceland and Ireland might soon default, and plans have been put in place in the Eurozone for the reintroduction of national currencies if the weaker economies start quitting the euro.29

Brown and Darling’s response hinges on things not getting worse and the recession ending soon. The state needs to bail itself out with rising tax revenues and public spending cuts. The neoliberal elite is betting everything on a short recession. But there are no good reasons for thinking it will be. It is not simply the damage already done by the bursting of the neoliberal bubble. It is what has replaced it: a gigantic black hole of busted banks and bad debt that is sucking capital and spending power out of the system, deflating the real economy, turning ever more debts bad. And it evolves: the monster is growing new heads.

With inflation close to zero, and tax and interest rate cuts apparently unable to reflate the economy, the system faces the danger of a “liquidity trap”. Capitalists will borrow money to invest only if they think they can make a profit. If demand is falling, and in particular if prices are falling, the fear is that eventual returns will not cover the cost of investments—even when interest rates are close to zero. The best thing then is simply to hoard money: if prices are falling, a cache of savings will buy more in the future.

It is when a liquidity trap threatens that cutting interest rates can be like “pushing on a piece of string”. This was a key feature of the Japanese crisis of the 1990s. Though interest rates were sometimes at zero and the Bank of Japan repeatedly pumped money into the system (the “quantitative easing” now much discussed), the economy stagnated. Capitalists and consumers continued to save rather than borrow and spend.30

Another growing problem is protectionism. After 1929 world trade fell by two thirds and global unemployment quadrupled, as protectionist barriers went up across the world.31 The reason is simple: capitalism is a competitive system in which the long-term interests of the global system may clash with the short-term interests of blocs of capital. So protectionism increases in a crisis, and that makes the crisis worse.

It is happening already. China has long been charged with running a form of protectionism with an “undervalued” yuan making exports cheap and earning a huge balance of payments surplus. With the Chinese economy now in freefall and tens of millions facing unemployment, the yuan, if anything, is likely to be further devalued. A series of tit for tat competitive devaluations is one possible form of protectionism. Alternatively, there are state subsidies to ailing industries. Both the US and leading European states Germany, France, Italy and Britain have announced support packages for their respective car industries. Already, in different ways, capitalist states are attempting to shore up and protect their own industries

Faced with similar problems in the 1930s John Maynard Keynes put forward the case for fiscal stimulus: the government had to both make money available and spend it. This meant governments abandoning balanced budgets and going deeply into debt to fund programmes of public spending. If Marx is the spectre at neoliberalism’s funerary feast, Keynes is the awkward guest. Keynesian economics cannot resolve the contradictions of capitalism. It is an attempt to manage them. But it is not true that it does not work in any sense. The problem, as Chris reminds us, is that Keynes was radical in theory but cautious in practice.32 The full development of his policy prescriptions ran up against a political barrier: the opposition of the capitalist class to state encroachment on the commanding heights of the economy.

This seems confirmed by three counter-examples. In Russia there was no depression at all, since state-direction of investment and labour maintained high levels of growth in what was, in effect, a siege economy insulated from the global market.33 In Germany by the mid-1930s the depression was more or less over and virtually everyone was back at work. The Nazis smashed organised labour, restructured industry, imposed state direction and borrowed heavily to fund public investment.34 And in the United States the end of the depression amounted to a bastardised form of Keynesianism: the full-employment war economy was created by levels of government borrowing and spending in the early 1940s that dwarfed those of the late 1930s.35

The inherent logic of Keynesianism is the transformation of private capitalism into state capitalism. Historically, state-directed investment on the scale necessary to terminate a slump has occurred in the context of social upheaval and political crisis—the Stalinist counter-revolution in Russia, the Nazi seizure of power in Germany, the US entry into the Second World War. It was “military Keynesianism” that ended the Great Depression.

What the ruling class fears, on the other hand, is a left wing variant powered by mass struggle from below. It is the job of socialists to make that fear a reality.

Struggle, socialist economics and transitional demands

We are witness to perhaps the greatest crisis in the history of the system. Yet the economic and political barriers to Keynesian-type programmes of state spending are immense. Barack Obama’s $800 billion stimulus package has been derided on one side as nowhere near enough and attacked on the other as profligate and irresponsible. The ruling class is deeply split over what to do. The problem is not simply the cost. It is also a problem of politics.

The neoliberal elite remains in power across the globe. Defenders of the rich, big business and the rule of profit for 30 years, they are deeply committed to the interests of their class. Boom may have turned to bust, and increasingly panic-stricken measures to regenerate private investment and private consumption proved futile. But the alternative—a wholesale switch from monetary to fiscal policy, to direct state investment and a programme of public works—would, if on a sufficient scale to have a significant impact, involve a frontal attack on the power and profits of capital. It would also break the separation between economics and politics that is so central to bourgeois ideology. The idea that the “invisible hand” of market forces determines what happens in the workplace and the economy, that this most important realm of social life is beyond the reach of democratic decision making and rational planning, is a critical barrier to the development of revolutionary consciousness. The “reification” of the economy—the conception of it as an impersonal force outside human will—structures the “alienation” of workers under capitalism, their sense that they do not have, and cannot have, control over the world that shapes their lives.

Public works fuse economics and politics. If the state can build railways, hospitals and council houses—if, indeed, it can do this better without the chaos, waste and profiteering of private capitalism—then why not publicly controlled steel making, car production and supermarket chains? The risk to the ruling class is that a massive programme of public works designed to kickstart the economy would risk generating a political dynamic of change that could rapidly spin out of control.

So we are at an impasse. Bankers will not lend because their banks are bust and they do not think borrowers can repay. Industrialists will not invest because markets and profits are collapsing. Consumers will not spend because they are deeply in debt and fear for their jobs. The system is like Frankenstein’s monster lifeless on the slab however many thousands of volts are pumped into it.

How should socialists intervene? It is not enough to argue that socialism would be a better system: to do that and nothing more would be abstract propaganda. It is necessary to agitate for action from below—for protests, strikes and occupations—against the jobs massacre and its consequences for the working class. But we also need to bridge the gap between propaganda and agitation, between the need for socialism and the class struggle of workers today. We need “transitional demands”.

Tainted by the dogmatism of orthodox Trotskyists, in whose hands Trotsky’s 1938 Programme fossilised into the Ten Commandments, transitional demands have in fact been central to revolutionary strategy in periods of acute crisis. The “Theses on Tactics” approved at the Third Comintern Congress in 1921 argued that “communist parties must put forward demands whose fulfilment is an immediate and urgent working class need, and they must fight for these demands in mass struggle, regardless of whether they are compatible with the profit economy of the capitalist class or not”36.

Trotsky’s “Programme of Action for France” of June 1934 is a classic example of a set of transitional demands to be raised by revolutionaries in the context of mass struggle.37 The central demand of the Communist-led National Unemployed Workers Movement in Britain for “work at trade union rates or full maintenance” is a concrete instance of a transitional demand that mobilised hundreds of thousands of unemployed workers in militant protests during the 1920s and 1930s.38

When the system is broken and cannot satisfy basic needs, or when the system is challenged by an insurgent working class whose aspirations it cannot realise, it is appropriate to raise demands which unite workers in struggles for reforms which challenge the logic of capital and push beyond the limits of what the system can afford.

We should demand the right to work, not simply because all workers are entitled to a living, but because employment is reflationary, because labour is productive, and because there are social needs to be satisfied. We should demand a programme of council house building, not only to house the hundreds of thousands who are homeless, stuck in temporary accommodation, or paying extortionate rents to private landlords, but also because it would employ tens of thousands of construction workers. We should demand that benefits are doubled, restoring them to their 1970s level, not only because the poor are needy and innocent, but because those on low incomes have to spend virtually everything they get, so welfare is reflationary.

The neoliberal elite is panic stricken, divided and discredited. Its response to the crisis has failed and will continue to fail. Yet its class allegiance precludes wholesale state control and public works.

But for workers state control, public works and better welfare are common sense: if politicians have billions for war and the banks, why not billions for homes, health and the unemployed? On every front, on every issue, we have to counterpose the political economy of the working class to the political economy of capital. The role of transitional demands is to crystallise the difference, bridge the gap between propaganda and agitation, and marshal our side for struggle.

Tens of thousands of school, college and university students joined the Gaza protests this winter. The radicalism and militancy of the anti-capitalist and anti-war movements might feed a revival of class struggle. But transmission will not be automatic. Socialists have to fight to make it happen.

Many of those young people will be seeking work this summer. Many will not find it. A new Right to Work Campaign could infuse the class struggle with the spirit of young radical protest. It could also focus the demand for state action, challenge the logic of capital and encourage workers’ resistance to the jobs massacre.

If we underestimate the scale of the crisis, we will underestimate the scale of response that is necessary. The wolf is upon us. We must arm.


1: Harman, 2009, p46. Thanks are due for critical comments on the first draft of this article from Chris Bambery, Eddie Cimorelli and Peter Segal.

2: Lapavitsas, 1988, pp17-18.

3: Harman, 2008.

4: Harman, 2007, pp148-150; Harman, 2008, p20.

5: Harvey, 2005, pp16-17.

6: Harman, 2007, pp148-150.

7: Harman, 2008, p22.

8: The Guardian, 30 January 2009.

9: See Glyn, 2006, pp129-155, especially p148.

10: Wolf, 2009, pp57, 83.

11: Wolf, 2009, p31.

12: Foster, 2007.

13: Kindleberger, 2002, pp91-107, 109-137.

14: Galbraith, 1976.

15: Kindleberger, 1986.

16: Galbraith, 1976, p123.

17: The Guardian, 30 January 2009.

18: The Guardian, 13 February 2009.

19: The Guardian, 1 January 2009, p14.

20: Hutton, 2008.

21: Harman, 2009, pp35-37.

22: Galbraith, 1976, pp194-207; Kindleberger, 1986, pp117-196.

23: Badger, 2008.

24: Galbraith, 1976, pp200-203, 209.

25: Harman, 2009, p35.

26: The Guardian, 20 January 2009.

27: Whitehead, 1985, pp181-201.

28: Harman, 2009, p38.

29: Choonara, 2009, p16.

30: Turner, 2008, pp135-187.

31: Harman, 1984, p62.

32: Harman, 2009, pp33-34.

33: Hobsbawm, 1994, pp96-97.

34: Galbraith, 1976, pp237-238.

35: Galbraith, 1976, pp253-255.

36: Hallas, 1985, p56.

37: Trotsky, 1934.

38: Hannington, 1967.


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