It was unregulated, not transparent and way too leveraged.
But with nine separate and mostly ineffective financial regulators, these risks were ignored. That is, until this second system crashed. In plain English, the whole system of finance capital is based on banks borrowing from other banks to buy equities the general term for assets traded on financial markets on the basis that the value of these equities will continue to rise indefinitely. If these equities begin to fall in price, the huge debts of these banks become exposed, and the contradictions in the system become apparent.
As the organ of finance capital and big business in Britain, the Financial Times very often gives a sound and honest analysis of economic and political perspectives, of course from the side of the barricades opposing ourselves. Unlike the wretched prolefeed that passes for the popular press, the primary role of the FT is to inform its capitalist readership. Whilst Marx was never able to complete a theory of crisis in his lifetime volumes II and III of Capital remained unfinished when he died , Marxists traditionally link capitalist crisis to the tendency of the rate of profit surplus value extracted per unit capital invested to fall over time.
Surplus value can only be extracted from workers, not machines. Surplus value is the value of the labour given by a worker above and beyond that which is paid to him or her as wages; hence it is the source of profit for the capitalist. Therefore, increasing the constant capital, for example, by investing in new machinery, whilst doubtless improving the production process, will mean that for the same surplus value extracted, a greater total capital constant and variable will have been invested; hence, the rate of profit will fall.
This manifests itself as a fall in prices of commodities think about how the price of electronic goods falls over time. Of course, this tendency is not a law — there are other interacting factors which can cause the rate of profit to rise. Marx identified more intense exploitation of labour, reduction of wages below their value, cheapening of the elements of constant capital, and the increase in share capital, amongst other factors.
Clearly, the tendency for the rate of profit to fall represents a huge contradiction in the capitalist system: competition forces capitalists to increase constant capital by investing in new technology, for instance , which leads to an ever-diminishing rate of return on that investment. This article is not the place for a detailed survey of the differing schools of thought on a how this contradiction manifests itself see, for example, The Marxist Theory of Crisis by Mick Brooks.
However, this current crisis originated in the financial sector, which in this current epoch dominates world capitalism.
The following quote from Capital is illuminating:. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. Marx is clearly identifying how concentration i. Despite all the increasingly complex types of securities — many not understood by those who trade them — they are in effect simply pieces of paper with made-up numbers on them. The U. That problem, and what to do about it, is at the center of my book Makers and Takers: The Rise of Finance and the Fall of American Business, a three-year research and reporting effort from which this piece is adapted.
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To understand how we got here, you have to understand the relationship between capital markets—meaning the financial system—and businesses. From the creation of a unified national bond and banking system in the U. Of course, there were plenty of blips along the way most memorably the speculation leading up to the Great Depression, which was later curbed by regulation. But for the most part, finance—which today includes everything from banks and hedge funds to mutual funds, insurance firms, trading houses and such—essentially served business.
It was a vital organ but not, for the most part, the central one.
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Over the past few decades, finance has turned away from this traditional role. Academic research shows that only a fraction of all the money washing around the financial markets these days actually makes it to Main Street businesses. Trouble is, research by numerous academics as well as institutions like the Bank for International Settlements and the International Monetary Fund shows that when finance gets that big, it starts to suck the economic air out of the room.
Globally, free-market capitalism is coming under fire, as countries across Europe question its merits and emerging markets like Brazil, China and Singapore run their own forms of state-directed capitalism. For some time now, finance has been thought by most to be at the very top of the economic hierarchy, the most aspirational part of an advanced service economy that graduated from agriculture and manufacturing. But research shows just how the unintended consequences of this misguided belief have endangered the very system America has prided itself on exporting around the world.
Financialization is a big, unfriendly word with broad, disconcerting implications. This revolution is often blamed on bankers. But it was facilitated by shifts in public policy, from both sides of the aisle, and crafted by the government leaders, policymakers and regulators entrusted with keeping markets operating smoothly. Greta Krippner, another University of Michigan scholar, who has written one of the most comprehensive books on financialization, believes this was the case when financialization began its fastest growth, in the decades from the late s onward.
According to Krippner, that shift encompasses Reagan-era deregulation, the unleashing of Wall Street and the rise of the so-called ownership society that promoted owning property and further tied individual health care and retirement to the stock market.
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The changes were driven by the fact that in the s, the growth that America had enjoyed following World War II began to slow. Rather than make tough decisions about how to bolster it which would inevitably mean choosing among various interest groups , politicians decided to pass that responsibility to the financial markets.
Little by little, the Depression-era regulation that had served America so well was rolled back, and finance grew to become the dominant force that it is today. The shifts were bipartisan, and to be fair they often seemed like good ideas at the time; but they also came with unintended consequences. Reaganomics famously led to a number of other economic policies that favored Wall Street.
Clinton-era deregulation, which seemed a path out of the economic doldrums of the late s, continued the trend. Loose monetary policy from the Alan Greenspan era onward created an environment in which easy money papered over underlying problems in the economy, so much so that it is now chronically dependent on near-zero interest rates to keep from falling back into recession. This sickness, not so much the product of venal interests as of a complex and long-term web of changes in government and private industry, now manifests itself in myriad ways: a housing market that is bifurcated and dependent on government life support, a retirement system that has left millions insecure in their old age, a tax code that favors debt over equity.
Debt is the lifeblood of finance; with the rise of the securities-and-trading portion of the industry came a rise in debt of all kinds, public and private. And yet, as finance has captured a greater and greater piece of the national pie, it has, perversely, all but ensured that debt is indispensable to maintaining any growth at all in an advanced economy like the U. Debt-fueled finance has become a saccharine substitute for the real thing, an addiction that just gets worse.
The amount of credit offered to American consumers has doubled in real dollars since the s, as have the fees they pay to their banks. As the economist Raghuram Rajan, one of the most prescient seers of the financial crisis, argues, credit has become a palliative to address the deeper anxieties of downward mobility in the middle class.
The rise of finance has also distorted local economies. Her second marriage, to a forensic pathologist, who initially showered her with attention and promised to care for her and her children, also ended badly. There was no sign of Rick Rescorla or his car. Three days later, driving home from work—she was now an administrative assistant at a nearby bank—she saw his car coming from the other direction. He noticed her, too, and rolled down his window. He told her that he regularly caught the six-ten train to Manhattan, and he had looked for her each morning on the way to the station.
Rescorla picked Susan up the following Sunday morning, and they drove to Frenchtown, on the Delaware River, and had brunch at an inn. Afterward, Rescorla pulled out a cigar, and she had one, too. He told her that his family had been poor, but every Saturday his grandmother gave him money for the movies. Would Susan take lessons with him?
They walked across the bridge over the Delaware. The next week, they enrolled at the Arthur Murray studio in Chatham. Both Rick and Susan turned out to be good dancers, and after class they would go to his house or hers and continue practicing as soon as they walked in the door. They excelled at Latin rhythms—the tango, the rumba, the samba. Rick bought Susan extra-high heels to give her more height on the dance floor.
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He also began helping her choose her clothes. Her friends at work were happy for her, and kidded her about being in love, but some warned her that she was rushing into a relationship with a man she barely knew. She saw Rick every day. They were so eager for time together that they neglected their families and friends. Susan felt that they had been destined to find each other late in life, after each had endured a long, sometimes arduous journey.
Rick had survived war and cancer; she had suffered through two debilitating marriages. She was interested in cultural activities, and introduced him to art galleries, museums, and antique shops. He loved nature and history; he took her to parks and historic sites. She was Episcopalian; he had embraced Zen Buddhism, and urged her to simplify her life, as he had. At his suggestion, she took up meditation.
In October, they decided to live together. In a development in Morristown, they found a town house with large glass doors and windows opening out onto a tranquil pond. The pond was edged with meadow grasses and attracted waterfowl and migrating birds. They sold their own houses and moved into the new one.
Susan got rid of her collection of antiques, her china, her crystal. Rick, too, wanted to start fresh. One day, as they were unpacking, Susan found a framed shadow box filled with medals and military decorations—among them the Silver Star, the Bronze Star with oak-leaf cluster, a Purple Heart, and the Vietnamese Cross of Gallantry. She hung the display on the wall of the den, but when Rick saw it he told her to put it away.
She also came across photographs of Rick in uniform at age twenty-five, with Army buddies, and with Vietnamese officials. He looked thin and wiry, with a buzz haircut and a big smile. Rick threw out some of the photographs and put others in a closet. Sometimes veterans who had served with him would telephone. He had his phone number and E-mail address changed to make it more difficult for them to reach him. He and Susan would often sit in their living room, meditating or gazing at the landscape.