Aftermath

A New Global Economic Order?

Craig Calhoun, Georgi Derluguian

• Publisher: NYU Press
• Year: 2011
• Print ISBN:
  9780814772843
• eBook ISBN:
  9780814772850
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

The global financial crisis showed deep problems with mainstream economic predictions, as well as the vulnerability of the world's richest countries and the enormous potential of some poorer ones. China, India, Brazil, and other counties are growing faster than Europe or America and have weathered the crisis better. Is their growth due to following conventional economic guidelines or to strong state leadership and sometimes protectionism? These issues are basic to the question of which countries will grow in comind decades, as well as the likely conflicts over global trade policy, currency standards, and economic cooperation.

Contributors include: Ha-Joon Chang, Piotr Dutkiewicz, Alexis Habiyaremye, James K. Galbraith, Grzegorz Gorzelak, Jomo Kwame Sundaram, Manuel Montes, Vladimir Popov, Felice Noelle Rodriguez, Dani Rodrik, Saskia Sassen, Luc Soete, and R. Bin Wong.

Aftermath is the third part of a trilogy comprised of the first three books in the Possible Future series.

Volume 1: Business as Usual
Volume 2: The Deepening Crisis
Volume 3: Aftermath

The three volumes are linked by a common introduction and can be purchased individually or as a set.

CHAPTER 1

A Savage Sorting of Winners and Losers, and Beyond

Saskia Sassen

The end of the Cold War launched one of the most brutal economic phases of the modern era. Following a period of Keynesian-led relative redistribution in developed market economies, a mix of government action and corporate economic interests led to a radical reshuffling of capitalism. Two logics organize this reshuffling. One is systemic and gets wired into most countries’ economic and (de)regulatory policies, most importantly privatization and the lifting of border tariffs. We can see this in the unsettling and debordering of existing arrangements within the deep structures of capitalist economies, through the implementation of specific fiscal and monetary policies in most countries around the world, albeit with variable degrees of intensity. The effect was to open up ground for new or sharply expanded modes of profit extraction even in unlikely domains, such as subprime mortgages on modest residences, or through unlikely instruments, such as credit-default swaps, a key component of the shadow banking system.

The second logic is the actual material development of growing areas of the world into extreme zones for the enactment of that systemic logic, that is, for these new or sharply expanded modes of profit extraction. The most familiar instances are global cities and the spaces for outsourced work. These have become thick local settings for global capitalism. There are others, notably the vast purchases of land in Africa and Central Asia to grow food, mine for rare metals, and get at water.¹

Critical to both these logics is the invention of extremely complex financial and organizational instruments to engage in what are, ultimately, new forms of extracting profit.² Many of the components that are part of the post-1989 global economy were already present and under development in the early 1980s. As such, just as the silent revolutions of 1989 are the iconic representation of a political process that had been building for a long time, so the corporate globalizing that took off in the late 1980s started many years earlier. But 1989 did make a major difference, most notably in giving these innovations the run of the world via the legitimating aura of market triumphalism. The outcome was the formation of a new kind of global economy, one centered in global firms using national governments to make global space for them,³ rather than a global economy centered in international trade and capital flows governed in good part by states, no matter their unequal power to do so.

In this chapter, there is room only to examine a few aspects of the dominant economic tendencies of the past decades and how to go beyond their deeply destructive character. The first section focuses on the capacity of finance to impose its logics across economic sectors. This financializing is not just a matter of the volume of finance but, more importantly, of its logic getting wired into a growing number of economic sectors. I am particularly interested in examining the capacity of finance to invent instruments that allow it to build high financial value from modest assets, often at the cost of the owner of the latter. Next I focus on the particularity of the current crisis and what it actually reveals about a system and its limitations—more a crisis of panic than a response to subprime mortgage losses. I conclude with a number of theses as to what can be done now in order to lay the groundwork for a better, more distributive future.

Advanced Capitalism and Its Mechanisms for Primitive Accumulation

There are few resemblances between these post-1989 economic histories and the celebration of post-1989 velvet revolutions in countries once part of the Soviet sphere of influence. Yet these economic histories spread to most of the world, including former Soviet-controlled countries. The end of the Cold War pronounced the free market victorious and neoliberalism the best growth policy for countries. All of this points to a systemic feature of advanced capitalism, one that may have been held in check by the Cold War but which rises to its full capacities for both expansion and destruction once freed from territorial restraints. This was the setting that enabled finance to enter a new phase which legitimized the financializing of growing sectors of the economy—a major effect was that “shareholder value,” rather than quality of product or sales, became the leading criterion for firms. One of the ironies emerging from the growing complexity of finance was the implementation of financial forms of primitive accumulation. It is this articulation of enormously complex financial and organizational instruments with elementary forms of extraction that concerns me here.⁴

Corporate outsourcing of jobs to low-wage countries is a simpler instance of this articulation than those coming from the world of finance. There is a large literature that has documented various links in the long chains that connect outsourced jobs to shareholders’ gain, firms’ profits, and consumers’ access to lower-cost products and services. Less attention has gone to the fact that to implement this outsourcing, global firms have had to develop complex organizational formats, using enormously expensive and talented experts. All of this complexity and talent is for the purpose of extracting more labor at lower cost than in their home countries; further, this organizational innovation encompasses the use of types of unskilled labor that would be already fairly low in these firms’ home countries. To get to this simple gain it took complex reorganizations of production processes and distribution, the passing of multiple new laws or regulations in home and in destination countries, and so on.

The insidious element is that millions of saved cents per hour of labor actually translate into a particular categorical positive: gains for shareholders. They can also contribute to increases in firms’ profit margins and consumers’ savings. But it is the first element for which the financial sector invented the instruments to articulate the saving of a few cents per hour of labor into shareholders gain.

Similarly, the financial sector has created some of the most complicated financial instruments to extract profit from even very modest households. The aim is to secure as many credit-card holders and as many mortgage holders as possible, so that they can be bundled into investment instruments. Whether people pay the mortgage or the credit card often matters less than securing that initial number of contracts. Once these contracts are bundled into an investment instrument, it is no longer dependent on the individuals. Trillions and trillions of dollars of profits have been secured on the backs of modest-income people, and these same people have been used to dilute risk and draw investors interested in collateralized financial assets.

Thus, in the United States, which is ground zero for these forms of primitive accumulation, one example is the series of instruments developed in the 2000s that allowed investors to benefit even from subprime mortgages for modest-income households. From the investors’ perspective, the key was the growing demand for asset-backed securities in a market where the outstanding value of derivatives was US$600 trillion, more than ten times the value of global GDP. To address this demand, even subprime-mortgage debt could be used as an asset. But the low quality of this debt meant cutting up each mortgage into multiple tiny slices and mixing these up with high-grade debt. The result was an enormously complex instrument that was also enormously opaque: tracing all the components of these bundled assets is difficult, and in many cases evidently impossible, as becomes clear with Lehman’s assets, whose components have still not been unbundled by a team of top-level experts as part of bankruptcy proceedings.

The critical financial innovation to make subprime mortgages on mostly modest homes work for investors is to delink subprime sellers’ and investors’ profits from the creditworthiness of the households obtaining the subprime home mortgage. Whether the mortgage is paid matters less than securing a certain number of loans that can be bundled up into “investment products.” Using complex sequences of “products,” to delink creditworthiness from investors’ profit and, second, selling off the instruments to pass on risk, investors have made trillions of dollars in profits on the backs of modest-income people. As with the outsourcing of labor, the insidious element is that the vast numbers of mortgage sales to modest-income individuals can actually translate into a second type of categorical positive: financial profits. The ensuing tens of millions of foreclosed homes have mostly not affected investors directly: only those who held on to these mortgages suffered from nonpayment. Most investors did not hold on, and indeed many investors also speculated against these instruments—that is to say, they speculated that crisis would hit. What investors experienced was a crisis of confidence as the numbers of foreclosures had grown to many millions by 2007 and as it became evident that it was impossible to trace the toxic component in their investments.

A mix of conditions, among them the fall in housing prices, led to extremely negative outcomes for households. Among the most biting of these outcomes was the sharp rise in foreclosures. In 2008, for instance, on average ten thousand households lost their home to foreclosure every day. An estimated ten to twelve million households in the United States will not be able to pay their mortgage over the next four years and, under current conditions, will lose their home. Indeed the available evidence for the first quarter of 2010 shows the highest levels of foreclosure yet of this current period that began in the early 2000s. This is a brutal form of primitive accumulation. Presented with the possibility (which turned out to be mostly a deception) of owning a house, modest-income people will put whatever few savings or future earnings they have into a down payment. Further, all the mortgage sellers were after was the contract representing the material asset (the residence). The negative effects on the household, on the neighborhood, on the city—none of that mattered. The whole process has become a reconditioning of the modest-income household sector, a more backward sector of capital, for its incorporation into a more advanced form of capitalism—high-finance.

Subprime mortgages can be valuable instruments to enable modest-income households to buy a house or even to get a second mortgage or a mortgage on a home that is already paid for. But what happened in the United States over the past few years was an abuse of the concept. The small savings or future earnings of modest-income households or the ownership of a modest house were used to enter into a contract necessary to develop a high-finance instrument that could make profits for investors even if those households defaulted and lost everything.

This has turned out to be a catastrophic and life-changing event for many of these households, and by extension, for whole neighborhoods now filled with foreclosed homes. It becomes clear in the microcosm that is New York City. Table 1.1 shows how whites, who have a far-higher average income than all the other groups in New York City, were far less likely to have subprime mortgages than all other groups, reaching just 9.1 percent in 2006, compared with 13.6 percent of Asian Americans, 28.6 percent of Hispanic Americans, and 40.7 percent of African Americans. The table also shows that all groups, regardless of incidence, had high growth rates in subprime lending from 2002 to 2006. If we consider the most acute period, 2002 to 2005, it more than doubled for whites, it basically tripled for Asians and Hispanics, and it quadrupled for blacks.

Table 1.1: Rate of Conventional Subprime Lending by Race in New York City, 2002 to 2006.

The subprime mortgage instrument developed in these years is just one case that serves to illustrate the specific role of finance in developing instruments that allow financial experts to “make” major additions to financial value on even very modest assets and future losses of assets. The complexity of what it takes to have a gain in high-finance contrasts with what it takes in traditional banking. In traditional banking, the gain is on the sale of money the bank has. In finance, the gain is on the sale of money the institution does not have. As a result, finance needs to “make” capital, which means speculative instruments and financializing of non-financial sectors, subjects I return to later in this chapter and develop more fully elsewhere.⁵

Crisis as Systemic Logic

Financial profit is a construction which either can be promptly materialized into a nonfinancial asset, such as an investment into building a dam or buying a telecommunications corporation, or can be used as a platform for further financial constructions, that is, speculation. The latter is what has dominated the past twenty years and generated the extremely high levels of financialization now evident especially in several major developed countries. This process has been partly facilitated by the use of electronic networks, software instruments, and the invention of many new instruments based on derivatives.⁶ More generally, and to give a sense of the orders of magnitude that the financial system has created over the past two decades, the total (notional) value of outstanding derivatives, which are a form of complex debt and the most common financial instrument, stands at over US$600 trillion. Financial assets have grown far more rapidly than the overall economy of developed countries as measured by GDP.⁷ In itself, this is not necessarily bad, especially if the growing financial capital is materialized in large-scale public-benefit projects—for example, a rapid transit system or the development of solar energy, to mention two attractive options. But in this current period that began in the 1980s, investing in the material economy was rare, except for some extreme cases such as the building up of Dubai. Mostly finance kept on developing more speculative and complex instruments. Historically, this process does seem to be part of the logic organizing finance—as it grows and gains power, it does not govern its power well.⁸

In the United States, the source of many of these organizational and financial innovations, the value of financial assets by 2006, right before the 2007 crisis, had reached 450 percent to US GDP.⁹ In the European Union, it stood at 356 percent to GDP, and the United Kingdom at 440 percent was well above the EU average. More generally, the number of countries where financial assets exceed the value of their gross national product more than doubled from thirty-three in 1990 to seventy-two in 2006. The global value of financial assets (which means debt) in the whole world by September 2008, as the crisis was exploding, was three and half times larger (US$160 trillion) than the value of global GDP.¹⁰

These numbers illustrate that it is an extreme moment. But is it an anomalous moment? I argue that it is not. Further, it is not created by exogenous factors, as the notion of “crisis” suggests. Having recurrent crises is the normal way this particular type of financial system functions. And every time we have bailed out the financial system since the first crisis of this phase, the New York stock-market crash of 1987, our governments have given finance the instruments to continue its leveraging stampede. We have had five bailouts since the 1980s, the decade when the new financial phase took off. Every time, taxpayers’ money was used to pump liquidity into the financial system. And every time, finance used it to leverage, aiming at more speculation and gain; it did not use it to pay off its debt because finance is about debt.

The financializing of a growing number of economic sectors since the 1980s has become both a sign of the power of this financial logic and the sign of its auto-exhaustion: insofar as finance needs to use (invade?) other economic sectors in order to grow, once it has subjected much of the economy to its logic, it reaches some type of limit. And then the downward curve is likely to set in. One acute illustration of this is the development of instruments by some financial firms that bet on growth in a sector and, simultaneously in other firms, of instruments that bet against that sector. Credit-default swaps were an illustration of this logic across firms, though they could conceivably (and illegally) also be used inside a given firm, as the recent lawsuit of the US government against Goldman Sachs makes clear. The current crisis has features which signal that financialized capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialization. Yet when everything has become financialized, finance can no longer extract value. It needs nonfinancialized sectors to build on. In this context, one of the last potential frontiers for financial extraction is modest-income households, of which there are a billion or more worldwide. A second frontier is bailouts through taxpayers’ money—which is real, old-fashioned, not financialized money.

When it comes to explaining the present financial crisis, the most common interpretation both among academics and among commentators is that the millions of subprime-mortgage foreclosures created the current financial crisis. As I explained above, this is incorrect.¹¹ Mass foreclosures were a crisis for home-owners and neighborhoods. For high-finance it was merely a crisis of confidence that began in August 2007. The values in play due to the actual foreclosures were relatively small for global financiers; what was alarming was not knowing what might next turn out to be a toxic asset given the impossibility of tracing the toxic component in complex investment instruments. It was the credit-default swaps, which had reached US$62 trillion by 2007, that launched the massive losses for high finance that exploded in September 2008. The millions of foreclosures alerted investors that something was wrong: those who had bought the credit-default swaps, sold as “insurance,” made their cl...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Introduction
• CHAPTER 1 A Savage Sorting of Winners and Losers, and Beyond
• CHAPTER 2 The 2008 World Financial Crisis and the Future of World Development
• CHAPTER 3 Growth after the Crisis
• CHAPTER 4 Structural Causes and Consequences of the 2008–2009 Financial Crisis
• CHAPTER 5 Bridging the Gap: A New World Economic Order for Development?
• CHAPTER 6 Chinese Political Economy and the International Economy: Linking Global, Regional, and Domestic Possibilities
• CHAPTER 7 The Global Financial Crisis and Africa’s “Immiserizing Wealth”
• CHAPTER 8 Central and Eastern Europe: Shapes of Transformation, Crisis, and the Possible Futures
• CHAPTER 9 The Post-Soviet Recoil to Periphery
• CHAPTER 10 The Great Crisis and the Financial Sector: What We Might Have Learned
• Notes
• About the Contributors
• Index