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     Jun 21, 2008
Page 1 of 3 
Bubbles, risk, crunch and war
By Cyrus Bina and Fernando Dachevsky

Cyrus Bina, distinguished research professor of economics at the University of Minnesota and author of The Economics of the Oil Crisis, discusses with Argentinean journalist Fernando Dachevsky the "unique and universal" economic crisis confronting the world, from its underlying causes to the "practical joke" solutions offered to the oil crisis by President George W Bush and Republican presidential candidate John McCain.

Fernando Dachevsky: In your opinion, what are the actual magnitude and perspectives of the current economic crisis?

Cina Bina: The present economic crisis is both unique and universal. It is unique in that it expresses concrete contradictory

 

dynamics of capital accumulation and its manifold contingent effects that are violently overflowing from one sector of the economy, namely the subprime mortgage industry in the United State, through the so-called structured investment vehicles and hedge funds which ultimately feed into the new infectious domain of fictitious capital, known as "securitization" - to the remaining realm of economic activity worldwide.

Here, the concrete magnitude of the crisis is not only a new chapter in the actual history of modern capitalism but also speaks loudly on the real meaning of transnationalization of capital and its global transmission in today's interconnected world.

This crisis is immanently universal in its effects and in its manifestation. It is about the polarization of wealth and, by implication, polarization of class, and the simultaneous tendency toward international and intranational dissonance and thus worldwide standardization of the working class. Let me take this occasion to reiterate that in modern capitalism, value theory is not only a theory of price formation but also simultaneously a theory of class polarization. The common feature of the system, aside from hitherto evolutionary stages, is one of renewal and destructive creation.

Although there have been a number of avoidable circumstances in this debacle - for instance, [through] careful regulation of the subprime housing market or precise legal guidelines for "securitization" of risky financial assets - the bundling of the "collateralized debt obligations" with the so-called asset-backed commercial paper, which leads to awesome turnover of capital based on ad hoc creation of fictitious credit upon fictitious credit (that is, IOU upon IOU) for the purpose of rapid profit gains and little or no cushion for security - [there also] is also the question of deliberate stretch that, in turn, jeopardized the safety of the entire financial system.

The classic definition of what is known as risk (that is, calculated risk) refers to a phenomenon that should effectively lend itself to calculation based on the probability theory and thus a known probability distribution prior to its occurrence.

However, the unconstrained piling up of risk upon risk is the stuff of uncertainty as opposed to risk which does exhibit non-linearity with chaotic patterns and which would not readily submit to probability theory, thus defying the conventional probability calculation. Therefore, for future references, both the individual agents and private and public institutions in this case need be alerted to actions (or inactions), policies (or lack thereof) that are gravely replete with unintended consequences - on top of what [Joseph] Schumpeter aptly identified as "instability of capitalism."
By focusing on a handful of the world's largest banks - from US investment banks such as Merrill Lynch, Citigroup and Morgan Stanley to others including HSBC, UBS, IKB Duetsche, Credit Agricole, Credit Suisse, Deutsche Bank, Canadian Imperial and Societe General - one can clearly see that the write-downs of risky securities (that are so far in tens of billions of dollars) will certainly continue for quite sometime. In the first quarter of 2008, the profit of big investment banks on stocks, bonds, and syndicated loans tumbled by more than 45%.

This experience has now opened a revealing window to the fully developed concept of fictitious capital, a phenomenon that in its embryonic stage was identified by Marx nearly 150 years ago. Today, the role of "fictitious capital" is either confused with the creation of surplus value or worse, deemed (axiomatically) as "phony," "unnecessary," or "superfluous" in respect to the actual process of capital accumulation even by certain sophisticated and self-proclaimed Marxist economists.

Yet, such an interpretation overlooks the reality of quasi-cannibalistic tendency of capitalist competition associated with the accumulation of capital worldwide. This criticism is also relevant to those (for instance, those within the Monopoly Capital School) who draw an exact parallel between the era of pre-globalized capital, classical trusts and administrative pricing (that is, early in the internationalization of finance capital a la Hilferding and/or a la Lenin) and that of contemporary globalization.

Moreover, the traditional left uncritically speaks of the so-called dominance of finance in accumulation, thus invoking rather anachronistically the political and economic descriptions that were once relevant to embryonic transnationalization and that are now unfit for the present epoch.

Also, speaking of capitalist competition here, it has nothing to do with the fiction of pure competition that has been portrayed in neoclassical textbooks and that has falsely taken as a point of departure by the majority of heterodox economists throughout profession. In my view, competition is a battle of capital against capital as eloquently argued by Schumpeter and, long before him, by Karl Marx. The present battle in the realm of finance capital is about the stretching of value, which has already been created in the realm of production and which is now about to be devalued and destroyed via the fast-paced synthetic process of creative destruction (a la Schumpeter) and destructive creation (a la Bina).
Finally, some of these critics have neither the necessary methodological capacity nor adequate technical training, nor the instinctive imagination to look at the economic crises in a holistic manner, thus commencing with capital as an undivided whole (that is as a social relation) before attempting to examine its unavoidable division into commodity, money, and productive forms.

For instance, in my opinion, "financialization" - currently a vogue term used by left-leaning heterodox economists - while hoping to describe the crisis at the same time tends to obscure the roots of volatility intrinsic in the very accumulation of capital, accompanied by destructive creation of fast-paced, hypercompetitive technological change.

This, as I have long contended, retreats from the reality of the workings of the law of value in the age of hypercompetitive globalization. I believe "financialization" is a side-track that obfuscates the desperate attempt at preservation of value in the sphere of circulation, which often leads to the weapon of mass competition in terms of shenanigans that we are now rather painfully witnessing in the course of the present crisis.

Today's economic crisis (and its very glimpse in terms of hyper-speculative activity) manifests itself acutely in the realm of finance in which the tendency to stretch the preservation of value is matched by its fast-paced destruction in the production process. It is in this context that contradictions between and within the spheres of production and circulation render perceptible and, however discursively, come within the global view.

FD: How is the crisis going to affect the United States? Which economies, do you think, are going to be the most affected in the short-run and in the medium-term?

CB: This crisis first appeared just like a hurricane in the US subprime housing market and then gathered strength before reverberating throughout the financial system worldwide. The proverbial US housing-market bubble has been waiting to be burst for a long time, as a number of keen observers, such as Dean Baker, had already forewarned, despite hollow optimism, if not shallow idealism, espoused by Alan Greenspan, former chairman of the Federal Reserve - who did not even listen to some of his colleagues who warned him to that effect as early as 2001.

The fallacy of supply-side economics and the myth of self-correcting markets, therefore, culminated in idealism of benign neglect and the straightjacket practice of neo-liberal ideology. The resultant speculative bubbles in the US real estate, mortgage institutions, collateralized debt market, asset-backed commercial paper market, and debt-obligation insurance market sequentially burst in the face of US authorities, before they hit the public and surpassed the boundaries of the United States - via the transnational channels.

The full consequence of this, for the US economy and world economy as a whole, has not yet been realized, as the crisis is still unfolding. This is the classic sign of unfolding of an economic crisis from potential to actual, and as such the battle ground between the maintenance of value, on the one hand, and its wholesale destruction before the next round of new accumulation.

This also speaks to the fragmented neoclassical economic orthodoxy (and its eclectic following in the heterodox tradition), whose macroeconomic theory is misconstrued through the fallacy of composition, thus falling back on the reduction of axiomatic micro counterparts (so-called micro-foundation) devoid of institutional significance. Today, therefore, we must recognize two different kinds of crises: (1) the periodic crisis of capitalism and (2) the intellectual crisis of bourgeois economics.

According to the International Monetary Fund (IMF), the US economy is predicted to grow not more than 0.5% and 1.6%, respectively, in 2008 and 2009. The IMF, however, misses the point that this is not an ordinary recession, given the staggering default in the US housing market, the augmented domino of derivatives in the financial system, the anticipation of further banking collapse, and inadequate policy action on the part of the Bush administration.

The projected growth for Chinese and Indian economies is respectively at 9.3% and 7.9% in 2008, which would be below 11.4% and 9.2%, respectively, in 2007. This, of course, is apart 

Continued 1 2


Myth-makers caught short in oil speculation
(Jun 18, '08)

The Fed and the strong dollar policy
(Jun 18, '08)

The next big US spending spree
(Jun 13, '08)


1. Why Iraq won't be South Korea

2. Taliban raise a storm in Kandahar

3. The murder of US manufacturing

4. Middle East serves US some humble pie

5. Myth-makers caught in oil speculation

6. A world still half red

7. Numbers, greed without limit

8. Are we all North Koreans now?

9. Guns blight US energy choices

(24 hours to 11:59 pm ET, June 19, 2008)

 
 


 

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