Source: Farshad Araghi, "Political Economy of the Financial Crisis: A World-Historical Perspective," Economic & Political Weekly, VOL

43, No. 45, 2008.

GLOBAL ECONOMIC CRISIS

Political Economy of the Financial Crisis: A World-Historical Perspective

Farshad Araghi

success of laissez-faires self-imposed historical amnesia is a key to understanding The Economist s logic. Such reications are usually attributed to the Smithian invisible hand metaphor, but even a cursory reading of Smith would suggest that he, as Marx, understood the economy as a profoundly social, and historical reality.

The Great Depression crisis was resolved by labour shifting the burden onto capital. This time the likely shifting of the burden of the nancial crisis from capital to labour and the middle classes will only deepen it. The two medium-term possibilities are corporate fascism and global Keynesianism. Will the United States President-elect Barack Obama be the representative of the latter? This, unfortunately, is not likely going by the president-elects position on the crisis and a possible solution.

he failure of laissez-faire economics to understand the historical roots of the current crisis lies in its success in severing all ties with historical p olitical economy. To play with Schumpeters words, laissez-faire economics is the victim of its own political success. As Marx would have it, the farce of neoliberal defeat follows the collapse of liberalism a century earlier. Writing in an essay precisely entitled The End of Laissez-Faire in 1926, Keynes put it thus:
Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. The world is not so governed from above that private and social interests always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from Principles of Economics that enlightened self-interest always operates in public interest. Nor is it true that self-interest generally is enlightened.

World-Historical Context
Understanding the current nancial crisis requires understanding its social and p olitical origins in the 20th century. From this perspective, I offer the following observations on the nancial meltdown seen in the broader social and historical context. The similarities between the current crisis and the Great Depression have been noted. There is however one crucial difference: The 1930s crisis was resolved by labour and popular movements shifting the burden of the crisis onto capital (via recognition of a social wage contract, collective bargaining and workers rights, national unemployment insurance relief and social security, etc). With socialism as a global alternative in the post-rst world war period, and with expanding nationalisms, anticolonial struggles, and labour, farm, and populist movements, a major fraction of American capitalism acknow ledged the need for a reformist compromise of high wages accompanied by mass consumption. Today however, the crisis is being dealt with by shifting its burden onto the working classes. In other words, whereas the solution to the 1930s crisis involved a downward redistribution of income, nancial capitals response to the crisis (from 1980 to the present) has been one of upward redistribution of income, via regressive tax policies, nancialisation, and construction of a (global) debt regime. Ironically, shifting the burden of the crisis to capital actually resolved the crisis of the 1930s, whereas shifting the burden of the crisis to labour and the middle classes (or what is left of it) will only deepen it.

Farshad Araghi (araghi@fau.edu) is with the Department of Sociology, Florida Atlantic University, Boca Raton, Florida, USA.

As even Nicolas Sarkozy put it: Selfregulation is nished; Laissez-faire is nished. While Keynesianism was historically recognised as a progress in economic thought, it was in fact a theoretical retreat vis--vis the socialist challenge in the e arly 20th century. Demand management was to solve overproduction crisis in the short term, and in the long term, as K eynes acceded, we were all dead. The real farce today, however, is not only the second defeat of laissez-faire, but the status of the US economic establishment which has yet to rediscover Keynes (despite the strong encouragement by the Swedish academy). While Americans at large are tending toward political reformism, mainstream economics is a discipline left behind. Thus The Economist concedes that capitalism is at bay only to conclude that c apitalism, eventually, corrects itself. The

Roots of the Crisis

Contrary to popular perception, the real estate crisis is only a symptom of the larger nancial crisis. The real estate crisis is r ooted in the strategy of nance capital to
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bring in ever more liquidity into lending and speculation. The 401k retirement a ccounts came before, and the privatisation of social security was to come next. Real estate was brought into the speculative game by Alan Greenspans drastic reduction of the federal funds rate after 2000 to reach a low of 1.13 per cent in 2003, thus inducing a huge migration of xed income securities to the Wall Street through the mortgage industry. As Greenspan put it in his Federal Reserve Boards semi-annual monetary policy report to the Congress in 2003,
policy accommodation aimed at raising the growth of output, boosting the utilisation of resources, and warding off unwelcome disination can be maintained for a considerable period without ultimately stoking inationary pressures (emphasis added).

While the massive transfer of investment capital from federal treasury securities to mortgage-backed securities played an important role in extending the crisis to the housing sector at the expense of turning the real estate into unreal/virtual estate, it did not cause the crisis. From a broader perspective, the current nancial crisis is a continuation of the Keynesian crisis of 1970s, when, in response to wage ination, and amidst competitive pressures and expansion of democratic rights (called the crisis of democracy by the emerging conservative think-tanks of the time) business went on strike against unionised labour and social democracy. As Paul Volker, president Jimmy Carters chairman of the US Federal Reserve, put it in 1979: The standard of living of the average American has to decline...I dont think you can escape that (New York Times, 1979). This was achieved by a monetary policy which raised the federal funds rate from 7.9 in 1978 to 16.4 in 1981, thereby forcing an economic recession with the aim of reducing wage ination and disciplining labour while drawing global nance capital to the US. At the same time, Reagans success in breaking the air trafc controllers strike of 1981 by ring 11,000 workers signalled a radical change in the state position relative to o rganised labour since the Taft-Hartley Act of 1947. The rising wages of the Keynesian p eriod, as presciently predicted by K alecki
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as early as 1943, were in part a result of full-employment policies and the relative social power of organised labour and s alaried classes. They were also the result of internalisation of high consumption norms by the working and middle c lasses leading to demand for higher wages to s atisfy new consumption needs. The r ejection of the Keynesian social c ontract occurred in the context of rising costs of the empire, the defeat in Vietnam, the oilcrisis, and the weakening position of the US dollar in the world economy l eading to the abandoning of the Bretton-Woods agreements by the Nixon administration. The post-war empire based on credit turned into an empire based on debt from the 1970s onwards. Chile and New York City were the early global and national grounds for the mobilisation against the demands of labour for higher standards of living, a mobilisation that continued in the 1980s through export of jobs to low wage areas, deunionisation strategies, adoption of exibilisation and ight-by-night policies on the one hand and nancialisation and mass indebtedness as a solution to mass consumption with low wages on the other. Financialisation, as Krippner shows, led to shifting the centre of protmaking activities to nance at the expense of production and trade. Credit substituted wages and national incomes to boost effective demand, thereby temporarily resolving the underconsumption crisis arising from dismantling the Keynesian social compact.

pressure on the value of the dollar. With the dollar falling, and with the rising costs of food and energy, ination will pursue amidst recession, causing one of the economists worse nightmares stagation. Thus unlike the depression of the 1930s when there was no growth and falling prices (depression and deation), this time it is likely that the economic downturn will come with upward pressure on prices (depression and ination). The reformist solution that could work in the short and the medium term would involve abandoning the debt regime in favour of high wages and full employment policies and massive investment in (green) infrastructural projects. Without such a policy, bailouts and rescue plans will at best have temporary effects. This solution, however, would require the fall of nance capital from commanding heights, something that does not yet seem likely in theUS.

American Reformism and Global Keynesianism?

The era of the US nancial hegemony is ending. This, combined with the probable US military failures in Iraq and Afghanistan, will lead to a multipolar global power structure in the short run and contestation over world hegemony in the long run. To further complicate the scenario, there is no long-term Keynesian solution to the crisis. Even if high employment, high wages, and high consumption policies were to be adopted and this time at a global level high consumption is no longer eco logically sustainable. High consumption in the form of environmental crisis will contradict the Keynesian solution more severely and more quickly than wage ination did in the 1970s. Still, there are those who see greening of capitalism as a long-term alternative. There are, however, two problems with this line of thinking: (1) Green production in the rich countries is likely to be compensated by externalising costs at the expense of poor areas in the world economy, and (2) green consumption in the rich countries is likely to be compensated by forced underconsumption and poisonous consumption elsewhere in the world. The long-term alternative to the current crisis would therefore

Role Reversal
The bursting of the nancial bubble and the resulting contraction of credit are only at the surface of a much deeper problem of deteriorating effective demand as a direct consequence of dismantling the Keynesian social compact and attempting a major upward redistribution of incomes since the last years of the Carter administration. Hence not only will the Paulson plan not work, but it will deepen the crisis as it makes the US government an appendix of Wall Street. With the Paulson plan (and its later variants), it is as if Wall Street is acting like the state and the state is acting like Wall Street. This role reversal is likely to extend the crisis of condence to the state itself resulting in heavy downward

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have to go beyond reformist (green) capitalist solutions. Leaving the long-term prospect aside, there are two medium-term possibilities: Corporate fascism (i e, merger of corporations and the state, heightening inequalities, xenophobia, and Country ber Alles mentality along with repressive social policies, contraction of democracy and suppression of human rights) vs global Keynesianism (downward redistribution of income, equalisation, political

reformism, and respect for human rights). In the US, Bush has been the representative of corporate fascism. Will Obama be the representative of global Keynesianism? This is not likely, going by his current economic and political pronouncements. Whatever the answer, Obama is symptomatic of the rising wave of A merican reformism which has very limited prospects, precisely because of its reformist weltanschauung, for the time being, at least.

References
Greenspan, Alan (2003): Testimony of Chairman Alan Greenspan before the Committee on Financial Services, US House of Representatives, 15 July. Kalecki, Michal (1943): Political Aspects of Full Employment, Political Quarterly, (4): 322-31. Keynes, John Maynard (1963): Essays in Persuasion, W W Norton & Company, New York . Krippner, Greta (2005): The Financialisation of the Ameri can Economy, Socio-Economic Review, (3): 173-208. New York Times (1979): Volker Asserts US Must Trim Living Standards, 18 October. Polanyi, Karl (2001): The Great Transformation: The Political and Economic Origins of Our Time, Beacon Press, Boston. The Economist (2008): Capitalism at Bay, 18 October, pp 15-16.

Six Characters in Search of a Crisis

Tapan Babu

The world continues to be perplexed about which individuals and entities were responsible for the nancial crisis and why it took on such gigantic proportions. This article discusses the role of six suspects: Alan Greenspan, Bill Clinton, George Bush, the banks, the system of fair value accounting and the credit rating agencies.

n the play Six Characters in Search of an Author by Luigi Pirandello, six characters try to narrate their story to the author and end up in a limbo wherein the audience is unable to see any denouement. The current nancial crisis has elements of such a Pirandello play. Some of the characters in the current crisis perhaps represent the ultimate/proximate causes of the crisis and depending on the stance of the protagonist, one tends to place specic importance on a particular character. Who are these characters?

Sgherri 2007). The articially low interest rates made excessive risk taking possible, leading to the subprime crisis. In some sense, low short-term rates could have led to the carry trade whereby money went into bonds, stocks, real estate, emerging markets, and commodities anywhere that it might earn a higher return than the very low rates that were on offer in the US and Japan (Frankel 2006).1 The trouble with the perception of rising housing price is that in the US it created a selffullling prophecy that prices would continue to go up and up and cannot come down ever (Chart 1, p 33). The responsibility of Greenspan goes beyond maintaining an articially low interest rate. He could be associated also with lax regulation and supervision. It has been reported that:
Edward M Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford. But when Mr Gramlich privately urged Fed examiners to investigate mortgage lenders a fliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman. Both the Fed and the Bush administration placed a higher priority on promoting nancial innovation and what President Bush has called the ownership society. .MrGreenspan, in an interview, vigorously defended his actions, saying the Fed was poorly equipped to investigate deceptive lending and that it was not to blame for the housing bubble and bust (Andrews 2007).

Alan Greenspan
If the seeds of the crisis were sown in the good times, characterised by a lax monetary policy and a free macroeconomic environment, then the former Chairman of the US Federal Reserve, Alan Greenspan seems to be a prominent character. Recall that the monetary policy of low interest rates was initiated in response to the collapse of the new economy bubble and then the post-9/11 recession of 2001. An enormous amount of liquidity was pumped into the global monetary system during 2001-05 with the short-term interest rates reduced to 1% (their lowest level in 50 years). In fact, in order to deal with the economic downturn following the stock market crash, the Fed has driven the cost of capital signicantly below the natural rate for over four years (Lombarda and

Tapan Babu is an economist based in New York.

It was only in his 24 October 2008 testimony to the US Congress that Greenspan said he made a mistake in his hands-off regulatory philosophy. He is reported to have quoted something he had written in March 2008: Those of us who have looked
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