The proposed $ 700 billion bail out for US banks is a striking indication of the extent of the current crisis of financialised global capitalism. $ 700 billion is nearly three times the Gross Domestic Product (total value of goods and services) of South Africa. The most recent bail out proposal follows earlier hand outs to mortgage lending companies, Fannie Mae and Freddie Mac, as well as the buy out of major insurance companies. The failure by the US Congress to approve it led to the biggest ever single day’s fall in US stock prices. And yet, it is far from clear that the bail out package, even if approved, would actually succeed in “stabilizing” the crisis-ridden financialised global capitalist system.
What lies behind this crisis of global capitalism? And what implications does it have for workers and the poor in South Africa?
In Volume III of Capital, Marx demonstrated why capitalism is unable to develop along a path of uninterrupted expansion, and instead always evolves in cycles of booms and busts. Because the system is essentially anarchic, during periods of boom it is driven by a feeding frenzy of individualized expansion into new areas of activity. Inevitably after time this includes areas where the underlying productive activity is unable to sustain profitability. The cycle turns and a huge competitive struggle ensues to determine which capitals must be destroyed to allow the system to re-create itself in another cycle of expansion. Capitalist globalization since the 1990s has seen what has been called “financialisation” of investment. Facilitated by the introduction of Information and Communications Technology (ICT), capital has built the capacity to move from one investment to another in any part of the globe virtually at the press of a button. In this environment new financial institutions and new practices have emerged, located principally in the United States as the corporate headquarters of global finance capital. “Leveraging” (meaning extending credit to a value several times that of underlying assets) and “derivative trading” (meaning repackaging real assets into financial assets in various forms) have been the basis on which enormous profits have been accumulated in recent years. Yet this has become further and further removed from the productive base of all wealth and accumulation in the “real” economy of manufacturing, agriculture and productive services, meaning that the engine room of capitalist accumulation has increasingly become in the words of Cde Fidel Castro “the casino economy” of trading in financial instruments.
Both these elements are essential to understand the current crisis. At its onset, orthodox financial commentators told us that the origin of the crisis was problems in the “sub prime” housing mortgage market in the US. It is now evident, even to vulgar commentators, that this explanation is wholly inadequate and that the “sub prime” mortgage issue was a mere symptom of a much more profound phenomenon. Essentially during the upswing, financialised capital penetrated into a whole range of activities that would otherwise have been considered “risky”. Marshalling arguments located in the ideology of neo-liberalism and market fundamentalism, finance capital resisted calls for regulation and instead asserted its unfettered “right” to “leverage” all kinds of financial instruments off “risky” underlying assets, as well as create “derivatives” of various kinds. This kind of activity, it is now apparent, has affected (and infected) large parts of the system – not just in the US but also in Europe and Asia. Whether we are yet at the bottom of the cycle, or whether any of the proposed bail outs will have any impact remains to be seen. The crisis has already taken its toll on supposed icons of US banking (like Lehman Brothers) and the institution of investment banks (banks that do not take deposits).
What then does this mean for us in South Africa? A phase of capitalist downswing always implies contraction in production and employment. This, moreover, is always an uneven process across the imperialist chain. Thus far, South Africa and Africa have been partly shielded by the rise of the so-called “Global South” (China, India, Brazil) as significant economic powers. Industrial development in these countries continues to be minerals intensive and this has fueled high prices for mineral products. Thus far, these countries have experienced the impact of the global crisis as relatively small declines in very high growth rates. In policy terms, this must surely be a major reason why we need to prioritise deepening our relations with these countries and insisting on continuing to diversify our trade relations.
Thus far, too, South African financial institutions have been spared the worst of “contagion” from the crisis in the US. Interestingly, The Business Times of 21 September attributed this partly to “exchange control” which meant “there is a healthy degree of trapped liquidity within the financial system”.
But, there still remain serious risks. Continued downturn could further depress production across the world, including in the countries of the “Global South”. Moreover, Morgan Stanley has warned that capital flows to “emerging markets” could be cut by a quarter in 2009 – as capital seeks to exit perceived “risky investments”. South Africa could find itself significantly impacted on by the latter, as we have relied on inflows of short term foreign capital (“hot money”) to fund the deficit on the current account of the balance of payments (meaning we continue to import more goods and services than we export).
In immediate policy terms, this would suggest that that the drive to incrementally lift exchange controls needs to be revisited, that we must ensure that “leveraging” and “derivative trading” by South African financial institutions is properly and effectively regulated, and that we urgently take steps to reduce our dependence on short term foreign capital.
In the longer run, the current crisis of financialised global capitalism must surely become a rallying cry to redouble our efforts to end a system in which the lives and destinies of working people and the poor across the world are held hostage to a handful of speculators in Wall Street.