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Global Economic Crisis: Interview with John Bellamy Foster

The current global financial crisis is said to originate with a few dodgy “sub-prime” mortgages made by US banks to poor people.

Yes, the financial crisis that began in late 2007 is associated with the collapse of the sub-prime mortgage market.  But that is just one aspect of a much larger financial crisis and that itself is one aspect of a much larger problem of the financialization of capitalist economy that has been going on for decades.

Since the slowdown of the world capitalist economy in the 1970s, we have seen a period of stagnation where in each decade the growth rate of the world economy (and the economy in the center states) has been slower than the decade before.  The 70s had a slower rate of growth than the 60s, the 80s were slower than the 70s, the 90s were slower than the 80s, and the 2000s have so far been the slowest decade.

This slowdown is very obvious in the US economy.  The slowdown has been due to a stagnation of investment, so they try and stimulate demand.

One way they have tried to do this is through enhanced military spending, which is also being carried out as part of an imperial strategy.  The US is now spending about a trillion dollars a year on the military if you add in all the different elements, including the wars in Iraq and Afghanistan.

Another way they have tried to offset the stagnation is through the growth of the financial system.  So all the profits the capitalists can’t find investment outlets for are poured into finance.  So we have a huge growth of the financial superstructure of the economy, which is now far bigger than the productive base, what the economists call the “real economy of income.”

The financial structure dwarfs that.  Financialization means a shift in gravity from the real economy (production-centered economy) to financial speculation.

This system has become more and more unwieldy.  As it expanded, they have had to take on larger and larger amounts of risk.  They’ve had to develop more and more exotic financial instruments and the system has become opaque, multi-layered, gargantuan, and uncontrollable.

This is something that the financial press, the International Monetary Fund, and the central banks are very concerned about.  There are all sorts of growth of derivative markets that are supposed to slice and dice risk and protect capital, but it is all very unstable.

In the US in 2000 there was a stock market collapse and it was part of this financialization problem.  They had no way to save the economy but to lower interest rates and to create another bubble — this time in real estate.

They took mortgage loans and they “securitized” them — i.e. they turned them into complex investment vehicles that they could trade on.  This created a whole shadow banking system to support this.

The hedge funds are part of this.  The structured investment vehicles that hold these new mortgage-based securities are collateral debt obligations.  They have all these new vehicles such as credit-debt swaps, which are complex forms of speculation and insurance.

It is enormously complex and the financial world itself hardly understands it and how to evaluate it.

The whole thing started to come apart last summer, beginning in late July when Bear Stearns found that it couldn’t put a value on some hedge funds that had what they called “financial toxic waste.”  These hedge funds had this financial toxic waste in the form of collateralized debt obligations that had some sub-prime mortgages in them.

One of these hedge funds lost 90% of its value and the other about 100% of its value.  The entire financial community panicked because they realized that the phenomenal values they had placed on these things were meaningless.

The potential chain reactions were enormous because the system is opaque, which means that nobody knows where the financial toxic waste is buried. Nobody knows because the interconnections are too complex and nobody wants the mortgage-based securities anymore because they are seen as too dangerous.

They call them “nitroglycerine” or “weapons of mass destruction.”  The whole thing is unstable.

So we have another financial bubble that has burst and, of course, it is affecting working people because the whole speculation was based on homes.  Many people were pushed into taking out adjustable rate mortgages and mortgage loans in which there was no equity (i.e. for 100% of the value of the house).

People were told to refinance and refinance, to take more cash out on their home loans and treat it like a piggy bank.  Since in the US people haven’t had a real increase in wages for 30 years, people were just taking money out of their homes and increasing their debt just to survive and consume.

So the working class is left in terrible shape.  And if consumption collapses in the US, that affects the Chinese economy and the whole world economy.

So this is extremely unstable and dangerous.

The root of this crisis is the stagnation of the economy that has been going on for a long time — financialization was supposed to be the answer to that.  It has turned out to be a crisis in itself.

They have no answer to this in the US but to lower interest rates again, have the Federal Reserve take over hundreds of billions of dollars of bad loans and bail out the financial institutions as much as they can.  Then they have to find a way to blow another bubble.

You have described this financializaton of the economy as “gargantuan”; can you give us some figures that indicate the scale of this process?  What is the size of the “bad debt” held by US banks?

No one has any idea.  In the derivatives market, all the values are in nominal terms and there is no real way of relating these values to the real economy.  You can talk about tens of trillions of dollars of these financial instruments but nobody really knows how to value these things and a lot of it is based on fictional incomes, like the non-existent servicing of the sub-prime mortgages.

These values can inflate or deflate very quickly.  It doubles in price one year and goes down by as much in the next year.  Their nominal values only measure a possible loss, but what does that mean?

If, when it doubled in price, you concluded you were much richer and went and borrowed on it, increasing your debt, then when it goes down in price you find you did not have that wealth at all but you have these debts.

Debt has expanded so fast in the US that, by the end of 2005, the debt in the US economy was equal to the gross world product, the income of the entire world.  In the first half of 2007, they started to panic at the decline in housing prices and the implications of this.

There was a 49% increase in credit-debt swaps, which was an attempt by financial institutions to protect themselves.  So the credit-debt swaps, which comprise only one part of the derivatives market, rose to US$40 trillion — exceeding by a number of times US gross national product (which was $14.2 trillion at end of 2007).  So it is huge compared even to the total incomes of all the workers and companies — it is dangerous for that reason alone.

Probably the only thing all economists would agree on is that an economy grows on the basis of investment.  If you want economic growth you have to have net investment.  Undistributed profits are supposed to go into net investment and that is the whole rationale for the capitalist class.  That’s the purpose they are supposed to carry out — accumulate profits and use it to invest.

In the US the net investment in the late 60s was about 4.8% of GDP, but it has been falling pretty steadily since, with some up-and-down movement.  By 2005, which was the peak of the latest economic cycle, it had fallen to 1.5% of GDP.  Now net investment in the US has almost completely disappeared.

Capitalists are not investing in the productive sector at all.  And it is not because they don’t have any profits to invest.  Right now, net investment has probably fallen below 1% of GDP.  The corporations have $600 billion in cash that they are sitting on and are not investing because there are no profitable investment outlets out there.

So they are sitting on this big pile of cash.

Meanwhile, in the US the job situation has deteriorated so that the proportion of the adult population (males especially) who are employed is the lowest since the Great Depression.

This is not reflected entirely in unemployment figures because people are dropping out of the job market altogether as they are so discouraged.  Jobs are disappearing and people are more and more desperate.

And this supposedly is the leading economy on Earth.

Why don’t the US government and reserve banks, those champions of neo-liberal economics, say, let the companies with the bad debt go to the wall, take the pain, and let the economy fix itself according to laissez faire economic theory?

In this crisis, these institutions have already decided that this approach is definitely out.  The big capitalists have said to the reserve banks and to the government that they have to be rescued on this.

In March, the US Federal Reserve Board loaned $200 billion to the leading financial institutions and supervised the bailout of Bear Stearns and its absorption by JP Morgan-Chase.  The Federal Reserve is taking over a lot of these mortgage-based securities, something they have never done before.

They are taking over the securities that no one wants and there is no market for, and they are taking them for what they call “non-recourse loans.”  They don’t want to call it a bailout but it means the same thing — the losses will be borne by the Federal Reserve Board and the taxpayer.

They are doing everything they can to pour liquidity into the system.  They lowered the interest rate at record speed, pouring liquidity not only into the major banks but also into the shadow economy of the hedge funds and other similar financial institutions.

So capital has already made its decision, as well as the Federal Reserve Board and other central banks.  They justify it by saying that if they didn’t the whole financial system would come tumbling down.  The amounts at risk are too immense and the relationships between financial institutions and other companies are too complex.

Bear Stearns, for instance, had a couple of trillion dollars of credit-debt swaps and so the consequences for other financial institutions of it going down would have been unbelievable.  And they would have been worldwide.  So they had to move in, they had no choice.

However, while the Federal Reserve Board cannot let these institutions fail, the “Keynesian” approach is not really available.  What people usually mean by taking a Keynesian approach is introducing regulations on these financial institutions.

But regulations can’t be imposed very easily because the whole financialization process requires increased risk and increased speculation and an increase in the number of financial instruments available.  If this process is not allowed to go on, then there will be a financial contraction and the system starts to come apart.

The Federal Reserve Board and the US government are not in control of the situation.  They have the bull by the horns and they can’t let go.  They can only provide more liquidity and remove regulations.

They can’t impose regulations because their only solution is to blow another speculative bubble, because fundamentally the economy is ill and has been for three decades and financialization has failed to cure it.

Because Australia now exports most of its raw materials to China, there is a lot of speculation about how much the growth in the Chinese economy is dependent on the health of the US economy.

The US is no longer China’s number-one trading partner.  It has become Europe.  So some people say that this stabilizes things, but not really.

But what is generating the growth in the Chinese economy is its export surplus.  The export surplus of the Chinese economy is equivalent to the current account deficit of the US economy, so these economies remain inter-dependent.  If the US economy contracts seriously then that will affect China.

Europe is basically in trade balance with China, so if the US economy contracts China loses its market and the basis of its export surplus.  So China could have a very severe economic crisis as a result of this.

In addition, the Chinese currency has been pegged to the US dollar and the collapse of the US dollar has an impact of China’s foreign reserves.

However, China has an advantage because of its relatively weak internal demand so it could compensate by expanding the consumption of its working class.  It could create a more internally oriented economy, which would also be the best thing for its population.  This would mean that wages would have to go up.

But the immediate effect of a real crash in US consumption would be a big slowdown in the Chinese economy.  China has been rapidly building up its industrial capacity and it could find that capacity unusable.

Historically there has never been an economy that has grown so fast and for so long as the Chinese economy.  So the idea that the Chinese economy is going to be able to increase at this rate of 8-9% a year, year after year, goes against historical experience, which would suggest that it is bound to experience a slowdown.


John Bellamy Foster is editor of Monthly Review and teaches political economy and environmental sociology at the University of Oregon.  He is the author of Marx’s Ecology: Materialism and Nature and Ecology Against Capitalism.  Peter Boyle is a regular contributor to Green Left Weekly.  This interview was first published in Green Left Weekly (#749) on 7 May 2008.



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