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
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
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