Already by the late 1980s the seriousness of the situation was becoming clear to those not wedded to established ways of thinking. Looking at this condition in 1988 on the anniversary of the 1987 stock market crash, Monthly Review editors Harry Magdoff and Paul Sweezy, contended that sooner or later—no one could predict when or exactly how—a major crisis of the financial system that overpowered the lender of last resort function was likely to occur. This was simply because the whole precarious financial superstructure would have by then grown to such a scale that the means of governmental authorities, though massive, would no longer be sufficient to keep back the avalanche, especially if they failed to act quickly and decisively enough. As they put it, the next time around it was quite possible that the rescue effort would “succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and precarious level. But sooner or later, next time or further down the road, it will not succeed,” generating a severe crisis of the economy.

As an example of a financial avalanche waiting to happen, they pointed to the “high flying Tokyo stock market,” as a possible prelude to a major financial implosion and a deep stagnation to follow—a reality that was to materialize soon after, resulting in Japan’s financial crisis and “Great Stagnation” of the 1990s. Asset values (both in the stock market and real estate) fell by an amount equivalent to more than two years of GDP. As interest rates zeroed-out and debt-deflation took over, Japan was stuck in a classic liquidity trap with no ready way of restarting an economy already deeply mired in overcapacity in the productive economy. 24

“In today’s world ruled by finance,” Magdoff and Sweezy had written in 1987 in the immediate aftermath of the U.S. stock market crash:

the underlying growth of surplus value falls increasingly short of the rate of accumulation of money capital. In the absence of a base in surplus value, the money capital amassed becomes more and more nominal, indeed fictitious. It comes from the sale and purchase of paper assets, and is based on the assumption that asset values will be continuously inflated. What we have, in other words, is ongoing speculation grounded in the belief that, despite fluctuations in price, asset values will forever go only one way—upward! Against this background, the October [1987] stock market crash assumes a far-reaching significance. By demonstrating the fallacy of an unending upward movement in asset values, it exposes the irrational kernel of today’s economy. 25

These contradictions, associated with speculative bubbles, have of course to some extent been endemic to capitalism throughout its history. However, in the post-Second World War era, as Magdoff and Sweezy, in line with Minsky, argued, the debt overhang became larger and larger, pointing to the growth of a problem that was cumulative and increasingly dangerous. In The End of Prosperity Magdoff and Sweezy wrote: “In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government rescue measures to prevent collapse of the financial system merely lay the groundwork for still more layers of debt and additional strains during the next economic advance.” As Minsky put it, “Without a crisis and a debt-deflation process to offset beliefs in the success of speculative ventures, both an upward bias to prices and ever-higher financial layering are induced.”26

To the extent that mainstream economists and business analysts themselves were momentarily drawn to such inconvenient questions, they were quickly cast aside. Although the spectacular growth of finance could not help but create jitters from time to time—for example, Alan Greenspan’s famous reference to “irrational exuberance”—the prevailing assumption, promoted by Greenspan himself, was that the growth of debt and speculation represented a new era of financial market innovation, i.e., a sustainable structural change in the business model associated with revolutionary new risk management techniques. Greenspan was so enamored of the “New Economy” made possible by financialization that he noted in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”27

It was only with the onset of the financial crisis in 2007 and its persistence into 2008, that we find financial analysts in surprising places openly taking on the contrary view. Thus as Manas Chakravarty, an economic columnist for India’s investor Web site, Livemint.com (partnered with the Wall Street Journal), observed on September 17, 2008, in the context of the Wall Street meltdown,

American economist Paul Sweezy pointed out long ago that stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse. He said the stagnation of the underlying economy meant that business was increasingly dependent on the growth of finance to preserve and enlarge its money capital and that the financial superstructure of the economy could not expand entirely independently of its base in the underlying productive economy. With remarkable prescience, Sweezy said the bursting of speculative bubbles would, therefore, be a recurring and growing problem. 28

Of course, Paul Baran and Sweezy in Monopoly Capital, and later on Magdoff and Sweezy in Monthly Review, had pointed to other forms of absorption of surplus such as government spending (particularly military spending), the sales effort, the stimulus provided by new innovations, etc. 29 But all of these, although important, had proven insufficient to maintain the economy at anything like full employment, and by the 1970s the system was mired in deepening stagnation (or stagflation). It was financialization—and the growth of debt that it actively promoted—which was to emerge as the quantitatively most important stimulus to demand. But it pointed unavoidably to a day of financial reckoning and cascading defaults.

Indeed, some mainstream analysts, under the pressure of events, were forced to acknowledge by summer 2008 that a massive devaluation of the system might prove inevitable. Jim Reid, the Deutsche Bank’s head of credit research, examining the kind of relationship between financial profits and GDP exhibited in chart 2, issued an analysis called “A Trillion-Dollar Mean Reversion?,” in which he argued that:

U.S. financial profits have deviated from the mean over the past decade on a cumulative basis… The U.S. Financial sector has made around 1.2 Trillion ($1,200bn) of ‘excess’ profits in the last decade relative to nominal GDP… So mean reversion [the theory that returns in financial markets over time “revert” to a long-term mean projection, or trend-line] would suggest that $1.2 trillion of profits need to be wiped out before the U.S. financial sector can be cleansed of the excesses of the last decade… Given that...Bloomberg reports that $184bn has been written down by U.S. financials so far in this crisis, if one believes that the size of the financial sector should shrink to levels seen a decade ago then one could come to the conclusion that there is another trillion dollars of value destruction to go in the sector before we’re back to the long-run trend in financial profits. A scary thought and one that if correct will lead to a long period of constant intervention by the authorities in an attempt to arrest this potential destruction. Finding the appropriate size of the financial sector in the “new world” will be key to how much profit destruction there needs to be in the sector going forward.

The idea of a mean reversion of financial profits to their long-term trend-line in the economy as a whole was merely meant to be suggestive of the extent of the impending change, since Reid accepted the possibility that structural “real world” reasons exist to explain the relative weight of finance—though none he was yet ready to accept. As he acknowledged, “calculating the ‘natural’ appropriate size for the financial sector relative to the rest of the economy is a phenomenally difficult conundrum.” Indeed, it was to be doubted that a “natural” level actually existed. But the point that a massive “profit destruction” was likely to occur before the system could get going again and that this explained the “long period of constant intervention by the authorities in an attempt to arrest this potential destruction,” highlighted the fact that the crisis was far more severe than then widely supposed—something that became apparent soon after. 30

What such thinking suggested, in line with what Magdoff and Sweezy had argued in the closing decades of the twentieth century, was that the autonomy of finance from the underlying economy, associated with the financialization process, was more relative than absolute, and that ultimately a major economic downturn—more than the mere bursting of one bubble and the inflating of another—was necessary. This was likely to be more devastating the longer the system put it off. In the meantime, as Magdoff and Sweezy had pointed out, financialization might go on for quite a while. And indeed there was no other answer for the system.

Back to the Real Economy: The Stagnation Problem

Paul Baran, Paul Sweezy, and Harry Magdoff argued indefatigably from the 1960s to the 1990s (most notably in Monopoly Capital) that stagnation was the normal state of the monopoly-capitalist economy, barring special historical factors. The prosperity that characterized the economy in the 1950s and ’60s, they insisted, was attributable to such temporary historical factors as: (1) the buildup of consumer savings during the war; (2) a second great wave of automobilization in the United States (including the expansion of the glass, steel, and rubber industries, the construction of the interstate highway system, and the development of suburbia); (3) the rebuilding of the European and the Japanese economies devastated by the war; (4) the Cold War arms race (and two regional wars in Asia); (5) the growth of the sales effort marked by the rise of Madison Avenue; (6) the expansion of FIRE (finance, insurance, and real estate); and (7) the preeminence of the dollar as the hegemonic currency. Once the extraordinary stimulus from these factors waned, the economy began to subside back into stagnation: slow growth and rising excess capacity and unemployment/underemployment. In the end, it was military spending and the explosion of debt and speculation that constituted the main stimuli keeping the economy out of the doldrums. These were not sufficient, however, to prevent the reappearance of stagnation tendencies altogether, and the problem got worse with time. 31

The reality of creeping stagnation can be seen in table 2, which shows the real growth rates of the economy decade by decade over the last eight decades. The low growth rate in the 1930s reflected the deep stagnation of the Great Depression. This was followed by the extraordinary rise of the U.S. economy in the 1940s under the impact of the Second World War. During the years 1950–69, now often referred to as an economic “Golden Age,” the economy, propelled by the set of special historical factors referred to above, was able to achieve strong economic growth in a “peacetime” economy. This, however, proved to be all too temporary. The sharp drop off in growth rates in the 1970s and thereafter points to a persistent tendency toward slower expansion in the economy, as the main forces pushing up growth rates in the 1950s and ’60s waned, preventing the economy from returning to its former prosperity. In subsequent decades, rather than recovering its former trend-rate of growth, the economy slowly subsided.

Table 2. Growth in real GDP 1930–2007

Source: National Income and Products Accounts Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product, Bureau of Economic Analysis.

It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s. 32 But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality. 33 Chart 3 shows a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present. This reflected the fact that real wages of private nonagricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades. 34

Chart 3. Wage and salary disbursements as a percent-age of GDP

Sources: Economic Report of the President, 2008, Table B-1 (GDP), Table B–29—Sources of personal income, 1959–2007.

This was part of a massive redistribution of income and wealth to the top. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000. In the United States the top 1 percent of wealth holders in 2001 together owned more than twice as much as the bottom 80 percent of the population. If this were measured simply in terms of financial wealth, i.e., excluding equity in owner-occupied housing, the top 1 percent owned more than four times the bottom 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth. 35

The truly remarkable fact under these circumstances was that household consumption continued to rise from a little over 60 percent of GDP in the early 1960s to around 70 percent in 2007. This was only possible because of more two-earner households (as women entered the labor force in greater numbers), people working longer hours and filling multiple jobs, and a constant ratcheting up of consumer debt. Household debt was spurred, particularly in the later stages of the housing bubble, by a dramatic rise in housing prices, allowing consumers to borrow more against their increased equity (the so-called housing “wealth effect”)—a process that came to a sudden end when the bubble popped, and housing prices started to fall. As chart 1 shows, household debt increased from about 40 percent of GDP in 1960 to 100 percent of GDP in 2007, with an especially sharp increase starting in the late 1990s. 36

This growth of consumption, based in the expansion of household debt, was to prove to be the Achilles heel of the economy. The housing bubble was based on a sharp increase in household mortgage-based debt, while real wages had been essentially frozen for decades. The resulting defaults among marginal new owners led to a fall in house prices. This led to an ever increasing number of owners owing more on their houses than they were worth, creating more defaults and a further fall in house prices. Banks seeking to bolster their balance sheets began to hold back on new extensions of credit card debt. Consumption fell, jobs were lost, capital spending was put off, and a downward spiral of unknown duration began.

During the last thirty or so years the economic surplus controlled by corporations, and in the hands of institutional investors, such as insurance companies and pension funds, has poured in an ever increasing flow into an exotic array of financial instruments. Little of the vast economic surplus was used to expand investment, which remained in a state of simple reproduction, geared to mere replacement (albeit with new, enhanced technology), as opposed to expanded reproduction. With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry (see chart 4)—and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic.

Chart 4. Percent utilization of industrial capacity

Source: Economic Report of the President, 2008, Table B–54—Capacity utilization rates, 1959–2007.

Hence, profits were increasingly directed away from investment in the expansion of productive capacity and toward financial speculation, while the financial sector seemed to generate unlimited types of financial products designed to make use of this money capital. (The same phenomenon existed globally, causing Bernanke to refer in 2005 to a “global savings glut,” with enormous amounts of investment-seeking capital circling the world and increasingly drawn to the United States because of its leading role in financialization.)37 The consequences of this can be seen in chart 5, showing the dramatic decoupling of profits from net investment as percentages of GDP in recent years, with net private nonresidential fixed investment as a share of national income falling significantly over the period, even while profits as a share of GDP approached a level not seen since the late 1960s/early 1970s. This marked, in Marx’s terms, a shift from the “general formula for capital” M(oney)-C(commodity)–M¢ (original money plus surplus value), in which commodities were central to the production of profits—to a system increasingly geared to the circuit of money capital alone, M–M¢, in which money simply begets more money with no relation to production.

Chart 5. Profits and net investment as percentage of GDP 1960 to present

Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table 5.2.5. Gross and Net Domestic Investment by Major Type, (Billions of dollars). Table B-1 (GDP) and Table B-91 (Domestic industry profits), Economic Report of the President, 2008.

Since financialization can be viewed as the response of capital to the stagnation tendency in the real economy, a crisis of financialization inevitably means a resurfacing of the underlying stagnation endemic to the advanced capitalist economy. The deleveraging of the enormous debt built up during recent decades is now contributing to a deep crisis. Moreover, with financialization arrested there is no other visible way out for monopoly-finance capital. The prognosis then is that the economy, even after the immediate devaluation crisis is stabilized, will at best be characterized for some time by minimal growth, and by high unemployment, underemployment, and excess capacity.

The fact that U.S. consumption (facilitated by the enormous U.S. current account deficit) has provided crucial effective demand for the production of other countries means that the slowdown in the United States is already having disastrous effects abroad, with financial liquidation now in high gear globally. “Emerging” and underdeveloped economies are caught in a bewildering set of problems. This includes falling exports, declining commodity prices, and the repercussions of high levels of financialization on top of an unstable and highly exploitative economic base—while being subjected to renewed imperial pressures from the center states.

The center states are themselves in trouble. Iceland, which has been compared to the canary in the coal mine, has experienced a complete financial meltdown, requiring rescue from outside, and possibly a massive raiding of the pension funds of the citizenry. For more than seventeen years Iceland has had a right-wing government led by the ultra-conservative Independence Party in coalition with the centrist social democratic parties. Under this leadership Iceland adopted neoliberal financialization and speculation to the hilt and saw an excessive growth of its banking and finance sectors with total assets of its banks growing from 96 percent of its GDP at the end of 2000 to nine times its GDP in 2006. Now Icelandic taxpayers, who were not responsible for these actions, are being asked to carry the burden of the overseas speculative debts of their banks, resulting in a drastic decline in the standard of living. 38

A Political Economy

Economics in its classical stage, which encompassed the work of both possessive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and socialist thinkers such as Karl Marx, was called political economy. The name was significant because it pointed to the class basis of the economy and the role of the state. 39 To be sure, Adam Smith introduced the notion of the “invisible hand” of the market in replacing the former visible hand of the monarch. But, the political-class context of economics was nevertheless omnipresent for Smith and all the other classical economists. In the 1820s, as Marx observed, there were “splendid tournaments” between political economists representing different classes (and class fractions) of society.

However, from the 1830s and ’40s on, as the working class arose as a force in society, and as the industrial bourgeoisie gained firm control of the state, displacing landed interests (most notably with the repeal of the Corn Laws), economics shifted from its previous questioning form to the “bad conscience and evil intent of the apologetics.”40 Increasingly the circular flow of economic life was reconceptualized as a process involving only individuals, consuming, producing, and profiting on the margin. The concept of class thus disappeared in economics, but was embraced by the rising field of sociology (in ways increasingly abstracted from fundamental economic relationships). The state also was said to have nothing directly to do with economics and was taken up by the new field of political science. 41 Economics was thus “purified” of all class and political elements, and increasingly presented as a “neutral” science, addressing universal/transhistorical principles of capital and market relations.

Having lost any meaningful roots in society, orthodox neoclassical economics, which presented itself as a single paradigm, became a discipline dominated by largely meaningless abstractions, mechanical models, formal methodologies, and mathematical language, divorced from historical developments. It was anything but a science of the real world; rather its chief importance lay in its role as a self-confirming ideology. Meanwhile, actual business proceeded along its own lines largely oblivious (sometimes intentionally so) of orthodox economic theories. The failure of received economics to learn the lessons of the Great Depression, i.e., the inherent flaws of a system of class-based accumulation in its monopoly stage, included a tendency to ignore the fact that the real problem lay in the real economy, rather than in the monetary-financial economy.

Today nothing looks more myopic than Bernanke’s quick dismissal of traditional theories of the Great Depression that traced the underlying causes to the buildup of overcapacity and weak demand—inviting a similar dismissal of such factors today. Like his mentor Milton Friedman, Bernanke has stood for the dominant, neoliberal economic view of the last few decades, with its insistence that by holding back “the rock that starts a landslide” it was possible to prevent a financial avalanche of “major proportions” indefinitely. 42 That the state of the ground above was shifting, and that this was due to real, time-related processes, was of no genuine concern. Ironically, Bernanke, the academic expert on the Great Depression, adopted what had been described by Ethan Harris, chief U.S. economist for Barclays Capital, as a “see no evil, hear no evil, speak no evil” policy with respect to asset bubbles. 43

It is therefore to the contrary view, emphasizing the socioeconomic contradictions of the system, to which it is now necessary to turn. For a time in response to the Great Depression of the 1930s, in the work of John Maynard Keynes, and various other thinkers associated with the Keynesian, institutionalist, and Marxist traditions—the most important of which was the Polish economist Michael Kalecki—there was something of a revival of political-economic perspectives. But following the Second World War Keynesianism was increasingly reabsorbed into the system. This occurred partly through what was called the “neoclassical-Keynesian synthesis”—which, as Joan Robinson, one of Keynes’s younger colleagues claimed, had the effect of bastardizing Keynes—and partly through the closely related growth of military Keynesianism. 44 Eventually, monetarism emerged as the ruling response to the stagflation crisis of the 1970s, along with the rise of other conservative free-market ideologies, such as supply-side theory, rational expectations, and the new classical economics (summed up as neoliberal orthodoxy). Economics lost its explicit political-economic cast, and the world was led back once again to the mythology of self-regulating, self-equilibrating markets free of issues of class and power. Anyone who questioned this, was characterized as political rather than economic, and thus largely excluded from the mainstream economic discussion. 45

Needless to say, economics never ceased to be political; rather the politics that was promoted was so closely intertwined with the system of economic power as to be nearly invisible. Adam Smith’s visible hand of the monarch had been transformed into the invisible hand, not of the market, but of the capitalist class, which was concealed behind the veil of the market and competition. Yet, with every major economic crisis that veil has been partly torn aside and the reality of class power exposed.

Treasury Secretary Paulson’s request to Congress in September 2008, for $700 billion with which to bail out the financial system may constitute a turning point in the popular recognition of, and outrage over, the economic problem, raising for the first time in many years the issue of a political economy. It immediately became apparent to the entire population that the critical question in the financial crisis and in the deep economic stagnation that was emerging was: Who will pay? The answer of the capitalist system, left to its own devices, was the same as always: the costs would be borne disproportionately by those at the bottom. The old game of privatization of profits and socialization of losses would be replayed for the umpteenth time. The population would be called upon to “tighten their belts” to “foot the bill” for the entire system. The capacity of the larger public to see through this deception in the months and years ahead will of course depend on an enormous amount of education by trade union and social movement activists, and the degree to which the empire of capital is stripped naked by the crisis.

There is no doubt that the present growing economic bankruptcy and political outrage have produced a fundamental break in the continuity of the historical process. How should progressive forces approach this crisis? First of all, it is important to discount any attempts to present the serious economic problems that now face us as a kind of “natural disaster.” They have a cause, and it lies in the system itself. And although those at the top of the economy certainly did not welcome the crisis, they nonetheless have been the main beneficiaries of the system, shamelessly enriching themselves at the expense of the rest of the population, and should be held responsible for the main burdens now imposed on society. It is the well-to-do who should foot the bill—not only for reasons of elementary justice, but also because they collectively and their system constitute the reason that things are as bad as they are; and because the best way to help both the economy and those at the bottom is to address the needs of the latter directly. There should be no golden parachutes for the capitalist class paid for at taxpayer expense.

But capitalism takes advantage of social inertia, using its power to rob outright when it can’t simply rely on “normal” exploitation. Without a revolt from below the burden will simply be imposed on those at the bottom. All of this requires a mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds—using the power for change granted to the people in the Constitution; even going so far as to threaten the current duopoly of the two-party system.

What should such a radical movement from below, if it were to emerge, seek to do under these circumstances? Here we hesitate to say, not because there is any lack of needed actions to take, but because a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.

Some liberal economists and commentators argue that, given the present economic crisis, nothing short of a major public works program aimed at promoting employment, a kind of new New Deal, will do. Robert Kuttner has argued in Obama’s Challenge that “an economic recovery will require more like $700 billion a year in new public outlay, or $600 billion counting offsetting cuts in military spending. Why? Because there is no other plausible strategy for both achieving a general economic recovery and restoring balance to the economy.”46 This, however, will be more difficult than it sounds. There are reasons to believe that the dominant economic interests would block an increase in civilian government spending on such a scale, even in a crisis, as interfering with the private market. The truth is that civilian government purchases were at 13.3 percent of GNP in 1939—what Baran and Sweezy in 1966 theorized as approximating their “outer limits”—and they have barely budged since then, with civilian government consumption and investment expenditures from 1960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 The class forces blocking a major increase in nondefense governmental spending even in a severe stagnation should therefore not be underestimated. Any major advances in this direction will require a massive class struggle.

Still, there can be no doubt that change should be directed first and foremost to meeting the basic needs of people for food, housing, employment, health, education, a sustainable environment, etc. Will the government assume the responsibility for providing useful work to all those who desire and need it? Will housing be made available (free from crushing mortgages) to everyone, extending as well to the homeless and the poorly housed? Will a single-payer national health system be introduced to cover the needs of the entire population, replacing the worst and most expensive health care system in the advanced capitalist world? Will military spending be cut back drastically, dispensing with global imperial domination? Will the rich be heavily taxed and income and wealth be redistributed? Will the environment, both global and local, be protected? Will the right to organize be made a reality?

If such elementary prerequisites of any decent future look impossible under the present system, then the people should take it into their own hands to create a new society that will deliver these genuine goods. Above all it is necessary “to insist that morality and economics alike support the intuitive sense of the masses that society’s human and natural resources can and should be used for all the people and not for a privileged minority.”48

In the 1930s Keynes decried the growing dominance of financial capital, which threatened to reduce the real economy to “a bubble on a whirlpool of speculation,” and recommended the “euthanasia of the rentier.” However, financialization is so essential to the monopoly-finance capital of today, that such a “euthanasia of the rentier” cannot be achieved—in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”50

October 25, 2008

Notes

1. Harry Magdoff and Paul M. Sweezy, The Irreversible Crisis (New York: Monthly Review Press, 1988), 76. Back to Article
2. James K. Galbraith, The Predator State (New York: The Free Press, 2008), 48. Back to Article
3. “Congressional Leaders Were Stunned by Warnings,” New York Times, September 19, 2008. Back to Article
4. Manas Chakravarty and Mobis Philipose, “Liquidity Trap: Fear of Failure,” Livemint.com, October 11, 2008; John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973), 174. Back to Article
5. “Drama Behind a $250 Billion Banking Deal,” New York Times, October 15, 2008. Back to Article
6. “Government’s Leap into Banking Has its Perils,” New York Times, October 18, 2008. Back to Article
7. “Single-Family Homes in U.S. Fall to a 26-Year Low,” Bloomberg.net, October 17, 2008; “Economic Fears Reignite Market Slump,” Wall Street Journal, October 16, 2008. Back to Article
8. See “Depression of 2008: Are We Heading Back to the 1930s,” London Times, October 5, 2008. On the Japanese stagnation, see Paul Burkett and Martin Hart-Landsberg, “The Economic Crisis In Japan,” Critical Asian Studies 35, no. 3 (2003): 339–72. Back to Article
9. “The U.S. is Said to Be Urging New Mergers in Banking,” New York Times, October 21, 2008. Back to Article
10. “CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic,” Bloomberg.net, October 22, 2008. Back to Article
11. “Banks are Likely to Hold Tight to Bailout Money,” New York Times, October 17, 2008. Back to Article
12. Hyman Minsky, Can “It” Happen Again? (New York: M. E. Sharpe, 1982), vii–xxiv; “Hard Lessons to be Learnt from a Minsky Moment,” Financial Times, September 18, 2008; Riccardo Bellofiore and Joseph Halevi, “A Minsky Moment?: The Subprime Crisis and the New Capitalism,” in C. Gnos and L. P. Rochon, Credit, Money and Macroeconomic Policy: A Post-Keynesian Approach (Cheltenham: Edward Elgar, forthcoming). For Magdoff and Sweezy’s views on Minsky see The End of Prosperity (New York: Monthly Review Press, 1977), 133–36. Back to Article
13. Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, no. 4 (October 1933): 344; Paul Krugman, “The Power of De,” New York Times, September 8, 2008. Back to Article
14. “Amid Pressing Problems the Threat of Deflation Looms,” Wall Street Journal, October 18, 2008; “A Monetary Malaise,” Economist, October 11–17, 2008, 24. Back to Article
15. Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” National Economists Club, Washington, D.C., November 21, 2002, http://www.federalreserve.gov. Back to Article
16. Ethan S. Harris, Ben Bernanke’s Fed (Boston, Massachusetts: Harvard University Press, 2008), 2, 173; Milton Friedman, The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing, 1969), 4–14. Back to Article
17. Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2000), 5; Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963). For more realistic views of the Great Depression, taking into account the real economy, as well as monetary factors, and viewing it from the standpoint of the stagnation of investment, which above all characterized the Depression see Michael A. Bernstein, The Great Depression (Cambridge: Cambridge University Press, 1987), and Richard B. DuBoff, Accumulation and Power (New York: M.E. Sharpe, 1989), 84–92. On classic theories of the Great Depression see William A. Stoneman, A History of the Economic Analysis of the Great Depression in America (New York: Garland Publishing, 1979). Back to Article
18. Ben S. Bernanke, “Money, Gold, and the Great Depression,” H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia, March 2, 2004, http://www.federalreserve.gov. Back to Article
19. Ben S. Bernanke, “Some Thoughts on Monetary Policy in Japan,” Japan Society of Monetary Economics, Tokyo, May 31, 2003, http://www.federalreserve.gov. Back to Article
20. Bernanke, Essays on the Great Depression, 43. Back to Article
21. "On Milton Friedman’s Ninetieth Birthday,” Conference to Honor Milton Friedman, University of Chicago, November 8, 2002. Ironically, Anna Schwartz, now 91, indicated in an interview for the Wall Street Journal that the Fed under Bernanke was fighting the last war, failing to perceive that the issue was uncertainty about solvency of the banks, not a question of liquidity as in the lead-up to the Great Depression. “Bernanke is Fighting the Last War: Interview of Anna Schwartz,” Wall Street Journal, October 18, 2008. Back to Article
22. Ben S. Bernanke, “Asset Prices and Monetary Policy,” speech to the New York Chapter of the National Association for Business Economics, New York, N.Y., October 15, 2002, http://www.federalreserve.gov; Harris, Ben Bernanke’s Fed, 147–58. Back to Article
23. Ben S. Bernanke, “The Economic Outlook,” October 25, 2005; quoted in Robert Shiller, The Subprime Option (Princeton: Princeton University Press, 2008), 40. Back to Article
24. Magdoff and Sweezy, The Irreversible Crisis, 76; Burkett and Hart-Landsberg, “The Economic Crisis in Japan,” 347, 354–56, 36–66; Paul Krugman, “Its Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, no. 2 (1998), 141–42, 174–78; Michael M. Hutchinson and Frank Westermann, eds., Japan’s Great Stagnation (Cambridge, Massachusetts: MIT Press, 2006). Back to Article
25. Magdoff and Sweezy, The Irreversible Crisis, 51. Back to Article
26. Magdoff and Sweezy, The End of Prosperity, 136; Hyman Minsky, John Maynard Keynes (New York, Columbia University Press, 1975), 164. Back to Article
27. Greenspan quoted, New York Times, October 9, 2008. See also John Bellamy Foster, Harry Magodff, and Robert W. McChesney, “The New Economy: Myth and Reality,” Monthly Review 52, no. 11 (April 2001), 1–15. Back to Article
28. Manas Chakravarty, “A Turning Point in the Global Economic System,” Livemint.com, September 17, 2008. Back to Article
29. See John Bellamy Foster, Naked Imperialism (New York: Monthly Review Press, 2006), 45–50. Back to Article
30. Jim Reid, “A Trillion-Dollar Mean Reversion?,” Deutsche Bank, July 15, 2008. Back to Article
31. See Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, The Dynamics of U.S. Capitalism (New York: Monthly Review Press, 1972), The Deepening Crisis of U.S. Capitalism (New York: Monthly Review Press, 1981), and Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). Back to Article
32. Bellofiore and Halevi, “A Minsky Moment?” Back to Article
33. See Michael Yates, Longer Hours, Fewer Jobs (New York: Monthly Review Press, 1994); Michael Perelman, The Confiscation of American Prosperity (New York: Palgrave Macmillan, 2007. Back to Article
34. Economic Report of the President, 2008, Table B-47, 282. Back to Article Back to Article
35. Correspondents of the New York Times, Class Matters (New York: Times Books, 2005), 186; Edward N. Wolff, ed., International Perspectives on Household Wealth (Cheltenham: Edward Elgar, 2006), 112–15. Back to Article
36. For a class breakdown of household debt see John Bellamy Foster, “The Household Debt Bubble,” chapter 1 in John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009). Back to Article
37. Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond Virginia, March 10, 2005, http://www.federalreserve.gov. Back to Article
38. Steingrímur J. Stigfússon, “On the Financial Crisis of Iceland,” MRzine.org, October 20, 2008; “Iceland in a Precarious Position,” New York Times, October 8, 2008; “Iceland Scrambles for Cash,” Wall Street Journal, October 6, 2008. Back to Article
39. See Edward J. Nell, Growth, Profits and Prosperity (Cambridge: Cambridge University Press, 1980), 19–28. Back to Article
40. Karl Marx, Capital, vol. 1 (New York: Vintage, 1976), 96–98. Back to Article
41. See Crawford B. Macpherson, Democratic Theory (Oxford: Oxford University Press, 1973), 195–203. Back to Article
42. Friedman and Schwartz, A Monetary History of the United States, 419. Back to Article
43. Harris, Ben Bernanke’s Fed, 147–58. Back to Article
44. See John Bellamy Foster, Hannah Holleman, and Robert W. McChesney, “The U.S. Imperial Triangle and Military Spending,” Monthly Review 60, no. 5 (October 2008): 1–19. Back to Article
45. For a discussion of the simultaneous stagnation of the economy and of economics since the 1970s see Perelman, The Confiscation of American Prosperity. See also E. Ray Canterbery, A Brief History of Economics (River Edge, NJ: World Scientific Publishing, 2001), 417–26. Back to Article
46. Robert Kuttner, Obama’s Challenge (White River Junction, Vermont: Chelsea Green, 2008), 27. Back to Article
47. Baran and Sweezy, Monopoly Capital, 159, 161; Economic Report of the President, 2008, 224, 250. Back to Article
48. Harry Magdoff and Paul M. Sweezy, “The Crisis and the Responsibility of the Left,” Monthly Review 39, no. 2 (June 1987): 1–5. Back to Article
49. See Keynes, The General Theory of Employment, Interest, and Money, 376, and Essays in Persuasion (New York: Harcourt Brace and Co., 1932), 372; Paul M. Sweezy, “The Triumph of Financial Capital,” Monthly Review 46, no. 2 (June 1994): 1–11; John Bellamy Foster, “The End of Rational Capitalism,” Monthly Review 56, no. 10 (March 2005): 1–13. Back to Article
50. In this respect, it is necessary, we believe, to go beyond liberal economics, and to strive for a ruthless critique of everything existing. Even a relatively progressive liberal economist, such as Paul Krugman, recent winner of the Bank of Sweden’s prize for economics in honor of Alfred Nobel, makes it clear that what makes him a mainstream thinker, and hence a member of the club at the top of society, is his strong commitment to capitalism and “free markets” and his disdain of socialism—proudly proclaiming that “just a few years ago...one magazine even devoted a cover story to an attack on me for my pro-capitalist views.” Paul Krugman, The Great Unraveling (New York: W. W. Norton, 2004), xxxvi. In this context, see Harry Magdoff, John Bellamy Foster, and Robert W. McChesney, “A Prizefighter for Capitalism: Paul Krugman vs. the Quebec Protestors,” Monthly Review 53, no. 2 (June 2001): 1–5. Back to Article

Sources: Calculated from Table B–91—Corporate profits by industry, 1959–2007. Ta-ble B–1—Gross domestic product, 1959–2007, Economic Report of the President, 2008.

Already by the late 1980s the seriousness of the situation was becoming clear to those not wedded to established ways of thinking. Looking

Already by the late 1980s the seriousness of the situation was becoming clear to those not wedded to established ways of thinking. Looking at this condition in 1988 on the anniversary of the 1987 stock market crash, Monthly Review editors Harry Magdoff and Paul Sweezy, contended that sooner or later—no one could predict when or exactly how—a major crisis of the financial system that overpowered the lender of last resort function was likely to occur. This was simply because the whole precarious financial superstructure would have by then grown to such a scale that the means of governmental authorities, though massive, would no longer be sufficient to keep back the avalanche, especially if they failed to act quickly and decisively enough. As they put it, the next time around it was quite possible that the rescue effort would “succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and precarious level. But sooner or later, next time or further down the road, it will not succeed,” generating a severe crisis of the economy.

As an example of a financial avalanche waiting to happen, they pointed to the “high flying Tokyo stock market,” as a possible prelude to a major financial implosion and a deep stagnation to follow—a reality that was to materialize soon after, resulting in Japan’s financial crisis and “Great Stagnation” of the 1990s. Asset values (both in the stock market and real estate) fell by an amount equivalent to more than two years of GDP. As interest rates zeroed-out and debt-deflation took over, Japan was stuck in a classic liquidity trap with no ready way of restarting an economy already deeply mired in overcapacity in the productive economy. 24

“In today’s world ruled by finance,” Magdoff and Sweezy had written in 1987 in the immediate aftermath of the U.S. stock market crash:

the underlying growth of surplus value falls increasingly short of the rate of accumulation of money capital. In the absence of a base in surplus value, the money capital amassed becomes more and more nominal, indeed fictitious. It comes from the sale and purchase of paper assets, and is based on the assumption that asset values will be continuously inflated. What we have, in other words, is ongoing speculation grounded in the belief that, despite fluctuations in price, asset values will forever go only one way—upward! Against this background, the October [1987] stock market crash assumes a far-reaching significance. By demonstrating the fallacy of an unending upward movement in asset values, it exposes the irrational kernel of today’s economy. 25

These contradictions, associated with speculative bubbles, have of course to some extent been endemic to capitalism throughout its history. However, in the post-Second World War era, as Magdoff and Sweezy, in line with Minsky, argued, the debt overhang became larger and larger, pointing to the growth of a problem that was cumulative and increasingly dangerous. In The End of Prosperity Magdoff and Sweezy wrote: “In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government rescue measures to prevent collapse of the financial system merely lay the groundwork for still more layers of debt and additional strains during the next economic advance.” As Minsky put it, “Without a crisis and a debt-deflation process to offset beliefs in the success of speculative ventures, both an upward bias to prices and ever-higher financial layering are induced.”26

To the extent that mainstream economists and business analysts themselves were momentarily drawn to such inconvenient questions, they were quickly cast aside. Although the spectacular growth of finance could not help but create jitters from time to time—for example, Alan Greenspan’s famous reference to “irrational exuberance”—the prevailing assumption, promoted by Greenspan himself, was that the growth of debt and speculation represented a new era of financial market innovation, i.e., a sustainable structural change in the business model associated with revolutionary new risk management techniques. Greenspan was so enamored of the “New Economy” made possible by financialization that he noted in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”27

It was only with the onset of the financial crisis in 2007 and its persistence into 2008, that we find financial analysts in surprising places openly taking on the contrary view. Thus as Manas Chakravarty, an economic columnist for India’s investor Web site, Livemint.com (partnered with the Wall Street Journal), observed on September 17, 2008, in the context of the Wall Street meltdown,

American economist Paul Sweezy pointed out long ago that stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse. He said the stagnation of the underlying economy meant that business was increasingly dependent on the growth of finance to preserve and enlarge its money capital and that the financial superstructure of the economy could not expand entirely independently of its base in the underlying productive economy. With remarkable prescience, Sweezy said the bursting of speculative bubbles would, therefore, be a recurring and growing problem. 28

Of course, Paul Baran and Sweezy in Monopoly Capital, and later on Magdoff and Sweezy in Monthly Review, had pointed to other forms of absorption of surplus such as government spending (particularly military spending), the sales effort, the stimulus provided by new innovations, etc. 29 But all of these, although important, had proven insufficient to maintain the economy at anything like full employment, and by the 1970s the system was mired in deepening stagnation (or stagflation). It was financialization—and the growth of debt that it actively promoted—which was to emerge as the quantitatively most important stimulus to demand. But it pointed unavoidably to a day of financial reckoning and cascading defaults.

Indeed, some mainstream analysts, under the pressure of events, were forced to acknowledge by summer 2008 that a massive devaluation of the system might prove inevitable. Jim Reid, the Deutsche Bank’s head of credit research, examining the kind of relationship between financial profits and GDP exhibited in chart 2, issued an analysis called “A Trillion-Dollar Mean Reversion?,” in which he argued that:

U.S. financial profits have deviated from the mean over the past decade on a cumulative basis… The U.S. Financial sector has made around 1.2 Trillion ($1,200bn) of ‘excess’ profits in the last decade relative to nominal GDP… So mean reversion [the theory that returns in financial markets over time “revert” to a long-term mean projection, or trend-line] would suggest that $1.2 trillion of profits need to be wiped out before the U.S. financial sector can be cleansed of the excesses of the last decade… Given that...Bloomberg reports that $184bn has been written down by U.S. financials so far in this crisis, if one believes that the size of the financial sector should shrink to levels seen a decade ago then one could come to the conclusion that there is another trillion dollars of value destruction to go in the sector before we’re back to the long-run trend in financial profits. A scary thought and one that if correct will lead to a long period of constant intervention by the authorities in an attempt to arrest this potential destruction. Finding the appropriate size of the financial sector in the “new world” will be key to how much profit destruction there needs to be in the sector going forward.

The idea of a mean reversion of financial profits to their long-term trend-line in the economy as a whole was merely meant to be suggestive of the extent of the impending change, since Reid accepted the possibility that structural “real world” reasons exist to explain the relative weight of finance—though none he was yet ready to accept. As he acknowledged, “calculating the ‘natural’ appropriate size for the financial sector relative to the rest of the economy is a phenomenally difficult conundrum.” Indeed, it was to be doubted that a “natural” level actually existed. But the point that a massive “profit destruction” was likely to occur before the system could get going again and that this explained the “long period of constant intervention by the authorities in an attempt to arrest this potential destruction,” highlighted the fact that the crisis was far more severe than then widely supposed—something that became apparent soon after. 30

What such thinking suggested, in line with what Magdoff and Sweezy had argued in the closing decades of the twentieth century, was that the autonomy of finance from the underlying economy, associated with the financialization process, was more relative than absolute, and that ultimately a major economic downturn—more than the mere bursting of one bubble and the inflating of another—was necessary. This was likely to be more devastating the longer the system put it off. In the meantime, as Magdoff and Sweezy had pointed out, financialization might go on for quite a while. And indeed there was no other answer for the system.

Back to the Real Economy: The Stagnation Problem

Paul Baran, Paul Sweezy, and Harry Magdoff argued indefatigably from the 1960s to the 1990s (most notably in Monopoly Capital) that stagnation was the normal state of the monopoly-capitalist economy, barring special historical factors. The prosperity that characterized the economy in the 1950s and ’60s, they insisted, was attributable to such temporary historical factors as: (1) the buildup of consumer savings during the war; (2) a second great wave of automobilization in the United States (including the expansion of the glass, steel, and rubber industries, the construction of the interstate highway system, and the development of suburbia); (3) the rebuilding of the European and the Japanese economies devastated by the war; (4) the Cold War arms race (and two regional wars in Asia); (5) the growth of the sales effort marked by the rise of Madison Avenue; (6) the expansion of FIRE (finance, insurance, and real estate); and (7) the preeminence of the dollar as the hegemonic currency. Once the extraordinary stimulus from these factors waned, the economy began to subside back into stagnation: slow growth and rising excess capacity and unemployment/underemployment. In the end, it was military spending and the explosion of debt and speculation that constituted the main stimuli keeping the economy out of the doldrums. These were not sufficient, however, to prevent the reappearance of stagnation tendencies altogether, and the problem got worse with time. 31

The reality of creeping stagnation can be seen in table 2, which shows the real growth rates of the economy decade by decade over the last eight decades. The low growth rate in the 1930s reflected the deep stagnation of the Great Depression. This was followed by the extraordinary rise of the U.S. economy in the 1940s under the impact of the Second World War. During the years 1950–69, now often referred to as an economic “Golden Age,” the economy, propelled by the set of special historical factors referred to above, was able to achieve strong economic growth in a “peacetime” economy. This, however, proved to be all too temporary. The sharp drop off in growth rates in the 1970s and thereafter points to a persistent tendency toward slower expansion in the economy, as the main forces pushing up growth rates in the 1950s and ’60s waned, preventing the economy from returning to its former prosperity. In subsequent decades, rather than recovering its former trend-rate of growth, the economy slowly subsided.

Table 2. Growth in real GDP 1930–2007

Source: National Income and Products Accounts Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product, Bureau of Economic Analysis.

It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s. 32 But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality. 33 Chart 3 shows a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present. This reflected the fact that real wages of private nonagricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades. 34

Chart 3. Wage and salary disbursements as a percent-age of GDP

Chart 3. Wage and salary disbursements as a percent-age of GDP

Sources: Economic Report of the President, 2008, Table B-1 (GDP), Table B–29—Sources of personal income, 1959–2007.

This was part of a massive redistribution of income and wealth to the top. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000. In the United States the top 1 percent of wealth holders in 2001 together owned more than twice as much as the bottom 80 percent of the population. If this were measured simply in terms of financial wealth, i.e., excluding equity in owner-occupied housing, the top 1 percent owned more than four times the bottom 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth. 35

The truly remarkable fact under these circumstances was that household consumption continued to rise from a little over 60 percent of GDP in the early 1960s to around 70 percent in 2007. This was only possible because of more two-earner households (as women entered the labor force in greater numbers), people working longer hours and filling multiple jobs, and a constant ratcheting up of consumer debt. Household debt was spurred, particularly in the later stages of the housing bubble, by a dramatic rise in housing prices, allowing consumers to borrow more against their increased equity (the so-called housing “wealth effect”)—a process that came to a sudden end when the bubble popped, and housing prices started to fall. As chart 1 shows, household debt increased from about 40 percent of GDP in 1960 to 100 percent of GDP in 2007, with an especially sharp increase starting in the late 1990s. 36

This growth of consumption, based in the expansion of household debt, was to prove to be the Achilles heel of the economy. The housing bubble was based on a sharp increase in household mortgage-based debt, while real wages had been essentially frozen for decades. The resulting defaults among marginal new owners led to a fall in house prices. This led to an ever increasing number of owners owing more on their houses than they were worth, creating more defaults and a further fall in house prices. Banks seeking to bolster their balance sheets began to hold back on new extensions of credit card debt. Consumption fell, jobs were lost, capital spending was put off, and a downward spiral of unknown duration began.

During the last thirty or so years the economic surplus controlled by corporations, and in the hands of institutional investors, such as insurance companies and pension funds, has poured in an ever increasing flow into an exotic array of financial instruments. Little of the vast economic surplus was used to expand investment, which remained in a state of simple reproduction, geared to mere replacement (albeit with new, enhanced technology), as opposed to expanded reproduction. With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry (see chart 4)—and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic.

Chart 4. Percent utilization of industrial capacity

Source: Economic Report of the President, 2008, Table B–54—Capacity utilization rates, 1959–2007.

Hence, profits were increasingly directed away from investment in the expansion of productive capacity and toward financial speculation, while the financial sector seemed to generate unlimited types of financial products designed to make use of this money capital. (The same phenomenon existed globally, causing Bernanke to refer in 2005 to a “global savings glut,” with enormous amounts of investment-seeking capital circling the world and increasingly drawn to the United States because of its leading role in financialization.)37 The consequences of this can be seen in chart 5, showing the dramatic decoupling of profits from net investment as percentages of GDP in recent years, with net private nonresidential fixed investment as a share of national income falling significantly over the period, even while profits as a share of GDP approached a level not seen since the late 1960s/early 1970s. This marked, in Marx’s terms, a shift from the “general formula for capital” M(oney)-C(commodity)–M¢ (original money plus surplus value), in which commodities were central to the production of profits—to a system increasingly geared to the circuit of money capital alone, M–M¢, in which money simply begets more money with no relation to production.

Chart 5. Profits and net investment as percentage of GDP 1960 to present

Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table 5.2.5. Gross and Net Domestic Investment by Major Type, (Billions of dollars). Table B-1 (GDP) and Table B-91 (Domestic industry profits), Economic Report of the President, 2008.

Since financialization can be viewed as the response of capital to the stagnation tendency in the real economy, a crisis of financialization inevitably means a resurfacing of the underlying stagnation endemic to the advanced capitalist economy. The deleveraging of the enormous debt built up during recent decades is now contributing to a deep crisis. Moreover, with financialization arrested there is no other visible way out for monopoly-finance capital. The prognosis then is that the economy, even after the immediate devaluation crisis is stabilized, will at best be characterized for some time by minimal growth, and by high unemployment, underemployment, and excess capacity.

The fact that U.S. consumption (facilitated by the enormous U.S. current account deficit) has provided crucial effective demand for the production of other countries means that the slowdown in the United States is already having disastrous effects abroad, with financial liquidation now in high gear globally. “Emerging” and underdeveloped economies are caught in a bewildering set of problems. This includes falling exports, declining commodity prices, and the repercussions of high levels of financialization on top of an unstable and highly exploitative economic base—while being subjected to renewed imperial pressures from the center states.

The center states are themselves in trouble. Iceland, which has been compared to the canary in the coal mine, has experienced a complete financial meltdown, requiring rescue from outside, and possibly a massive raiding of the pension funds of the citizenry. For more than seventeen years Iceland has had a right-wing government led by the ultra-conservative Independence Party in coalition with the centrist social democratic parties. Under this leadership Iceland adopted neoliberal financialization and speculation to the hilt and saw an excessive growth of its banking and finance sectors with total assets of its banks growing from 96 percent of its GDP at the end of 2000 to nine times its GDP in 2006. Now Icelandic taxpayers, who were not responsible for these actions, are being asked to carry the burden of the overseas speculative debts of their banks, resulting in a drastic decline in the standard of living. 38

A Political Economy

Economics in its classical stage, which encompassed the work of both possessive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and socialist thinkers such as Karl Marx, was called political economy. The name was significant because it pointed to the class basis of the economy and the role of the state. 39 To be sure, Adam Smith introduced the notion of the “invisible hand” of the market in replacing the former visible hand of the monarch. But, the political-class context of economics was nevertheless omnipresent for Smith and all the other classical economists. In the 1820s, as Marx observed, there were “splendid tournaments” between political economists representing different classes (and class fractions) of society.

However, from the 1830s and ’40s on, as the working class arose as a force in society, and as the industrial bourgeoisie gained firm control of the state, displacing landed interests (most notably with the repeal of the Corn Laws), economics shifted from its previous questioning form to the “bad conscience and evil intent of the apologetics.”40 Increasingly the circular flow of economic life was reconceptualized as a process involving only individuals, consuming, producing, and profiting on the margin. The concept of class thus disappeared in economics, but was embraced by the rising field of sociology (in ways increasingly abstracted from fundamental economic relationships). The state also was said to have nothing directly to do with economics and was taken up by the new field of political science. 41 Economics was thus “purified” of all class and political elements, and increasingly presented as a “neutral” science, addressing universal/transhistorical principles of capital and market relations.

Having lost any meaningful roots in society, orthodox neoclassical economics, which presented itself as a single paradigm, became a discipline dominated by largely meaningless abstractions, mechanical models, formal methodologies, and mathematical language, divorced from historical developments. It was anything but a science of the real world; rather its chief importance lay in its role as a self-confirming ideology. Meanwhile, actual business proceeded along its own lines largely oblivious (sometimes intentionally so) of orthodox economic theories. The failure of received economics to learn the lessons of the Great Depression, i.e., the inherent flaws of a system of class-based accumulation in its monopoly stage, included a tendency to ignore the fact that the real problem lay in the real economy, rather than in the monetary-financial economy.

Today nothing looks more myopic than Bernanke’s quick dismissal of traditional theories of the Great Depression that traced the underlying causes to the buildup of overcapacity and weak demand—inviting a similar dismissal of such factors today. Like his mentor Milton Friedman, Bernanke has stood for the dominant, neoliberal economic view of the last few decades, with its insistence that by holding back “the rock that starts a landslide” it was possible to prevent a financial avalanche of “major proportions” indefinitely. 42 That the state of the ground above was shifting, and that this was due to real, time-related processes, was of no genuine concern. Ironically, Bernanke, the academic expert on the Great Depression, adopted what had been described by Ethan Harris, chief U.S. economist for Barclays Capital, as a “see no evil, hear no evil, speak no evil” policy with respect to asset bubbles. 43

It is therefore to the contrary view, emphasizing the socioeconomic contradictions of the system, to which it is now necessary to turn. For a time in response to the Great Depression of the 1930s, in the work of John Maynard Keynes, and various other thinkers associated with the Keynesian, institutionalist, and Marxist traditions—the most important of which was the Polish economist Michael Kalecki—there was something of a revival of political-economic perspectives. But following the Second World War Keynesianism was increasingly reabsorbed into the system. This occurred partly through what was called the “neoclassical-Keynesian synthesis”—which, as Joan Robinson, one of Keynes’s younger colleagues claimed, had the effect of bastardizing Keynes—and partly through the closely related growth of military Keynesianism. 44 Eventually, monetarism emerged as the ruling response to the stagflation crisis of the 1970s, along with the rise of other conservative free-market ideologies, such as supply-side theory, rational expectations, and the new classical economics (summed up as neoliberal orthodoxy). Economics lost its explicit political-economic cast, and the world was led back once again to the mythology of self-regulating, self-equilibrating markets free of issues of class and power. Anyone who questioned this, was characterized as political rather than economic, and thus largely excluded from the mainstream economic discussion. 45

Needless to say, economics never ceased to be political; rather the politics that was promoted was so closely intertwined with the system of economic power as to be nearly invisible. Adam Smith’s visible hand of the monarch had been transformed into the invisible hand, not of the market, but of the capitalist class, which was concealed behind the veil of the market and competition. Yet, with every major economic crisis that veil has been partly torn aside and the reality of class power exposed.

Treasury Secretary Paulson’s request to Congress in September 2008, for $700 billion with which to bail out the financial system may constitute a turning point in the popular recognition of, and outrage over, the economic problem, raising for the first time in many years the issue of a political economy. It immediately became apparent to the entire population that the critical question in the financial crisis and in the deep economic stagnation that was emerging was: Who will pay? The answer of the capitalist system, left to its own devices, was the same as always: the costs would be borne disproportionately by those at the bottom. The old game of privatization of profits and socialization of losses would be replayed for the umpteenth time. The population would be called upon to “tighten their belts” to “foot the bill” for the entire system. The capacity of the larger public to see through this deception in the months and years ahead will of course depend on an enormous amount of education by trade union and social movement activists, and the degree to which the empire of capital is stripped naked by the crisis.

There is no doubt that the present growing economic bankruptcy and political outrage have produced a fundamental break in the continuity of the historical process. How should progressive forces approach this crisis? First of all, it is important to discount any attempts to present the serious economic problems that now face us as a kind of “natural disaster.” They have a cause, and it lies in the system itself. And although those at the top of the economy certainly did not welcome the crisis, they nonetheless have been the main beneficiaries of the system, shamelessly enriching themselves at the expense of the rest of the population, and should be held responsible for the main burdens now imposed on society. It is the well-to-do who should foot the bill—not only for reasons of elementary justice, but also because they collectively and their system constitute the reason that things are as bad as they are; and because the best way to help both the economy and those at the bottom is to address the needs of the latter directly. There should be no golden parachutes for the capitalist class paid for at taxpayer expense.

But capitalism takes advantage of social inertia, using its power to rob outright when it can’t simply rely on “normal” exploitation. Without a revolt from below the burden will simply be imposed on those at the bottom. All of this requires a mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds—using the power for change granted to the people in the Constitution; even going so far as to threaten the current duopoly of the two-party system.

What should such a radical movement from below, if it were to emerge, seek to do under these circumstances? Here we hesitate to say, not because there is any lack of needed actions to take, but because a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.

Some liberal economists and commentators argue that, given the present economic crisis, nothing short of a major public works program aimed at promoting employment, a kind of new New Deal, will do. Robert Kuttner has argued in Obama’s Challenge that “an economic recovery will require more like $700 billion a year in new public outlay, or $600 billion counting offsetting cuts in military spending. Why? Because there is no other plausible strategy for both achieving a general economic recovery and restoring balance to the economy.”46 This, however, will be more difficult than it sounds. There are reasons to believe that the dominant economic interests would block an increase in civilian government spending on such a scale, even in a crisis, as interfering with the private market. The truth is that civilian government purchases were at 13.3 percent of GNP in 1939—what Baran and Sweezy in 1966 theorized as approximating their “outer limits”—and they have barely budged since then, with civilian government consumption and investment expenditures from 1960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 The class forces blocking a major increase in nondefense governmental spending even in a severe stagnation should therefore not be underestimated. Any major advances in this direction will require a massive class struggle.

Still, there can be no doubt that change should be directed first and foremost to meeting the basic needs of people for food, housing, employment, health, education, a sustainable environment, etc. Will the government assume the responsibility for providing useful work to all those who desire and need it? Will housing be made available (free from crushing mortgages) to everyone, extending as well to the homeless and the poorly housed? Will a single-payer national health system be introduced to cover the needs of the entire population, replacing the worst and most expensive health care system in the advanced capitalist world? Will military spending be cut back drastically, dispensing with global imperial domination? Will the rich be heavily taxed and income and wealth be redistributed? Will the environment, both global and local, be protected? Will the right to organize be made a reality?

If such elementary prerequisites of any decent future look impossible under the present system, then the people should take it into their own hands to create a new society that will deliver these genuine goods. Above all it is necessary “to insist that morality and economics alike support the intuitive sense of the masses that society’s human and natural resources can and should be used for all the people and not for a privileged minority.”48

In the 1930s Keynes decried the growing dominance of financial capital, which threatened to reduce the real economy to “a bubble on a whirlpool of speculation,” and recommended the “euthanasia of the rentier.” However, financialization is so essential to the monopoly-finance capital of today, that such a “euthanasia of the rentier” cannot be achieved—in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”50

October 25, 2008

Notes

1. Harry Magdoff and Paul M. Sweezy, The Irreversible Crisis (New York: Monthly Review Press, 1988), 76. Back to Article
2. James K. Galbraith, The Predator State (New York: The Free Press, 2008), 48. Back to Article
3. “Congressional Leaders Were Stunned by Warnings,” New York Times, September 19, 2008. Back to Article
4. Manas Chakravarty and Mobis Philipose, “Liquidity Trap: Fear of Failure,” Livemint.com, October 11, 2008; John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973), 174. Back to Article
5. “Drama Behind a $250 Billion Banking Deal,” New York Times, October 15, 2008. Back to Article
6. “Government’s Leap into Banking Has its Perils,” New York Times, October 18, 2008. Back to Article
7. “Single-Family Homes in U.S. Fall to a 26-Year Low,” Bloomberg.net, October 17, 2008; “Economic Fears Reignite Market Slump,” Wall Street Journal, October 16, 2008. Back to Article
8. See “Depression of 2008: Are We Heading Back to the 1930s,” London Times, October 5, 2008. On the Japanese stagnation, see Paul Burkett and Martin Hart-Landsberg, “The Economic Crisis In Japan,” Critical Asian Studies 35, no. 3 (2003): 339–72. Back to Article
9. “The U.S. is Said to Be Urging New Mergers in Banking,” New York Times, October 21, 2008. Back to Article
10. “CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic,” Bloomberg.net, October 22, 2008. Back to Article
11. “Banks are Likely to Hold Tight to Bailout Money,” New York Times, October 17, 2008. Back to Article
12. Hyman Minsky, Can “It” Happen Again? (New York: M. E. Sharpe, 1982), vii–xxiv; “Hard Lessons to be Learnt from a Minsky Moment,” Financial Times, September 18, 2008; Riccardo Bellofiore and Joseph Halevi, “A Minsky Moment?: The Subprime Crisis and the New Capitalism,” in C. Gnos and L. P. Rochon, Credit, Money and Macroeconomic Policy: A Post-Keynesian Approach (Cheltenham: Edward Elgar, forthcoming). For Magdoff and Sweezy’s views on Minsky see The End of Prosperity (New York: Monthly Review Press, 1977), 133–36. Back to Article
13. Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, no. 4 (October 1933): 344; Paul Krugman, “The Power of De,” New York Times, September 8, 2008. Back to Article
14. “Amid Pressing Problems the Threat of Deflation Looms,” Wall Street Journal, October 18, 2008; “A Monetary Malaise,” Economist, October 11–17, 2008, 24. Back to Article
15. Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” National Economists Club, Washington, D.C., November 21, 2002, http://www.federalreserve.gov. Back to Article
16. Ethan S. Harris, Ben Bernanke’s Fed (Boston, Massachusetts: Harvard University Press, 2008), 2, 173; Milton Friedman, The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing, 1969), 4–14. Back to Article
17. Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2000), 5; Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963). For more realistic views of the Great Depression, taking into account the real economy, as well as monetary factors, and viewing it from the standpoint of the stagnation of investment, which above all characterized the Depression see Michael A. Bernstein, The Great Depression (Cambridge: Cambridge University Press, 1987), and Richard B. DuBoff, Accumulation and Power (New York: M.E. Sharpe, 1989), 84–92. On classic theories of the Great Depression see William A. Stoneman, A History of the Economic Analysis of the Great Depression in America (New York: Garland Publishing, 1979). Back to Article
18. Ben S. Bernanke, “Money, Gold, and the Great Depression,” H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia, March 2, 2004, http://www.federalreserve.gov. Back to Article
19. Ben S. Bernanke, “Some Thoughts on Monetary Policy in Japan,” Japan Society of Monetary Economics, Tokyo, May 31, 2003, http://www.federalreserve.gov. Back to Article
20. Bernanke, Essays on the Great Depression, 43. Back to Article
21. "On Milton Friedman’s Ninetieth Birthday,” Conference to Honor Milton Friedman, University of Chicago, November 8, 2002. Ironically, Anna Schwartz, now 91, indicated in an interview for the Wall Street Journal that the Fed under Bernanke was fighting the last war, failing to perceive that the issue was uncertainty about solvency of the banks, not a question of liquidity as in the lead-up to the Great Depression. “Bernanke is Fighting the Last War: Interview of Anna Schwartz,” Wall Street Journal, October 18, 2008. Back to Article
22. Ben S. Bernanke, “Asset Prices and Monetary Policy,” speech to the New York Chapter of the National Association for Business Economics, New York, N.Y., October 15, 2002, http://www.federalreserve.gov; Harris, Ben Bernanke’s Fed, 147–58. Back to Article
23. Ben S. Bernanke, “The Economic Outlook,” October 25, 2005; quoted in Robert Shiller, The Subprime Option (Princeton: Princeton University Press, 2008), 40. Back to Article
24. Magdoff and Sweezy, The Irreversible Crisis, 76; Burkett and Hart-Landsberg, “The Economic Crisis in Japan,” 347, 354–56, 36–66; Paul Krugman, “Its Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, no. 2 (1998), 141–42, 174–78; Michael M. Hutchinson and Frank Westermann, eds., Japan’s Great Stagnation (Cambridge, Massachusetts: MIT Press, 2006). Back to Article
25. Magdoff and Sweezy, The Irreversible Crisis, 51. Back to Article
26. Magdoff and Sweezy, The End of Prosperity, 136; Hyman Minsky, John Maynard Keynes (New York, Columbia University Press, 1975), 164. Back to Article
27. Greenspan quoted, New York Times, October 9, 2008. See also John Bellamy Foster, Harry Magodff, and Robert W. McChesney, “The New Economy: Myth and Reality,” Monthly Review 52, no. 11 (April 2001), 1–15. Back to Article
28. Manas Chakravarty, “A Turning Point in the Global Economic System,” Livemint.com, September 17, 2008. Back to Article
29. See John Bellamy Foster, Naked Imperialism (New York: Monthly Review Press, 2006), 45–50. Back to Article
30. Jim Reid, “A Trillion-Dollar Mean Reversion?,” Deutsche Bank, July 15, 2008. Back to Article
31. See Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, The Dynamics of U.S. Capitalism (New York: Monthly Review Press, 1972), The Deepening Crisis of U.S. Capitalism (New York: Monthly Review Press, 1981), and Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). Back to Article
32. Bellofiore and Halevi, “A Minsky Moment?” Back to Article
33. See Michael Yates, Longer Hours, Fewer Jobs (New York: Monthly Review Press, 1994); Michael Perelman, The Confiscation of American Prosperity (New York: Palgrave Macmillan, 2007. Back to Article
34. Economic Report of the President, 2008, Table B-47, 282. Back to Article Back to Article
35. Correspondents of the New York Times, Class Matters (New York: Times Books, 2005), 186; Edward N. Wolff, ed., International Perspectives on Household Wealth (Cheltenham: Edward Elgar, 2006), 112–15. Back to Article
36. For a class breakdown of household debt see John Bellamy Foster, “The Household Debt Bubble,” chapter 1 in John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009). Back to Article
37. Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond Virginia, March 10, 2005, http://www.federalreserve.gov. Back to Article
38. Steingrímur J. Stigfússon, “On the Financial Crisis of Iceland,” MRzine.org, October 20, 2008; “Iceland in a Precarious Position,” New York Times, October 8, 2008; “Iceland Scrambles for Cash,” Wall Street Journal, October 6, 2008. Back to Article
39. See Edward J. Nell, Growth, Profits and Prosperity (Cambridge: Cambridge University Press, 1980), 19–28. Back to Article
40. Karl Marx, Capital, vol. 1 (New York: Vintage, 1976), 96–98. Back to Article
41. See Crawford B. Macpherson, Democratic Theory (Oxford: Oxford University Press, 1973), 195–203. Back to Article
42. Friedman and Schwartz, A Monetary History of the United States, 419. Back to Article
43. Harris, Ben Bernanke’s Fed, 147–58. Back to Article
44. See John Bellamy Foster, Hannah Holleman, and Robert W. McChesney, “The U.S. Imperial Triangle and Military Spending,” Monthly Review 60, no. 5 (October 2008): 1–19. Back to Article
45. For a discussion of the simultaneous stagnation of the economy and of economics since the 1970s see Perelman, The Confiscation of American Prosperity. See also E. Ray Canterbery, A Brief History of Economics (River Edge, NJ: World Scientific Publishing, 2001), 417–26. Back to Article
46. Robert Kuttner, Obama’s Challenge (White River Junction, Vermont: Chelsea Green, 2008), 27. Back to Article
47. Baran and Sweezy, Monopoly Capital, 159, 161; Economic Report of the President, 2008, 224, 250. Back to Article
48. Harry Magdoff and Paul M. Sweezy, “The Crisis and the Responsibility of the Left,” Monthly Review 39, no. 2 (June 1987): 1–5. Back to Article
49. See Keynes, The General Theory of Employment, Interest, and Money, 376, and Essays in Persuasion (New York: Harcourt Brace and Co., 1932), 372; Paul M. Sweezy, “The Triumph of Financial Capital,” Monthly Review 46, no. 2 (June 1994): 1–11; John Bellamy Foster, “The End of Rational Capitalism,” Monthly Review 56, no. 10 (March 2005): 1–13. Back to Article
50. In this respect, it is necessary, we believe, to go beyond liberal economics, and to strive for a ruthless critique of everything existing. Even a relatively progressive liberal economist, such as Paul Krugman, recent winner of the Bank of Sweden’s prize for economics in honor of Alfred Nobel, makes it clear that what makes him a mainstream thinker, and hence a member of the club at the top of society, is his strong commitment to capitalism and “free markets” and his disdain of socialism—proudly proclaiming that “just a few years ago...one magazine even devoted a cover story to an attack on me for my pro-capitalist views.” Paul Krugman, The Great Unraveling (New York: W. W. Norton, 2004), xxxvi. In this context, see Harry Magdoff, John Bellamy Foster, and Robert W. McChesney, “A Prizefighter for Capitalism: Paul Krugman vs. the Quebec Protestors,” Monthly Review 53, no. 2 (June 2001): 1–5. Back to Article

John Bellamy Foster is editor of Monthly Review and professor of sociology at the University of Oregon. He is the author of Naked Imperialism (Monthly Review Press, 2006), among numerous other works. Fred Magdoff is professor emeritus of plant and soil science at the University of Vermont in Burlington, adjunct professor of crops and soils at Cornell University, and a director of the Monthly Review Foundation. This article is the final chapter in John Bellamy Foster and Fred Magdoff's book, The Great Financial Crisis: Causes and Consequences (Monthly Review Press, January 2009).

For the best account of the Federal Reserve  (http://www.freedocumentaries.org/film.php?id=214).  One cannot understand U.S. politics, U.S. foreign policy, or the world-wide economic crisis unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena.  The same sort of national-banking relationships as in our country also exists in Japan and most of Europe. 

In 1963, John F. Kennedy issued Executive Order 11110 which would have removed the power of money creation from all US private banks, including the privately-owned Federal Reserve, and invested that power in the US Government. Unfortunately, Kennedy died suddenly a few weeks later and his plans died with him.

***

The Problems of Debt

In the USA 100% of the money supply is created by the private banks. In Britain the figure is over 97%. In the rest of the world, the figure is estimated to be over 95%. All this money is created as a debt. It is created when people borrow money, as banks do not lend existing money; they just create new money out of thin air to lend.

Money created as a debt by the banks bears a charge of interest. This increases the amount of money that the economy owes by an amount greater than the amount in existence. This means that the economy is a saddled with a debt that can never be paid off, merely passed around like a game of Pass-the-Parcel in a Belfast pub. It is like a game of musical chairs, where someone has to lose out.

***

A Solution

Money does not have to be based on debt, nor indeed does it have to be based on precious metals. Real wealth is the goods and services that people create for each other. Money is merely a means of exchange. It could be created by HM Treasury and spent on providing public services, saving us all a modicum of taxation, and then the economy would not have to be saddled with large debts.

Executive Order 11110 issued by John F. Kennedy on June 4^th 1963, from Wikipedia

This executive order allows the U.S. Secretary of the Treasury to issue $4.29 billion in silver certificates ($2 and $5 Notes) against silver bullion based on authority delegated by the President to the Secretary under the Thomas Amendment to the Agricultural Adjustment Act.

 

Silver certificates were printed without interest. The Order was for the Treasury to issue silver certificates against all silver held by the government which did not already have certificates against it. The Order was needed due to the passage of Public Law 88-36 which repealed the Silver Purchase Act and other related monetary measures. One result was that after the repeals, only the President could issue new silver certificates.  The Federal Reserve System could replace the certificates, but only in larger denominations. The thrust of the Order returned the authority to issue new silver certificates (and specify denominations) back to the U.S. Treasury.

 

This theory was further explored by U.S. Marine sniper and veteran police officer Craig Roberts in the 1994 book, Kill Zone.^[28] Roberts theorized that the Executive Order was the beginning of a plan by Kennedy whose ultimate goal was to permanently do away with the United States Federal Reserve, and that Kennedy was murdered by a cabal of international bankers determined to foil this plan.  [jk finds this the most plausible of a dozen theories.  Kennedy had expressed extreme frustration of the Bay of Pigs failure and other issues with the CIA.  But it is hard to believe that the CIA would on its own, for to protect its power structure, kill the President.]

This executive order allowed for the Federal Reserve System to distribute and exchange currency at lower denominations that met the growing economic need. The authoritative basis for the Order was substantially nullified in 1982 with the passage of Public Law 97-258. The Order was never directly reversed, but in 1987, Executive Order 12608 [by Ronald Reagan] revoked the section that added by Executive Order 11110^[1], essentially nullifying it.

 

Kennedy was killed by more than one shooter, and from 2 directions.  See Wikipedia Kennedy assassination conspiracy theories.

 

1)  Former U.S. Marine sniper Craig Roberts and Gunnery Sergeant Carlos Hathcock, who was the senior instructor for the U.S. Marine Corps Sniper Instructor School at Marine Corps Base Quantico in Quantico, Virginia, both said it could not be done as described by the FBI investigators. “Let me tell you what we did at Quantico,” Hathcock said. “We reconstructed the whole thing: the angle, the range, the moving target, the time limit, the obstacles, everything. I don’t know how many times we tried it, but we couldn’t duplicate what the Warren Commission said Oswald did. Now if I can’t do it, how in the world could a guy who was a non-qual on the rifle range and later only qualified 'marksman' do it?”^[13]

2)  Robert McClelland, a physician in the emergency room who observed the head wound, testified that the back right part of the head was blown out with posterior cerebral tissue and some of the cerebellar tissue was missing. The size of the back head wound, according to his description, indicated it was an exit wound, and that a second shooter from the front delivered the fatal head shot.^[11]

3)  Kennedy's death certificate located the bullet at the third thoracic vertebra — which is too low to have exited his throat.^[14] Moreover, the bullet was traveling downward, since the shooter was by a sixth floor window. The autopsy cover sheet had a diagram of a body showing this same low placement at the third thoracic vertebra. The hole in back of Kennedy's shirt and jacket are also claimed to support a wound too low to be consistent with the Single Bullet Theory.^[15][16]

These three facts are sufficient to prove that the Warren commission was a high-level cover-up

 

 

Books

The Secrets of the Federal Reserve - Eustace Mullins
The Creature from Jekyll Island - the Federal Reserve - G. Edward Griffin
Web of Debt - The Shocking Truth About Our Money System - Ellen Hodgson Brown
The Case Against the Fed - Murray N. Rothbard
Naked Capitalist, The - W. Cleon Skousen
Wall Street and the Rise of Hitler - Anthony Sutton
A History of Money and Banking in the United States - Murray N. Rothbard

excerpts from the book 'Tragedy and Hope' - A History of the World in Our Time by Carroll Quigley, 1966

Articles

Follow the Money to Citibank
Dirty Laundry-Multinational banks as bagmen for global crime syndicates
U.S. Banks and the Dirty Money Empire
Shell Game - Citibank attacks money-laundering regulations
Explosive Revelations - banks, tax havens, and money laundering
Servicing Citi's Interests - GATS and the Bid to Remove Barriers
to Financial Firm GIobalization
Give Us 0.01 Percent - Tobin tax
The Federal Reserve (6/06)
Confessions of a banker - Following money trail through offshore operations of Citibank (8/06)
Federal Reserve Bank (3/07)
Credit as a Public Utility: the Key to Monetary Reform (5/07)
Who Owns The Federal Reserve? (10/08)
What Banks, Academics, the Media and Politicians Don't Tell You About Money - November 2008
The Federal Reserve Abolition Act (12/08)
Ground Zero on Wall Street - Nationalize Federal Reserve (12/08)
The Wall Street Ponzi Scheme called "Fractional Reserve" Banking (12/08)
Nationalize the Federal Reserve - "American Monetary Act" (2/09)
President Obama: Nationalize the Fed and Create Our Own Money (2/09)
A New Monetary System (3/09)
Thinking Positively About Monetary Policy - Nationalizing the Federal Reserve (3/09)
The Big Takeover - how Wall Street insiders are using the bailout to stage a revolution (4/09)
Revive Lincoln's Monetary Policy - an open letter to President Obama (4/09)
Top Senate Democrat: Bankers 'Own' the US Congress (5/09)
The Weimar Hyperinflation? Could it Happen Again? (5/09)
Manipulation: How Markets Really Work (5/09)
Ending Today's Economic Crisis Simply and Easily, in America and Globally (5/09)
What the Big Banks Have Won [Wall Street Bailout] (6/09)
Great American Bubble Machine - Goldman Sachs & market manipulation (7/09)

 

 

Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."