Four crises of the contemporary world capitalist system

By William K. Tabb

Monthly Review, October 8, 2008 -- This essay examines aspects of the global political economy that I hope will inform progressive governments and movements for social change. It evaluates the constraints and opportunities presented in the current conjuncture of world capitalist development by analysing four areas of crisis in the contemporary world capitalist system. These are not the only contradictory elements in the contemporary conjuncture, but they are, in my view, the most salient.

The first problem is the financial turbulence that has gripped the economy of the United States and has had widespread effects. It is a crisis that further discredits mainstream Anglo-American economics. I do not know that it is the crisis of capitalism. For this to be the case it would not only have to become much deeper, but its impacts would have to be felt more dramatically as a systemic failure. Most importantly, a party formation capable of explaining how such crises are inherent in the nature of the functioning of capitalism and of inspiring a socialist alternative would have to mobilise a movement of the sort that ended apartheid in South Africa. Without the last, even a deep and painful crisis will be, at best, only the occasion for reforming and not abolishing capitalism.

A second crisis is that of US-led imperialism, which has been discredited both in terms of its regime-change-wars-of-choice and the increasingly effective resistance to the international financial and trade regime we know as the Washington Consensus. Because of the incalculable harm neoliberalism has done and continues to do, it is now ideologically on the defensive. A third point of crisis is the rise of new centres of power in what had been the peripheries of the capitalist system and the tensions this has unleashed, providing room to maneouvre for countries wishing to break with the United States. A fourth area of crisis has to do with resource usage, the uneven distribution of the necessities of life and a growth paradigm that is no longer sustainable. Here grassroots social movements in South Africa and elsewhere are leading actors in resisting privatisations and the imposition of a hyper-individualism that brings disaster for the most oppressed and exploited.

Crisis one: Financialisation and financial crisis[1]

How much damage the current financial meltdown will cause remains to be seen, but the harm is already extensive. At the level of systemic crisis an important issue relates not just to the economic costs and the way rescue operations are premised on tax payer bailout, but whether financial capitalism can sustain itself. Martin Wolf, the Financial Times senior economic columnist, writes about capitalism “mutating” from “mid-20th century managerial capitalism into global financial capitalism.”[2] John Bellamy Foster, editor of Monthly Review, argues “that although the system has changed as a result of financialisation... financialisation has resulted in a new hybrid phase of the monopoly stage of capitalism that might be termed ‘monopoly-finance capital.’”[3] Finance has been able to restructure productive capitalism, the economy that actually produces real goods and services people consume. In a new way it appropriates more and more of the surplus created in the processes of production, not only in the core, but in what has been the periphery of the world system.

Taken as a whole the corporate profits of the financial sector of the US economy in 2004 were $300 billion, compared to $534 billion for all non-financial domestic industries, or about 40 per cent of all domestic corporate profits. They had been less than 2 per cent of total domestic corporate profits forty years earlier, a remarkable indication of the growth of financialisation in the US political economy. This was both an economic and a political development, as the financial sector gained leverage over the rest of the economy, in effect gaining the power to dictate priorities to debtors, vulnerable corporations and governments. As its power grew, it could demand greater deregulation, allowing it to grow still further and endangering the stability of the larger economic system.

It seemed that finance had developed a new magical M–M' circuit, in which money could be made solely out of money, without the intervention of actual production. The new secret of accumulation was presumed to be leverage and risk management, which allowed the purchase of assets that promised higher returns even if they carried a higher risk and the borrowing of many times the amount the investor had in equity capital—perhaps ten, twenty, thirty, or in some cases a hundred times as much. When so highly leveraged, even a small rise in value could return great profit on the initial investment. Given global markets, the money might be borrowed at low interest rates in Japanese yen and invested in high return US financial assets, junk bonds and derivatives of all sorts.

So long as asset values rose, whether in bundles of mortgages in collateralised debt obligations (CDOs), or more exotic products, investors made a great deal of money. This encouraged others to copy these strategies, to bid up asset prices. The increasing value of these assets allowed even greater borrowing to purchase still more, further bidding up prices, in an upward spiral producing bubbles that eventually popped. Financialisation as an accumulation strategy has brought not only severe crisis with the failure of financial markets but has put the United States in a position resembling that of a poor nation in debt to foreign creditors—its currency declining, its trade policies favouring elites and its government demanding that some taxpayers pay more to recapitalise the financial system while providing more tax cuts to the affluent and corporations.

Toxic collateralised debt obligations are featured in most discussions, but a central aspect of financialisation is the growth in debt itself: government debt (much of it the result of military spending and tax cuts and other “incentives” for corporations and the rich), consumer debt of all kinds and corporate debt. The explosion in debt creation has powered an economy that has strong stagnationist tendencies. The irrationality of a class divided society is that profits accruing to corporations will not be reinvested to produce things people and the society as a whole need and want, because the purchasing power of the working class is kept limited and the corporate rich will not pay the taxes needed by the state sector to provide desired public goods. There is an overinvestment in capacity to produce that cannot be utilised within an irrational social structure in which the only effective demand is that backed by adequate purchasing power.

Overproduction in the midst of unmet social needs characterises the system, as does pressure on workers everywhere to take lower compensation as a result of the class power of capital and its ability to pit workers against each other. The surplus produced and appropriated by capital cannot find outlets in production and spills over into financial speculation where it is absorbed in speculative bubbles that eventually collapse, spreading chaos and pain through the economy. Beyond these general tendencies is the connection between financialisation and rising inequalities and the declining economic fortunes of most working-class people as prices for basics—home heating oil, gasoline, health care and food—have soared. In the United States, where the victory of shareholder capitalism has been extreme (as opposed to stakeholder capitalism in which workers, communities and the public are also considered interested parties whose views and needs must to a greater extent be taken into consideration), workers have been squeezed the hardest.

During the Bush presidency, the United States lost one in five manufacturing jobs and that too is part of financialisation and globalisation. Wages have been pushed down, pension benefits curtailed, health care burdens shifted onto workers and their families, employees made to work part-time or fired and hired back as “temporary” workers and so on—all in order to meet profit targets and to finance the huge debts companies are burdened with as a result of widespread borrowing to finance takeovers. More people are working part-time or as temporary workers and are pessimistic about the prospects of their children. They see their government captured by the corporations and the wealthy.

Widespread popular pessimism is justified because three trends interact to make the prospects of the majority of US workers bleak. The first is continued globalisation of the production of goods and services to lower-wage venues. Less skilled work can be done more cheaply elsewhere. Further, no amount of education can preserve many jobs that can be done by well educated workers in India, China, Eastern Europe and elsewhere. Second, technology increases output per worker, meaning that each worker can produce more and when demand for output does not expand faster than their productivity, fewer workers are needed. We see this in basic industries such as auto and steel that once employed far more production workers. Third, the jobs that are expanding are mostly low paid, nonunionised McJobs. Furthermore, the unrelenting attack on unions starting with Ronald Reagan’s destruction of the air traffic controller’s union set the precedent for using replacement workers to break strikes, not to mention the ability of owners—thanks to National Labour Relations Board connivance—to fire workers.

Anglo-American expertise in finance was presumed to be the lever that would ensure the continued prosperity of these economies. Having pioneered the growth of financialisation in their own economies, promoting growth through the creation of vast amounts of debt and forcing its financial regime and rules on the developing world through the mediation of the International Monetary Fund and World Bank, capital has been expanding financial operations into the so-called emerging markets. Now we see a meltdown on Wall Street and the irony of foreign sovereign wealth funds and other investors having to rescue the pillars of the US financial empire. How should we understand these contradictory developments? This is a political question. It needs to be answered like any other economic matter in which a small elite benefit at the expense of the many. Its solution should not be how to allow them to continue to do so but how to force social regulation so they cannot do so.

It is here that the loyal opposition, in the United States the Democratic Party, in Europe the social democrats and third-way triangulators everywhere, by essentially accepting the power of capital, lose the respect of working people, who now must self-organise by creating anti-capitalist parties if they are to defend their interests and change the social relations that promise only a future of further exploitation. In Die Linke, the German party formation far to the left of the Social Democrats, we see a successful example of such a party, which is becoming a force in that country’s politics. As noted later in this essay, in Latin America, the continent with the longest experience with the devastation of neoliberalism, the masses have supported a variety of left parties that promise to one degree or another to break with capitalist social relations.

Crisis two: US imperialism—losing hegemony

There have been two recent failures of US imperialism: the discrediting of the neoliberal Washington Consensus and the revulsion against the shock and awe violence of Washington’s arrogant militarism. The growing condemnations qualify, I think, as a crisis for the continued easy exercise of hegemony and for the ruling-class presumption that it has the capacity unilaterally to run the world. After the failures of Iraq and Afghanistan, the hubris of the Bush neo-cons has been discredited and their program of wars and conquest has been questioned and perhaps now rejected by most Americans.

One faction of this ruling class has seen international trade and finance regimes favouring US capital as key. The other wing has been quick to threaten and take military action to reassert and impose US hegemony. The US ruling class always employs both strategies, but the balance between the two shifts with the state of the world and domestic politics.[4] The two dominant ideological factions of this class can be characterised by looking at the most powerful cabinet figures and policies of two recent presidents. The key figure in Bill Clinton’s administration was Robert Rubin, the secretary of the treasury. Under Bush, Donald Rumsfeld, the secretary of defence was the most powerful.

Of course, the dominant figure in the administration is Vice President Cheney, a man of incomparable devious devotion to an imperial presidency and the rewarding of a small elite, willing to use whatever means necessary to intimidate and destroy opposition at home and abroad. With Clinton, although the projection of US power and use of violence were important, the spreading of the Washington Consensus was the key foreign policy. Under Bush it was shock and awe. Today both strategies are proving unsuccessful to a remarkable extent. The failure of the Washington Consensus to bring development is widely recognised and despite its imposition on dozens of countries in the 1980s and 1990s, it is now being effectively resisted around the world. Again, this is not to say that both policies have not done and continue to do great damage.

Let me comment briefly first on US militarism and then more fully on the demise of the Washington Consensus. Americans were led into a war in Iraq on the basis of lies and are now unconvinced that the attack on Iraq was a good thing. There is a dawning understanding that the United States not only lost Iraq but that the situation in Afghanistan is further revealing an inability to occupy and enforce regime change and imperialist stability. The increased awareness that such adventurism is bankrupting the country while domestic priorities like health care and jobs with adequate pay need to be the priority is challenging imperial America from within to an extent not previously seen.

Many Americans may still support the assertion of national power in easy victories over weaker “enemies”, but they have had their fill of long, drawn out, costly misadventures. For many, the charade of “Mission Accomplished” has produced reactions ranging from unease to hatred of those who think them stupid and so easy to manipulate. US imperial ambitions in Iraq have led to much elite soul searching and they have promoted popular opposition not only abroad but increasingly at home where the claim to be spreading democracy and fostering development are wearing thin. Globally these pretenses are thoroughly discredited. The decline of US credibility and hegemonic power is a major part of what is new in the world system.

Last year on the tenth anniversary of the East Asian financial crisis, two points were widely made. The first was the acknowledgment that capital market liberalisation had brought instability and not growth. Even studies by International Monetary Fund (IMF) economists came to this conclusion. A paper coauthored by the chief economist of the IMF concluded that it is difficult to make a convincing connection between financial integration and economic growth once other factors are taken into account. The sudden stop of capital inflow can be devastating. Second, neoliberal policies were hardly mistakes. It is clear that neoliberal ideologues and Wall Street interests pushed policies that harmed debtor countries while the financiers profited from financial liberalisation. It is not only radical leftists who now hold this view.[5]

What took place in countries forced into accepting Washington Consensus neoliberal policies was a process of accumulation by dispossession—a construct introduced by David Harvey. This is a process in which working people are divested of their assets and their rights. He has in mind the privatisation of water, health care and education, goods that had been or should be entitlements. The sale of these things in private markets dispossessed those who could not afford what should have been theirs by right. The term is a propos of what has happened in the aftermath of financial crises. Global state economic governance institutions have imposed structural adjustment programs and conditionalities that, in privatising public goods, dispossess people through debt repayment, the loss of government benefits and the liberalisation of the local economy to the benefit of foreign investors and domestic elites.

When the United States got in trouble in 2007, Washington rescued financial institutions, rather than imposing the harsh medicine it advocated and forced on others. Instead, it lowered interest rates and bailed out those responsible for the crisis. Moreover, after decades of denouncing the unsophisticated banking structures and practices and crony capitalism of the third world, the United States financial system was revealed as incompetent. The presumed sophistication of bank risk-assessment models were shown as so much hogwash. The dishonesty revealed in the subprime market was far more extensive than anything found in any developing nation. Rather than letting the value of financial assets find their equilibrium level in transparent markets, the US Treasury tried to organise a cartel to prevent this process and to shore up the housing market and save the collateralised debt instruments from collapsing, much at odds with what the Treasury Department had recommended to others. As Martin Wolf wrote, “Not for a long time will people listen to US officials lecture on the virtues of free financial markets with a straight face.”[6] Of course, countries like South Africa are left with heavy debt burdens and the neoliberal policies embraced by the Mbeki government, while the United States itself follows far different policies.

One impact of this unmasking of the interests that benefited from the Washington Consensus policies was a rush by Western leaders to invite the now more significant developing countries to take a greater role, to be given greater voting rights and to exercise more power in the Bretton Woods institutions. By 2007, when the developing economies were accounting for a far larger share of the world economy and many were growing significantly faster than the richer economies that had long dominated these regimes, we began to hear statements such as the one from Mervyn King, governor of the Bank of England, that the IMF could “slip into obscurity” without radical reform.[7] That the developed countries with 15 per cent of the global population hold 60 per cent of the voting power at the IMF and World Bank is perhaps finally no longer in their own interests.

On the diplomatic front, there have been proposals to broaden the G-8. Philip Stephens, the chief political commentator of the Financial Times, proposes expansion to a G-13 by adding the IBSA countries (India, Brazil and South Africa), along with Mexico and China. The idea of such expansion according to World Bank President Robert Zoellick is that they are being invited to become “responsible stakeholders.”[8] It may be that the reorganisation of the world economy is producing a more inclusive transnational capitalist class with a global interpenetration of ownership most prominently through sovereign wealth funds but more commonly through a diversification of ownership on a global scale and the increased interaction among elites.[9]

At the same time, discontent with growing inequalities and the arrogance of capital, local and foreign, has created local movements for fundamental change and awareness through venues such as the World Social Forum that another world is possible. There are conflicting pressures on the governments of the South, from capitalists at home, the masses below and governments and international agencies representing foreign capital above. While there is at the moment the expectation that these governments will generally throw their lot in with the traditional imperial powers, there has been increasing popular pressure against this.

There is of course the likelihood that financialisation centred in the North will continue to grow in the countries of the South, with banks and other financial institutions (many foreign-owned) appropriating a larger slice of the surplus. Such a repetition of the historic pattern of the penetration of imperialist finance in these countries will undoubtedly produce new and more severe crises and once again the people will have to bear the cost. The alternative would have to be a fundamental shift to social control over capital. We will have to use what we have learned in opposing neoliberalism to say no to the growth of high-risk finance and its depredations.

On the positive side, some third world governments have shifted in a progressive direction, sometimes in an effort to strike a better bargain for local capital, sometimes because of genuine commitment to a social agenda and often as the result of a compromised tension between the interests at stake. In Latin America, after periods of military rule and neoliberal policy dominance, Mercosur under Brazilian leadership has put a crimp in the US attempt to form a Free Trade Area of the Americas. As a single market, it is the world’s sixth largest economy. With 260 million people and a combined Gross Domestic Product of over four trillion dollars, it represents a formidable development.

The more radical Bolivarian Alternative for Latin America (ALBA) promotes not only regional solidarity but social transformation based on socialist goals and ideals. In 2007 the Mercosur and ALBA countries created a Banco del Sur (Bank of the South) to offer an alternative development finance instrument premised on solidarity and totally rejecting Washington’s thinking and controls.[10] Some of the member countries have withdrawn from the IMF and the World Bank. The Banco del Sur operates on a one country, one vote principle and, building on the Venezuelan Bank for Economic and Social Development priorities, favours cooperatives and community ownership, offering below-market interest rates to public and social enterprises. With a proposed capitalisation of seven billion dollars, it represents a serious challenge to the US-controlled Bretton Woods Institutions as well as the Washington-dominated neoliberal Inter-American Bank.

The changes in the region have been dramatic as leftist governments have come to power. In 2005 South America accounted for 80 per cent of IMF outstanding loans. Today the region’s borrowing accounts for less than 1 per cent of the IMF global loan portfolio. Along with the Banco del Sur there is talk of a regional monetary system so that bilateral trade can take place in domestic currencies with a goal of eventually creating a common currency for the region.

Social movements are pushing the Banco del Sur to take a more grassroots approach, to reject mega infrastructure (as pushed by Brazil) that supports monocultures including agrofuels and instead finance local infrastructure to support food and energy sovereignty, produce generic medicines and extend membership to other countries of the South. Such formations—always a mix of transformational and reformist elements—illustrate important historical momentum. The failures of the Washington Consensus and the increased strength of alternative centres of power, both of the left and the national-developmentalist right, are reshaping the global political economy. Also significant is the great weakening of the US dollar—its former strength having been both a result and a source of US power.

We are now witnessing the loss of what Charles DeGaulle once called the “exorbitant privilege” of the United States, derived from its role as issuer of the international currency. George Soros, speaking to the World Economic Forum in January of 2008, suggested, “It’s basically the end of a sixty-year period of continuing credit expansion based on the dollar as the reserve currency.”[11] The advantage the United States has enjoyed by being able to borrow in its own currency has been undercut by abuse, outsized current account deficits and the buildup of dollars in foreign hands. This has progressed to the point where the money creation and lower US interest rates implemented by the Federal Reserve to stave off financial collapse have driven down the currency’s value and encouraged further flight from the dollar.

Given the dollar’s serious decline, there would be fear of free fall if not for the fact that it is not easily replaceable in the short term. While at present about a quarter of the world’s monetary reserves are in euros and two-thirds are held in US dollars, there are predictions from respected sources that the euro could be a more important reserve currency than the dollar within a decade. These predictions are based on rising inflation in the United States, its large current account deficits, the costs of imperial overreach and simulation models by leading economists.[12] Of course, the economic situation continues to deteriorate everywhere; at this writing Europe is facing severe economic problems and there is a slow down in the “emerging economies” suggesting a larger crisis than has heretofore been acknowledged. A renewed strength of the dollar could be a reflection of greater trouble elsewhere rather than economic recovery in the United States.

Finance capital has expanded in parasitic form. Not only have the masses in the South suffered but the working people of the rich countries are now being told they must bail out “their” banks and other financial institutions. The class component of this redistributive model is becoming more apparent. As the international political economy becomes more multipolar US hegemony will increasingly be challenged in other areas in addition to the currency issue.

Crisis three: The new centres of power

Let me turn then more broadly to the world historic phenomenon of the rise of non-Western economic and political players. In 2006, for the first time, emerging markets accounted for over 50 per cent of global output. If they continue to grow at the rate they have, forecasts project a very different world by mid-century. Their rise will, I expect, prove as significant as the emergence in the late nineteenth century of Germany, Russia and Japan. A 2006 study by PriceWaterhouseCoopers projected that in the year 2050 the Chinese economy would be almost as large as that of the United States in dollar terms and that India would be the third largest. A year later Goldman Sachs researchers predicted China would pass the United States in 2027 and India’s economy would become larger than that of the United States before 2050. Investment bankers predict Brazil’s economy in 2050 will be as large as Japan’s and the Indonesian and Mexican economies will be larger than those of the United Kingdom and Germany.

PriceWaterhouseCoopers’ researchers expect the “E-7” (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) will be about 25 per cent larger than the current G-7 and will be driving the growth of the global economy. Whatever one may think of the details of such projections, there is little doubt that momentous changes in relative nation-state economic standing are in the offing. The role these new economic powers play in the international political economy will matter significantly. Whether they will be prone to new crises brought on by increased financialisation of the sort now plaguing the United States will also be important. Greater financialisation and fragility creates new dependencies and therefore new possibilities for global crisis.

The importance of China is hard to overstate. It has already made advances in a number of parts of the world. For example, at its recent summit with forty-eight African leaders, Hu Jintao pledged to double assistance to the continent, cancel debt owed by thirty-three countries and provide five billion dollars in concessional loans and credits. The Chinese president has also been traveling in Latin America, which is increasingly orienting its trade to Asia. Other developments in Asia, such as the move by the region’s finance ministers toward creating a common currency, also have major implications for the dollar.

In Asia itself there are major historical changes underway. A recent Foreign Policy essay begins: “Northern Asia is in transition. After 60 years of US domination, the balance of power in the region is shifting. The United States is in relative decline, China is on the ascent and Japan and Korea are in flux. The implications for Washington are profound.”[13] What has been called a “Beijing Consensus” based on respect for sovereignty and mutual economic benefit is widely appealing as an alternative to Washington’s version of spreading democracy and the “free” market by cruise missiles and economic threats. Nonetheless, China is an exploitative power repressive to its working class. It is a transitional capitalist economy in which the children of high party officials have appropriated the social wealth as a result of the defeat of socialism.

The point is not that these emerging state powers are progressive but rather that a multipolar world offers other countries some space they did not have when US hegemony was unquestioned. There is emerging what Conn Hallinan calls a “consortium of convenience”,[14] the drift toward a partnership among China, India and Russia, which, if it matures, could shift global power from Washington. Russia is selling advanced military systems to both India and China and cooperating on energy. Daniel Drezner, writing in Foreign Affairs, the publication of the establishment Council on Foreign Relations, describes “a coalition of the sceptical”, which includes states ranging from Argentina to Pakistan and Nigeria and a revitalisation of the nonaligned movement in an anti-Americanism that is taking on renewed salience.[15] It is possible then that we are entering a period where there will be more room for progressive states to manoeuvre.

The need for access to energy on the part of India and China is a factor in the Shanghai Cooperation Organisation (SCO) formed in 2001, which includes China, Russia and the “stans” (Uzbekistan, Turkmenistan, Kyrgyzstan). India has joined SCO and Iran, Pakistan, Mongolia and Afghanistan have been given observer status. (The United States was pointedly denied observer status.) The SCO has declared that the United States should leave the Middle East and is emerging as a counter to NATO.[16] While a country like India plays all sides in global maneuvering, it has invested tens of billions in gas and oil interests in Iran. Such actions, driven by the need for energy supplies, impact the prospects for US violence toward Iran and the future of US military bases in Turkmenistan, Kyrgyzstan and Azerbaijan. China, which in a few years will be the biggest consumer of energy in the world, has been exceedingly active all over the planet in search of energy supplies and indeed other commodities.

There is as well the emergence of a new “Seven Sisters”, a term Enrico Mattei coined to describe the seven Anglo-American companies that controlled oil in the Middle East after the Second World War. Today it is not ExxonMobil, Royal Dutch Shell and the others but Russia’s Gazprom, CNPC of China, Venezuela’s PDVSA, Brazil’s Petrobras, Saudi Aramco and Petronas of Malaysia that are the seven giant producers. Resource nationalism is likely to grow in importance as these state-owned companies squeeze the Anglo-American companies to force additional concessions. The politics of the new Seven Sisters is, of course, diverse; the Saudis, a staunch US ally, are the most powerful. That Venezuelan oil is controlled by the Chávez regime, which is trying to lead the nation toward a twenty-first century socialism, is an important development, as are new nationalisations in Ecuador, Peru and Bolivia. Putin’s takeover of Gazprom symbolises a reawakened Russian bear.

Crisis four: Resources and sustainability

The final and perhaps greatest crisis is that of the availability and distribution of such critical resources as oil, food and water. The sustainability of human life is simply not consistent with inherently wasteful capitalist growth.

The International Energy Agency’s World Energy Outlook tells us that 50 per cent more energy will be needed in 2030 than in 2005 (after adjusting for efficiency improvements) and that almost three-fourths of this increased demand will come from developing countries, with China and India alone responsible for 45 per cent of the increase in demand. After 2015, China is expected to be the planet’s biggest carbon dioxide emitter, ahead of the United States, followed by India as the third largest emitter. (Other studies show China is already the biggest contributor of greenhouse gases.)

There are two political issues of some significance here. The first is that the United States and other rich countries have used the lion’s share of the world’s resources for a long time. Social justice requires not simply that the developing countries help ration future use of non-renewable resources but that those who have long over-consumed bear a greater than proportionate share of the cost of such a transition. Second, there must be new patterns of human development premised on ecological concerns as well as social justice and these must take a more prominent place in the work of international councils, which now seem to accept that the only important thing is terrorism. A sixth of the world’s population enjoys an energy-intensive lifestyle. As the numbers aspiring to this type of consumption grows, the planet’s problems will increase. The American Dream will become much more expensive and finally unsustainable. It cannot be widely shared along present production and consumption patterns. Not only are billions of people not benefitting from global capitalism, but those who do are adding pressure to the resource base of the planet.

Today a quarter of all deaths in the world have some link to environmental factors and most of the victims are poor people who are already vulnerable due to malnutrition and lack of access to medical care. Malnutrition is likely to become a more serious issue as food prices continue to rise. Seventy-five per cent of the world’s poor people are rural and most of them depend on agriculture. Since it is hard for them to make a living, there is massive migration to the cities of the developing world. A billion people now live in the slums of these growing cities where they scavenge a living or eke out a marginal existence as street vendors. Agronomists tell us that almost every country in the world has the soil, water and climate resources to grow enough food for its people to have an adequate diet.[17] However, this would require serious land reform and technical and financial support. In very few places are such policies practiced and food insecurity is said to affect close to half of humanity.

On the more hopeful side, we are seeing countries reject the World Bank’s insistence that they not subsidise agriculture. Malawi, which for years hovered at the brink of famine, with five million of its thirteen million people needing emergency food aid after a disastrous 2005 maize harvest, decided to subsidise its poor farmers and was soon exporting hundreds of thousands of tons of maize thanks to the help it gave the farmers, whose yields grew dramatically. The United States, while willing to provide food aid from its agricultural surplus (grown with huge federal subsidies to US farmers), refuses to assist farmers in poor countries. Even as it insists that they follow the free market, the United States undermines the ability of Third World farmers to compete by dumping free or low-cost agricultural exports in their countries.

There is a growing use of maize to produce ethanol and soy beans for diesel fuel, as well as an increased desire of large numbers of the newly affluent to consume meat. Increasingly, grains feed animals and not people. China’s average caloric intake from meat consumption, for example, has doubled since 1990 and given that it takes ten pounds of grain to produce one pound of pork and double that for beef, such a growing demand has consequences for those who find the staples of life becoming too expensive for their own survival. The food-price index computed by The Economist magazine went up by 30 per cent in 2007 and will go up by far more in 2008. Indeed, the United Nation’s World Food Program issued an extraordinary emergency appeal on March 23, 2008, to governments to increase their collective donations by at least a half-billion dollars to fund the higher cost of their feeding seventy-three million people in close to eighty countries. They noted a 20 per cent jump in food costs in just three weeks along with the impact of the increase in oil prices on shipping costs. Grain prices are rising at an annual rate of 80–90 per cent. Rice prices surged 30 per cent in one day in late March 2008, having doubled in the less than three months since the start of the year, provoking protests among the poor in some Asian countries where rice is a dietary staple.

At the same time, what has been called the American diet of refined white flour, corn sweeteners and corn-fed animal fats is replacing traditional diets for too many of the world’s people. Refined sugars create obesity and promote diseases such as diabetes by replacing the complex nutrients of traditional foods. The uncontrolled profit motive is destroying health and increasing medical costs dramatically as it poisons its customers with adulterated and unhealthy foods. Each of these broad areas of crisis is brought about by the normal activities of capitalists in a system that accepts the right to profit at virtually any cost. The mass media and the political system strive at all times to keep the public from understanding the heavy burden on global humanity that these systemic priorities impose.


In my remarks I have stressed four areas of crisis of the contemporary world system: the financial crisis, the loss of relative power by the United States, the rise of other centres of accumulation and resource depletion and ecological crisis. The US strategy remains to project military power to control oil and other resources. The other wing of the eagle is relying on appropriation of surplus through financial vehicles, but this hardly exhausts its tactics. It also demands the enforcement of protected monopoly rents by international patent and licensing regimes to protect intangible property rights, from Microsoft Windows to Big Pharma claiming ownership of the human genome. The extension of property rights and the enclosing of the scientific commons need to be (and are being) opposed by developing countries, which pay exorbitant licensing fees and are not allowed to use what in the past would be common knowledge inheritance.

Just as high-risk finance needs to be limited and socially controlled, science should be liberated so that technological progress is not artificially constrained and monopoly rents cannot be demanded. For the developing world, the strategies of both wings of the imperial eagle have been exposed.

The Washington Consensus has been discredited and although the damage it causes continues, it has not achieved Washington’s goals. There has been a uniting of much of the world into a coalition of the unwilling. If serious left-wing governments took power in many countries of the South, there could be dramatic reconstruction of the global political economy. However, those who now run these countries are hardly revolutionaries. We can expect elements of collaboration, cooperation and contestation depending on what pressures these elites are subject to. A progressive South Africa could help shape an alternative to the Anglo-American capitalist world system and influence new centres of power that claim to represent the interests of the Global South and someday may have governments that actually do so.

[William K. Tabb taught economics at Queens College for many years and economics, political science and sociology at the Graduate Centre of the City University of New York. His books include Economic Governance in the Age of Globalisation (Columbia University Press, 2004), Unequal Partners: A Primer on Globalisation (The New Press, 2002) and The Amoral Elephant: Globalisation and the Struggle for Social Justice in the Twenty-First Century (Monthly Review Press, 2001). He can be reached at william.tabb AT This essay, which first appeared in Monthly Review, October 2008, is adapted from a talk presented to the Amandla Conference “Continuity and Discontinuity of Capitalism in the Post Apartheid South Africa”, in Cape Town, April 4–6, 2008.

1.   This section draws on William K. Tabb, “The Centrality of Finance”, Journal of World-Systems Research, XIII (2007), 1.
2.   Martin Wolf, “Unfettered finance is Fast Reshaping the Global Economy”,
Financial Times (June 18, 2007).
3.   John Bellamy Foster, “The Financialisation of Capitalism”,
Monthly Review (April 2007): 1.
4.   William K. Tabb “The Two Wings of the Eagle”, in John Bellamy Foster and Robert W, McChesney, eds.,
Pox Americana: Exploring the American Empire (New York: Monthly Review Press, 2004).
5.   Kenneth Rogoff, Eswar Prasad, Shang-Jin Wei and M. Ayhan Kose (2003) “The Effects of Financial Globalisation on Developing Countries: Some Empirical Evidence”,
6.   Martin Wolf , “Why the Sub-Prime Crisis is a Turning Point for the World Economy”, paper presented at the Globalisation and Economic Policy Centre, Nottingham University, March 5, 2008, The Powerpoint presentation, which is available on the Web, has a number of useful graphs and tables.
7.   Krishna Guha and Chris Giles, “IMF wants more say for rising economies; Asian countries would have greater influence”,
Financial Times, April 5, 2008.
8.   Philip Stephens, “A Table for Thirteen”,
Foreign Policy (January/February, 2008): 65.
9.   Willaim K. Tabb, “Globalisation Today; At the Borders of Class and State Theory”,
Science & Society (January 2009).
10. Mark Engler “
Latin America Banks on Independence”, In These Times (February 2008): 43.
11. Craig Karmin and Joanna Slater, “Dollar’s Dive Deepens as Oil Soars”,
Wall Street Journal, February 29, 2008.
12. Jeffrey Frankel, “The Euro Could Surpass the Dollar Within the Next Decade”, (March 18, 2008), 2008.
13. Jason T. Shaplen and James Laney, “
Washington’s Eastern Sunset; The Decline of US Power in Northeast Asia”, Foreign Policy (November-December 2008): 82.
14. Conn Hallinan, “Challenging a Unipolar World”,
Foreign Policy in Focus, January 21 2008,
15. Daniel W. Drezner, “The New
New World Order”, Foreign Affairs (March/April 2007).
16. William K. Tabb, “Fumbling Through the Great Game in
Eurasia: the British and US spreading ‘Freedom’ through Invasion, Occupation and Regime Change”, Z Magazine (November 19, 2006).
17.   Fred Magdoff “The World Food Crisis”,
Monthly Review (May 2008).


The Financial Crisis of U.S. Capitalism
by William K. Tabb

The Will Miller Lecture, University of Vermont, October 28, 2008

Like many people who do not live around here, and maybe some who do, I had not heard of Will Miller, so, on being invited to be part of the Will Miller Social Justice Lecture series, I went to the organization's Web site and learned that "Events sponsored by the Lecture Series: will be connected to social, ecological and political concerns; will assist the community in understanding the origins, workings and implications of capitalism and imperialism; will encourage active participation in the creation of a more just society; and will be accessible to all." Now, one's ears perk up at words like capitalism and imperialism.

Economists don't use the word capitalism very much although we talk about capitalism all the time. We just don't name the system as often as we should. When I was given the title of tonight's talk, "The Financial Crisis of U.S. Capitalism," it of necessity changed what I was going to say in interesting ways. For while it is important to talk about the state of the economy, the weaknesses of the bailout plans proposed and debated, still a certain clarity emerges when their class character is discussed and it becomes clearer why meaningful reform is so hard. These most important questions have a lot to do with how capitalism works, how the economy cannot be separated from politics, and how politics cannot be separated from the distribution of wealth and class power.

This topic, the current financial crisis described as a crisis of capitalism, is the way a lot of the most conservative people in America view our situation, including a goodly number of members of the House of Representatives. Representative Jeb Hensarling, a conservative Texas Republican, tells his fellow representatives that this is no time to abandon free-market principles and start along that "slippery slope to socialism." "How can we have capitalism on the way up, and socialism on the way down?" he asks. How indeed. Representative Thaddeus McCotter, a Michigan Republican, recalls that "peace, land, and bread" was the 1917 slogan of the Bolshevik Revolution. "Today," he told his colleagues, "I suggest that the people on Main Street have said they prefer their freedom, and I am with them." Actually they seem to be saying that they don't want to bail out the banks so they can afford bread, health care, and gasoline. Such conservatives voting to prevent socialism in America do not acknowledge that it is a socialism for the rich at the expense of the rest of us. The ideological right wants to save capitalism from the likes of such dangerous radicals as George W. Bush, Ben Bernanke, and Henry Paulson. This is a comic turn of events. They do not understand that business cycles are integral to the workings of capitalism and have been since its beginnings and that the more extreme form of laissez faire, the more violent the economic crisis.

Let me explain how the system itself created this crisis by starting with how the last crisis was solved. In the late 1990s, as you may remember, the economy expanded thanks to the Internet and the high tech boom as investors made money on this new technology, which led others to float the stock of new companies that promised to do the same. Many had no business plan, no chance of ever making money, but the animal spirits of investor/speculators, greed, and the herd mentality bid up prices of such stock until they reached such unrealistic levels that in 2000-2001 the stock market came crashing down. To address the crisis, the Federal Reserve lowered interest rates and kept lowering them. This made it cheaper for companies and individuals to borrow and helped people pay off debt and borrow more. One area that was particularly impacted was real estate: because it is not so much the cost of a home as how much must be paid each month to stay in it that matters, low-interest mortgages made ownership cheaper. As housing prices rose and kept rising, mortgage originators grew lax in their standards. Ninja (no income, no job) loans and little or no down payment became common. To keep the bubble going, low teaser-rate loans which would reset in the future were offered, and interest-only mortgages were popularized; by 2005, adjustable-rate mortgages allowing borrowers to make very low initial payments for the first years were the norm in more than half of new home loans. By 2006, the most popular mortgage option included paying less than the amount due each month, the difference being added to the principal and subject to dramatically higher monthly payments in the future.

Even if you were a banker who saw where all this was heading, you could not refuse to play. If you did, your bank would earn less than its competitors, your stockholders would wonder why they shouldn't get someone else who could increase the profits, and you would be out of a job. If you were the person handing out the loans and interviewing people, your income depended on how many loans you originated. What happened to them after that was not your problem. You will have earned your bonus. The banks learned to securitize these loans -- that is, to gather a bunch of them, some millions of dollars worth, and sell these collateralized debt obligations to someone else who would receive the income. You would get paid up-front with money you could lend to still more borrowers. Since the values kept rising and defaults for years were very low, the rating agencies thought these were safe instruments. Government regulators saw nothing wrong. They mostly came from the banking industry, at least the political appointees at the top did, and they laid down policy. Between mid-2000 and 2004, American households took on three trillion dollars in mortgages. Interestingly, during these same years, the U.S. private sector borrowed what BusinessWeek calls "an astonishing $3 trillion" from the rest of the world -- astonishing because that is a lot of money. Between a third and half of the mortgages were financed with foreign money. Banks, especially in Europe, hold a lot of the toxic securitized debt. Some of their banks are in more trouble than ours thanks to these unwise purchases of presumably "safe" assets.

As the bubble inflated, the Securities and Exchange Commission changed the rules to allow investment banks to take on a great deal more risk, a disastrous decision that led to the collapse of Wall Street as we have known it. The big investment banks asked for and got from the SEC exemption from regulation limiting the amount of debt they could take on. After the change, they no longer had to keep the billions of dollars in safety-cushion reserves against possible bad investments. From then on, with very little of their own money, they could leverage themselves to greater extremes, that is, borrow and invest more in relation to the actual capital the bank possessed. On the up side, this meant they could make great profits with exotic and non-transparent financial instruments and simpler ones which were as it turned out far more risky than they thought. Without the protective buffer of greater reserves, however, they quickly ran out of money when things began to go bad and they could not sustain the extent of leverage which for Bear Stearns was short-term debt 33 times the value of capital they held. The SEC examiners pointed out the growing problem before the banks publicly were seen to be in grave danger, but these warnings were ignored by political appointees at the top of the SEC itself.

By allowing the banks to self-regulate and making it more difficult for the staff to investigate and go after companies the staff believes to have broken the law, the SEC, as in the case of many other executive branch agencies, moved the country away from social responsibility to laissez faire at serious cost to the American people. The pendulum will now shift. How far and for how long depends on how deep the crisis becomes and how the American public learns to think about why they are suffering and what can be done. This is a question to which we shall return.

When the inevitable crash happened and the air went out of the bubble, the nature of what banks do became central. Banks have liabilities to their depositors and others which are short-term. People can demand their money back when they want or, in the case of money borrowed at low rates for short-term loans, very soon. The banks' assets are their long-term loans including twenty- and thirty-year mortgages. If these mortgages and other loans begin to look risky and it seems the banks may not get their money back, those who have lent money to the banks panic and want their money now. The banks don't have it. This is a liquidity problem. The purpose of FDIC insurance is to calm those who have lent to the bank. But today much bank borrowing is in large money market deposits, commercial paper in large denominations, and interbank borrowing -- none of which is insured, so it's hard to come by these days. Thus a liquidity problem. But if the banks hold assets which are worth less than their liabilities this is a solvency crisis. What we are watching is a spreading solvency crisis in which the value of assets is falling, from the value of homes, to the value of the mortgages and the collateralized debt obligations based on these assets, to other collateralized debt obligations based on car loans and credit card payments as the broader economy weakens.

Before the House voted down the Paulson plan, a European minister asked what happens if the Treasury's $700 billion program to buy toxic debt does not work. Mr. Paulson told the minister, "We have nothing else." Remarkable. Just as in Iraq. No real planning. Just a faith-based initiative and throwing money at private companies. The taxpayer money extended in purchases, guarantees, grants, and loans is well north of a trillion and a half dollars. By comparison the wars in Iraq and Afghanistan from 2001 to 2008 have so far cost us "only" $790 billion, maybe by tonight $900 billion. Getting us out of the financial crisis we are in, economists think, will cost from one to two trillion dollars. It depends on how it is done and who pays how much of the total. Mr. Paulson had sought authority to act alone with his acts nonreviewable by any court or administrative agency. Congress refused to cede such power and the lamest of lame duck presidents had no mandate to force much at all from the people's elected representatives feeling heat from the grassroots. The key question is what price the Treasury will pay for bad assets. If it pays the current market price, it forces banks to write down such assets to perhaps 20 to 25 percent of the value they would have if things were as they had been before the bubble burst. If it pays more (with taxpayer money), it subsidizes ("rewards") the banks for their bad judgment. Mr. Paulson says he will not overpay, but what does that mean? If he doesn't "overpay" in the sense of paying more than the market now believes these toxic assets are worth, he is not helping solve the crisis.

If the loans the banks made are bad loans, even toxic loans as the term of art has it, the value of assets is less than the value of bank liabilities. In this case, the banks are insolvent, not as Paulson claims merely holding illiquid assets. Not able to meet their debts, they either go out of business or sell themselves at a bargain price to a stronger institution. Sometimes no one will buy them unless the government takes a big share of the toxic loans. Hence the inevitable socialism for the rich which we are told must take place or else it is the end of the world for the rest of us as well. Paulson demanded money to save the banking system his way. It has not washed for reasons mainstream economists have explained. It now turns out that the Treasury is making unsecured loans and buying commercial paper from companies which need short-term loans they can't get from banks even after the bailout passed. This is to say the real economy is being helped and the plan to buy toxic waste was not needed to bring liquidity to credit markets -- which it did not do in any case. There has begun to be widespread criticism of how Paulson saw the crisis and who he thought needed to get taxpayer money.

There have now been lots of lectures, panel discussions, and teach-ins in which economists have weighed in on the financial crisis. In September at Harvard, a standing-room-only crowd of MBA students worried about their job prospects were told that indeed the job market for them looked bleak this year. The phrase used by Jay Light was a "slow-motion train wreck." But, for Robert Merton, the main point was that innovation is inherently risky. Some ideas will fail, he reminded his audience, and innovators inherently outrun existing regulatory structures. That is just how it is. We don't want to clamp down on innovation because "innovation is the engine of growth." Not only must Wall Street be bailed out but any attempt to regulate may produce overregulation and that is worse than the crash itself for it puts the future of capitalism's foundational energy in danger.

This is a line taken by many defenders of the system. The Financial Times editorial writers with a repetitious insistence tell readers that government may well only mess it up. In early October, they pointed out that it was the regulated banks that had problems, not the unregulated hedge funds. The same day this editorial appeared on page 12, on page 17 the paper ran a story headed "Hedge Funds Prey on Rivals." It was essentially about how the rest of the pack turns on its weak members by, as the writer said, embracing "increasingly cannibalistic" trading strategies. This is what happened after Bear Stearns collapsed. The pack went after the next weakest investment bank, Lehman Brothers. At this point the commercial banks won't lend to each other because they don't know who is holding how much toxic waste and will be unable to pay back loans even a day later. Now it turns out many hedge funds are collapsing.

This effort to blame government needs to be seen as an effort by ideologues and other defenders of the current system to prevent social regulation in the public interest. The analysis typically opposes something called government with something called the market. In actuality, capitalists who own the companies which want the rules that help them get richer pay politicians to get what they want. Government is not an above-the-fray entity but a terrain of contestation among capitalist interests which are at odds with one another and between the general interests of capital and the interests of the working class. To blame government is to assume an independence government does not have. Its decisions reflect class power and the interests of particularly powerful fractions of capital, limited only by public outrage and the courage of those representatives who have been elected for their real independence from these interests and commitment to the working class. Residents of this state might know of such a senator, for example.

Among speculators there is outrage that the government has limited short selling which fed the downward cycle and encouraged more financial institution bankruptcies. The Financial Times warned against too much government interference in the market and cited the Smoot-Hawley Act which raised tariffs and presumably prolonged the Great Depression as the prime example of how "government" makes things worse. However, if one is looking at capitalism, it is clear that Smoot-Hawley was passed because America's most powerful capitalists were national capitalists who wanted protection from foreign competition. Smoot-Hawley would not be passed today because the most powerful capital is now transnational capital. The "government" which passed Smoot-Hawley then is not the same government as today's which would not pass such a law because the dominant fraction of capital has changed in this era of globalization. Similarly the reason the Paulson plan favors Wall Street and ignores the needs of domestic manufacturers and Main Street is that Paulson represents Wall Street in Washington in much the same way that the "government" once represented large industrialists. What fractions of capital are dominant goes a long way to explaining what "government" proposes to do. Now, the extreme free-marketeers are being displaced by fractions of capital which understand the dangers of their shortsightedness. Working people have become angry and have made their anger felt in Washington. This has led once enthusiastic free-marketeers to move rhetorically to the left.

On the same Harvard panel this past September, N. Gregory Mankiw, chairman on Mr. Bush's Council of Economic Advisers from 2003-2005, told the audience that Wall Street likes Mr. Bush's interpretation that current prices on Wall Street are too low and government should pay more for these assets to get prices, and thus profits of the financial firms, back up. He points out that economists are skeptical of "throwing money at the problem" because, first, it won't do all that much and, second, many of them think government should take equity positions in these companies, that is, take preferred stock, which can be sold at a profit after recovery, and run them in the public interest. That is from a mainstream Republican academic. Also on the panel, Kenneth Rogoff, the former chief economist at the International Monetary Fund, enforcer of neoliberalism throughout the world, echoed the sentiment: "The problem is not merely bad debts held by institutions but bad banks themselves." The $700 billion bailout, he said, would have the effect of maintaining management salaries and bidding up the price of bank stock when the financial sector instead needs to shrink. He actually said a large financial sector as we now have is "unproductive" for the economy as a whole. He actually thought we should focus on the needs of homeowners facing default. After decades during which these men as public officials pursued policies based on the idea that uncontrolled free markets always knew best, in a crisis they knew that, to save the system in their own country, strong government action was needed.

There has been a cacophony of punditry to the effect that it will be a long time before anyone listens to Washington policy makers give economic lectures. At the UN the new General Assembly session opened with the Secretary General making this clear in his disparaging remarks about "the magic of the market," a reference to the term made famous a quarter of a century ago when Ronald Reagan explained that the poor countries needed not more aid and government programs but trade and the magic of the market. Michael Mandel, BusinessWeek's senior columnist, calls what has happened "the Great Repudiation" (October 13, 2008, p. 32). It is assumed it will also be a long time before business and political leaders can call for unregulated markets again. Within modern American capitalism, though, regulation and deregulation has been a pendular phenomenon. After recovery, self-interest and the re-establishment of ideological hegemony brings a shift back to the magic of the market and deregulation, until the next crisis hits. As if to presage just such an ideological swing back, Mankiw, too, warned against excessive regulation which would choke off innovation.

On the West Coast at the University of California-Berkeley, eminent economists who tended Democratic were more critical though nevertheless supportive of the bailout because not doing it would be worse -- not that the bailout would solve the problem, of course. Barry Eichengreen said that, after a year of holding action which had not solved the problem, the TARP (Troubled Asset Relief Program) would give the Treasury Department wiggle room. His colleague Brad DeLong, a former Clinton official, told the audience, "Don't call it a bailout or TARP." He recommended calling it "seizure" and renaming the program "the troubled asset seizure and forced bank nationalization plan." This is exactly what Paulson had been trying to avoid. He did not want to seize the banks and nationalize them. Taking over AIG for $65 billion of your dollars and asking for a little under 80 percent ownership so he could call it conservatorship -- 80 percent or more would have been nationalization -- the idea was not to take control but leave the same people in charge. The Bush people and especially Paulson, strong advocates of deregulation as they are, just could not do what most economists understood needed doing: nationalizing the banks, sorting them out, and directing them to make loans to the real economy and letting the stockholders, top managers, and speculators take their losses. It is not surprising that Mr. Paulson, former head of Goldman Sachs, thinks this way. But it is also a question of the correlation of class forces within the political system and the pressures on the state.

At the time DeLong spoke, eight million Americans were out of work. The figure is higher today. They need jobs. The recession will deepen. The credit squeeze means that businesses cannot get the credit they need. They are cutting back on investment, on payroll, on employees. They are shutting down divisions rather than fixing them. Salaries and wages are being held down in an effort to ride out the crisis. But this means less purchasing power and more pressure on the economy. Why should the big money be spent to prop up Wall Street and not help working people? The government needs to allow courts to lower the mortgage rates and principal on homes, so that those who can afford to pay realistic mortgages can stay in their homes. These are not normal times and ordinary people are becoming restive and increasingly active in making their feelings heard.

There are two relevant models for addressing the financial crisis. The first is closer to the Paulson approach; it is how Japan handled its banking crisis in the 1990s which resulted from a speculative bubble, its government initially refusing to recognize the scale of the problem and financially supporting financial institutions. The result was a decade of slow or no growth and the spending of a vast amount of public monies to recapitalize what is now a far more concentrated banking system. Their broader economy has still not really recovered. The second is the Swedish case where the government took over and reorganized the banks under state ownership. In 1985, Sweden deregulated its credit markets, leading to the kind of property speculation and bubble we have repeated. Between 1990 and 1994 this bubble burst, leaving 90 percent of the banking sector with massive losses, including all of the country's largest banks. The government divided banks into those that could be saved and those that it judged could not or should not, letting many fail, and taking on the bad assets of banks but leaving the shareholders of these banks with nothing. Over time they sold off the assets and then as the banks returned to health sold them to private owners. Taxpayers got their money back and economic growth resumed. Of the two models, the latter is clearly better than the former in crisis.

It is not surprising that government always bails capital out. The difference between the two approaches considered above is a willingness to nationalize and reorganize the banks versus just throwing money at the banks and waiting for the market to recover by itself. The distinction here is between the two major perspectives within the capitalist class. As the British have recently shown by nationalizing a big part of their banking system, taking preferred stock in exchange for a cash infusion, for the more sensible, less ideologically driven fraction of capital, pragmatic survival comes first. The pragmatic faction accepts that, if throwing money at failing enterprises and extending more loans and loan guarantees proves ineffective, the government is forced to nationalize the insolvent enterprises and run them at a loss (when the enterprises become once again profitable, capital leans on the government to sell them back to private investors).

The best the renegade Republicans (who it turns out are a majority of the party in the House of Representatives) can come up with is a private insurance scheme to solve the crisis. Private insurance has failed. That is why the largest private insurance company AIG had to be nationalized -- excuse me, placed under "concervatorship." The other major Republican rebels' solution was to do away with the capital gains tax and lower the corporate income tax since, they said, the U.S. "has the highest corporate income tax in the world." The statutory rate is high in the U.S. However, this is not the rate corporations actually pay. Most US companies doing business in the U.S. (57 percent of them) paid no federal income tax in at least one year between 1998 and 2005. More than half of foreign corporations and over 40 percent of US corporations paid no income tax for two or more of those years according to the General Accounting Office. Companies minimize or eliminate their tax burden, leaving the rest of us to pay more. In 2005, the last year for which we have data, 25 percent of the largest US companies paid no federal income taxes despite gross sales that year of well over a trillion dollars. They hardly need a tax cut. What is more, the logic is wrong. Companies don't invest because they will pay lower taxes but because they see they will make money by expanding production, investing in new plants and equipment and hiring more workers. They will not do this in an economy where the consumers have borrowed more than they can repay and workers are losing jobs. As stagnation deepens the giveaway programs to the corporate rich have less impact on the rest of the economy, which is why the New Deal had to move to direct job creation.

At the level of what more is to be done, the question arises: what will be done for working people? This is a secondary question for the elites. The primary one for them is saving capital (especially US capital) and the system itself. But what of the lives of ordinary people? Their needs and desires do not ordinarily rank very high beyond symbolic rhetorical sympathy unless large numbers of people are angry and focused on the crimes of the elites who run their country and who encourage and enforce the rules that allow capitalist excesses (which are seen as just part of how the system operates and so of no real concern to governments serving capital). Until the issue of class power and the structural nature of capitalism as a system of class domination is brought in, reform will always be limited and never enough to either prevent crises or put the working class victims of the system first when it comes to societal priorities.

Having laid out my broad take on things, let me go back to the elements which have driven the U.S. economy over the last decade or so and especially fueled the two great bubbles, the high tech-Internet optimism of the late 1990s and the housing boom of roughly the first half of the present decade. I would also stress other key elements lurking beneath the surface. The first is the expansion of military spending which feeds a right-wing politics because it depends on promoting fear of the enemy and misdirecting anger outward as well as funding companies that are major campaign contributors for the right. The second is a secular stagnation which is disguised by the pattern of redistributive growth in which the upper ten percent of households (especially the upper one-tenth of one percent among them) get more and more of the wealth of the country while the majority are denied basic infrastructure, education, health care, and of course secure decently paying jobs and retirement. The third is the remarkable rise in debt which funded consumption through these years. Consumer debt allowed working families to maintain their standard of living to some extent. But there are limits to how much debt people can carry. US households now spend more of their disposable income to pay off debts (14 percent) than to buy food (13 percent). This has never happened before.

Because real wages have stagnated for decades, Americans have had to borrow more. They have pulled hundreds of billions out of their homes by refinancing, increased their credit card debt, and raided their 401(k)s to pay for living expenses. Household indebtedness rose from 50 percent of GDP in 1980 to 71 percent in 2000 to 100 percent in 2007. Student loans were two billion dollars in 1996-7 but $17 billion in 2006-7 according to the College Board. The job market is making it hard to pay off these loans which amount to well over $20,000 on average. The financial sector's indebtedness was 21 percent of GDP in 1980 but rose to 83 percent by 2000 and was 116 percent of GDP in 2007. Government debt paid for tax cuts to the rich and wars in the Middle East. The impact of the huge federal debt, which grows with each new bailout, will make it harder to properly address the recession in ways that will serve the majority of the American people. The total American debt (the debt of households, business, and government) has doubled as a proportion of GDP since 1980 and was 350 percent of GDP even before the recent dramatic taking on of new debt by the government. It was not simply bankers' "mistakes" and/or greed which produced the crisis but efforts to use debt to overcome the stagnationist tendency of the economy. It is this structural issue, an economy which cannot grow without resorting to a large buildup of debt and speculative financial asset investment, that is not being faced. The irrationality of a system which does not meet people's needs but requires such artificial and finally dangerous methods of growth is not a very good system.

There is a specter haunting Wall Street. At this point it appears in odd cartoonish tributes to Marx and socialism. In a recent issue of The Economist, which is a libertarian business publication, there is a drawing of French President Sarkozy reading Das Capital in gleeful approval in front of a crumbling New York Stock Exchange (October 4, 2008, p. 55). The suggestion was that Sarkozy, who had said American laissez faire ideology as practiced during the subprime business "was as simplistic as it was dangerous," is looking forward to the demise of the system. But of course Sarko is a big fan of America and capitalism. He, as The Economist full well understands, is just responding to French public opinion which rejects free-market capitalism. The story itself points out other statements by Sarkozy, such as "capitalism is the system that has enabled the extraordinary development of western civilization" (a sentiment, by the way, that Marx would have endorsed). Moreover, Sarkozy also says that "anti-capitalism offers no solution to the current crisis." On that, Marx could not disagree more with the President of France. His riposte might be something like, "Yes, the system may recover -- but only at great cost to working people, who will eventually understand that they do not have to put up with all this." He would also add that we now have the potential to meet human needs, accept that the development of each of us should be the goal of all of us, reject wars for oil, save the planet, and have ordinary people learn that they can govern themselves.

The same issue of The Economist had another one of Obama and McCain coming to the finish line behind which there are crumbling bank buildings and one worried person on the sidelines saying to another, "The end is just the beginning." And so it is. Things will get a lot worse before they get better. The question will be to what extent public pressure and popular mobilization insist that working people are helped first and foremost; that the patterns of taxation and pro-corporate policy making are reversed; and, as in the Great Depression, that greater social control over capital is put in place.

David Harvey in an introduction to a new printing of The Communist Manifesto called attention to one of its modest proposals for reform, the centralization of credit in the hands of the state. This is happening already on a temporary basis as it did in Sweden and now in the UK and other places. So wrote Harvey earlier this year, why not consider some of the other equally modest but wholly sensible proposals -- such as free (and good) education for all children, serious progressive taxation, and significant inheritance taxation? The proposals made in the Manifesto for the most part now strike us as tame stuff. Yet even those which were to some extent achieved have been significantly repealed in the last decades in America. It would be useful to think about what we need and want and demand it, if not in some grand manifesto then in public discussion, demonstrations, and electoral struggles. I expect Will Miller might have thought something along these lines of economic democracy the right sort of answer to bailouts for banks and bankers. And, if these are good ideas for a time of crisis, why not as a route to a more just economic system? We may be moving closer to a point similar to the one when the New Deal began: an entire economic system is understood to be broken and the usual policies of bailing out corporations can't reverse the decline, fear permeates all and hundreds of millions of Americans are desperate. At such times, people begin to say if this is how capitalism works it is time to figure out something better. At least that is what Will Miller would be asking us to think about. If things keep going the way they have been, many Americans will be up for the conversation.

William K. Tabb is Professor Emeritus, Queens College, City University of New York. He is the author of The Amoral Elephant: Globalization and the Struggle for Social Justice in the Twenty-First Century (Monthly Review Press, 2001) among other publications.