Friday, 19 December 2008

Where's All This Going to Stop?

Look at the graph. What are the implications of that line showing US financial profits to be so much higher than the line showing profits from non financial firms? Doesn't it strike you as a bit, well, odd.

It was argued, until the credit crunch, that it wasn't odd at all: we had somehow shuffled into a new and more stable world where 'financial innovation' and the e-economy had upped the return on capital in the way industrialisation had done 150-200 years ago. So naturally financial services would have higher than average returns. All perfectly normal. Everything for the best in the best of all possible worlds. I wonder how that opinion is holding up?

Two views.

"In 1999 or 2000, I gave a talk ... about capital markets and how they worked. ....So I wondered, How do I explain derivatives?, and I used the model of mirrors.

First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go."

Gao Xiqing, president of the China Investment Corporation, The Atlantic. Via the inevitable, and inevitably good on matters Chinese, Blood and Treasure.

Or, put in terms of classic Marxist political economy by the heirs of Paul Sweeny,

"...stagnation ..[is] the normal state of the monopoly-capitalist economy, barring special historical factors..... It was the reality of economic stagnation beginning in the 1970s... 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.” ... With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry —and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic..... 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. ..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. "

I think I'll hold onto that neat qualifier "at best" slotted into the penultimate line of the Monthly Review quote. It's the optimistic view.

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