Interview of John Bellamy Foster on The Great Financial Crisis

John Bellamy Foster is editor of Monthly Review and professor of sociology at the University of Oregon.  He is the coauthor with Fred Magdoff of The Great Financial Crisis: Causes and Consequences, recently published by Monthly Review Press.

MW: Do you think that the American people have been misled into believing that the current financial crisis is the result of subprime loans and toxic assets?  Aren’t these merely the symptoms of a deeper problem; financialization?  Can you explain financialization and how the economy became more and more detached from productive activity and more and more dependent on the accumulation of paper wealth?

JBF: I think it is true, as you say, that the American people have been misled by analyses of the crisis into focusing on mere symptoms, or on the straws that broke the camel’s back, such as subprime loans.  There is still a great deal of toxic financial waste out there in the financial superstructure of the economy, but the real problems go much deeper. One reason for this failure to account realistically for the crisis is that those at the top of the system have very little clue themselves, given the near bankruptcy of orthodox economics.  A second reason is that the dominant ideology is designed to naturalize/externalize economic disaster, pretending it has nothing to do with the inner contradictions of the system but is simply the result of human psychology, mistakes of federal regulators, deregulation, corruption of a few individuals, etc.  Under these circumstances, what you get from the elites and the media is mostly nonsense, though there are individuals in the financial community, in particular, that are now analyzing the problem at a deeper, more realistic level.

The first thing to recognize is that this is a very serious crisis, of an order of magnitude comparable to the Great Depression.  It is not a regular business cycle downturn or credit crunch.  This should suggest that there are long-term forces at work.  These include, over the last third of a century, stagnation, or the slowing down of the economy, and the financialization, the shift in the center of gravity of the economy from production to finance.  Financialization refers not to just one or two financial bubbles (such as the New Economy bubble and the housing bubble) but to the growing reliance on financial speculation, which can be treated as a whole series of bubbles one after the other, each new one bigger than the last.  This has been the dominant economic development since the 1970s, and especially since the 1980s.  This financialization was occurring on top of a “real economy” or productive economy that was more and more stagnant.  Given the rot below, financial speculation thus became the only game in town, serving to lift the economy.  More and more economic activity was geared not to production but to the pursuit of paper claims to wealth.  The last bubble-bursting episode, associated with the housing or subprime bubble, was so severe that it brought financialization to an end, generating what we call in the title of our new book The Great Financial Crisis.

The idea at the top was that the financial explosion could be managed, and a financial collapse prevented.  The central banks as lenders of last resort could pour liquidity into the system at critical points to avoid a financial avalanche.   And in fact they succeeded in doing this for decades.  Ben Bernanke, the current head of the Federal Reserve, even referred a few years ago to “The Great Moderation,” in which the business cycle had been overcome by monetary policy.  Following the successful leveraging of the system out of the 2001 crisis that followed the 2000 bursting of the New Economy bubble, he assumed that they now had discovered the elixir of indefinite financial-based growth.  Yet, the scale of the financial superstructure of the economy kept on rising in relation to the stagnant production system underlying it and finally it overwhelmed the capacity of the Federal Reserve and other central banks to stave off the inevitable financial collapse.

From a long-term perspective we can say that there is a kind of mean reversion taking place whereby the financial system and the inordinate profits it generated over decades is reverting to the long-term trend of the overall stagnant economy, which means that trillions upon trillions upon trillions of dollars in capital assets are being lost.  And with financialization no longer lifting the economy as it has in decades past, we are face to face with the underlying forces of long-term stagnation.  For this reason the best economists and financial analysts are now saying that when the recovery from this crisis begins, perhaps in 2011, it will be an L-shaped recovery, pointing toward long-term stagnation as in the depression decade.  Without financialization there is nothing on the horizon to boost the U.S. and other advanced capitalist economies.

MW: Is the financial crisis the result of deregulation, lax lending standards, and too much leveraging or are there more important factors involved?  In your new book The Great Financial Crisis, you say that stagnation is unavoidable in mature capitalist economies because “a handful of corporations control most industries” which has ended “price warfare.”  How has “monopoly capital” paved the way for financialization and the creation of derivatives, structured debt instruments, and other complex investments?  Could you clarify what you mean by stagnation and how it led to the present crisis?

JBF: The long-term process of the growth of financial speculation or financialization (the shift in gravity of the economy from production to finance) was a process that had to keep going because once it stopped you would have a financial avalanche.  As increased debt is used more and more to leverage financial speculation, the quantity of debt increases while its quality decreases.  This means that the level of risk keeps rising.  As speculation becomes more extreme various mechanisms are introduced to manage risk.  Structured debt instruments like collateralized debt obligations and credit default swaps, and a host of other exotic financial instruments, were introduced supposedly to reduce the risk of the individual investor, but ended up expanding risk system-wide.  Ideologically the increased risk is rationalized in various ways — for example the presumed high tech basis of the New Economy bubble and the notion that new financial instruments had sliced and diced risk and thereby lessened risk exposure in the subprime bubble.  But eventually, the decrease in quality that goes along with the increase in quantity of debt has its effect.  In this respect, the giving out of subprime loans was simply part of the normal evolution (though this time on a massive scale) of financial instability basic to speculative finance.  This was well explained by economist Hyman Minsky in his various works on the “financial instability hypothesis,” largely ignored by mainstream economists.

Regulation of this system was impossible, since the risk had to keep rising and any attempt to place any limits on the system once financialization got to a certain point risked a financial meltdown.  The capitalist state therefore had no choice but gradually to dismantle the entire financial regulatory system and to allow risk to grow.  Indeed, in every major financial crisis over the last thirty years the response was financial deregulation.  The risk-prone structure that emerged was presented as “optimal” in the governing ideology, and the IMF and other institutions worked at imposing the same supposedly advanced, high-risk “financial architecture” on all the countries of the world.

The real underlying problem, as indicated above, was stagnation.  Explaining stagnation is a long and complex process.  It was analyzed in depth by Paul Baran, Paul Sweezy, and Harry Magdoff.  For a fuller understanding, beyond what I am able to give in this short space, I recommend our book The Great Financial Crisis and earlier works by Baran, Sweezy, and Magdoff, especially Baran and Sweezy’s Monopoly Capital.   There are two factors basically to consider: maturity and monopoly.  Maturity stands for the fact that industrialization is an historical process.  In the beginning, i.e., the initial industrial revolution phase, there is a building up of industry virtually from scratch as in the United States in the nineteenth century and China today.  During this period the demand for new investment seems infinite, and if there are limits to expansion they lie in the shortage of capital to invest.  Eventually, however, industry is built up in the core areas, and after that production is geared more and more to mere replacement, which can be financed out of depreciation funds.

In a mature economy, growth is increasingly dependent on finding investment outlets, and capital tends to generate more surplus (or investment-seeking capital) than can be absorbed in existing outlets.  New industries arise (such as the computer, digital product industry of today), but normally the scale of such industries relative to the whole economy is too small to constitute a major boost to the entire economic system.  Although the capitalist economy is not often discussed in terms of such a historical process of industrialization (which lies outside the governing ideology), it is taken for granted in discussions of the world economy that the more mature economies of the United States, Europe, and Japan are only going to grow nowadays at, say, a 2.5 percent rate, while emerging economies may grow much faster.  The maturity argument was influenced by Keynes and developed by Alvin Hansen in the late 1930s and early 1940s in such works as Full Recovery or Stagnation? and Fiscal Policy and Business Cycles.   But the most powerful and clearest theoretical discussion of maturity was provided by Paul Sweezy, building on a Marxian frame of analysis, in his Four Lectures on Marxism.

The second factor is monopoly (or oligopoly).  Marx was the first to discuss the tendency in capitalist economies toward the concentration and centralization of capital, an emphasis that has distinguished Marxian economics.  In Marxian and radical institutionalist economics, this led to the emergence by the last quarter of the nineteenth century (consolidated only in the twentieth century) of a new stage of capitalism that came to be known as the monopoly stage (or monopoly capitalism) displacing the earlier freely competitive stage of capitalism of the nineteenth century.  In essence, the economy in the nineteenth century was dominated by small family firms (other than railroad capital).  In the twentieth century this turns into an economy of big corporations.  Although monopoly capital remained a stage of capitalism, the laws of motion of the system were modified.  The biggest change is the effective banning of price competition.  Monopolistic (or oligopolistic) firms, as Paul Sweezy, then a young Harvard economist, famously explained in the 1930s in his theory of the kinked-demand curve of oligopolistic pricing, tend to shift prices in only one direction — up.  Price competition among the majors is seen as self-defeating and replaced by a steady upward movement of prices, usually a form of indirect collusion, following the price leader (usually the biggest firm in an industry).

With the effective banning of price competition in mature industries (there is still price competition in rising industries where a shakedown process is occurring), the main assumption of orthodox conceptions of the capitalist economy is violated.  Competition continues over low cost position in an industry (i.e. over productivity), and in other areas aimed at market share, such as advertising and branding of products (referred to as “monopolistic competition”).  But actual price competition under monopoly capital is usually treated as “price warfare,” which is no longer acceptable.  Throughout the nineteenth century in the United States the general price level fell with the exception of the Civil War years.  Throughout the twentieth century the general price level rose with the exception of the Great Depression years.

The result of all of this is that, given rising productivity, monopolistic corporations end up grabbing as surplus a larger portion of the gains of productivity growth (and virtually all the gains when real wages are also stagnant), leading to a tendency of the surplus of monopoly capital to rise.  There is then a vast and growing investment-seeking surplus, which, however, encounters relatively diminished investment outlets due to a number of factors: industrial maturity, growing inequality which negatively affects consumption (insofar as this is based on paychecks not debt), and persistent unused industrial capacity which discourages the further expansion of capacity.  In Marxian terms, we can say that the rate of surplus value (or the rate of exploitation) within production is too high for all of the surplus value potentially generated through production to be realized in final sales.

As Keynes taught, savings/surplus (ex ante) that is not invested simply disappears, so this slows down the economy as a whole.  But the problem of surplus capital seeking investment is not thereby alleviated, since monopoly capital tends to adopt measures that continually pump up potential surplus even in a crisis.  So the contradiction continues.

Baran and Sweezy summed up their argument by claiming that stagnation was the normal tendency of the monopoly capitalist economy.  This was in sharp contradiction to received economic theory which assumed that capitalism by nature tended toward rapid economic growth and full employment.  In the mainstream view, rapid growth and full employment were intrinsic to the system, so the emergence of slow growth required a specific explanation.  In contrast, Baran,  Sweezy, and Magdoff, building on a long line of thinkers before them (Marx, Veblen, Keynes, Hansen, Kalecki, Steindl), argued the opposite, that it was periods of rapid growth under monopoly capitalism, such as the now fabled Golden Age of the 1950s and ’60s, that needed to be explained as due to special factors.  In their view, it was necessary to point to the specific historical stimuli that propelled extraordinary periods of rapid development (in the Golden Age: enormous consumer liquidity after the war, a second great wave of automobilization, military spending associated with two regional wars in Asia and the Cold War, the expansion of the sales effort, etc.).  Stagnation itself was the normal tendency of the system and so could be accounted for simply by the waning of such special factors.

If investment and consumption are inadequate to maintain demand, as is the normal case under monopoly capitalism, the government is called into help.  In the United States, this has often taken the form of increased military spending (which is crucial to the imperial goals of the system) and lately through financialization.  Both of these means of maintaining demand, however, have reached their limits (the U.S. accounts for as much military spending as the whole rest of the world put together and cannot easily expand this at present), resulting in a deepening economic stagnation.

Baran and Sweezy’s Monopoly Capital had pointed to financial sector expansion as a possible countervailing factor to stagnation, but in the 1960s this was merely potential and had not emerged to any large extent.  The evolution of the system from the 1970s on became so dependent on the growth of finance, and the incorporation of the giant corporations into this, that I have termed this later phase “monopoly-finance capital.”

MW: As the economy has become more dependent on financialization for growth, the gap between rich and poor has grown wider and wider.  As you point out in your book, “In the United States the top 1 percent of wealth holders in 2001 owned more than twice as much as the bottom 80 percent of the population.  If this was simply measured in terms of financial wealth, the top 1 percent owned more than four times the bottom 80 percent” (p 130).  How have working class people managed to keep their heads above water with all this wealth being shifted to the rich?

JBF: The answer is fairly obvious.  If people cannot maintain their standard of living on the basis of their income, they will borrow against income and against whatever wealth they have.  The result — if their incomes don’t rise, or if the value of whatever assets they have do not increase — is that they will simply get deeper and deeper in debt in an attempt simply to stand still.  I became concerned about the growth of working-class household debt in 2000 and carried out a study of The Survey of Consumer Finances, which is published every three years by the federal government with a three year lag in the data.  This is the only major federal government data source that we have on household debt broken down into income groups so that we can determine the debt burden of different classes.  I published an article based on this research in the May 2000 issue of Monthly Review entitled “Working-Class Households and the Burden of Debt.”  I then followed this up six years later with an article in the May 2006 Monthly Review on “The Household Debt Bubble,” which was to be incorporated into The Great Financial Crisis.  There I wrote that “The housing bubble and the strength of consumption in the economy are connected to what might be termed the ‘household debt bubble,’ which could easily burst as a result of rising interest rates and the stagnation or decline of housing prices.”  This is of course what happened, and the reason why this crisis has turned out to be so severe was the destruction over decades of the finances of working-class households, on the back of which financialization took place.

MW: Will you define “debt-deflation” and explain its potential danger to the economy?  As credit continues to tighten and housing prices sink; aren’t we slipping into a reinforcing deflationary spiral?  Do you think that fiscal policy will reverse this trend or is the stimulus package too small to stop real estate and equities from continuing to slide?

JBF: The term “debt-deflation” is associated particularly with the work of Irving Fisher during the Great Depression. Fisher wrote an article for the journal Econometrica in 1933 entitled “The Debt-Deflation Theory of Great Depressions.”  Deflation as applied to the general economy is a drop in the general price level, something not seen in the United States since the Great Depression, and catastrophic in the economy of monopoly capital (and even more so under monopoly-finance capital).  In the first place, deflation (or disinflation, i.e. the reduction of inflation to what the Federal Reserve calls “below optimal” levels) means that the profit margins of corporations are squeezed, even if the cost structure of production and productivity remain the same.  Under these circumstances price competition is reactivated with giant firms actually in a life-and-death struggle.  This also generates pressure for heavy layoffs and wage reductions, creating all sorts of vicious cycles.

But the real fear of deflation has to do with the enormously bloated financial structure and the huge debt load of the economy.  Under inflation, which is usually assumed to be built into the advanced capitalist economy, debts are paid back with smaller dollars (that is, worth less over time).  In a deflationary economy, however, debt has to be paid back with bigger dollars (worth more over time).  This then creates a debt-deflation spiral, enormously accelerating financial meltdown.  As Fisher put it, “deflation caused by the debt reacts on the debt.  Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes.”  Stated differently, quoting from The Great Financial Crisis (p. 116), “prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more defaults, leading to yet lower prices, and thus a deflationary spiral.”  In order to check this deflationary tendency, the Federal Reserve and the Treasury have been trying to reflate the economy by printing money (euphemistically called “quantitative easing”).  But they have not succeeded and deflationary forces are still very strong, causing President Obama to warn shortly after his election that “we now risk falling into a deflationary spiral that could increase our massive debt even further.”

It is also worth mentioning the effect that deflation has on investment.  With capital faced with the fact that a few years down the line the price level could be lower than it is now, expected profits on investment in new productive capacity (given that this takes years to be built and has to paid for in current prices) are depressed, creating a deeper stagnation of accumulation.

The stimulus package introduced by the Obama administration is far too small to pump up demand and reflate the economy under these circumstances.  It is less than $400 billion a year, forty percent of which is tax cuts, so that the increased governmental spending is miniscule compared to the size of the hole created by the drastic drop in consumption, investment, and state and local government spending.  It is also dwarfed by the total federal government support programs, primarily to financial institutions, which now amount to more than $9.7 trillion in the form of cash infusions, debt guarantees, swaps of Treasuries for financial toxic waste, etc.

MW: Karl Marx seems to have anticipated the financial meltdown we are now facing.  In Capital, he said, “The superficiality of political economy shows itself in the fact that it views the expansion and contraction of credit as the cause of the periodic alterations of the industrial cycle, while it is a mere symptom of them.”  Marx appears to agree with your theory that the real problem is deeper — economic stagnation which forces surplus capital to look for more profitable investments.  While the monetarist theories of Milton Friedman are under withering attack, Keynes and Marx seem to have held up rather well.  What does Marx mean when he talks about “political economy”?

JBF: Marx was an acute analyst of financial crises in his time and described their main features.  However, he saw financial expansions (as economists in general have until recently) as occurring at the peak of a boom, not as a secular phenomenon.  Financialization in the sense of a long-term shift in the center of gravity of the economy toward finance, with financial speculation building over decades, is a completely unprecedented situation.

Marx and Engels did place great emphasis on the growth of joint-stock companies/corporations and the appearance of a market for industrial securities that began to operate near the end of the nineteenth century.  It was this creation of the modern market for industrial securities that was the real beginning of the emergence of finance as a relatively independent aspect of the monopoly capitalist economy.  There are essentially two pricing structures to the economy: one in the real economy related to the production of goods and services, the other in the financial realm associated with the pricing of assets (paper claims to wealth).  The two are interrelated but can be disassociated from each other for periods of time.  Keynes in the 1930s singled out the dangers of an economy that was increasingly governed by the speculative pricing of financial assets.  Marx was such an acute observer of capitalism that even in his time he began to see the contradictions emerging between money (or fictitious) capital and real capital.

One thing that Marx did argue in this context is that surges in financial speculation were responses to stagnation and decline in the real economy, as capital desperately sought a way to maintain and expand its surplus.  Thus he wrote that the “plethora of money capital” in such periods was due to “difficulties in employment, through a lack of spheres of investment, i.e. due to a surplus in the branches of production” and showed nothing so much as the immanent barriers to capitalist expansion (quoted in The Great Financial Crisis, p. 39).

Marx remains the strongest foundation for the critique of the capitalist economy, down to our day.  But the real Keynes (not to be confused with the bastardized Keynesianism of today) is also important, since he emphasized what he called the “outstanding faults” of the capitalist economy: the tendency to high inequality and high unemployment.  He also pointed to the dangers of a system geared to speculative finance.

MW: Is wage stagnation and income inequality a direct result of financialization?

JBF: I would put it the other way around.  Wage stagnation and growing income and wealth inequality are components of the underlying stagnation tendency.  Both have shown a tendency to worsen over time, resulting in deepening stagnation tendencies within the overall economy.  Real wages in the United States peaked in 1971, when Richard Nixon was president, and by 2008 had fallen back to 1967 levels, when Lyndon Johnson was president.  This is in despite of the enormous growth of productivity and expansion of wealth over the intervening decades.  Hence, this is a marker of “the tendency of surplus to rise,” as Baran and Sweezy put it, or a rising rate of surplus value, in Marx’s own terms.  This was accompanied by a massive growth of income and wealth at the top.  As we stated in The Great Financial Crisis (p. 130), “From 1990 to 2002, for each added dollar made by those in the bottom 90 percent [of income] those in the uppermost 0.01 percent (today about 14,000 households) made an additional $18,000.”  By 2007, income/wealth inequality in the United States had reached 1929 proportions, i.e., the level reached just prior to the 1929 Stock Market Crash that led to the Great Depression.

I do think you are right, though, that financialization made income and wealth inequality worse and contributed to the stagnation of wages.  We can see neoliberalism as basically the ideology of monopoly-finance capital, introduced originally as the ruling class response to stagnation, and then increasingly geared to promoting the financialization of capital, itself a structural response to stagnation.  Neoliberalism promoted incessant breaking of unions, forcing down wages, cutting state social welfare spending, deregulation, free mobility of capital, development of new financial architecture, etc.  One way to understand this is the enormous need for new cash infusions to feed a financial superstructure that was voracious in its demand for new money capital, which it needed to leverage still more piling up of debt and financial speculation.  Insurance companies, real estate, and mutual funds all provided infusions into this financial superstructure, as did the state.  All limits were removed.  Under these circumstances workers were encouraged to use their houses like piggy banks to finance consumption, credit cards were handed out to teenagers, subprime loans were pushed on those with little ability to pay.  Individual retirement packages were shifted toward IRAs that were tied into the speculative financial system.  This had all the signs of an addictive system.  In these circumstances, too, the real economy, particularly production of goods and manufacturing, was decimated.  In the introduction to The Great Financial Crisis we include a chart covering the period since 1960 showing production of goods as a percentage of GDP in a slow, long-term decline, while debt as a percentage of GDP is skyrocketing over the same period.  All of this meant a massive redistribution away from working people to capital, and to those at the pinnacle of the financial pyramid.

MW: In your book The Great Financial Crisis, you are critical of Paulson’s capital injections into the banks saying that “at most they buy the necessary time in which the vast mass of questionable loans can be liquidated in an orderly fashion, restoring solvency but at a far lower rate of economic activity — that of a serious recession or depression.”  On Friday, Timothy Geithner told CNBC that “We will preserve the system that is owned and managed by the private sector.”  This suggests that the Treasury Secretary might not liquidate the toxic assets at all, but try maintain the appearance that these underwater banks are solvent.  What do you think will happen if Geithner refuses to nationalize the banks?

JBF: I would not interpret Geithner’s statement that way.  Rather we are experiencing one of the greatest robberies in history.  I have written on the question of nationalization for the “Notes from the Editors” forthcoming in the March 2009 Monthly Review.  All the attempts to rescue the financial system at this time go in the direction of nationalization.  The federal government is providing more and more of the capital and assuming financial responsibility for the banks.  However, they are doing everything they can to keep the banks in private hands, resulting in a kind of de facto nationalization with de jure private control.  Whether the federal government is forced eventually toward full nationalization (that is, assuming direct control of the banks) is a big question.  But even that is unlikely to change the nature of what is going on, which is a classic case of the socialization of losses of financial institutions while leaving untouched the massive gains still in the hands of those who most profited from the whole extreme period of financial speculation.

To get an idea of what is happening, one has to understand that the federal government, as I have already indicated, has committed itself thus far in this crisis $9.7 trillion in support programs primarily for financial institutions.  The Federal Reserve (together with the Treasury) now has converted itself into what is called a “bad bank.” It has been swapping Treasury certificates for toxic financial waste, such as collateralized debt obligations.  As a result the Federal Reserve has become the banker of last resort for toxic waste with the share of Treasuries in the Fed’s balance sheet dropping from about 90 percent to about 20 percent over the course of the crisis, with much of the rest now made up of financial toxic waste.

Obviously, full, straightforward nationalization would be more rational than this.  But one has also to remember the system of power — both economic and political — that we are dealing with at present.  The classic case of full bank nationalization was Italian corporatist capitalism of the 1920s and ’30s, and was carried out by the fascist regime.  Without suggesting that we are headed this way now, it should be clear from this that nationalization of banks itself is no panacea.

The fact that Geithner, Obama’s pick for Treasury Secretary, is overseeing the enormous robbery taking place, probably exceeding any theft in history, with the ordinary taxpayers picking up the tab, should certainly cause one to ask questions about the “progressive” nature of the new administration.

MW: Former Fed chief Alan Greenspan has dismissed criticism of his monetary policies saying that no one could have seen the humongous bubble developing in housing.  In your book, however, you make this observation:  “It was the reality of economic stagnation beginning in the 1970s . . . that led to the emergence of the ‘new financialized capitalist regime’s kind of ‘paradoxical financial Keynesianism’ whereby demand in the economy was stimulated primarily ‘thanks to asset bubbles'” (p 129).  The statement suggests that the Fed knew exactly what it was doing when it slashed rates and created a speculative frenzy.  Debt-fueled asset bubbles are a way of shifting wealth from one class to another while avoiding the stagnation of the underlying economy.  Can this problem be fixed through regulation and better oversight or is it something that is intrinsic to capitalism itself?

JBF: Greenspan is of course trying desperately to salvage his reputation and to remove any sense that he is culpable.  I would agree that the Fed knew what it was doing up to a point and deliberately promoted an asset bubble in housing — what Stephanie Pomboy called “The Great Bubble Transfer” following the bursting of the New Economy tech bubble in 2000.  The view that no one saw the dangers of course is false.  It reminds me of Paul Krugman’s face-saving claim in his The Return of Depression Economics and the Crisis of 2008 that while some people thought that financial and economic problems of the 1930s might repeat themselves, these were not “sensible people.”  According to Krugman, “sensible people” like himself (that is, those who expressed the consensus of those in power) knew that these things could never happen — but turned out to be wrong.  It is true, as Greenspan says, no one could have foreseen precisely what really happened.  And certainly there were a lot of blinders at the top.  But there were lots of warnings and concerns.  For example, I drafted an article (“The Great Fear”) for the April 2005 issue of Monthly Review that referred to “rising interest rates (threatening a bursting of the housing bubble supporting U.S. consumption)” as one of the key “perils of a stagnating economy.”  Other close observers of the economy were saying the same thing.

The Federal Reserve Board, indeed, was internally debating in these years whether to adopt a policy of pricking the asset bubbles before they got further out of control.  But Greenspan and Bernanke were both against such a dangerous operation, claiming that this could bring the whole rickety financial structure down.  Since they didn’t know what to do about asset bubbles they simply sat on their hands and tried to talk the market up.  The dominant view was that the Federal Reserve could stop a financial avalanche by putting a rock in the right place the moment there was a sign of trouble.  So Bernanke went ahead, closed his eyes and prayed, raising interest rates to restrict inflation (an action demanded by the financial elite), and the rest is history.

At all times it was those at the commanding heights of the financial institutions that called the shots, and the Fed followed their wishes.  Greenspan himself is no dummy.  He wrote in Challenge Magazine in March-April 1988 of the dangers associated with housing bubbles.  But as a Federal Reserve Board chairman he pursued financialization to the hilt, since there was no other option for the system.  Needless to say, such financialization was associated with the growing disparities in wealth and income in the country.  Debt itself is an instrument of power and those at the bottom were chained by it, while those at the top were using it to leverage rising fortunes.  The total net worth of the Forbes 400 richest Americans (an increasing percentage of whom were based in finance) rose from $91.8 billion in 1982 to $1.2 trillion in 2006, while most people in the society were finding it harder and harder to make ends meet.  None of this was an accident.  It was all intrinsic to monopoly-finance capital.

MW: The financial crisis is quickly turning into a political crisis.  Already governments in Iceland and Latvia have collapsed and the global slump is just beginning to accelerate.  Riots and street violence have broken out in Greece, Latvia, and Lithuania and worker-led protests have become commonplace throughout the EU.  As unemployment skyrockets and economic activity stalls, countries are likely to experience greater social instability.  Do you see this crisis as an opportunity political mobilization?  How does one take deep-seated discontent and rage and shape it into a political movement for structural change?

JBF: The first thing to recognize is that we are suddenly in a different historical period.  One of my favorite quotes comes from Gillo Pontecorvo‘s 1969 film Burn!, where the main character William Walker (played by Marlon Brando) states: “Very often between one historical period and another, ten years suddenly might be enough to reveal the contradictions of a whole century.”  We are living in such a period; not only because of the Great Financial Crisis and what the IMF is now calling a depression in the advanced capitalist economies, but also because of the global ecological crisis that during the last decade has accelerated out of control under business as usual, and due to the reappearance of “naked imperialism.”  What made sense ten years ago is nonsense now.  New dangers and new possibilities are opening up.  A whole different kind of struggle is emerging.

The sudden fall of the governments in Iceland and Latvia as a result of protests against financial theft is remarkable, as are the widespread revolts in Greece and throughout the EU, with millions in the streets.  The general strikes in Guadeloupe and Martinique, the French Antilles, and the support given to these movements by the French New Anti-Capitalist Party is a breakthrough.  In fact much of the world is in ferment.  Latin Americans are engaged in a full-scale revolt against neoliberalism, led by Venezuela’s Bolivarian revolution, and the aspiration of a new socialism for the 21st century (as envisioned also in Bolivia, Ecuador, and Cuba).  The Nepalese revolution has offered new hope in Asia.  Social struggles on a major scale are occurring in emerging economies such as Brazil, Mexico, and India.  China itself is experiencing unrest.

The one place in the world where this world historical ferment appears to not be having telling effect at present is the United States.  This can be traced to two reasons.  First, the United States as the center of a world empire is a fortress of conservatism.  Second, the election of the Obama administration has confused progressive forces, leading to absurd notions that the Democrats under Obama are going to create a New New Deal without renewed pressure arising from a revolt from below.  Meanwhile, under Obama’s watch, and with the help of his chosen advisers, vast amounts of state funds are being infused into the financial system to benefit private capital.

What is needed in the United States today, we argue in The Great Financial Crisis, is a renewal of the classic concept of political economy (with its class perspective), whereby it comes to be understood that the economy is subject to public control and should be wrested from the domination of the ruling class.  The bailing out of the system right now is going on with taxpayer funds but without the say of the public.  A revolt to gain popular control of the political economy is therefore necessary.

It is possible to start with the demand for a New New Deal rooted in the best legacy of the Roosevelt administration in the 1930s, most notably the Works Progress Administration.  But as Robert McChesney and I argued in “A New New Deal under Obama?” in the February 2009 issue of Monthly Review, the struggle has to move quickly beyond that to an expansion of workers’ rights along socialist principles, breaking with the logic of capital.  For this to occur, there has to be a great revolt from below on at least the scale of the industrial unionization movement of the 1930s that created a new political force in the country (later destroyed in the McCarthy Era).  The story of this struggle is told in David Milton’s classic account, The Politics of U.S. Labor, which also points out that the rising labor movement was led by socialists and radical syndicalists.

It is important, as István Mészáros explained in his Beyond Capital, that the radical politics opened up in this historical moment not be diverted into attempting to save the existing system, but be directed at transcending it.  As Mészáros wrote: “To succeed in its original aim, radical politics must transfer at the height of the crisis its aspirations — in the form of effective powers of decision making at all levels and all areas, including the economy — to the social body itself from which subsequent material and political demands would emanate.”

In the United States a primary goal of any radical politics should be to cut military spending, which is the imperial iron heel holding down the entire world, while corrupting the U.S. body politic and diverting surplus from pressing social needs.

The obvious weak link of the whole political, ideological, and economic structure in command in the United States today is that the system has clearly failed to meet peoples’ real needs.  Rather than addressing these pressing needs in the crisis, the emphasis of the economic overlords is to bail out private capital at virtually any cost.  Between October 2008 and January 2009, the federal government provided about $160 billion in capital and infusions and debt guarantees to the Bank of America, which had a total net worth in late January of only a small fraction of that amount.  The rest had gone down the rat hole.

The robbing of public funds to bail out private capital is now on a scale probably never before seen.  A politicized, organized working class capable of understanding and reacting to that theft, and choosing thereby to restructure society, to meet real social, egalitarian needs is what is now to be hoped for.  The title of a recent cover story Newsweek declared: “We Are All Socialists Now.”   As it turned out, Newsweek‘s editors were simply referring to the increase in public spending now taking place — hardly an indication of socialism.  But the fact that this is said at all in the mainstream media points to the fact that we are in a different historical moment in which radical forces have the possibility of moving forward.

A shorter version of this interview appeared in other publications.