You Can’t Eat a Collateralized Debt Obligation: Why Money Doesn’t Make the World Go Round

The global financial crisis that began in 2007 was clearly about money, credit, and finance.  For mainstream economists and politicians — from neoliberals like John B. Taylor at Stanford and Tony Abbott, through pragmatists like Barack Obama and Australian prime minister Kevin Rudd, to Keynesians and social democrats like Paul Krugman at Princeton and John Quiggin at the University of Queensland — this was the full story.

They debate whether the nature of markets or the inadequacies of government regulation led to the hysterical speculation of the mid 2000s and then the breakdown of the global credit system.  The notion that the causes of the crisis may lie in the way in which capitalist production is structured by class relations doesn’t cross their minds.

The mainstream accounts of the crisis are wrong, but they seem to make sense in three ways.  First, they offer more or less plausible explanations of movements in prices, supply, demand, and economic indicators.  Out of these they spin happily-ever-after stories about what needs to be done to overcome the problems that led to the crisis.

They operate, secondly, in the interests of the capitalist class by justifying practical steps to sustain profit rates.  This may be by preventing rapid economic collapse, through government stimulus spending.  Or, on the other hand, they may urge governments to reduce their deficits, by cutting back on public spending, employment, and living standards, in order to restore profits.

Although rival schools of mainstream economics don’t acknowledge it, the differences between these approaches are mainly questions of timing: when the necessary cutbacks will lead to minimum pain for bosses.

Finally, plausible but superficial explanations of the crisis also serve ruling class interests by concealing how capitalist exploitation necessarily leads to economic breakdowns like that of 2007-2009, when the capitalist system cannot even maintain working class living standards.  As the Communist Manifesto put it, the ruling class “is unfit to rule” because it cannot even guarantee the survival of the wage slaves it exploits.

Profits are only restored through a crisis when large numbers of people are thrown out of work as production is “rationalized,” productive resources lie idle, and working class living standards are slashed by employers and governments.


Capitalism is an impressive building; its impressive outer surface is money and movements of prices on markets.  But the vital structures of capitalist production make that façade possible and keep it in place.  The link between them is the commodity form, the way most of the things we need, food, clothing, shelter, transport, etc. have a price and are bought and sold.

For millennia, money has been an aspect of economic activity.  Societies which consistently make commodities need money.  Commodities are things produced for sale rather than to satisfy the immediate needs of producers or those who exploit them by taking what they have made.  In class societies before capitalism, the producers were generally peasants, occasionally slaves.  The main exploiters were the senior officials of states which imposed taxes, feudal lords who extracted rent, or slave owners.

Money arose as the producers themselves or their exploiters traded commodities.  It performed vital functions that were impossible if trade was only based on barter.  Initially money took the form of a special commodity, particularly gold, that had value itself because, like other commodities, it was the product of human labor.  The money commodity served as a ready standard for measuring the prices of all other commodities.  And, under capitalism, price ultimately derives from the amount of labor time that goes, on average, into producing commodities.  It was the “universal equivalent” that could also be used to buy any other commodity, that is, it was a means of exchange.

Under capitalism, most production takes the form of creating commodities and the commodity form is a feature of the production process itself.  People sell their ability to work, their labor power, as a commodity to bosses.  The distinction between labor power and labor is important here.  Employers extract as much labor as they can out of the labor power whose control they have purchased, by making sure that workers don’t slack off by taking long breaks, going slow, or otherwise wasting time that belongs to the boss.

Labor power is a commodity like all others in that its value is the amount of labor that went into making it, in the form of the effort to make the commodities necessary for the reproduction of human beings.  Not only food, childcare, etc. but also the costs of learning specific skills used at work.

But labor power is also different from other commodities.  It is human creativity for sale, capable of generating more value than it took to produce it in the first place.

When it is set to work, bosses owns the right to direct that labor power as well as the tools and raw materials it uses to produce new commodities.  The new commodities, and the additional value embodied in them, created by human labor, likewise belong to the bosses.  That’s where profits come from.

In class societies before capitalism, exploitation was pretty obvious: lords, state officials, or slave owners simply took away things you produced or what they were worth in money.  There was no exchange of equivalents — just a rip-off, ultimately backed up by the threat of violence.  Under capitalism, exploitation is concealed by the sale of labor power.  The exploitation happens through the exchange of commodities at their value for money rather than because exploiters get commodities or money for nothing.

The commodity form and money are capitalism’s self-camouflage.  Economics seems to be all about them, but they conceal the exploitation of wage labor, that is class relations, in the production process.

The owners of wealth do not always immediately reinvest the value that they have accumulated.  They may be saving up for a new project, or repetition of an old one, or holding off for better conditions before they invest again.  In these circumstances, money serves as a convenient store of value.  This was straightforward when there was a special, durable money commodity.


States’ regulation of money was, from long ago, an aspect of managing the commodity-based economy of their territories and also of funding their own activities.  Developed capitalism has progressively dispensed with the money commodity.  Initially states supplemented the money commodity with symbols for it.  Eventually, the coins and notes that we are used to keeping in our pockets and purses became the only valid form of money within each state’s boundaries.  When such symbolic money can no longer be converted into the money commodity it is “fiat money.”  The money we use today is fiat money; gold no longer plays a role in the monetary system.

When there are credit arrangements, under which commodities can change hands at a different time from the payment for them, money is a means of payment.  This creates credit money, promises to pay that are distinct from cash which might only be needed when contracts are finally settled.  As economic activity grew in scale and complexity, banking emerged and credit money became increasingly important.  Credit money was created by those involved in trade and banks, which held otherwise idle reserves of those who were not themselves using the value they had accumulated, as deposits and lent them out.

Internationally, the money commodity facilitated trade across the boundaries of states.  Just as states eventually replaced commodity money with fiat money, financial institutions and states have accepted some national currencies as the means to settle international accounts.  They are known as “reserve currencies.”  Since World War II, the most important has been the US dollar, even after the link between it and gold was severed in 1971.

But the acceptability of a reserve currency can change.  The rise of the Euro as a reserve currency to rival the US dollar, for example, has recently been undermined by economic crisis in the Euro zone.  The weakness of the economies of Greece and other European Union countries with very high levels of government debt have led to worries about stability of the Euro.

While money predates the dominance of the capitalist mode of production, the transactions, planning, and allocation of resources of capitalism are impossible without money, credit, and finance (the activities of banks and similar institutions in directing funds to where they will earn the greatest return).

Although indispensable for capitalism, credit and financial activities do not create new value.  Interest and financial profits derive from new value created in the productive sector of the economy.  Capitalists in the productive sector who borrow have to hand over a share of their profits to lenders in the form of interest for the right to use the lender’s capital.  States which borrow have to pay interest out of their revenue which ultimately comes from the productive sector.  And workers have to shell out some of their wages to keep up with payments on mortgages and other loans.

With the transition away from reliance on the money commodity at home or in international transactions, the stability of currencies and consequently credit and financial arrangements more than ever relies on the confidence capitalists have in them.  This trust is based on the strength of the economies with which the currency is associated and especially on the power of the state that backs it to ensure that it can be exchanged for a predictable quantity of real value embodied in commodities, even though it has no intrinsic value itself.

So, even though the United States was at the center of the global crisis of 2007-2009, during the periods of greatest uncertainty the US dollar was bought up as a “safe-haven” currency.  The unparalleled killing power of the armed forces of the USA guarantees the value of the dollar.

Credit and Finance

The complications of credit and financial systems mean that there can be all kinds of glitches.  The failure or even worries about a single corporation can trigger a contraction of credit.  Lenders may be reluctant to provide funds until they can work out whether the failure exposes potential borrowers, as creditors or customers, to problems.  In a similar way, problems in one financial institution can ripple out to others.  Contractions in credit can slow down or stop growth in the production of real commodities, or even lead to less being produced.

The net of businesses exposed to such problems has been spread wider by new mechanisms to spread the risk that credit and other contracts won’t be fulfilled, in the form of insurance and hedge funds.  When problems are small and their dimensions easy to determine, this cushions their impact.  If the failures are large and both their scale and implications are unclear, these efforts to spread risk end up spreading the crisis.

In the United States, financial institutions during the early and mid 2000s gambled that housing prices would rise forever.  They made “sub-prime” loans to people who would never be able to pay them back.  Then, to spread the risk, the loans were bundled together and sold off as securities.  People with mortgaged houses had to pay interest and make repayments to the owners of the securities who were also entitled to the revenue from sale of the home if mortgage payments weren’t made.

Such securities are a form of “fictitious capital,” traded as though they are real commodities with an intrinsic value.  In fact they are only the right to an income stream that arises from a financial arrangement rather than from the use of the money to directly generate new value in a real production process.  Not only mortgage-backed securities, but also shares and government bonds are forms of fictitious capital.

Financial instruments can be even more complicated.  “Collateralized debt obligations” are bonds, promises to pay interest at a specified rate, issued by companies whose assets are holdings of other loans, bonds, or securities.  This is not to mention derivatives.  They can be futures or options: contracts to buy or sell, or the rights to sell or buy, at specified prices real commodities, amounts of particular currencies, shares, bonds, etc. at a specific point in the future.  Or they can be swaps: agreements to exchange the income steams from different financial assets.

Shares were initially designed to raise money for productive investment; bonds as a form of readily tradable loan; and more arcane instruments as, perhaps, means of spreading risk.  But most of the trading in fictitious capital today is speculative: gambling in the hope of making gains at the expense of other players in the market.  It does not create new value and just shuffles around existing value, held by other speculators or by productive capitalists.

The rapid growth of financial speculation has meant that the implications of problems in one geographical area or economic sector for the rest of the economy are ever harder to work out before the crisis hits.

But the healthier the real economy which underpins the tower of financial activity, the more rapidly will local and sector specific problems be sorted out.  Extensive new avenues for highly profitable productive investment can offset the jitters and losses caused by the failure of expectations in credit and financial markets.

Economic Crisis

The rate of profit in the advanced capitalist economies has been trending downwards for more than four decades.  The scale of speculative financial activity in the lead up to the current crisis was itself is a consequence of limited outlets for profitable productive investments.

During the first phase of the crisis, from 2007 to 2009, the problems began in the US housing market and spread throughout the global financial system, leading to recessions and the economic contractions in most countries.

Credit froze up across the planet as banks stopped lending to each other, or anyone else, out of fear that borrowers might hold toxic assets like mortgage-backed securities and therefore be unable to pay back loans.  Lack of credit and worries about the future led businesses to suspend investments, individuals to put off spending that could be delayed.

Governments which could afford to spent big to keep their economies, so reliant on credit money, going.  In the USA, Australia, Japan, Germany, Britain, China, and other countries, governments borrowed, created more fiat money in the form of central bank funds, or dipped into reserves to shore up, bail out, or take over banks and other financial institutions.  To promote consumption, they encouraged borrowing by cutting interest rates, gave cash handouts to citizens, and spent up big themselves.  The Chinese regime set lending quotas for banks.

Only poorer governments, of necessity, did not engage in stimulus spending.  This was the approach extreme neoliberals recommended everywhere.  That approach certainly sent less efficient businesses to the wall and put pressure on working class living standards.  But it risked killing off so many firms that the remainder would not be able to drive an economy-wide recovery for many years.

If real economies are fundamentally sound, then stimulus policies should jumpstart robust economic growth.  Both state revenues and real estate prices would rise.  Governments would use their increased tax income to pay off debt.  Public and private financial institutions would sell off real estate without making phenomenal losses.  The Keynesians would proclaim the truth of their dogma, the pragmatists the wisdom of their policies.

Instead, a second phase of the crisis became more obvious this year.  As the Greek economy crumbled under the weight of public debt, the social democratic government began to attack working class living standards by cutting wages in the public sector, pensions, and spending on health, education, and welfare.

Now there is a growing consensus that cutting government deficits is the key to maintaining financial stability and thus restoring prosperity.

Spain, likewise under a social democratic government, but also conservative regimes in Germany, Britain, Italy, and France are inspired by this dogma.

Rudd has promised to do the same; Australian opposition leader Tony Abbott to do it harder and faster.  Obama is moving in the same direction.

Financial austerity measures did not begin in 2010.  In countries particularly hard hit by the crisis or with weak economies, the cuts began much earlier, for example in Iceland, Ireland, and the Baltic states.

A return to financial stability won’t solve the basic problems that led to the crisis: you can’t eat a collateralized debt obligation.  Its fundamental causes lie in the displacement of living labor by machinery and equipment — the key to raising productivity under capitalism — driven by competition among capitals and hence a lower average rate of profit across the economy.  But efforts to cut public spending are part of a solution to the crisis in the interests of bosses and at workers’ expense.

The other elements of this solution are squeezing more profits out of workers and allowing more relatively unprofitable businesses to go bankrupt.  Even as some governments engaged in stimulus spending during the early stages of the crisis, employers across the world used uncertainty about jobs and rising unemployment to hold or push down wages and increase workloads.

As governments economize on their spending they will be less able to bail out weak capitals.  This means their assets can be bought up cheap and set in motion again but risks more widespread corporate collapses and the possibility that idle machinery, equipment, and buildings will just be allowed to rust and rot alongside unemployed workers.

The alternative solution, getting rid of capitalism, is not risk-free either.  But it holds out the promise that we can get off the deadly, profit-driven ferris wheel with its booms and slumps, and start producing to satisfy human needs.

Rick Kuhn’s Henryk Grossman and the Recovery of Marxism won the Deutscher Prize in 2007.  He is a contributor to Socialist Alternative

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