The Great Financial Crisis: Causes and Consequences

"The Great Financial Crisis" by John Bellamy Foster and Fred Magdoff offers one of the most cogent and timely analyses of the current economic meltdown available in print. Composed of a series of articles first published in Monthly Review magazine between May 2006 and December 2008, with additional material including a Preface, Introduction and References, the authors amply demonstrate the usefullness of the Marxist tradition in explaining the root causes of this latest crisis of capitalism. Importantly, the authors rescue economics from the bondage of abstraction and science by showing us that power and politics define the dynamics of the capitalist system, making the crucial point that it is the working class who both supplies the source of wealth and bears the greatest burden in times of economic distress. Drawing heavily on the groundbreaking work of Paul Sweezy and Harry Magdoff, the authors contend that stagnation (slow growth and high unemployment) is the normal state of affairs in mature economies where monopoly capital has come to control the means of production. High levels of profitability has the effect of diminishing the purchasing power of the working class, leading to decreased investment in real productive ventures and increased financial speculation. At some point, finance is almost completely decoupled from the real economy and becomes a driving force on its own, leading to ever increasing indebtedness, inequality and systemic instability. Foster and Magdoff convincingly demonstrate the prescience of Sweezy and Magdoff's work, which was written in the 1960's, arguing that today we are witnessing the unfolding of precisely the kind of crisis that had been predicted. We also come to understand how the government's response thus far has remained insufficient to the task inasmuch as policy decisions are made by key decision makers such as Ben Bernanke, who remains wedded to neoliberal orthodoxy. In that light, the administration's attempts to bailout the private sector with public money can be seen as a twisted yet peculiarly logical response by the powerful to fix a broken system that nonetheless heaps further insult upon an overexploited working class. Through their thoughful writing and analysis, Foster and Magdoff help us recognize the real problem as one of financial insolvency wrought by a system that serves only to satiate the wealthy, and implores the rest of us to demand a more sustainable and just system of economics that privilges people before profits. I highly recommend this outstanding book to everyone.

THE GREAT FINANCIAL CRISIS is a very important book. But before I get into detail, I should say that the lead essay on the emerging housing bubble--written in early 2006--convinced me, in conjunction with the MR team's analysis of the coemerging eco/energy crisis, that the future for capitalism was not bright and so I took a chunk (spring of 2007) of retirement money and paid off my house --against the advice of financial advisors and in-laws, etc, who claimed that my interest rate on the money invested would continue to exceed my mortgage rate so that it was foolish to pay off the house merely to feel more secure. Well: the money that went to pay off our house would have lost over half of its value. Booya to the financial advisors and well meaning relatives! John Bellamy Foster saved me over 25 grand and gave me some security: were I to lose my job, at least they couldn't take the house! Okay: the best way to understand this book is to contrast it with a book like Dean Baker's recent PLUNDER AND BLUNDER. Baker's is a very useful book on the stock market and housing bubbles, but despite a host of superficial similarities between the two books, they really offer rival causal analyses of the crisis. For Magdoff and Foster, financialization, with its attendant speculation, bubbles, and debt driven consumption, is a necessary consequence of intrinsic stagnationist tendencies in the capitalist economy. These tendencies themselves emerge from the contradictions of capitalism. There is on the one hand the contradiction between capital and labor, with the structural domination of capital over labor giving rise to growing EXTREME inequality and thus the effective demand problem that arises when the workers don't have the funds to buy back more than a small share of what they produce, and capitalists are faced with diminishing profit expectations on new investment. One way to overcome this problem under capitalism is debt driven consumption, which encourages the formation of bubbles. Thus, in the era of late neoliberal capitalism, itself responding to the contradictions and stagnationist tendencies in u.s. capitalism's golden age, workers who owned houses with inflating prices could finance consumption with their appreciating equity--until the bubble burst. On the other hand, there is of course the contradiction between capitals at all levels that lead to profitability crises of various sorts that in turn render speculation and financialization both attractive and necessary, even if both not only fail to solve but eventually intensify the contradictions of capitalism to which they were a response. Foster and Magdoff are very good on how our debt driven consumption works up to a point to "grow the economy," but past that point, begins to backfire, turning the economy toward stagnation once again. In contrast, Baker's book is about how we can avoid bubbles in the future by getting back to precisely that golden age of productive capital

The ideologues of modern economics--from Paul Krugman to Gary Becker and BusinessWeek to The Economist--have displayed utter impotence in the face of the Great Financial Crisis. Pierre Bourdieu said that the system of belief or justifications of modern economics, commonly understood as `neoliberalism,' "which dresses up simply conservative thought in the guise of pure reason, has to be fought, with reasons, arguments, refutations, demonstrations; and this implies scientific work." (see Acts of Resistance: Against the Tyranny of the Market) In The Great Financial Crisis, Foster and Magdoff take up this challenge with great success: for those interested in moving beyond the perpetual media chatter over the proximate causes of the crisis--from bad apples to bad regulation--this is a stimulating, and essential, read. Many of the chapters were originally published in Monthly Review (monthlyreview.org), dating back to May 2006, which means that it is possible to see how initial predictions accurately and penetratingly anticipated real world events. One of the reasons, as Foster and Magdoff note in the Preface, is that this work is built on the "shoulders of giants," some of whom are beginnig to make regular appearances in the mainstream media: Marx, Schumpeter, Keynes, Minsky, Galbraith. And, most importantly, Paul Baran, Paul Sweezy and Harry Magdoff, whose pioneering works (especially Monopoly Capital: An Essay on the American Economic and Social Order) laid the groundwork for the current analysis. Magdoff and Sweezy lived through the Great Depression--as they say, "economic stagnation in its most agonizing and pervasive form, including its far-reaching ramifications in every aspect of social life, was an overwhelming personal experience." (see Stagnation and the Financial Explosion) And it is the reality of economic stagnation which lies at the root of the analysis in The Great Financial Crisis. Essentially, the authors argue that normal tendency of advanced capitalist economies is toward economic stagnation: slack investment, slow growth and high unemployment. Their understanding of the dynamics of stagnation is rooted in the historical development the U.S. economy itself, stretching back to the 1930s. Consequently, readers are treated to both an historical and critical analysis, with careful documentation and explanation of each period of stability, growth, and crisis. What pulled the U.S. out of the Great Depression--New Deal Stimulus or War? What sustained growth after the end of World War II? Did U.S. capitalism enter a new stage with the growth of financial markets? What are the roots of the explosion of consumer debt? How are consumer debt and financialization related? These are just a few of the questions that are analyzed and clearly supported with straightforward government statistics. This book may at first appear primarily concerned with economics and economic crisis. Yet one of its most important contributions is revealing economics

In the late 19th century, Karl Marx described a feature of the credit system of his time, writing that "it develops the motive of capitalist production, enrichment by the exploitation of others' labour, into the purest and most colossal system of gambling and swindling..." (Capital Volume III, p. 572). It is with this legacy and from this critical angle that John Bellamy Foster and Fred Magdoff explain the causes and consequences of the current economic crisis. Of course, the capitalist system has changed since Marx's writing. While Marx understood the tendency of the introduction of credit to redirect the flow of profit into the hands of bankers, rather than industrialists, Foster and Magdoff demonstrate the extent to which this tendency had been realized by the beginning of the 21st century. What you get from this book is that the economic problem we presently face is caused neither by "a few bad apples" nor even the explosion of finance, per se. Rather, the current crisis is "symptomatic of the underlying stagnation tendency that has its roots in the whole pattern of accumulation under monopoly-finance capital" (p. 20). The rest of the book goes on to explain what Foster and Magdoff mean by this. I think it is important to point in a review, however, one implication of monopoly-finance capital that is highlighted in the chapter "The Household Debt Bubble." The impact on real people and their everyday lives has been severe; in the past thirty years, households have been increasingly burdened by indebtedness, although this burden consistently has been disproportionately carried by the bottom 90 percent of the population, in terms of income. Therefore, financial insecurity may be a characteristic of a capitalist economy, but what is also characteristic is that this insecurity is not felt by the richest segments of the population. Foster and Magdoff ultimately treat this economic crisis in terms of its impact on real people, not abstract economic theory. In that way, The Great Financial Crisis is not only an understandable counter-argument to the many confusing explanations and bad metaphors being proposed by mainstream analysts attempting to unravel the crisis. (In the book, the charts and tables alone easily do enough to put these arguments to rest.) But, it is also written with the experience of real human beings in mind.

I've been teaching the financialization of the US economy for some years now. It's not been easy to find a clear, thorough and convincing analysis of the tendency of the economy to shift from industrial production to financial speculation and other forms of debt as a source of business profits. The onset of the current financial crisis makes it more urgent to have available to both students and the general public a lucid and detailed explanation of what's happening and why. In my opinion, this book fits the bill. There's nothing else quite like it. Foster and Magdoff's book makes the economic and political issues crystal clear without undue simplification. So, for those who suffer from "economics anxiety" this book is an oasis in a desert of dry, incomprehensible and often ideologically obfuscating economicspeak. The authors discuss the financialization of what was previously an industrial economy, the explosion of debt and speculation which followed the deindustrialization of America, the household debt bubble and how all this came to a head in the present meltdown. The book is helpfully divided into two parts, the first discussing the causes of the meltdown, and the second describing and analyzing the consequences. Key terms such as securitization and derivatives are defined, the views of major economists from Milton Friedman to J.M. Keynes and Hyman Minsky are explained and, perhaps most importantly, there is an extensive analysis of the relation between the financial and the real, i.e. tangible-goods-and-services-producing, economies. The authors demonstrate that the real economy is afflicted with a built-in tendency toward mounting underutilization of its technological and human resources, so that the gap between actual and potential production tends to get wider and wider. This manifests itself as growing unused productive capacity (what economists call "capacity overhang"), unemployment and wasteful production. As this problem grew in severity and profitable industrial investment opportunities withered, investment-seeking capital moved toward financial means of generating "profits." The scare quotes indicate that what this process of financialization produces is phantom, spurious "wealth," which must eventually dissipate in popped bubbles, recession or depression and the liquidation of real wealth as the widget-producing economy disintegrates in escalating unemployment and widespread business failures. A brief review cannot do justice to this very helpful and insightful book. I have come across no better analysis of what will probably turn out to be the most severe crisis to beset modern capitalism, bar none, including the Great Depression.