So I’m out of the country for three weeks. Raych and I are getting civilly united back in NZ.
Exciting times in the world of finance. What strikes me as much as the elevator in freefall is the US Fed decision that caught it. A three-quarters-of-a-percentage-point cut in one go, and outside the regular meeting schedule. The Fed tends to move its rate more boldly than lesser central banks like the Reserve Bank of Australia. But this is bigger than normal. Things are looking pretty shaky here, with brokers foisting a record volume of margin calls on their clients. That means clients who have borrowed money to put in the market have to increase their deposit to cover their losses, or sell out completely. That’s the stuff of chain reactions. Still, things seem to have stabilised.
Sharemarkets play a much bigger role in popular consciousness than they do in the economy and you can’t read much off what happens in them. They’re volatile by nature. It’s surprising to me though that the Fed is catering so much to the market – it indicates that central bankers are very worried. It also shows that the idea of a smooth menu of monetary policy options, from ‘tight’ to ‘loose’, is a myth. In a crisis there is no middle. Central bankers are worried about a financial collapse so they have been forced to pump liquidity into the system. Much more than they would like to be given that inflation is still a threat. What’s happening in the financial markets can diverge from what’s happening in the ‘real’ economy. But financial trouble forces the authorities’ hand. This happened in the aftermath of the dot com boom – a sharemarket bubble burst, Greenspan cut rates to soften the downturn, and an unintended consequence was the housing bubble, which has itself now burst.
This dilemma is manifesting in a different way in Australia. In the States a recession is obviously on the cards, so the Fed wants to cut rates anyway, though not as rapidly as it is. Here the RBA is more worried about inflation than recession, as we can see from Governor Glenn Stevens’ speech the other day. He hinted that he thought financiers were bullying other central banks into lowering rates:
I believe that central banks everywhere are acutely conscious of this [inflation risk]. I would venture, however, that the tolerance among some parts of the investment community for a cautious approach by policy is not high, if some of the commentary we read is any guide. This, too, adds to the delicacy of the tasks facing policy‑makers.
Stevens argues that there are two ways America’s (and to a lesser extent, Europe’s) problems could come to Australia, which is undoubtedly still booming. There’s the potential transmissions through ‘real’ trade links – a slowdown in American consumption hitting Asian exports, which puts Asia into recession, with both developments hitting Australian exports. Then there’s the potential for the same financial pressures at work in the US and Europe to work here.
To start with the trade link possibility: the authorities and other optimists (who are still in a majority about Australia’s ‘fundamentals’) think that at least that path will take some time to take effect here, so the immediate problem is still inflation. However, previous RBA research has suggested that world business cycles have become increasingly synchronised – much more than can be explained by the trade link. The researchers were puzzled as to why, but speculated that it might be due to financial transmission.
Which brings us to the second possibility. Asian sharemarkets fell as much as anywhere over the past week; investors are jittery there too. But that may not mean much. The world credit crunch was transmitted into the Australian money market, as I described back in August. But it has so far been milder.
Last week the RBA put out an excellent primer for anyone who wants to get up to speed on how the asset-backed commercial paper (ABCP) markets work and what has been happening. It backs up my story, but these writers have put in figures where I had no idea about the magnitudes. They show that banks in Australia have not been directly exposed to the players in the ABCP markets to the extent of those in America. In the States the banks have been forced to provide back-up credit (because of prior contracts) worth 10 per cent of their total assets (weighted as per Basel guidelines for risk). Here the figure is only 2.3 per cent. Furthermore, the RBA has taken the unusual step of removing some of the burden by purchasing some of the paper itself, with repo agreements that the other party will buy them back eventually. That has supported the market such that a much higher proportion of commercial paper is still outstanding in Australia than in the US, where more than a third of ABCP outstanding prior to the crisis has been redeemed.
That has helped banks deal with the other way they are exposed – by their own borrowing on the money markets. Much of the banks’ prior borrowing on American markets has been rolled over into the domestic market, which would not have happened without the help of the Reserve Bank. Banks have faced higher borrowing costs and have passed some of it on into mortgage and business lending rates, which they are able to do thanks to the fact that their finance company competitors are still winded.
The classic way in which a financial or banking crisis leads to a real recession is by cutting back firms’ access to credit and thereby lowering investment. But these days firms are not that indebted – there’s an unprecedented amount of outstanding debt, but most of it is owed by households. So this is a different situation to the storms of the 1980s, and really quite new. The question is how consumer spending will be affected by tougher credit and higher interest rates, if in fact credit conditions do toughen (though corporate lending is certainly not irrelevant.) So far in Australia there isn’t much sign of a slowdown in lending – athough the official credit stats are only available up to November. I think the RBA and the government will continue to worry about inflation for a while.
One little footnote: An interesting side-effect of the repatriation of bank borrowing has been a sudden fall in official foreign currency and other international reserves. They have fallen from a high point in May of $84,610 million to $30,523 million in December. They’ve been more than halved since this all broke out in August. According to the RBA, this is due to the unwinding of repurchase agreements with the private banks. To repay their overseas obligations and renew them in Australia, they needed their foreign currency back. Domestic assets were switched with the RBA.
John Edwards, chief economist at HSBC Australia and once Keating adviser and biographer, wrote an op-ed in the Australian Financial Review just before Christmas saying this was something to worry about, that the central bank was funding the current account deficit out of reserves and that this was unsustainable. An RBA economist wrote back saying it was nothing to worry about. Unfortunately the AFR has an ass-backwards internet policy such that I can’t even access them via a library database – so no link and I’m not able to jog my memory about the argument. So I’m just noting it. The Keating association does not exactly enhance Edwards’ credibility on this issue, given Keating’s disastrous obsession with the current account deficit. (Though, to be fair, Edwards didn’t become chief adviser until well into the recession we had to have.)
I finished MacIntyre’s Short History of Ethics and he was going pretty much where I thought he was. Modern society dissolved the bases of old integrative ethics based on role-fulfilment, just as happened in the dissolution of the classical Greek polis. But he doesn’t focus so much on the modern form of one consequence of the earlier breakdown – the draining away of political content from ethics as people become remote from political decisions. Possibly because there is no medieval equivalent of the polis, so that isn’t felt as a loss: those with political agency are even more restricted in number and philosophers are not among them.
Still, the dawning of modern ethics is full of politics. From Hobbes onwards MacIntyre treats political philosophy as indistinguishable from ethics – Machiavelli and Hobbes share a chapter with Luther and Spinoza, for example. The transition to absolutism and later its dissolution with the rise of the bourgoisie leave their marks. But the Victorian utilitarians appear as the last of a breed for whom ethics and politics are inseparable.
From the late 19th century onwards ‘ethical philosophy’ becomes very abstract, treating individuals as if they are independent from society, and becomes increasingly bogged down in extremely dull arguments about language as some metaphysical reason for ‘shoulds’ is sought. (This kind of thing has a history, stretching back to Kant’s categorical imperative, which ran parallel to Enlightenment political philosophy.)
Of course no such metaphysical ahistorical reason can be found. Kantian ethics is a failure. Ethical philosophy becomes estranged from everyday practical ethics, and those practical ethics – of ordinary people, remote from politics despite formal democracy – have themselves become fragmented as society has become mediated primarily by commodity exchange and hierarchies at a workplace level. In a capitalist society social development is removed from both ‘organic’ social interaction and from the political sphere, which has come under the dominion of representative democracy. This is my interpretation: MacIntyre calls it the rise of ‘individualism’ but I think that makes it sound too much like a purely ideological devolopment.
In discussing Greek society, I suggested what might happen when such a well-integrated form of moral life broke down. In our society the acids of individualism have for centuries eaten into our moral structures, for both good and ill. But not only this: we live with the inheritance of not only one, but of a number of well-integrated moralities. Aristotelianism, primitive Christian simplicity, the puritan ethic, the aristocratic ethic of consumption, and the tradiions of democracy and socialism have all left their mark upon our moral vocabulary. Within each of these moralities there is a proposed end or ends, a set of rules, a list of virtues. But the ends, the rules, the virtues, differ… A conservative Catholicism would treat obedience to established authority as a virtue; a democratic socialism such as Marx’s labels the same attitude servility and sees it as the worst of vices. For puritanism, thrift is a major virtue, laziness a major vice; for the traditional aristocrat, thrift is a vice; and so on.
It follows that we are liable to find two kinds of people in our society: those who speak from within one of these surviving moralities, and those who stand outside all of them. Between the adherents of rival moralities and between the adherents of one morality and the adherents of none there exists no court of appeal, no impersonal neutral standard. For those who speak from within a given morality, the connection between fact and valuation is established in virtue of the meanings of the words they use. To those who speak from without, those who speak from within appear merely to be uttering imperatives which express their own liking and their private choices. [p. 268]
But society no longer relies on ideological moral agreement to function (if it ever did). A wide range of incompatible ethical viewpoints proliferates, along with the pluralist ideology that ‘everybody has their own opinion’ and deciding between them is impossible. This is not dysfunctional for capitalist society because people’s practical activity is, for the most part, directed by capital, for which they have to work. Role is dissociated from commitment. The impersonal, bureaucratic aims of the employer rule; the ideas in people’s heads about the good life are at best a hobby.
Again, MacIntyre doesn’t quite go there – that’s my interpretation – but now that I’m a little way into his later book After Virtue , I think that’s what his ideas point to.
Sydney is having a weird, wet summer. A year or two ago I would have felt gypped. It’s usually so bright here that old Sydneysiders tend to have a squint. But now I’m stuck inside writing all the time and I don’t really mind. Actually I think rain suits the neighbourhood, rusting all the corrugated iron and sluicing the dirty gutters.
I’ve lived around here almost three years now and I love it. Yesterday I was drinking at the corner pub with a friend. There’s a pub on just about every block in the inner suburbs. Takeaways are expensive – about $15 for a six-pack of cheap beer. Longnecks are a little cheaper, but still at least 150 per cent of the price of equivalent beer in New Zealand. I don’t know why, tax or liquor licensing, but it means drinking at the pub is not much more expensive. So they’re everywhere and start to fill up from lunchtime. There are two within a minute’s walk of my place, and at least five more within ten.
The one on the immediate corner is undoubtedly the seediest but it’s between my place and my friend’s so we often end up there. It has a captive clientele with two storeys of ‘studio apartments’ above it. My friend introduced me to one of the inhabitants yesterday and as it got crowded he invited us upstairs.
A South Sydney ‘studio apartment’ is a room in a boarding house. You share the bathroom and maybe a kitchen, though it’s common for the landlord to not bother with the kitchen and you are left with whatever appliances you can plug into the wall to supplement a diet of kebabs and chips. It’s a man’s world, women tend to leave as fast as they can. (I lived in one of these places for a few months until Raych joined me over here.) WordPress hasn’t sorted out scratch’n'sniff yet so you have to use your imagination: mouldering carpet and stale smoke.
But that’s the smell of history. I’d say this place above the pub would have been there at least a hundred years. The one I lived in was once a Glebe mansion, probably converted in the 1930s. Today the clientele is pretty cosmopolitan, one-third immigrants, one-third local students and young labourers and one-third what you might call seasoned men of the streets. Our host was one of the last category, a guy with some serious charisma, a happy punter who gets beer bought for him all the time by young guys like us keen to hear about his talkback radio revelations. And this guy has the king of views, which these photos don’t begin to do justice to, from an outsized balcony some people would pay hundreds of dollars a week for if it wasn’t rotted through around the edges. He didn’t mind me taking these photos over the rooftops, but warned me not to step where the wood gets dark.
I reckon The Wire is the best American TV show since The Simpsons. The fifth and final season started last week, and in my anticipation I stumbled on this blog, Heaven and Here, which is devoted to intelligent appreciation of the show.
It’s become a bit of a cliché in the press to say The Wire is like a 19th century European novel. This series, the critics are calling it ‘Dickensian’; for example:
Over at Heaven and Here, and elsewhere, commenters have been suggesting others: Tolstoy (tragicomic elements and narratives of redemption); Zola (the social scope and sense of j’accusation); Dostoevsky; and further afield, Greek tragedy and even Camus (cops and reformers pushing Sisyphus’s rock uphill).
But I’m with Heaven and Here’s Jetsetjunta, who suggests another Victorian reference point: Marx.
The show is obsessed with class, and not just in the way most Americans think of class, in terms of rich and poor – though there is plenty of that. It’s about labour and capital. The show’s most consistent theme is the alienation of labour. The detectives just want to do ‘police-work’, their bosses are driven by numerical abstractions, the stats or the dollars, forever being forced to rationalise Daniels’ department for one insane reason or another.
Capital proper is mainly off-stage, or perhaps hiding in plain sight all over the scenery. Sure, the dealers are a stand-in, especially under economics major Stringer Bell, and during their diversification into real estate and political donations. But the real corporate America is missing. In the second series, most obviously about class, port management is hardly to be seen, except when they’re showing scary movies about robot stevedores and asking union leader Subotka to show visitors how the system really works. It’s only finally in the fifth season with the newsroom that management is clear and present. Keeping business off-camera seems at first a gaping hole in creator David Simon’s avowed plan to portray how American society works as a whole. But in fact I think it works to radicalise the show. Most ‘progressive’ Americans think in terms of ‘corporations’ rather than ‘capital’. The former has people in charge who are evil; the latter is a faceless and diffuse social force, which controls simply by going about its business in a banal and unthinking manner.
In not giving capital a face, Simon removes the easy way out: it’s not because of individual personalities with evil motives that things are the way they are. Every villain in The Wire either works for somebody else, or, at the top of the chain, has to do what they do to keep their market share/campaign contributions and votes/budget. Time and again, when someone at the top is knocked out, their role in the social order is quickly refilled. Avon, Stringer Bell, Marlo. Royce, Carcetti.
The Wire is an attempt to portray a whole social structure. It’s realism rather than naturalism. Though the characters are fully drawn, and the writers take pride in naturalistic dialogue of the streets, it is structured to show how a whole society hangs together – or doesn’t, really. The BPD and the Barksdales are two social structures in conflict: sympathy is with certain individuals within each side, but the institutions are the real contenders. From the second series the ambition is ramped up, to show the unions, city hall, the schools and finally the press. So if we have to choose a single 19th century European novels, I go with Balzac. Balzac was Marx’s favourite novelist, after all, because of his lifelong attempt to portray his society in all its aspects, always thinking of it as a whole, but showing how it was falling apart at the hands of the rising bourgeoisie.
Does David Simon have radical intentions? That’s beside the point. As Engels wrote to an author who had sent him her own novel:
I am far from finding fault with your not having written a point-blank socialist novel, a “Tendenzroman”, as we Germans call it, to glorify the social and political views of the authors. This is not at all what I mean. The more the opinions of the author remain hidden, the better for the work of art. The realism I allude to may crop out even in spite of the author’s opinions. Let me refer to an example. Balzac whom I consider a far greater master of realism than all the Zolas passés, présents et a venir [past, present and future], in “La Comédie humaine” gives us a most wonderfully realistic history of French ‘Society’, especially of le monde parisien [the Parisian social world], describing, chronicle-fashion, almost year by year from 1816 to 1848 the progressive inroads of the rising bourgeoisie upon the society of nobles, that reconstituted itself after 1815 and that set up again, as far as it could, the standard of la viellie politesse française [French refinement]. He describes how the last remnants of this, to him, model society gradually succumbed before the intrusion of the vulgar monied upstart, or were corrupted by him; how the grand dame whose conjugal infidelities were but a mode of asserting herself in perfect accordance with the way she had been disposed of in marriage, gave way to the bourgeoisie, who horned her husband for cash or cashmere; and around this central picture he groups a complete history of French Society from which, even in economic details (for instance the rearrangement of real and personal property after the Revolution) I have learned more than from all the professed historians, economists, and statisticians of the period together. Well, Balzac was politically a Legitimist; his great work is a constant elegy on the inevitable decay of good society, his sympathies are all with the class doomed to extinction. But for all that his satire is never keener, his irony never bitterer, than when he sets in motion the very men and women with whom he sympathizes most deeply – the nobles. And the only men of whom he always speaks with undisguised admiration, are his bitterest political antagonists, the republican heroes of the Cloître Saint-Méry, the men, who at that time (1830-6) were indeed the representatives of the popular masses. That Balzac thus was compelled to go against his own class sympathies and political prejudices, that he saw the necessity of the downfall of his favourite nobles, and described them as people deserving no better fate; and that he saw the real men of the future where, for the time being, they alone were to be found – that I consider one of the greatest triumphs of Realism, and one of the grandest features in old Balzac.
All the same, all the signs are the Simon is coming from the left. In an otherwise great feature in the New Yorker, Margaret Talbot writes:
It’s hard to classify Simon politically, but anytime you start thinking of him as some sort of bleeding-heart socialist you’re brought up short by his unremitting skepticism about institutions.
But what ‘bleeding-heart socialist’ has faith in capitalist institutions? It has become a common complaint on the liberal left that The Wire is reactionary because of its scorn for reform. Hamsterdam, Bunny Colvin’s school programme and especially the Carcetti arc all show how the political system eats its idealists. Matthew Yglesias complains:
Fundamentally, I think his vision of the bleak urban dystopia and its roots is counterproductive to advancing the values we hold dear… In political terms it’s a dark vision that, like Dostoevsky’s, veers wildly between radical and reactionary and that exists, fundamentally, outside the lines of “normal” arguments about policy. Simon believes that we are doomed, and political progress requires us to believe that we are not.
If you’re outraged by The Wire, do you then … go and support the election of your own Tommy Carcetti? Or do you throw up your hands and rail against the depredations of the market economy? This could lend itself to some more radical challenge to the status quo, and of course we’re never shown the depredations of Chavez’s Venezuela where petrosocialism has fuelled new inequalities and new repression.
And, as the newsroom becomes the target in the final season, the press fights back. It’s become a common trope in press reviews to portray Simon as an Angry Man, bitter and twisted by his experiences as a journalist at the Baltimore Sun. The darkness of The Wire allegedly reflects nothing more than Simon’s own alienated psyche.
Of course, this is entirely to the show’s credit. It makes the right people uncomfortable. The real life presidential primary season is showing again that the American political theatre can’t even begin to admit the problems of The Wire exist. The show has the audacity of despair; if it suggests no solutions, at least it is honest. (You won’t find the Clintons doing a YouTube skit about it.) Yglesias and pals have always got The West Wing.
PS: This was mostly written when I came across David Simon’s own comment at Yglesias’s blog. This post is long enough – still, I think it’s worth posting in full:
Writing to affirm what people are saying about my faith in individuals to rebel against rigged systems and exert for dignity, while at the same time doubtful that the institutions of a capital-obsessed oligarchy will reform themselves short of outright economic depression (New Deal, the rise of collective bargaining) or systemic moral failure that actually threatens middle-class lives (Vietnam and the resulting, though brief commitment to rethinking our brutal foreign-policy footprints around the world). The Wire is dissent; it argues that our systems are no longer viable for the greater good of the most, that America is no longer operating as a utilitarian and democratic experiment. If you are not comfortable with that notion, you won’t agree with some of the tonalities of the show. I would argue that people comfortable with the economic and political trends in the United States right now — and thinking that the nation and its institutions are equipped to respond meaningfully to the problems depicted with some care and accuracy on The Wire (we reported each season fresh, we did not write solely from memory) — well, perhaps they’re playing with the tuning knobs when the back of the appliance is in flames.
Does that mean The Wire is without humanist affection for its characters? Or that it doesn’t admire characters who act in a selfless or benign fashion? Camus rightly argues that to commit to a just cause against overwhelming odds is absurd. He further argues that not to commit is equally absurd. Only one choice, however, offers the slightest chance for dignity. And dignity matters.
All that said, I am the product of a C-average GPA and a general studies degree from a state university and thirteen years of careful reporting about one rustbelt city. Hell do I know. Maybe my head is up my ass.
If The Wire is too pessimistic about the future of the American empire — and I’ve read my Toynbee and Chomsky, so I actually think a darker vision could be credibly argued — no one will be more pleased than me as I am, well, American. Right now, though, I’m just proud to see serious people arguing about a television drama; there’s some pride in that. Thanks.
This looks fantastic: a website devoted to oral history of my neighbourhood, Redfern. I’ve only just started browsing through it. Some great stuff about the squatting origins of the Block:
Roberta Sykes: Well I suppose The Block was all boarded up and lots of the houses there had been gutted and there weren’t facilities available. There were a lot of people around at the time who had nowhere to sleep and they would prise the boards off the windows and climb in and sleep there. [That was around] 1970, 1971, 1972.
Mum Shirl always had a concern for people who had nowhere to sleep and they would start sleeping in empty houses. She would run around to make sure they were all right. There are all sorts of background things that I am not sure about, like what triggered off the police oppression against the people who were sleeping in there, whether the developers suddenly got it in their minds. All those buildings belonged to somebody, somebody had been buying them, some big company, with the intention of developing them at some stage but years in the future. Meanwhile there was a shortage of shelter for people in the inner city so people were taking the advantage of going into the boarded buildings because they had nowhere else to go. Then the police started targeting that area to harass people and that’s when Mum Shirl and myself and others got involved. At the same time there were other targets of harassment like the Empress Hotel and places like that, where we understood the Riot Squad was being trained there by running in and rounding up blacks and things happening, and it seemed to us like the same thing was happening with people even less able to defend themselves.
They were just thrown into police paddy wagons, were they?
Roberta Sykes: Sometimes they were, sometimes they were beaten up. Then it almost turned into like a small urban war between the people and the police. Once we started to become involved, they started to get even heavier and they seemed to be, from my perspective, being trained to act without compassion. Since I would say the overwhelming majority of those young white male policeman had never known an Aboriginal, it wasn’t difficult for them to be made afraid of Aborigines, for them to believe all sorts of fantastic things about them, that they were crazy, their heads are as hard as bullets so you are going to have to bang them to get some sense into them, that sort of attitude.
Mick Mundine: Well I started in 1975 and my brother was working in 1974. I came here and I got a job and I started as a painter. Now at the time there were about six houses was getting renovated, as you know, the company [Aboriginal Housing Company] was registered in 1973 and the reason why the company was set up was a lot of Aboriginal people found it very hard to get [into] private real estate. It was very racist in them day. So a group of ‘goomies’ [heavy drinkers] squatted in these three houses. Now at the time, Father Ted Kennedy used to help a lot of people up at the Catholic church in Redfern in conjunction with Bob Bellear and his wife, Kaye. They were the ones who really got together, got a good mob of people from the community and got the company [Aboriginal Housing Company] registered and it carried on from there.
The new ISJ has a fantastic interview with Costas Lapavitsas about the financial troubles. It touches on many aspects in an accessible way.
He makes a very important point: that this is a banking crisis, which is quite different to either a currency crisis or a sharemarket bust. Sharemarket ‘corrections’ are a dime a dozen and usually a surface phenomenon, though they might be a sign of something else.
Banks, especially large commercial banks, are different—they are the foundation of the capitalist financial system because they create most of the fresh credit and they create money. They are not like other financial institutions of similar size such as pension funds. If banks carry bad debt and cannot deal with it, the financial system as a whole cannot work well.
That is what we are witnessing now. The epicentre of the crisis lies in the money market, which has been unable to function properly since last August. The money market is where the banks lend to each other, something that is fundamental to capitalist finance. Money market lending gives flexibility to banks and is a reliable way of pricing what they sell. If the money market does not work well, then banks cannot work well. Since August the money market has gone from a complete freeze to just about chugging along. The reason is obviously that banks do not trust each other, since all of them carry assets that are contaminated by subprime loans. Deep uncertainty in the money market has meant that the financial system has had increasing difficulty in creating fresh credit.
This feeds into the ‘real’ economy because it is dependent on a flow of credit to grease the wheels of finance and production, and also because a substantial component of demand is financed by new credit. That is how this is likely to cause a recession. Interestingly, though, as he points out, non-financial capital is much less reliant on external financing than it was in the 1980s. Commercial debt is much lower (relative to revenue), but it has been replaced by an explosion of household debt – especially in the Anglo countries. (This is also true in Australia, and is why mortgage rates are so important to monetary policy these days, when previously it was usually understood as working mainly on investment spending.)
The dynamics of lending to households are quite different to lending to firms, because households generally don’t spend the money on productive assets like factory machinery that are going to return a profit over time. Instead of the repayment and interest being funded by profits, it comes ultimately from wages and salaries. (To the extent that households have borrowed to invest in rental properties, the repayment stream comes from other people’s wages and salaries, but still wages and salaries.) Many people have borrowed, though, expecting to repay out of capital gains rather than future incomes. But to the extent that these capital gains are outpacing the growth of expected returns, they are based on a bubble – investors bidding each other up.
Another way of putting this is that the options for banks are inherently limited if they focus on lending to private individuals. They can increase their profits by appropriating a larger part of wage income, but obviously this has its limits, especially if real incomes are not rising. Banks can also manufacture asset price bubbles. If financial asset prices rise, banks can make additional profits by drawing fresh groups of individuals into the market under the pretext of capital gains and secure lending. If banks create a housing bubble, for example, people appear to become richer even though real incomes are not necessarily rising. Fresh groups of borrowers are attracted into the markets, or existing ones become more heavily indebted, and banks make extra profits by transforming an increasing part of aggregate personal income into loanable money capital.
When these bubbles burst, the first to feel the pinch are workers and others who have borrowed excessively. Millions of people in the US have already lost, or are due to lose their homes this year and next. It is shocking that at the moment not a word is said officially about their plight. But as workers and others are hurt by the burst of the bubble, consumption suffers and this has knock-on effects on real accumulation too.
It is clear that this is not the same mechanism as described in classical Marxist analysis where the capitalist firm would borrow, over-expand production, be unable to sell its products and therefore find it impossible to honour its debts to banks and others. Then the firm would be forced to curtail its output, and possibly even go bankrupt. The current crisis has followed a different mechanism. There will be an impact on the real economy, but the paths will be unusual.
There’s plenty more in there: parallels with Japan’s banking crisis of the 1990s (and beyond); global imbalances; and the dilemmas of central banking. Check it out.
What is interesting about the banks raising their mortgage rates independently of the Reserve Bank moving the cash rate? It’s a symptom of a shift that could ultimately be more important than the immediate cause, the global credit crunch.
It’s the first time such a rise has happened in ten years. But movements the other way have been more common, narrowing the gap between the cash rate baseline and the banks’ lending rates. The reason was the entry of all the new mortgage broking firms. These firms started the securitisation trend we now hear so much about. They lent to home-buyers, but offloaded the loans as soon as possible onto third parties. They did this by issuing securities (i.e. bonds) tied to the payments from the mortgages. This meant that their own money was tied up for only the short period between signing the mortgage and selling the mortgage-backed security. So smaller companies could muscle in on the banks’ business. Of course the banks got in on the action and issued their own asset-backed securities. This competition lowered the margin between the cash rate and the rate mortgage borrowers pay.
Another effect was to change the nature of mortgages. Previously, a mortgage tied up a single organisation’s funds for decades. The availability of mortgages was thus limited by the amount of funds that could be tied up like that. But with a market for mortgage-backed securities, no individual organisation’s funds were committed for so long. If they needed cash, they could sell the securities. Now mortgages could be funded out of a broader pool of funds – they could sit alongside bonds and shares in portfolios of instruments that can be sold at will. They were more liquid than old-school mortgages, in other words. I imagine this development was partly responsible for the housing binge and bubble of the 2000s.
But there’s another thing. These markets were quite international. Mortgages in Sydney, Auckand, Perth, etc, could be funded by securities sold on markets in New York, London, Tokyo – at the interest rates prevailing on those markets, exchange rate risks hedged off with derivatives. The fact that interest rates were lower there than in this part of world for the whole decade so far made it profitable for firms to do this. But of course the Reserve Banks of Australia and New Zealand had no influence on those interest rates. In fact a couple of years ago in New Zealand the central bank was extremely frustrated that its hikes of the base rate did not flow through into mortgage rates. It wanted to cool the housing market, but the gears of the monetary policy machine were slipping.
Now things have gone into reverse in the credit markets. Pressure is going the other way. But the point is the same – that bank interest rates are less closely tied to the national central bank. Although central banks have been forced to bail out the markets, they are less in control than they seemed to be – in fact the forced pumping of liquidity into the market is itself a loss of control.
Australia did not have the same issue as New Zealand in the housing boom, probably because it is that much larger. But New Zealand could be a sign of things to come. The point is not obvious now, because it just so happens that the private banks’ de facto policy tightening is moving in the same direction the central bank wants to go. The private tightening may in fact take the place of a public tightening. But there is no particular reason why the effect will always go the way the central bank wants.
Most of the story above about securitisation is in the past tense, because the crunch has stopped it almost dead for now. But chances are, once this all blows over – even if that’s on the other side of a major recession – securitisation will be back to stay, and continue to grow. Plenty of once-novel instruments – like commercial paper – have been implicated in financial crises and then come back as part of the wallpaper. Central banks being forced to intervene to stop a meltdown in fact reassures the markets in the long run that such instruments, and the institutions that issue or hold them, will not be allowed to fail. New markets make themselves indispensable.
The Brenner-Gindin exchange has spilled over onto Louis Proyect’s site, where he collects their replies. Leo Panitch and Patrick Bond enter the field, too, and Doug Henwood sides with Gindin. Though as Brenner points out, we shouldn’t over-emphasise the disagreements. I would have posted this link as an update in yesterday’s post, but I didn’t want you to miss it.
This discussion at the Brecht Forum last month between Robert Brenner and Sam Gindin gives a good intro to two major strands of Marxish political economic thinking about what’s happening. The videos stop before each speaker is finished unfortunately, but there’s enough there to get the picture. Otherwise, if you prefer not to stuff around with Google Video, Louis Proyect helpfully supplies links to both sides’ arguments in print.
To the extent they disagree, I’m firmly on Gindin’s side. In the long run, capitalism has been pretty healthy on its own terms these last couple of decades. The ‘credit crunch’ may well trigger a major recession, especially in the US. But it’s pretty unlikely to be a systemic crisis.
Brenner is right to focus on the profit rate and to suggest its fall was a major link in the chain of the 1970s crisis. But his explanation for the decline – “the onset and persistence of chronic overcapacity in world manufacturing” – is not very convincing. And as Gindin points out, it’s the postwar boom that was the real exception in capitalism’s history, not the less impressive performance since. Not too much should be made of the failure of mature capitalism to maintain a long boom forever. Brenner’s hypothesis about the replacement of state debt by private debt is really interesting, though, but he is not entirely clear about how it has happened.
Gindin’s argument is the one he has been making for quite a few years along with Leo Panitch. You can read a lengthy version here, and I highly recommend it. The gist is this: the neoliberal turn of the 1980s has been very successful in re-establishing capital’s social dynamism. Of course economic cycles and financial crises are going to recur, but they are not systemically threatening – without a political alternative, with capitalism firmly naturalised in the political consciousness, crisis in fact makes a good excuse for restructuring and it is easy to pass the real costs onto labour. The real crisis is still for the left, and economic crisis is no short cut.