The Road to Bankruptocracy: How events since 2009 have led to a new mode of reproduction

02/03/2011 by

Today I am continuing the narrative of my forthcoming book  The Global Minotaur. The last post on the matter chronicled the Crash of 2008 (for all the previous posts on the Minotaur click this archive). My  chronicleended abruptly and arbitrarily toward the middle of 2009. It reads like a breathless horror story. Unlike its Hollywood equivalents, however, it features no natural ending. Happy or unhappy. It is a never ending story that began in 2007 and is bound to continue for a long, long time. So, I had to sever it at some point in order to return to the meaning of it all. I chose May 2009 for no particular reason. Today I take stock on what happened since 2009 (see the Low Down below) and sketch out our world’s slide into what I call Bankruptocracy, the new regime that succeeded what was once known as capitalism…

The low down

If I were to summarise the state of the world after May 2009, I could not do better than to use the following words:

“We are now in the phase where the risk of carrying assets with borrowed money is so great that there is a competitive panic to get liquid. And each individual who succeeds in getting more liquid forces down the price of assets in the process of getting liquid, with the result that the margins of other individuals are impaired and their courage undermined. And so the process continues…. We have here an extreme example of the disharmony of general and particular interest…”

These words were penned by John Maynard Keynes in 1932.[1] Only they apply to our post-2008 world with greater gravity than they did in the aftermath of 1929. For in 1929, total outstanding credit in the United States was 160% of GDP. By 1932, when Keynes scripted these lines, as debts mounted up and GDP fell, it had risen to 260% of GDP. In contrast, the United States, under the Global Minotaur‘s regime, had entered the Crash of 2008 with total outstanding credit 365% of GDP. Two years later, in 2010, it had risen to a stupendous 540% of GDP. And this without counting derivatives, whose nominal outstanding value is at least four times GDP.

However appallingly impressive the numbers may be, they fail to convey the reality. On the eve of the Crash of 2008, after three decades of serving the Global Minotaur‘s world, the average American workers’ real wages never even reached their early 1970s levels. Working longer hours than ever before, and achieving remarkable productivity gains, they had realised no tangible benefits. And then, all of a sudden, in or shortly after 2008, they were literally turned into the streets in their millions.

Almost four million Americans lost their jobs while, according to the US Mortgage Bankers Association, it is estimated that 1 in 200 homes was repossessed by the banks. Every three months, from 2008 to 2011, 250,000 families had to pack up and leave their homes in shame. On average one child in every US classroom is at risk of losing her or his family home because the parents cannot not afford to meet their mortgage repayments. Adding to this tale of woe, the US-based Homeownership Preservation Foundation tells us (based on a survey of 60 thousand homeowners) that more than 40% of American households are getting further and further into debt every year (even though the American economy as a whole is ‘de-leveraging’, i.e. reducing its debt).

Anyone wishing to grasp the discontent that permeates Main Street, as average America is depicted, is advised to contrast the wholesale angst experienced by American families against the imagery of a revivified Wall Street (Main Street’s binary opposite). On the one hand, the multitudes who worked hard and for decreasing returns were rewarded, during the Minotaur‘s reign, with bitterly hard labour and, after the Minotaur’s fall from grace, they were scrapped like old used up appliances. On the other hand, the small minority who produced worthless paper assets and brought the world to its knees with their immense pay-packets and equally colossal egos, received more than $10 trillion worth of tax-propelled assistance. Is it any wonder that the Tea Party is finding it easy to recruit among those disgruntled enough to believe that the ‘system’ is rotten to the core?

Meanwhile, in Europe the crisis is gathering pace, threatening the common currency’s very existence (an interesting crisis to which I return in Chapter 8). Beyond the United States and Europe, it is often said that the Emerging Countries (i.e. the parts of the Third World that started growing in the late 1990s) were relatively unscathed by the Crash of 2008. While it is true that China successfully used simple Keynesian methods for delaying the crisis, through spending more than $350 billion on infrastructural works in one year (and close to twice that by 2010), a study by Beijing University shows that poverty rates actually increased, the rate of private expenditure fell (with public investment accounting for the continuing growth) and even consumption declined markedly (as a proportion of GDP). Whether this type of Keynesian growth is sustainable without the Global Minotaur is our era’s next huge question mark.

Countries like Brazil and Argentina, which export large quantities of primary commodities to China, weathered 2008 better than others. India too seems to have managed to generate sufficient domestic demand. Nevertheless, it would be remiss not to take into consideration the fact that the Third World had been in a deep crisis, caused by escalating food prices, for at least a year before the Crash of 2008. Between 2006 and 2008 average world prices for rice rose by 217%, wheat by 136%, corn by 125% and soybeans by 107%. Its causes were multiple but also intertwined with the Global Minotaur.

Financialisation, and the ballistic rise of options, derivatives, securitisation etc., led to new forms of speculation at the Chicago Futures’ Exchange over food output. In fact, a brisk trade in CDOs, comprising not mortgages but the future price of wheat, rice and soybeans, gathered steam in the run up to 2008. The rise in demand for bio-fuels played a role too, as they displaced normal crops with crops whose harvest would end up in 4X4 monsters loitering around Los Angeles, Sydney and London. So did the many natural disasters (e.g. devastating floods in Pakistan and Australia, consuming bushfires in Russia and… Australia; most likely the manifestations of global warming) which inflated food prices  further.

Add to that the drive to commodify seeds in India and elsewhere by US multinationals like Cargill and Monsanto, the thousands of suicides of Indian farmers caught in these multinationals’ poisonous webs, and the effects of the demise of social services at the behest of the IMF’s special adjustment programs (SAPs) etc., and a fuller picture emerges. In that picture, the Crash of 2008 seems to have made a bad situation (for the vast majority of people) far worse.[2]

Tellingly, when the G20 met in London on April 2009, and decided to bolster the IMF’s fund by $1.1 trillion, the stated purpose was to assist economies worldwide to cope with the Crash. But those who looked more closely saw, in the fine print, a specific clause: The monies would be used exclusively to assist the global financial sector. Indian farmers on the verge of suicide need not apply. Nor should capitalists interested in investing in the real economy.

The slide into Bankruptocracy

The Crash of 2008 seriously wounded the Global Minotaur. Since 2008/9, the Crisis has eased. But it has not gone away. The beast is down and no one any longer performs its crucial function of keeping America’s twin deficits running and of absorbing the world’s surpluses. Thus, the Crisis is constantly metamorphosising, taking its toll differently in different places. This is no longer a financial crisis. It is not even an economic crisis. It has become a political crisis.

In the United States unemployment continues at an unsustainable (especially for America) 10% level. Europe’s unemployment is up there too. Both entities, the dollar and the euro zones, have, in the meantime, been rendered ungovernable by their squabbling elites. In the United States, the Obama Administration, following the Republicans’ victory in the November midterm elections of 2010, is effectively bamboozled. No longer able to pump-prime the economy with fiscal stimuli, the lonely task of tilting at the slow burning Crisis has fallen on Ben Bernanke’s Fed. So, the Fed, unhappily, is still desperately trying to increase the quantity of money circulating in the American economy by buying hundreds of billions of paper assets (quantitative easing is the name of the game).[3] Bernanke knows that this is far from an ideal situation but is left with no choice at a time of stalemate between the White House and Congress.

In Europe, the Crisis has put in train centrifugal forces that are tearing the eurozone apart, setting the surplus economies, with Germany at the helm, against the stragglers, whose structural deficits no amount of belt-tightening can cure. Unable to coordinate policy at some central level, Europe dithers, its economies stagnate, the productive fibre degenerates and, consequently, the dream of political union, which was pushed along so brilliantly by post-war US administrators on the basis of enhanced growth prospects, is flaking off.

Three years after the Crash of 1929, the election of President Roosevelt brought to power a government hell bent on grappling with the Crisis by political means. The banking sector had collapsed and the new authorities seized the day. Wide ranging regulatory controls were introduced and, for a while, the political will to deal with the Crisis decisively, rationally and at all costs met little resistance from the exhausted rentiers and bankers; men whose antipathy for political solutions is proportionate to their perception of how their power will be curtailed.

Alas, today, three years after our very own 1929, the balance of power is exactly the reverse: Political authority waned within a year or two of the Crash because it expended all its capital unconditionally shoring up the almost-defunct financial sector. In a typical zombie movie setting, the un-dead banks drew massive strength from our state system and then immediately turned against it! Both in America and in Europe, politicians are wallowing in terror of banks which, only yesterday, they had saved.[4] Thus, the very financial sectors that were at the heart of the problem, now hold our politicians in awe, not only making it impossible to implement sensible policies for dealing with the ongoing Crisis but silencing all sensible public debate on what really happened as well.

If evidence of this state of zombie terror is needed, take the report on the Crash of 2008 delivered on 27th January 2011 by the Financial Crisis Inquiry Commission.[5] Two years of research and intensive deliberation led to the lame conclusion that the Crash was due to excessive risk taking and inadequate regulation. And as if the spectacular lameness of this conclusion is not sad enough, the Republican minority members issued their own verdict: It was the state’s fault! How? The two state-controlled mortgage providers, Fannie Mae and Freddie Mac, had encouraged too many poor Americans to take out subprime mortgages. Another case of the state making a mess of things by stepping into a market that it understood nothing of. The evident truth that Fannie Mae and Freddie Mac were the tail wagged by the Wall Street dog; that they only joined in the frenzy of CDO production late in the piece; that the private money generation machine was a global phenomenon designed and directed by Wall Street’s private banks; that Europe saw exactly the same pattern form in the complete absence of Fannie Mae and Freddie Mac; none of that counts. The only thing that matters is that the truth does not get in the way of Wall Street’s resurgence.

A similar cloud of silliness permeates Europe’s post-Crash official debates. A visiting extra-terrestrial reading the serious European press will come to the conclusion that Europe’s crisis happened because some peripheral states borrowed and spent too much. That little Greece, uppity Ireland and the languid Iberians tried to live beyond their means by having their governments debt-finance living standards over and above those that their production efforts could sustain. Setting aside the irony of this accusation, especially when it comes from US financiers (whose pre-2008 Minotaur-reliance would put to shame anyone else’s attempts to live off other people’s capital), the problem with this type of narrative is that it is simply not true. While Greece was, indeed, running a large deficit, Ireland was a paragon of fiscal virtue. Indeed, Spain was running a surplus when the Crash of 2008 hit and even Portugal was no worse than Germany in its deficit and debt performance. But who cares about the truth when lies are so much more fun, not to mention functional to those who are desperate to shift the spotlight from the real locus of the Crisis: the banking sector?

Once upon a time, the Left-Right divide dominated political and economic debate. In the red corner, the Left argued that economic life is too important to leave to market forces; that society is better off with centrally planned economic activity. In the blue corner, free marketeers countered that the best way of serving the social good is to allow a Darwinian market-based process to weed out the least efficient economic practices so that the successful ones prevail. In 1991 the red corner met its calamitous defeat, from which it never really recovered. In 2008, unbeknownst to most, it was the blue corner’s turn: For since then, in view of the post-2008 developments on both sides of the Atlantic, nothing seems to succeed like grand failure.

If anything, the Darwinian process has been turned on its head: The more unsuccessful a private organisation is, and the more catastrophic its losses, the greater its ensuing power courtesy of taxpayer financing. In short, socialism died during the Global Minotaur‘s golden age and capitalism was quietly bumped off the moment the beast ceased to rule over the world economy. In its place, we have a new social system: Bankruptocracy – rule by bankrupted banks (if I were allowed to practise my Greek, I would call it ptocho-trapezocracy[6])

Summing up, future generations will study the story of the Crash of 2008 in a bid to understand a crucial ingredient of their own present. In it they will find important clues of a new type of regime that changed the texture and dynamic of global capitalism forever. Whether my chosen term, bankruptocracy, will have caught on is neither here nor there. What matters is that 2008 marked a significant discontinuity. That life after it will not resemble what went on before it. In the context of this book’s narrative, the new post-2008 era is marked by a grand absence and a hefty presence: Absent is the Global Minotaur that gave us the world prior to 2008 and which led us to the Crash of 2008. Present are its resurgent handmaidens which, after 2008, returned with a vengeance. A world in which the Minotaur‘s handmaidens are running riot, liberated from the beast’s whims, is the world of our near future.

[1] “The World Economic Outlook”, The Atlantic Monthly,  149: 521-526 (May 1932)

[2] Shiva Vandana, an Indian physicist and ecologist who directs the Research Foundation on Science, Technology, and Ecology, offers a compelling explanation of the food crisis that had erupted in the developing nations just before the Crash of 2008. See Earth Democracy: Justice, Sustainability, and Peace, Cambridge, Mass.: South End Press.

[3] Quantitative easing is usually referred to as a species of printing money. This is not strictly true. What the Fed is doing is purchasing from banks and other institutions all sorts of paper assets (US government bonds plus private companies’ bonds). It does this by creating overdraft facilities for these institutions from which they can draw for the purposes of lending to others. But if these institutions do not lend to others (because they cannot find clients willing to borrow), the result is zilch. This is why I am saying that quantitative easing is an attempt to create money. The Fed’s tragedy is that it is trying to print money but finds it hard to succeed!

[4] In Europe, politicians are even terrified of bankers whose bacon they are still saving, daily, and to the tune of billions per month!

[5] The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by President Obama in May 2009.

[6] Ptochos is Greek for pauper but also for bankrupt. Trapeza is Greek for bank (originally it means table and is associated with banking because in ancient Greek city states borrowing and lending transactions were carried out in the Agora, with the parties to the transaction being seated around long tables).

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