The Crisis and Speculative Capitalism
Billionaire investor George Soros, writing in the Financial Times, calls it “the worst financial crisis in 60 years.” In The New York Times, liberal economist Paul Krugman speaks of “a sort of minor-key reprise of the banking crisis that swept America in 1930 and 1931.” For economist and former Labor Secretary Robert Reich, contributing to the same paper, the crisis deepens because the US consumer is “totally spent.” Chalmers Johnson sees the “debt crisis” as the “the greatest threat to the American Republic.” The Wall Street Journal on March 17, 2008 ominously stated “The last six days have shaken American capitalism.”

The desperate meeting of Federal officials, JP Morgan Chase chiefs, and Bear Sterns executives on Sunday, March 16 only underscores the chorus of dire assessments. The Fed chairman, the Treasury Secretary, their staffs and their corporate counterparts sought to salvage the pieces of the collapsing Bear Sterns giant brokerage house and secure a firewall against further disaster in the financial sector.

Finally the depth and breadth of the economic crisis has set in. Fear and panic have replaced a hollow confidence that markets will restore order with time and careful attention from the authorities at the Federal Reserve. Instead, the smug, arrogant pushers of market fundamentalism are beginning to creep toward the exits. You can hear it in the uneasy jokes and halting comments of the media talking heads.

We began writing and warning of the seriousness of this disaster last April.

How did we get here?

I suppose we, too, are fundamentalists – Marxist fundamentalists. In volume III of Capital, Marx writes of the role of foreign trade in maintaining or increasing – temporarily – the rate of profit. Bear in mind that Marx believed that capitalist accumulation led, all things being equal, to a decline in the rate of profit within the capitalist system. For reasons that we will not discuss here, he maintained that this tendency of the rate of profit to fall was the primary cause of capitalist crisis. Yet he recognized that there were countertendencies – events that would restore vigor to a system headed for the historical junk pile. An expansion of trade was one such countertendency. Marx’s world was different than ours, but we can apply the same thinking to trends in our time. After the demise of the socialist community, the entire world, with the possible exception of Cuba and The People’s Democratic Republic of Korea, was drawn into a single global market. World trade organizations and trade agreements greased the rails for this development. Many countries joined this global market eagerly, some reluctantly under the weight of inevitability (“There is no alternative”), and a few, like Yugoslavia, under coercion. This has been vulgarly described as “globalization” – vulgar, because the word masks the underlying process. The radically enlarged market had one fundamental trait that benefited capital enormously: the cost of labor was radically reduced. In Marxist terms, the rate of surplus value (rate of exploitation) exploded. Put another way, the mass of value captured by the capitalist class grew while the value secured by the working class diminished sharply, especially in the US. This trend has been ably reported in the mainstream press, though one has to put the two facts next to each other to appreciate Marx’s point. While Marx argued that in the long run the rate of profit (capitalist surplus divided by labor costs and other factors of production) would fall, he recognized that, on many occasions, the rate of surplus value could spike with a consequent restoration or growth in the profit rate. This is precisely what occurred through jost of the decade after the elimination of the socialist economic union.

The seeds of the current crisis spring from this period of expansion, high profits, low labor costs and great expectations. One might think that, under the weight of competition, labor militancy, or government policy, capitalism would settle into a period of measured, blissful growth. But that is not how this system works. The motor driving capitalism is accumulation – acquisition of more and more and an ever greater share of the whole of society’s wealth. Gordon Gekko in the movie Wall Street put it simply and crudely: “Greed is good.” Without this powerful drive for accumulation there would be no capitalism.

While in Marx’s time there were, of course, banks, he knew nothing of the giant financial engines of our time that pool huge sums of capital to invest and lend in pursuit of profit. With the world market-based surge of profits playing out at the end of the twentieth century, capitalism, and especially its financial sector, refused to be weaned from the unusually high profits secured during this period. The spike in productivity generated by computerization, robotization, and information technologies played out at the same time, with incremental investments in these areas producing decreasing growth in productivity. As Marx would predict, this had a dampening effect upon profit growth. Nonetheless, the financial sector refused to accept a diminishing growth in profit. Billions of dollars of investment capital flowed into the high technology sector with the faith that either a new technology revolution was around the corner or the old one was still alive. Of course, the hyperbole of the surge drew investors like honey, creating a bubble with no relation to the realities of the actual profitability of the high technology sector. Any sense of real value was spurned for the hope of high returns. The collapse of this high-tech bubble is now widely recognized, spawning the recession of 2000-2001.

With the economy stagnating, the Federal Reserve, under Alan Greenspan’s leadership, lowered interest rates dramatically, flooding the US economy with cheap – nearly free – credit. Thus, even the jost marginal enterprises were able to borrow their way out of the recession. Losses were covered by debt with aljost magical affect.

The financial titans pounced on this period of easy credit, leveraging assets to borrow vast sums and investing in every imaginable scheme from buyouts to complex security trades. Because of the easy credit, the acceptance and manipulation of debt became the centerpiece of financial activity.

In Marx’s time, loans were largely the exchange of real assets for deferred assets; a lender surrenders an agreed upon asset with the understanding the asset or something of equal value plus interest will be returned within a fixed time. Burrowers assumed debt for productive activity calculating that the success of the productive activity would outweigh the costs of debt.

But today’s financial capitalists view debt differently. Complex financial strategies – more and more often deeply buried in opaque hedge funds – resemble gambling. This speculative capitalism, growing inversely to the decline of productive capitalism, has become decisive in the US economy. The easy money of the Greenspan credit splurge only accelerated this trend. The language and the mechanism are complex and challenging, but the idea is simple: establish market wagers on the performance of other actors in the market and back these wagers with as much borrowed money as confidence will allow. For example, if research reveals that a peak in soybean futures prices always coincides with the opening date of the Illinois State Fair, borrow money, buy the futures well in advance of that date, and sell them off immediate after the Fair opens. Repay the debt and enjoy a fat return. 

Two factors separate speculative capitalism from traditional investment. Firstly, the speculative capitalist has no vested interest in the outcome apart from achieving a return on a predicted outcome. If thousands of buyers and sellers in the soybean market lose millions because of the speculative wager, if the soybean market collapses after future prices declines, the speculative capitalist could care less. He or she has moved on to the next wager.

Secondly, speculative capitalism distorts markets. The millions of borrowed dollars entering the market before the Fair will accelerate the rise in soybean futures and the quick exit after the Fair will speed their fall. Other investors’ positions will be affected in ways that are not reflective of the supply and demand or the real value of soybeans.

Of course there’s nothing new about people speculating in the market, but the scope and manner of today’s speculative capitalism is different. The following features separate contemporary speculative capitalism from its predecessor:

  1. Contemporary speculative capitalism relies more on the tools of game theory, computational speed, statistical analysis, and, in far too many cases, inside or privileged information. It is one thing to acquire all the public information about market entities and weigh it in investment decisions, quite another to possess and use tools that guarantee an advantage in investment speculation. The former allows for everyone to be a winner short of foolhardiness; the latter succeeds only if some win and others lose. Using Black Jack as our model, card counters win because others are not using their strategy. If all players are card counters, no one accrues an advantage.

  1.  Contemporary speculative capitalism has devised and expanded new vehicles for market wagers. Hedge funds – mysterious, private entities –  have been in existence for less than fifty years. Unlike other funds, they are free of outside scrutiny, open to only select players, and based upon cutting edge betting strategies. When they were new and small in number, they achieved returns far greater than any other kind of fund – they enjoyed the advantages of a card counter in the game of Black Jack. But the number of hedge funds grew exponentially because of this success. From the early 90’s through now, their capital grew from $200 billion to $2 trillion. As a result, the advantage of individual hedge funds over other investment vehicles has been diminished. Thus, their ability to remain advantaged over others has declined and their capability of amplifying crisis has grown. In time of crisis, they begin to more ruthlessly seek advantage, a development that The Wall Street Journal aptly calls “Crunch Capitalism.”

  1. Today, speculative capitalism depends overwhelmingly on borrowed money. It’s a simple truth that if you have a winning strategy, the more money bet, the more money won. Thus, speculators incur debt in order to bet far greater sums than they can draw from their own coffers. The powerful brokerage houses and investment banks both devise their own hedge funds to make these bets and preference hedge funds for loans. The Greenspan period of low interest rates provided an opportunity of nearly cost-free borrowing. It was as if a gambler could approach the Black Jack table with nearly unlimited chips. Obviously, having both limitless stakes and little personal risk can court betting disaster.

  1. Contemporary speculative capitalism lives and dies on immediate investor return. Unlike productive capitalism, speculative capitalism must produce instant and satisfying results. Intense competition shifts investment aljost instantaneously in the speculative market. The current credit seizure was preceded by an ocean of liquidity. At first glance this may appear paradoxical, but it explains how speculation brought the system into crisis. More than two years ago, we explored the ocean of capital (and potential credit) existing in the world. We explained elsewhere that it was increasingly difficult to find an investment haven for the enormous mass of wealth accumulated in the hands of the capitalists. We noted that only by taking greater risk could the customary profit be maintained. It was this thirst for the accustomed rate of profit in an environment of fewer high profit opportunities that spawned the crisis that now plagues the US economy. The logic of capitalist accumulation drove financial institutions to make new use of this pool of capital, including loans to millions who were unlikely to find the means to repay. The imperative of instantaneous and high yields demanded it.

Several conclusions are recommended by our discussion of speculative capitalism and its role in the current economic crisis. jost obviously, speculative capitalism is parasitic. It is a growth feeding off of and expanding from the nourishment of the productive sectors of the economy. As in Marx’s time, the creation of means of production and, broadly speaking, the means of consumption (the maintenance and enrichment of the lives of human beings) remain the fundamental basis for economic activity.

For the vast majority of people – working people – speculative capitalism plays no direct role in their lives beyond some clerical and maintenance jobs and an occasional blip in their retirement accounts. Despite the impression left by the media, financials – especially, the stock market – are no true barometer of the health of economic life except in their capacity to absorb wealth or disrupt the economy’s normal function. We see that clearly in the current crisis. The effects of speculative capitalism run amok are disrupting, corrupting, and distorting all other healthier sectors of the US economy. Moreover, federal, state and local public officials bear the blame for inviting speculative capitalism into the public sector through privatization, contracting out, and public-private partnerships. Bond issuance counts as another insidious device for enriching speculative capitalism and burdening working people collectively with long term debt. All of these policies are explained by the Marxist concept of State-Monopoly Capitalism as we have argued.

Distracted by the credit meltdown, jost people have failed to notice the latest result of the insatiable appetite of speculative capitalism. As The Wall Street Journal noted on February 29, 2008, investors have fled the stock and bond market and turned to commodity speculation. The recent spike in inflation so worrisome to consumers “has been fueled by institutions, hedge funds, and individual investors. These investors are pouring money into new investment vehicles that let investors quickly and easily make bets in relatively small markets.” And so the disease infects another area of the economy.

In another move sparked by speculation, hedge funds disrupted the municipal bond market recently. As The Wall Street Journal reported on March 1-2, 2008, “Months of turmoil in the municipal-bond market, long a placid haven for individual investors, reached a boiling point on Friday – as hedge funds were forced to unwind complicated bets and in the process dump billions of dollars of the securities. As a result of that surprising forced selling, yields on debt from municipalities and other tax exempt issuers jumped to their highest levels in history…”

Does any sane person believe that this insatiable foraging for profit serves the public good?

No working class program of action can ignore the dangers of speculative capitalism. Like any parasitic growth, speculative capitalism should be excised from the economic body.

We are at a critical juncture. Even the jost optimistic, true believers see the current crisis stretching well into 2009 and the next administration. Depending on public policy, this could prove to be far too short-sided. As we have argued, the crisis is deeply seated in the political shifts of the last century, changes that generated a moment of substantial recovery for a flagging capitalist world economy. These gains have been exhausted. The desperate attempts to rekindle this “gilded” era have produced speculative orgies that have brought mountains of debt and a falling standard of living upon the working class. The ruling class response has been to ignore the consequences for the vast majority of people and shore up the collapsing parasitic, speculative financial system. With millions facing home loss, financial ruin, unemployment and battered personal savings, the elite consensus cares only to offer life support to the perpetrators of this fine mess.

It takes little insight to see that the recent government sponsored rescue of the sinking Bear Sterns financial empire was a weekend stealth mission to restore the confidence of the financial bandits that plundered the US economy. As a result, the bandits are once again remorselessly on the prowl seeking new victims. Out of the shambles comes a new, invigorated JP Morgan Chase proud owner of Bear Sterns assets and $30 billion in federal loans. In exchange, the public treasury now owns the dregs that brought Bear Sterns down: the jost worthless securities in the company’s portfolio.

If that were not enough, the Federal Reserve offered up to $200 billion in exchange for depressed securities to the 20 jost rapacious Wall Street wolves. In the ensuing week the gluttonous carnivores tapped on average $13 billion per day! This is the same Federal government that can never find money for AMTRAK and public transportation systems. This is the same Federal government that starves social programs from Social Security to veteran’s benefits. This is the same federal government that dismantled welfare and scrapped affirmative action. Different administrations come and go, but show the same fealty to monopoly capitalism.

A true working class program would call for the elimination of parasitic speculative capitalism. The jost fatal and effective weapon against these destructive creatures is the weapon of nationalization. Public ownership of financial institutions would insure that savings, credit, and investments were protected and directed towards the good of all. The foolish notion that private individuals and corporations, motivated by an insatiable drive for profit, could guide these important functions in a socially beneficial way is soundly discredited by the raging crisis. The current crop of Presidential aspirants has offered no solutions that even remotely seek to tame the ravages of speculative capitalism. There is absolutely no recognition of the class aspects of the speculative debacle. A long hard road lies ahead.


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