UFPPC (www.ufppc.org) — Digging Deeper LXXXVII: July 20, 2009, 7:00 p.m.

John Bellamy Foster and Fred Magdoff,

The Great Financial Crisis: Causes and Consequences

(New York: Monthly Review Press, January 2009.)

[

Thesis.

“[S]tagnation generatesfinancialization” (106)—i.e., this is not anew stage of capitalism but is a newphase of what can be called “monopoly-finance capital,” which is the latestresponse to the problem of stagnation of capital accumulation and investment inmature capitalist economies, an internalcontradiction described by Marx (

Capital

,vol. 3, ch. 15): “the

real barrier

of capitalist production is

capital itself

”(quoted 91).]

Preface.

Dated Nov. 6, 2008 (but Ch. 6is dated Dec. 2008). The financializationand speculative bubbles thatcharacterize the current crisis, earning itthe name of the “Great Financial Crisis”(apparently first used by James Petras),are an answer to the problem of stagnation of production, whose analysishere is an application of the work of PaulBaran, Paul Sweezy, and Harry Magdoff (7-8). Most of it was published earlier in

Monthly Review

(8-9).

Introduction.

“The Great FinancialCrisis began somewhat inconspicuouslyin late summer 2007 with the failure of two Bear Stearns hedge funds, and thenwent from bad to worse despitecountless attempts by governments tohalt its progress” (11). The “neo-classicalKeynesian synthesis” supported by AlvinHansen and Paul Samuelson thoughtcapitalist economics had solved theproblem of stagnation (12-14). ButBaran and Sweezy in

Monopoly Capital

(1966) argued that this problem wasunsolved, resulting in expedients likemilitary spending, advertising,speculative finance, etc. (14-15). Keyneswas aware of the role that finance playedin this problem, an insight that wasrediscovered and developed by HymanMinsky of Washington University in St.Louis in the “financial instabilityhypothesis” upon which he worked fromthe 1960s on; this analysis emphasizedthe increasing scale and fragility of thefinancial structure under capitalism andthe growing importance of governmentas the lender of last resort (16-19).According to this view, it is notunproductive investment, but rather “thewhole pattern of accumulation undermonopoly-finance capital” that is “thereal problem” (20). The first fivechapters of this book are little-changedarticles from

Monthly Review

(21). Thisbook is incomplete in the sense that itlargely ignores the international economyand intergovernmental debt, a neglectthat can be justified by the U.S.’spreeminent position (21-22). “[T]hewider story . . . still remains to be told”(22). The authors doubt the feasibility of a new New Deal and believe thatsocialism is the only rational answer tothe crisis (22-23).

PART I: CAUSESCh. 1: The Household Debt Bubble.

[May 2006] Swelling consumer debt hasfinanced recent economic growth (27-29). As a result, “financial distress isever more solidly based in lower-income,working-class families (31; 29-34).Predatory lending is increasing, and withit debt collection agencies (34-35). Thehousing bubble seems about to burst(36). In a Feb. 2005 interview in

Barron’s

, Stephanie Pomboy predictedthat stagflation was ahead (37-38).

Ch. 2: The Explosion of Debt andSpeculation.

[November 2006] In the1970s & 1980s, Harry Magdoff and PaulSweezy “proposed that the generaltendency of mature capitalism is towardstagnation” (i.e. overaccumulation of

capital) on account of “[a] shortage of profitable investment opportunities” (39).Unused productive capacity andunemployment are indicators of this (39-41). Imperialism and globalization (aform of imperialism) are responses to thisproblem, as the increasing share of profits that are earned abroad shows (41-42). Technological innovation canstimulate the economy (42).Government spending does too,especially military spending (42-44).Debt can also stimulate economicgrowth, though bank debt used forspeculation “has little to no stimulatoryeffect on production” (45; 44-45). Thelast decades have seen a “trulyastounding” and “near-continuous)growth of debt, with decreasingeconomic effect due to its increasingbasis in speculation (45-49). This growthis unsustainable, but when it will collapsecannot be predicted (49-50). After thestock market implosion of 2000 the Fedcreated a real estate bubble with lowinterest rates (50-51). The Bushadministration has swelled governmentdebt (51-52). Finance has increasinglybecome the dominant economic activity,even in non-financial sectors (53-56).Speculation has swelled by severalorders of magnitude: “For example, in1975, 19 million stock shares tradeddaily on the New York Stock Exchange.By 1985 the volume had reached 190million, and by 2006, 1,600 millionshares with a value of over $60 billion.Even larger is the daily trading on theworld currency markets, which has gonefrom $18 billion a day in 1977, to thecurrent average of 1.8 trillion a day!

That means that every twenty-four hoursthe dollar volume of currency tradingequals the entire world’s annual GDP!”

(56, emphasis in original; 56-58).Speculation increases instability (58). The mergers-and-acquisitions boom wasalso due to capital seeking higher ratesof return (58-60). Taxpayers are “left tofoot the bill when problems arise” (61;60-62).

Ch. 3: Monopoly-Finance Capital.

[December 2006] Forty years afterBaran & Sweezy’s

Monopoly Capital

(1966), the system still suffers from the“stagnation impasse” of capitalaccumulation but has found ways of prospering by entering a “new hybridphase of the system ‘monopoly-financecapital’” (64; 63-64). Baran & Sweezy’sbook analyzed the advent of giantoligopolistic firms leading to increasedsurplus and the problem of disposing of that surplus (64-65).

Monopoly Capital

noted briefly but

failed fully to foreseethe importance of the expansion of thefinancial sector through mergers andacquisitions, the growth of financialmarkets and occupations (65-68). “Thefinancialization of monopoly capital, it isnow apparent, represented a whole newhistorical period—one that no one hadany inkling of in the 1960s, and that,according to existing economic doctrine,both mainstream and Marxian, remainslargely inexplicable today” (69). Anunresolved conceptual problem remainsas to the nature of finance, which“cannot be written off as merely afictional mirror of [stocks of existingcapital goods] as has been customary ineconomic theory . . . Both production andfinance under capitalism are at one andthe same time both real and monetary innature” (70). How long this speculation-fueled financialization can sustain itself isuncertain (71-74). Neoliberalglobalization and imperial militaryaggressiveness are “aimed primarily atregaining some of the lost U.S.hegemony over the world economy” (75;75-76).

Ch. 4: The Financialization of Capitalism.

[April 2007]Financialization (a term made current byKevin Phillips in the early 1990s for aphenomenon first analyzed by HarryMagdoff and Paul Sweezy in

Monthly Review

) does not represent a new stageof capitalism but rather a “permanent

structural necessity of the stagnation-prone economy” in which the relationsbetween the “real” and the “financial”economy are “inverted” (84; 77-88).

PART II: CONSEQUENCESCh. 5: The Financialization of Capitaland the Crisis.

[April 2008] The crisistouched off by the collapse of thesubprime mortgage market in July 2007“signals a new phase” of monopoly-finance capital (92; 91-93). The realestate bubble after the 2000 marketcrash followed the classic pattern of novel offering, credit expansion,speculative mania, distress, and crashand panic (93-99). Unlike conventionalanalyses focusing on greed, addiction tohigh consumption, etc., which tend topresent stagnation as a

result

of stalledfinancialization, Foster and Magdoff connect what is happening tocapitalism’s unresolved problem of thedisposition of capital accumulation andpresent it as a

cause

of financialization(100-09).

Ch. 6: Back to the Real Economy.

[December 2008] In the financial crisisfrom July 2007 to December 2008, theFed acted to avoid debt deflation anddepression by monetary means,confining itself to acting as the lender of last resort (111-20). Understandingfinancialization as a response tostagnation of capital accumulation helpsunderstand the situation, as somemainstream sources acknowledged in themidst of the crisis (120-27). Butstagnation is the normal condition in thephase of monopoly capital, and accountsfor other features like growing inequality,the growth of indebtedness (128-33). Acrisis of financialization only accentuatesthe problem of stagnation, with globaleffects (133-34). Historically, the studyof

political economy

has beendepoliticized for ideological purposes andtransformed into supposedly class- andstate-free discipline of

economics,

butthis veil “has been partly torn aside andthe reality of class power exposed”; it istime to turn away from orthodoxneoclassical economics to contrary views(134-37). Progressive forces need toeducate the public about the non-naturalnature of the crisis and the need to holdthose at the top responsible andaccountable; there is a need for “aradical movement from below” with as itsaim “replacing the present system of capitalism with something amounting toa real political and economic democracy;what the present rulers of the world fearand decry most—as ‘socialism’” (140;137-40).

Notes.

Index.

4 pp.

About the Authors.

John BellamyFoster

is professor of sociology at theUniversity of Oregon and author manybooks, among them

Naked Imperialism

(2006),

Marx’s Ecology

(2000),

TheTheory of Monopoly Capitalism

(1986),and (with Brett Clark and Richard York)

Critique of Intelligent Design

(2008). —

Fred Magdoff

taught at the Universityof Vermont in Burlington, is a director of the Monthly Review Foundation, and isco-editor (with John Bellamy Foster andFrederick Buttel) of

Hungry for Profit: The Agribusiness Threat to Farmers, Food,and the Environment

Additional information.

Sincepublishing

The Great Financial Crisis,

John Bellamy Foster

has published

TheEcological Revolution: Making Peace withthe Planet.

Foster was born on Aug. 19,1953. He was already an antiwar activistwhen he enrolled at The Evergreen StateCollege in 1971. There he met RobertMcChesney. Foster earned his Ph.D. inpolitical science at York University in Toronto. He began collaborating withPaul Sweezy of

Monthly Review

in theearly 1980s. He taught at Evergreen in1985-1986, then found a tenure-track job