“If the world is upside down the way it is now, wouldn’t we have to turn it over to get it to stand up straight?” -Eduardo Galeano. … Photographs of workers’ protest in a Chinese toy factory.
Courtesy: China Daily
Courtesy: Telegraph
The ‘Alternative Guidelines Towards Encounter Deaths’ and Strategies of Resistance
Date: 28 November 2008 Time: 3.00. p.m. Venue: Dayar-e Mir Taqui Mir, Jamia Millia Islamia (near the Vice Chancellor’s office)
Jamia Teachers’ Solidarity Group invites you to a Round Table on the ‘Alternative Guidelines Towards Encounter Deaths’ with special focus on the extra-constitutional powers given to Special Forces and Strategies of Resistance keeping in mind the present context where the naked brutality of the police and armed forces have unleashed a reign of terror not only on the Muslim population residing in the country in the states of Kashmir, Delhi, Gujarat, Maharashtra, Kerala but also in the north-eastern states of India particularly Manipur. The logic of countering terrorism/armed resistance might have different contextual specificities but the laws used for ‘encounter’ and the manner in which the same is executed flouting all human rights guidelines is a major cause of concern today. The petition filed by Peoples’ Union of Liberties, Maharashtra and the alternative draft submitted to the Supreme Court and the favourable hearing it has received has strengthened the voices of alternatives across the country. While the Batla House encounter on 19th September has been the centre of our activities, it is necessary to link it to wider political struggles going on in the country as the incident is hardly an isolated one. In Delhi itself we have witnessed several encounters along with bomb blasts that keep happening like a ceremonial ritual giving the much needed masala for the media houses to run, elsewhere we read reports or view open terrorist activities of minorities being lynched and tortured to death by the self-proclaimed votaries of the Hindu majority and feel ‘protected’ by the distance that separates us from the event that might be a prime time show. The question is no longer confined to minority communities alone since it is not only religious or racial/ethnic scape-goating that is happening, but also in a calculated manner all voices that question the State and its institutions get throttled one way or the other. Civil rights movements therefore necessarily assume a kind of ‘defensive’ role – challenging the powers that be after an incident of violation has taken place. With the recent revelations of the CBI regarding the role of the Special Cell and the booking of criminals in saffron perhaps the tide is turning where an offensive campaign may be mobilized to instill policy changes in law that might be yet twisted to protect the rights of the people vis-à-vis the interests of the State.
The panel of initiators for the discussion are –
Prashant Bhushan –(Human Rights Lawyer) – Defence Counsel for the PUL petition in Supreme Court regarding alternative guidelines on encounter deaths; Sufian Siddiqui – (Supreme Court Lawyer), Bimol Akoijam – (JNU)
The discussants for the Round Table are - Gautam Navlakha – (Democratic Rights activist), Nirmalangshu Mukherji – (Dept. of Philosophy, DU), Tripta Wahi – (Dept. of History, DU), Vijay Singh – (Dept. of History, DU)
New Socialist Initiative: a collective committed to the regeneration of revolutionary socialist politics invites you for a Seminar on Socialism For the Twenty First Century on Sunday 30th Nov at 4 P.M. Venue: Conference Hall, Rajendra Bhavan, 210 Deendayal Upadhyaya Marg, New Delhi - 110002
Humanity stands at the threshold of new crises and new possibilities. As global capitalism takes humanity through another round of economic crisis, increasing unemployment, and poverty, a simple and stark question raises its head. Is humanity condemned to live with exploitation, oppression, dehumanising working conditions, wars and a looming ecological catastrophe, or is it capable of building a society without class, caste, and gender injustices, a society where the path to growth is not paved with poverty, hunger and overworked human bodies, where competitive greed is not the most rewarded human emotion. Rulers of the world since times immemorial, form Egyptian Pharaohs to Greek slave owners to Chinese Emperors to the current capitalist breed have always believed that they rule over the best of the world. The question raised above would scare them. For the people on the other hand, this question offers a stark choice. Either they succumb to ruling class ideologies, their obfuscations, allurements and sedation, and remain blind to it. Or, they doubt, critique and ask questions; if humanity is to make a better world, how should it go about it? What lessons does history teach in this regard?
Ever since capitalism became the dominant social system, socialism has been integral to humanity’s endeavours to imagine and achieve a better social world. Against the private profit greed of capitalism, socialism pitted the ideal of collective well-being; against a discouraged and alienated mass of humans created by capitalist profit machines, socialism envisioned an active and organized humanity that is fully aware of historic capabilities and tasks; against the freedom to make profit by one that leads to the misery of many, socialism raised the banner of a society in which the ‘the free development of each is a condition for the free development of all.’ To imagine socialism will become irrelevant even while capitalist injustices continue, is to believe humanity to be a condemned species. On the other hand to imagine that specific answers to the above questions provided by socialist visionaries like Saint Simon, Fourier and Owen, or by Marx and Engels, who put socialist theory on a firm scientific basis, or by practitioners of socialism like Lenin and Mao, will be correct in every aspect in the context of current too will be incorrect. For, capitalism has changed. It has changed, through trial and errors while dealing with its own crises, and by its efforts to counter and deflect mass movements against its rule. The most significant changes have occurred in the political and ideological domain. Liberal bourgeois democracy has become the norm of state rule, not just in economically advanced countries, but in underdeveloped countries like India too. Feudal ideologies based on ideas of natural hierarchy and blind faith in the super natural have been replaced by individualism and consumerism of a mass society, which while freeing humans of hierarchical constraints also dis-empower them by obfuscating the social context of their life.
Revolutions of the twentieth century, the Russian, the Chinese, the Vietnamese, or the Cuban, managed to rid a segment of humanity from direct capitalism. History has shown that their success was only partial. While they succeeded in saving their societies from the crises they were in, they failed to put them irreversibly on the path to socialism. Our current context in the twenty first century demands a critical engagement with the history and legacy of these revolutions. Interestingly, it is also in the current context, at a stage of history already shaped by two centuries of capitalist rule and at a time when capitalism as a social system reigns unopposed for the first time globally, that one also hears renewed stirrings for socialism in settings as diverse as hills of Nepal in South Asia, and favelas of Venezuela in Latin America. What do experiences of these countries tell us about prospects of socialism?
We feel that it is time that we revisit these ongoing stirrings for socialism and also start the process of reenvisioning socialism for our times. To start a meaningful discussion New Socialist Initiative, which is a collective committed to the regeneration of revolutionary socialist politics has invited eminent journalist Anand Swaroop Verma, scholar-activist Achin Vanaik and thinker Ravi Sinha to share their ideas on the theme.
The Jamia Teachers’ Solidarity Group reacting sharply to the ongoing communal vitiation of the political environment by the Bharatiya Janata Party issued an open letter to the Chief Election Commissioner of India, Mr. N. Gopalaswami. The indiscriminate manner in which the Bharatiya Janata Party and its parent organizations had been targeting the minority communities in the country in Kandhamal, Dhule, Udulgudi creates an alarming situation that challenges the very moral fabric of a secular, democratic nation. Not only the credentials of a central university like Jamia Millia Islamia is being regularly brought into question, a sense of insecurity, fear and anxiety is created in the adjoining area of Batla House, Jamia Nagar, Abul Fazal Enclave, etc. where primarily the Muslim population resides. The hate campaign of the BJP has to be stopped at all cost and before the guilt of those who have been killed in the encounter, one of whom was a minor and the five who have been accused of being involved in seditious activities against the State is proved before a court of law, they cannot be referred to as terrorists
Subject: Demand to Restrain Bharatiya Janata Party targeting the Muslim community in Jamia and Batla House area in their election campaign.
Dear Sir,
Following the incident of encounter at L-18 in the Batla House area on September 19, 2008 where a MA Previous year student of Jamia Millia Islamia and a 17-year old boy were killed by the Special Cell on the ground of their involvement with the bomb blasts in Delhi and other cities of the country, Bharatiya Janata Party had been actively engaged in a virulent hate campaign fomenting communal sentiments in the country to garner votes in their favour. Two of the five young men who are in police custody for their alleged involvement in seditious activities are students of Jamia Millia Islamia, while the other three were young men seeking out a career in the city. The recent findings of the CBI regarding the activities of the Delhi Police Special Cell has cast a serious aspersion over the credibility of their findings and since the issue of Batla House ‘encounter’ is yet to be produced before the court of law, one cannot pronounce them as guilty. Thus, the constant reference by the BJP to the deceased (one of whom was a minor) and the five arrested as terrorists is not only malicious and politically motivated but also legally invalid.
We urge your office to immediately intervene in the matter and take necessary action against a political party like the Bharatiya Janata Party who have been campaigning for the forth-coming elections in a language that is contrary to the secular, democratic spirit of the Indian Constitution.
The letter was signed by several members of the teaching fraternity.
Thanking you,
Yours’ truly,
Manisha Sethi
Adil Mehdi
Anuradha Ghosh
Sreerekha
Dave Hill
The current crisis of Capital and the current response
In the current juncture, the crisis of capitalism, as in the repeated crises of capital and overproduction and speculation predicted by Marx, capitalists have a big problem. Their profits, the value of the shares and part control of companies by Chief Executive Officers and other capitalist executives (late twentieth century capitalists), are plummeting. The rate of profit is falling, has fallen.
The political response by parties funded by Capital, such as the Democrats and Republicans in the USA, and Labour, Liberal and Conservative in the UK is not to blame the capitalist system, not even to blame the neoliberal form of capitalism (new brutalist public managerialism/ management methods, privatisation, businessification of education, for example, increasing gaps between rich and poor, between schools in well-off areas and schools in poor areas). They have criticised only two aspects of neoliberalism: what they now (and only now!) see as the over-extent of deregulation, and the (obscene) levels of pay and reward taken by ‘the big bankers’, by a few Chief Executive Officers (CEOs).
Not an end to Capitalism or even to Neoliberal Capitalism
Talk of an end to neoliberalism is premature, so is talk of an end to capitalism. Criticism in the mainstream capitalist media and mainstream capitalist political parties is only of the excesses of Capitalism, indeed, only the excesses of that form of capitalism- neoliberal capitalism- that has been dominant since the 1970s, the Thatcher-Reagan years- dominant in countries across the globe, and within the international capitalist organisations such as the World Bank, the International Finance Corporation, the World Trade Organisation.
Premature, too, is talk of a return to a new Keynesianism, a new era of public sector public works, together with (in revulsion at neoliberalism’s- in fact- capitalism’s- excesses) a new Puritanism in private affairs/ private industry.
The current intervention by governments across the globe to ’save banks’ can be seen as ’socialism for the rich’, a spreading of the pain and costs amongst all citizens/ taxpayers to bail out the banks and bankers. Side by side with this bailing out of the banks (while retaining them as private- not nationalised institutions!) is the privatisation, and individualisation of pain- the pain that will be felt in wallets and homes and workplaces throughout the capitalist countries, both rich and poor. Already (November 2008) we see in Britain the Conservative Party changing its previous policy of matching Labour’s spending plans for 2010 onwards into a rightward slide- saying that public services will have to suffer, to pay for the cost of the crisis. Capitalist governments throughout the world will, unless successfully contested by class war and action from below, make the workers and their/ our public services, pay for the crisis. So that, once again, the bankers can make their billions, extracted from the surplus value of the labour power of workers.
It is true that finance institutions need government intervention, in order to keep funding loans and mortgages, to prevent banks and finance capital repossessing people’s homes. But under what conditions?
Marxists and left socialists need to lead and support calls and mobilisations for the nationalisation of the banks. In Britain, for example, people such as John McDonnell, the leader of the ‘left’ Labour MPs in Britain, and the LRC (Labour Representation Committee) and Marxist groups such as the Socialist Party and the International Socialist Group and the Socialist Workers Party call for banks to be taken into public ownership (with the SP calling for ‘compensation only on the basis of proven need’), in other words for the nationalisation of finance to be complete and long-term.
But Capital and the parties it funds will, seek to ensure that Capital is resurgent, and that after what they see as this temporary ‘blip’ in capitalist profitability, it will once again confidently bestride the world, though with less of an obvious smirk on its face, and with less obvious flashing of riches. At least for the time being.
In times such as these, of economic crisis and of the inevitable retrenchment, it will be the poor that pays for the crisis, in fact, not just the poor, but the middle and lower strata of the working class.
Controlling the Workers
And who better to ‘control’ the workers, the workforce, to sell a deal – cuts in the actual wage (relative to inflation) and the social wage (cuts in the real value of benefits and of public welfare and social services)- but the former workers’ parties such as the Labour Party, or, in the USA, the party with (as with labour in Britain) links to the trade union movement- the Democrats. So US Capital swung massively behind Obama in the US Presidential election, and it is likely that increasing sections of British Capital will swing behind Gordon Brown and what is still regarded by many as a workers’ party, or at least, the more social democratic of the major parties on offer. Better to control the workers when the cuts do come. And to return to a slightly less flashy form of capitalism- more regulated, but still the privatising neoliberal managerialising, commodifying, neo-colonial and imperialistic capitalism.
Resistance
This is, as ever, subject to resistance and the balance of class forces (itself related to developing levels of class consciousness, political consciousness and political organisation and leadership). Resistance is possible, and will, inevitably grow. Demonstrations, strikes, anger, outrage at cuts, will increase, perhaps dramatically, in the coming period. To repeat, to be successful instead of inchoate, such anger and political activism needs to be focussed, and organised. In such circumstances, the forces of the Marxist Left in countries across the globe, need to put aside decades old enmities, doctrinal, organisation and strategic disputes. In Britain, for example, the Socialist Party, the Socialist Workers party, Respect, the Alliance for Workers Liberty, the Communist Party of Britain, other groups on the Marxist Left, together with socialists within the Labour Party, need to rapidly form a coherent organisation/ alliance and expose the current crisis as a crisis not just of neoliberalism, but of Capitalism itself. And to pose Socialist alternatives. Here, the new anti-capitalist party in France (under the leadership of Olivier Besancenot), coalescing formerly rival groups and individuals, is an outstanding example of a successful regrouping/ regroupement of the Marxist Left. And in Britain, the Convention of the Left could play a coalescing role?
Of course, regroupment by itself just organises current activists and supporters. Regroupment needs to be followed by, accompanied now! by recruitment. At this particular moment in the crisis of capital accumulation and the actual and potential for loosening the chains of ideology/ false consciousness promulgated by knowledge workers in the (witting or unwitting) service of Capital.
Implications for Education Policy of the Current Crisis
Within England there may well be some minor changes following from disenchantment with neoliberalism. Such changes, the changes in recent years promoting more creativity in the curriculum, reducing the burden of tests, have been argued for by unions and by the Socialist Teachers Association (STA) for years.
But changes to restore and go beyond a more democratically accountable, less brutalist, less divisive, less test-driven, less punitive education system, are not yet on the cards. With campaigns and mass pressures they could become so.
But there is nothing inevitable about neoliberal education transmogrifying any time soon into liberal child friendly and/ or socialist education for equality. These need to be fought for, and will need to be part of a wider transformation of social and economic relations in society.
Which is why we can foresee an intensification of right-wing attacks on radical and socialist educators, on critical pedagogues, throughout the capitalist world.
The culture wars, between the ideologies/ belief systems of Marxism and Socialism on the one hand, and the various forms of pro-capitalist ideology: social democratic, liberal –progressive, neoconservative, neoliberal and racist/ Fascist ideologies on the other, will intensify.
Interest in Marxism is growing. More are seeing through the Emperors’ clothes of pro-capitalist politicians, sand their sleight of hand support for Finance Capitalism and Capitalist exploitation of the labour power of workers.
Hence, in these current times, Marxist and radical educators are dangerous. Intimidation, dismissals, public denunciations (there are many cases globally, most recently in Australia and the USA) will increase.
It is a time for civic courage, for hope, for Marxist analysis, for solidarity, for organisation. A united Left could and should display all five.
Dave Hill is Professor of education policy, University of Northampton, United Kingdom.
A Review of Labour Vulnerability and Debt Bondage in Contemporary India, CEC, March 2008, xii+92, Price - Rs 200.
The persistence of “debt bondage” in India has long mesmerised the progressive intellectuals and activists, a vast majority of whom still consider its existence as a reminder of the amphibian (semi-feudal, semi-capitalist) character of India’s political economy and its underdevelopment - overloaded with pre-capitalist “vestiges”. The booklet under review drastically differs from such an understanding of bondage. It does not view it as “a unique system”, rather as a form of employment relationship institutionalising labour vulnerability through debt. “Bonded labour is primarily a social relationship and all those labour relations where vulnerability of the workers is institutionalised through debt could be described as bondage”(6). Further, bondage is “a flexible and adaptive system of labour exploitation”(8).
With the development of capitalist relations in India, bondage has increasingly lost its earlier permanent and generational nature, and has become more and more temporary, seasonal and individualised. The public policy and legal-state machinery that are in place to identify and ‘eradicate’ bondage are unable to record and influence its reproduction in the era of globalisation. Informalisation - contractualisation and casualisation - of the work process that characterises the neoliberal regime of accumulation has tremendously increased labour vulnerability leading to a system of “neo-bondage”, as Jan Breman calls it. Debt and bondage are most rampantly used as mechanisms to mobilise cheap labour from hinterlands and ensure migration (seasonal or long-term) for labour supply in the industries in which India has a comparative advantage. In fact, “with respect to bonded labourers, debt is always a precondition for entering the labour market and in establishing an employer-employee relationship” (80-81).
This report based on extensive studies throughout India maps the institutionalisation of labour vulnerabilities through various forms of debt bondage in contemporary India. With the help of many case studies, it shows how debt posits an element of liability on the part of the worker in the employment relationship, thus reinforcing and consensualising the subjugation of labour under circumstances and conditions on which the worker has a lesser control than otherwise. Advance or debt shapes “the situation of being employed”. It reconfigures an employment relationship as that between the debtor and the creditor, thus reducing the “agency of labour” and alienating the rights and entitlements of workers that characterise the ideal contractual relationship. However, the liabilities in the relationship or general costs of labour are accumulated and bestowed on the worker. The report understands that the role of debt in bondage “is not as an element of an agreement for which there are separate rules and practices of enforcement, but rather… to construct how the claims of workers will be interpreted and treated” (20).
The third chapter of the report assesses the interventions of the state and other agencies to eradicate bondage and rehabilitate bonded labour. It details the provisions of the Bonded Labour System (Abolition) Act, 1976 and the subsequent judicial, legislative and executive activism. It enumerates the discrepancies in its implementation. The chapter also examines the intervention of NGOs. A significant conclusion in this regard is that it was the mobilisational and organisational efforts that were most effective in bonded labour eradication.
The report establishes that bonded labour too has contributed in “India shining” and its globalising aspirations. In fact, bonded labour is not just an input in commodity production; rather, workers in the relationship (conditioned by advances or debt) are essentially sellers of their labour power. “They are controlled by the employers in lieu of an advance or delayed payment or non-payment of minimum wages”.(82) Wages in such conditions are squeezed not only through depressed, delayed and deducted payments, but also via uncontrollable interest rates.
It is important to understand Marx’s conception of “wage slavery” here. The usage of this phrase was not at all allegorical or rhetorical, as many tend to believe. It conceptualised the unfreedom or coercion inherent in the dual freedom of labour (from physical compulsion and from the means of production). On one hand, this dual freedom creates an ambience that compels a labourer to sell his/her labour power. On the other hand, once labour power is sold for a period, the labourer has no control over its expenditure for that duration. It should be remembered though the custom is to pay the wages after labour-power is exercised, wages are, in fact, already advanced prior to the labour process not only for the purpose of records, but also as capital required for production - i.e., it constitutes variable capital that is required to buy labour-power and put it to work. In the circuit of capital given below, Money (M) is advanced to buy Means of Production (MP) and Labour Power (LP) before Production (P) can take place.
In fact, “whether money serves as a means of purchase or a means of payment, this does not alter the nature of the exchange of commodities”.(Karl Marx, Capital, Penguin, pp. 279) As “a means of purchase” money is advanced to the sellers of labour power prior to production, while as “a means of payment”, it remains as the worker’s “credit to the capitalist” until production is completed to be paid as wages afterwards. Functionally it hardly makes any difference - “this does not alter the nature of the exchange of commodities”. And both institutionalise labour vulnerabilities in their own way - advance (partial or whole) can easily be transformed into debt, creating liabilities that shape bondage, while wages can be delayed or even lost (when the capitalist goes bankrupt). In fact, the delay in receiving wages is a significant reason for indebtedness among workers. If in Marx’s England debt played a part in tying the worker more to a shop as a consumer, or to sustain the “truck system”, it can instigate other systems, too, to institute labour vulnerabilities. Ultimately the purpose is to increase these vulnerabilities and thus, reproduce the hegemony of capital over labour. The report remarkably succeeds in showing how this is done in various parts of India through debt bondage.
(This review was originally written for Labour File - A bimonthly journal of labour and economic affairs published from New Delhi)
Appendix
A. The process of proletarianisation to which the majority is subjugated, not the number of ‘ideal’ proletarians or wageworkers, defines capitalism. The actualisation of this process - and thus the degrees of proletarianisation or the “dual freedom of labour” differs according to the concrete contexts defined by the needs of capital and class struggle. More technically, this process is a long thread (not necessarily historical) between the formal subsumption to the actual subsumption of labour by capital - its two ends. At various junctures archaic unfreedom, like slavery, which generally characterised pre-capitalism is formally adopted (more aptly, exapted as explained in B) and transformed according to the conjunctural needs of capitalist accumulation. If we don’t recognise this processual aspect of capitalism, we will be lost in the miasma of overproduced forms and appearances in capitalism.
B. Stephen Jay Gould’s conception of exaptation, I believe, is very useful in understanding the dialectical internalisation of “vestiges” by new stages in evolution - both biological and social. Gould and Elisabeth S. Vrba in their 1982 paper define exaptation as (i) “a character, previously shaped by natural selection for a particular function (an adaptation), is coopted for a new use”; and, (ii) “a character whose origin cannot be ascribed to the direct action of natural selection (a nonaptation), is coopted for a current use”. This concept allows us to comprehend the reproduction of “vestiges” as a process internal to the new stage in development, not as something hindering the ‘complete’ realisation of the new stage.
C. The “purist” idea that “vestiges” obstruct (not shape or contextualise) capitalist development has for a long time informed the theory and practice of Marxism in the so-called third world countries - engaging the revolutionaries in the fruitless exercise of fighting the “vestiges” before taking on the basic system, thus investing their revolutionary vigour in the reformist project of the capitalist development. It is interesting to note that this is not only true about the “Leninists” and “Maoists”, as some “anti-Leninists” allege. Many anti-Leninists and anti-Maoists present more vehement denial of the feasibility of any socialist project in “backward” countries. Their conceptualistion of revolution not only goes against the thesis of “revolution in permanence” - “the downfall of all the privileged classes, and the subjection of these classes to the dictatorship of the proletariat by maintaining the revolution in permanence until the realisation of Communism, which is the final form of organisation of human society” - but is also an unconscious reinforcement of the notion of “socialism in one country”, which they profess to hate.
Pothik Ghosh
There can be nothing more precarious in the life of a liberal-democracy than the evacuation of politics from law. India currently faces precisely such a crisis, evident in the alleged emergence of Hindutva terror, its insidious denial by mainstream ’social’ and political outfits of the Hindu Right and, ironically, even the terms in which the secularist camp has sought to counter their propaganda. It is, in fact, the liberal-secular aspect of the problem that is, at once, most interesting and disturbing.
A sizeable section of Indian liberals has, in ascribing double standard to the sangh parivar that has been maligning the Maharashtra anti-terrorism squad’s investigation into the September 29 Malegaon blasts, unwittingly come to share the political-ideological assumptions of Hindutva. Sangh parivar outfits, after having viciously opposed all attempts to call into question the fairness and neutrality of police-investigative procedures into acts of what they call “jehadi terror”, have suddenly done a U-turn to accuse the Maharashtra ATS of being politically pliable and its line of probe into the Malegaon explosions ideologically compromised. Even the BJP has, as is its equivocal wont, carefully allowed only some of its senior leaders to lend their voices to this pernicious cultural-nationalist chorus.
Yet, accusing Hindutva groups of hypocrisy and double standard would close more democratic doors than open them. Such accusation may or may not help the anti-BJP forces score electoral brownie points now. But they would certainly discredit, in advance, all criticism and questioning of state institutions for all times to come. To get caught in debates about the desirablity of interrogating and criticising state institutions is to miss the point.
What matters is whether critical interrogation of state instrumentalities, or the criticism of such criticism, has been prompted by the political desire to render the state and its institutions accountable to a people who embody the values of our Constitution. That would be democracy. The politics of Hindutva, which seeks to make state institutions amenable to the will of a mass at odds with the constitutional principles of liberalism, is majoritarianism. And yet in the absence of a politics that would enable people to make that distinction, democracy and majoritarianism are easily conflated. Sangh parivar organisations have accomplished precisely that with great success.
In such circumstances, direct organisational links between the Malegaon accused and the sangh parivar, even if they do exist, are of little consequence. What is both important and indisputable is their ideological kinship. That, more than any organisational tie, is a characteristic feature of fascism.
Fascism cannot, however, be effectively battled as long as its opponents remain unaware of the gaps in the legalistic discourse and practice of liberal democracy. It is in those fissures that the pestilence of fascism, irrespective of whether it takes the form of Islamism or Hindutva, silently breeds. That said, it would be ideologically troublesome and politically perilous for us here in India to tar the two forms of fascism - Hindutva and Islamism - with the same brush. If anything, such an equation would only reinforce the problematic legal, anti-political praxis of liberal democracy.
We need to distinguish one from the other, even at the risk of appearing undesirably divisive. For, in the long run, more harm than good would be done if this difference is obscured now for some tenuous gains on the Hindu-Muslim brotherhood front. The point of this comparison is not to legitimise the idea of ‘lesser evil’. The point is to recognise the difference in political structures and processes constitutive of each of those strains of terror, if only to come up with a composite solution to the larger problem of civic violence of which both Islamism and Hindutva have become indivisible halves. There is absolutely no doubt that both the Islamists and the footsoldiers of Hindutva seek to close the liberal space through their terroristic campaigns, both covert and overt. But what is more germane is that while the former seeks to subvert liberal democracy by challenging it from the vantage point of opposition and resistance, the latter strives towards the same goal by using the language of liberal democracy and manipulating its institutions.
The recognition of this difference in methods is crucial because it serves to illuminate a rather intractable problem posed by demographics that liberal democracy cannot discern, leave alone resolve, as long as it posits itself in legal-ethical terms. The right to life of a citizen - the foundational liberty on which the edifice of liberal democracy stands - has implicit in its conception the idea of protecting a particular form of material and cultural life from elements that endanger it. The legal-ethical paradigm of liberal democracy entirely precludes the political-agnostic approach, which historicises the the normative liberal-democratic idea of citizen and his eligibility of rights as an abstraction of a certain (insurgent bourgeois) moment of transformative politics seeking real human autonomy. Such historicised engagement with liberal democracy would leave us with no choice but to seek to break with its ethical-legal framework if only to remain true to its impulse (read logic) of continuously seeking concrete human autonomy. The absence of such a reading - which is the default position to which the ethical-legal paradigm of liberal democracy inevitably obtains to - ends up upholding and defending the sovereignty of a certain form of life that is created solely by the majority community and accessed either only by its members or those among others who accept the ideological hegemony of such a qualified form of life, which constitutes the biopolitical horizon of the liberal-democratic polity. All others become, on this terrain of biopolitics, bearers of a form of bare life - as opposed and inferior to the qualified life form - whose sovereignty a liberal democratic state is not only not obliged to defend but is actually also tasked to hold at bay through repression because it threatens the sovereignty of the life of the citizen.
In such circumstances, a citizen eligible for his rights is one who enjoys the entitlements that enables him to the qualified form of cultural and material life, which comes to characterise the national mainstream. Those who cannot, or do not, access such entitlements are obviously not eligible to be rightful citizens. The paradox is that such biopolitical entitlements can be accessed by those who do not have it by invoking rights, even as those rights are denied to them precisely because they do not have the entitlements to that would qualify them as citizens. This problem cannot, clearly, be resolved within the ethical-legal and status quoist paradigm that liberal democracy posits but only through a politics that seeks to break/reconfigure/redistribute the status quo of entitlements by replacing legislation with a political movement of socio-economic transformation.
The absence of such a political imaginary - of which the hegemonic establishment of the ethical-legal discourse of liberal democracy is the other dialectical half - virtually legitimises majoritarianism, even as it frames the opposition of social groups either excluded or repressed in that status quo in some kind of minoritarian idiom, which is simultaneously rendered illegitimate. That is the reason why fascism, when it is manifest through Hindutva in our country, is seen by a whole clutch of committed liberal democrats through a prism tinged with partial, if not total, acceptability. The same bunch, not surprisingly, displays no such ambivalence while characterising Islamist fascism as the greatest evil of our times. There is a desperate need for a more agnostic (read political) approach to liberal democracy. Nothing short of that would help us transcend our fascist status quo and the liberal democratic discourse that makes this enormity possible.
(An abridged version of the article was published in The Economic Times)
Link to Global Economic Crisis-I
Link to Global Economic Crisis-II
Link to Global Economic Crisis-III
Link to Global Economic Crisis-IV
The Long Term Story
The long term story, as I have already indicated, is a story about the rise and (possible) fall of neoliberalism. The Golden Age of Capitalism - the two and a half decades after the second World War - drew to a close by the late 1960s and global capitalism entered a period of structural crisis. The process of general capital accumulation is largely driven by current and expected trends of profitability of capital (measured by the rate of profit). When the rate of profit declines the process of capital accumulation slows down, heralding a period of crisis of capitalism. The rate of profit had peaked in the early-to-mid 1960s in both Europe and the USA; thereafter, the rate of profit continued to decline for the next decade and a half falling from a high of about 20 percent to a low of around 10 percent.
Structural Crisis of Capitalism
Why did the rate of profit fall during this period? The falling profit rate goes to the heart of capitalism and shows up deep contradictions in the process of economic growth and technical change that accompanies capitalist development. The technological dynamism of capitalism is driven by competition between capitals to increase profits by reducing the cost of production. When the share of wages in national income is high, there is a strong incentive for capitalists to reduce the amount of labour required for production. The Golden Age of Capitalism, being a period of regulated and welfare capitalism, had ensured high and rising real wages and therefore maintained a high and relatively constant share of wages in national income. That provided the incentive for adopting labour saving technical change, i.e., adopting new techniques of production that required less and less labour per unit of output. Labour saving technical change increased the productivity of labour.
But the increasing productivity of labour came at a cost: falling productivity of capital or the output-capital ratio (the ratio of output to capital). Labour saving technical change, which increased labour productivity, was only achieved by replacing labour with capital, i.e., more and more labour was replaced by more and more machines in the process of production. This is one of the characteristic features that we often observe with capitalist development: mechanization and the increasing capital intensity of production. The use of more and more machines that increased labour productivity meant that every unit of output now required less labour but more capital; thus labour productivity increased but capital productivity fell.
This is the pattern of technical change, whereby labour productivity increases but capital productivity falls, that accompanies capitalist development during significant periods of time. This is also the way Marx had described the pattern of technical change under capitalism in his discussion of the process of general capital accumulation in Volume 1 of Capital. That is why economists Gerard Dumenil and Dominique Levy has called this pattern “trajectories a la Marx”, while Duncan Foley and Thomas Michl has called it Marx-biased technical change. But what has this pattern of technical change got to do with the falling rate of profit?
The rate of profit is defined as the ratio of profits to the total stock of capital and can be decomposed as follows:
rate of profit = (profit/capital) = (profit/output)*(output/capital)
Thus we see that the rate of profit is the product of two crucial ratios: (1) the share of profits in output, and (2) the productivity of capital. The share of profits in output, though high, had remained relatively stable through the Golden Age of Capitalism; this is a typical pattern observed under capitalism (other than for the neoliberal period). The productivity of capital, on the other hand, fell because of Marx-biased technical change leading to a sharp fall in the rate of profit, and ushering in a period of crisis for capitalism. The sharp decline in the rate of profit meant a decline in the revenues accruing to all sectors of the capitalist class, especially the top fraction. The neoliberal counterrevolution, the sharp turn in economic and social policy around the mid-1970s, was the response of the upper fraction of the capitalist class to their declining income and power (a more detailed development of this argument can be found in Dumenil and Levy, 2004).
Neoliberal Response as a Prelude to Crisis
The neoliberal turn largely managed to achieve what it had set out to. Profit rates started moving up and the revenue accruing to capital, especially the top fraction of capital associated with the financial sector, increased enormously. But it was a period of unmitigated disaster for the working class. Unemployment rates rose across the capitalist world, wages stopped growing (or slowed down considerably) in real terms, social welfare expenditures were gradually cut down, unions and other working class organizations were “busted”; in short, the social power and revenue accruing to the working class was severely restricted. It was a true counterrevolution which restored the power and privilege of the ruling class.
The two figures below demonstrate this in vivid terms. Between 1950 and 1973, real wages had increased at an annual compound rate of 2.61 percent, closely following the phenomenal growth of labour productivity which grew at an average annual compound rate of 2.70 percent. The next 25 years stand in stark contrast to this. Between 1974 and 1999, labour productivity grew at 1.62 percent per annum while real wages grew at only 0.92 percent per annum. Thus, even though labour productivity growth had slowed down significantly, it was still growing at close to twice rate at which real wages increased. This created a stupendous growth in profit incomes and created the source of finance that was to submerge the US working class in debt for the next four decades.
A crucial aspect of the neoliberal turn was the deregulation of sundry aspects of the economy, including, most importantly, the domain of operation of finance. The last great crisis of capital during the Great Depression had brought forth several important changes and new developments in the regulatory framework of capitalism. One by one, each of these laws relating to the operation of finance, both domestically and internationally, were whittled down or even outright overturned. Thus, the burgeoning profit income and the shredding of all regulation together created the supply of debt finance in the US economy. The demand for debt arose from a working class facing stagnant wage incomes but long used to growing consumption expenditures. The net result was the largest build-up of debt in the US economy since the Great Depression. During the beginning of the Great Depression total debt was about 300 percent of US GDP; in early 2008, total debt in the US economy was touching 350 percent of GDP. It was this huge debt build-up resulting from three decades of neoliberal economic policies that created a systemically fragile financial superstructure which imploded, leading to a credit freeze, when the housing bubble burst (I have borrowed parts of this argument from Wolf, 2008).
(Concluded.)
References:
Dumenil, G. and D. Levy. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. Harvard University Press.
Wolff. R. 2008. Capitalism Hits the Fan. Available here.
Link to Global Economic Crisis-I
Link to Global Economic Crisis-II
Link to Global Economic Crisis-III
The Medium Term Story
The medium term story of the evolving financial crisis begins at the end of the last century. With the bursting of the dot-com bubble at the end of the 1990s, possibilities of a long recession hovered on the horizon. The Federal Reserve, the Central Bank of the US, moved in with the tools of monetary policy to ease the slowdown. The target for the federal funds rate, the key short-term interest rate that the Fed monitors as part of it’s monetary policy tasks, was gradually lowered from over 6 percent per annum to a little below 2 percent within a span of about an year. Lowering interest rates to engineer a soft-landing for a slowing economy is a natural thing to do: reducing the cost of borrowing funds is a key way the Central Bank can affect the level of investment and consumption (especially of durable goods) expenditures and thereby boost the level of aggregate demand in a slowing capitalist economy. With finance in command, this normal and natural move had a perverse effect.
The effects of the falling federal funds rate gradually cascaded from the short-end to the longer end of the asset market, lowering interest rates on all kinds of contracts. One of the key long-term interest rates affected by this very sensible move of the Fed was the interest rate charged on various kinds of mortgage loans (loans to finance the purchase of homes). With mortgage interest rates falling, consumers not only started purchasing new homes with new mortgage loans but also refinancing their old mortgages. With the demand for mortgage loans increasing, and the increase sustained by a low-interest rate regime, house prices started picking up. Very soon, i.e., within a year or two, economists started noticing a bubble in house prices. There were several indicators of a house price bubble. For instance, the Case-Shiller house price index for 10 US cities - a commonly used price index for houses - increased rapidly since the early 2000s. Even more tellingly, the price-to-rental ratio of houses went through the roof. Between January 2000 and April 2006, the rental of an average house did not increase at all; during the same period, price of an average house increased by about 70 percent, sending the price-to-rental ratio on an upward spiral.
The fact that the price-to-rental ratio increased rapidly gave a clear indication that a house price bubble was building up. People were, in other words, purchasing houses not because of the service provided by a house but because of speculative motives. A rough proxy for the value attributed by consumers to the service provided by a house is the rental rate; since this was not increasing, it meant that people were not valuing the real service provided by the house. But prices of houses were shooting up giving an indication of an increasing demand for houses (relative to supply). Most of this demand was clearly arising from speculative motives; many of the house purchases were for the purpose of selling them off at a later date to reap capital gains (i.e., the profit derived from the difference between the selling and the buying price of the asset). Thus, the rise in prices was not driven by “fundamentals” (i.e., increase in the intrinsic value of the service provided by houses) but largely by speculative motives of capital gains; that is precisely what leads to an asset price bubble and that is what happened.
Sub-prime Mortgage Market
A run of a couple of quarters of rising house prices was very soon incorporated into the expectation formation mechanisms of financial markets. As has been observed over and over again in history, rising asset prices very soon creates irrational expectations that prices will keep rising, rising certainly in the foreseeable future if not forever. Such periods of rapidly rising expectations, feeding primarily on itself, have been labelled as “manias” by economists studying periods of asset price boom-and-bust. Prominent examples of such economists are Charles P. Kindleberger and Hyman P. Minsky, coming, as they are, from very different political traditions. In the context of the early twenty-first century US economy, the unprecedented house price bubble created grounds for the emergence of predatory lending and the sub-prime mortgage market. The sub-prime mortgage market was the market for mortgage loans to less-than-creditworthy borrowers at very high interest rates that often came with hidden but onerous terms. (Useful material on predatory lending and the subprime mortgage market can be found here)
A financial innovation that indirectly helped the emerging sub-prime mortgage market and the practice of predatory lending was “securitization”. Securitization, in the context of the mortgage market, meant pooling together hundreds and thousands of mortgage loans together and then selling bonds on that pool of mortgages. Investors buying those bonds - the mortgage backed bonds - received the income stream, both the principal and the interest, entailed by the mortgages as the mortgage borrowers serviced their debt. Securitization required that the entities, usually investment banks like Bear Stearns or Merril Lynch, that were issuing (i.e., selling) mortgage backed securities (the mortgage backed bonds or other kinds of assets backed by the mortgage pool) needed ownership of the pool of mortgages against which those mortgage backed securities were being issued. Thus, the entities that issued the mortgage backed securities went out and bought mortgage loans from the originators of the mortgages, i.e., those who sold the mortgage loan to the borrower, like Country Wide Financial (the largest mortgage seller in the US prior to the financial collapse).
The fact that mortgage loan originators had a market where they could sell off the mortgage loans they had originated created perverse incentives for the originators. Typically mortgage loan originators do a thorough screening to assess the financial background of applicants before making loans. With the emerging market for selling off mortgages, the effort at screening was reduced to zero. Things actually went even further. Since mortgages could be sold off at good prices to the investment banks, the mortgage loan originators had a incentive to start engaging in predatory lending, i.e., push mortgage loans on persons who they knew would not be able to sustain the payments entailed by the loan. Since the originator did not have to bear the risk of failure associated with non-payment of mortgage loans, they had no incentive to make prudent loans. All they had to do was to force some gullible working class person to agree to the sub-prime loan and then turn around and sell it off to some investment bank in Wall Street. Thus, the market for sub-prime mortgages proliferated, driven by rising demand coming from the Wall Street investment banks. And why were investment banks so eager to buy these sub-prime mortgages? To answer this question, let us look a little more closely at the process and results of “securitization”.
Securitization
Securitization is the division, repackaging and dispersal of debt, earning huge fee income for the entity (usually an investment bank) that is undertaking this process. The process starts with some commercial or investment bank buying a swathe of mortgages, some prime, some sub-prime, from smaller financial institutions and pooling them together. Each mortgage, recall, entails a stream of future payments; so the pool of mortgages, entails some specific stream of future payments. Various categories or “tranches” of bonds, arranged according to their risk characteristics, are then issued against the pool of underlying mortgages, i.e., against the stream of future payments entailed by the pool of mortgages. Investors who buy these bonds (mortgage backed securities) then have the claims on the mortgage payments coming through month after month after month; if some mortgage fails i.e., payments stop the lowest category (i.e., most risky) bondholder loses first, the losses travelling up the tier of the bonds.
Let us look at a specific example: Bear Stearns Alt-A Mortgage Pass-Through Certificate. This is how this mortgage backed security worked. Bear Stearns bought 2871 mortgages from different mortgage originators for a total of $1.3 billion; this mortgage pool had mortgages that had been originated in different parts of the US, each worth on average for $ 450,000. Bear Stearns then pooled these diverse mortgages and issued 37 different bonds against that pool of mortgages; these bonds were called the Alt-A Mortgage Pass-Through Certificates. Alt-A stands for a very specific kind of mortgage: a mortgage where the originator does not ask any questions about the financial situation of the borrower before making the loan. It is not even ascertained whether the person taking the loan has a stable employment or not! Two additional players come into the picture: credit rating agencies and insurance companies.
Since many investors had an idea that the mortgage backed bonds were risky investments, they required some “independent” rating agency like Standard & Poor’s or Moody’s to ascertain the riskiness associated with investing in those bonds. This is one of the typical functions of credit rating agencies: to ascertain the riskiness (i.e., risk of default) of bonds and assign a credit rating to it; credit ratings run from AAA/Aaa (least risky) to C/D (in default). There were two problems with the involvement of credit rating agencies in the whole securitization process. First, there was an acute shortage of reliable information about the mortgages in the underlying pool; recall how the mortgages in the pool had originated in very different geographical locations, had been offered to very different income categories of people. Most importantly, very little information was collected about the financial standing of the borrowers (especially in Alt-A mortgages). So, despite their best efforts, the credit rating agencies could not come up with realistic risk assessment of the bonds issued against the pool of mortgages. The second problem was even more serious: a conflict of interest. Who paid the fees to the credit rating agencies? The same investment banks that issued the mortgage backed bonds; thus, there was a real incentive for the rating agencies to underplay the risk and certify most of the bonds as “investment grade”. That is more or less what happened, as we now know.
The other player in the securitization process was an insurance provider; since investment in mortgage backed securities (and other related assets) carried some risk investors wanted insurance against default. The instrument that was used to provide insurance for such transactions was the credit default swap (CDS), a derivative financial instrument. Suppose an investor bought bonds worth $1 million; then, to insure herself against the possibility of default she could buy CDS from some financial firm like AIG on those bonds. The insurance premium that she had to pay, called the CDS rate or spread, was typically in the range of 1-2 percent of the value of the bonds, $1 million in this case. She would thus pay $ 20,000 (if the CDS rate was 2 percent) and the CDS contract would protect her against default for the period of the validity of the contract (typically a few years). In the bonds were to go into default the firm that had issued the CDS would have to pay her the amount of her losses.
There were several problems with the CDS market. First, it was an over-the-counter (OTC) market and did not operate through an exchange; hence the possibility of monitoring or regulating this market were negligible. All the contracts were bilateral contracts and no one other than the two parties to the exchange could, in principle know the details of the contract. Second, unlike traditional insurance contracts, there were no reserve requirements. Thus, the financial entity selling the CDS was not required, by law, to hold any reserves against the CDS issued, unlike traditional insurance. So, if the CDS were to actually come due there was no guarantee that the firm that had issued the CDS would be in a situation to make good it’s side of the contract. Third, the most bizarre aspect of the CDS market was that the investor buying the CDS was not required to hold the underlying assets.
This third aspect is truly incredible and led to a veritable explosion of speculation. Let us think about this for a minute. It meant that if I believed GM would fail three years down the line, an investor could buy $10 million worth of CDS on GM bonds by paying a fee of $200,000 (assuming a CDS rate of 2 percent); and this the investor could do even though she did not hold any GM bonds. If GM actually failed and her bet was correct she could make $10 million on an investment of $200,000, a phenomenal 49 fold return! One could never expect to make such return by actually holding the bonds, and so investors started making huge bets using the credit default swaps instead of investing in bonds and stocks. By the end of 2007, the CDS market had grown to about $ 55 trillion (about 4 times US gross domestic product).
But who bought the asset backed securities? Who bought the CDS? International investors of all kinds. Around the late 1990s, there was an enormous pool of footloose, speculative capital in the global financial arena. The East Asian crisis, the Russian crisis and several other developing country crises freed up finance for investment in the US; and these investors wanted high returns even if that meant holding risky assets. That is precisely what the Wall Street investment banks were busy churning out: highly risky but high-return investments in the form of the asset backed securities and other more exotic assets. Hedge funds, pension funds, sovereign country funds and other large institutional investors lapped up the exotic assets which promised high returns.
But the whole edifice was built on very shaky foundations. This highly-leveraged investment game could remain profitable if either of two conditions were met: (a) mortgage payments kept coming in, and (b) house prices kept moving up. If mortgage payments stopped coming in, the property could be taken over and sold; hence sub-prime mortgages remained profitable investments even when the borrower was almost certain to default as long as house prices kept moving up. In the middle of 2006 house prices stopped rising and foreclosures started piling up; and then the whole process, the whole speculative game, started unravelling.
To the Short-term once again
With the medium term story more or less under our belts, let us return once more to the short term story and ask: why did Bear Stearns fail? Why did Lehman Brothers fail? Why was Fannie and and Freddie nationalized? What caused the near-collapse of AIG? Bear Stearns and Lehman Brothers went under for very similar reasons: they could not keep borrowing to finance their positions. Towards the end of it’s life, Lehman was rolling over close to $ 100 billion a month to finance it’s investments in real estate, stocks, asset-backed securities, bonds and other financial assets. When news of foreclosures started pouring in, investors became convinced that Lehman had big holes in it’s balance sheet because of it’s exposure to the sub-prime mortgage market. They refused to lend it money; thus it’s cost of borrowing went up, it’s stock prices plummeted and it’s credit rating was dropped. With no other option left, it had to file for bankruptcy on September 15, 2008.
Fannie Mae and Freddie Mac were government supported entities (GSEs) that were created to help low-income homeowners get easy access to the mortgage market. They were meant to guarantee mortgages and was supposed to finance this operation by issuing it’s own bonds which were implicitly backed by the US government. It is now clear that they did not stick to this mandate of theirs. Instead, they used the subsidized loans that they could get from the market (due to the implicit government guarantee) to invest in mortgage backed securities which were backed by pools of sub-prime mortgages. When the sub-prime mortgages started failing, these institutions started losing asset values and it became clear by mid-2007 that they could not sustain the mounting losses. At that point the government stepped in to explicitly guarantee their debt (because it was spread far and wide in the global financial system) which finally culminated in their nationalization.
AIG, the largest insurance company in the US, got into serious trouble because of the credit default swaps that it had written. Around mid-September, about $ 57 billion of insurance contracts that it had written, in the form of CDS, required it to raise serious money. The CDS were all written on bonds linked to pools of sub-prime mortgages and as the sub-prime market worsened, the possibilities of the CDS payouts coming due increased. Because of the possible losses that it could incur, credit rating agencies downgraded AIG. The way the CDS contracts were written, a credit downgrade required AIG to demonstrate that it was capable of making good on it’s contracts; this required it to immediately “post collateral” to the tune of $ 15 billion; if it failed to post collateral, it would be considered bankrupt. Since it did not have that amount of reserves and could not borrow from a tightening credit market, it had to approach the Fed for funds.
Bubble bursts: Delevarging and Deflation
An aspect of the whole build-up that made the unravelling especially painful was the stupendous amount of leverage in the financial system. When the bubble was inflating every investment was so hugely profitable that investors borrowed heavily for investing. This was especially true of the investment banks whose leverage (i.e., ratio of debt to equity) was about 30:1 by 2007; thus, for every dollar of equity these institutions had borrowed 30 dollars. And a large part of the borrowing was at the shortest end of the market. This meant that the investment banks had to continuously borrow from the market (usually roll over their debt) in order to keep financing their assets and investments. This made the system extremely fragile because any serious problem would lead to painful deleveraging (i.e., forcibly reducing debt by various means often involving serious financial loss) and possibly even asset price deflation.
As foreclosures picked up speed, house prices started moving down. Defaults on mortgage payments and falling house prices meant that the mortgage backed securities started losing value. Often this meant that when lenders came knocking on the doors for their funds, assets had to be sold at short notice and at low prices to cover debt payments coming due. A rush to sell assets often led to a further fall in the value of assets, even those not linked to mortgage backed securities, leading to worsening balance sheets in wider and wider circles. With bonds losing value and even facing default, the CDS contracts suddenly started coming into effect. Since CDS issuers like AIG had not held any reserves for such contingencies, they got into greater and greater difficulties as bonds insured by CDS contracts started failing.
Falling assets values meant that financial firms faced greater difficulty in borrowing from the market, partly because the value of assets that they could offer as collateral had already fallen. Falling collateral value often lead to increasing costs of borrowing in terms of higher interest rates. Difficulty is accessing funds gives another push to sell off assets to cover debt payments, taking the spiral one step down. Deleveraging and an asset price deflation and a string of failures and rescues really led the financial system, in mid-September 2008, to completely lose faith in itself; it is this severe loss of confidence that manifested itself in the credit freeze, the center piece of the short-term story.
(To be continued.)
Link to Global Economic Crisis-I
Link to Global Economic Crisis-II
The Need for Aggressive Fiscal Intervention
Before we move on to looking at the global economic crisis from a medium term perspective, i.e., before we take a look at the phenomenon of the house price bubble and associated speculation that created the grounds for the current credit crisis, it might not be amiss to focus on what can be done in the short-run to deal with the real consequences of the economic crisis: the deep and prolonged recession that the US economy will undoubtedly be pushed into. Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending; businesses cut 240,000 jobs in October alone, the highest figure in 14 years. The financial storm, comprising a severe credit crisis and even a possible banking crisis, worsened the slowdown further. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. A direct and aggressive boost to aggregate demand is the only way to prevent the current recession from becoming a depression. Why is that so?
In any capitalist economy, such as the US economy, the level of aggregate economic activity and employment is determined, in the short run, by the level of aggregate demand, and fluctuations in employment and output are accordingly determined by fluctuations of aggregate demand. Aggregate demand is defined as the sum total of all expenditures on goods and services produced in the economy. Macroeconomists divide total expenditure that make up aggregate demand into four categories: consumption expenditure, investment expenditure, government expenditure and net export expenditure. Consumption expenditure is the total spending by households on durable and non-durable goods, and also services; investment expenditure is the total spending by firms on plant, equipment, machinery and inventories, and the residential investment expenditures by households; government expenditure includes the total spending by local, state and federal government agencies on goods and services (excluding transfer payments); and net export expenditure is the net amount that foreigners spend on buying goods and services produced in the domestic economy.
BEA figures released for the third quarter show that every component of aggregate demand emanating from the private sector of the US (or foreign) economy either declined or slowed down when compared to the second quarter. In real terms, consumption expenditure decreased by 3.1 percent, the steepest decline since 1980 when the US economy was in the grip of a severe recession; during the previous recession in 2001, consumption expenditures had not even declined. Investment expenditures, other than those devoted to maintaining inventories, have also declined. Real nonresidential fixed investment expenditures decreased 1.0 percent in the third quarter, in contrast to an increase of 2.5 percent in the second. Expenditures on nonresidential structures increased by 7.9 percent, compared with a much higher increase of 18.5 percent in the last quarter; expenditures on equipment and software decreased 5.5 percent. Real residential fixed investment decreased 19.1 percent, compared with a decrease of 13.3 percent in the second quarter. Demand emanating from the external sector has a similar story to tell: even though exports registered a positive growth, the growth had slowed down considerably falling from 12.3 to 5.9 percent.
This is hardly surprising. With credit drying up, home equity vanishing and layoffs increasing, working-class households cannot be expected to increase their expenditures on the purchase of goods and services; a continued decline in the stock markets, coupled with increasing volatility will make matters worse. A recent survey in the US showed that consumer confidence was at it’s lowest value in 40 years, and so it is almost certain that consumption expenditure will not rise in the foreseeable future. Neither will export expenditures rise to shore up aggregate demand because most of the economies in the world are either already into a recession or are rapidly slowing down. Nor can firms be expected to increase their expenditures on plant and machinery and equipment. And the problem here is more than a credit freeze: even if the credit markets were to ease due to government intervention, which it is adamantly refusing to do, firms might not be willing to expand their operations because they face sagging demand. Capitalist firms produce to make profits; if they expect markets to be down and demand to fall, they will cut back and not increase their expenditures even if the cost of financing goes down.
That leaves us with government expenditure as the only source for increasing aggregate demand. In the midst of possibly the worst economic crisis since the Great Depression, the US government needs to aggressively step up it’s expenditure on goods and services; since private expenditures, either of firms or of households, cannot be expected to increase in the short-term, aggressive fiscal intervention seems to be the only way the US government can prevent the economy from sliding into a decade long L-shaped recession that was Japan’s fate in the 1990s. Moreover, such expenditures are warranted even from a long-term perspective of economic growth. Rebuilding the crumbling public infrastructure like roads and bridges, improving and widening the ambit of the public transport systems in US cities, jump-starting the movement towards green technologies, making health care available to all working-class Americans, increasing the unemployment benefit substantially, investing in the educational infrastructure makes both short-term and long-term sense. It will help boost aggregate demand in the short run and prevent a slide into a prolonged recession, and in the long run it will build the physical and human capital to help take the US economy into a higher growth trajectory.
Two alternatives to boost the economy, which are often brought up in this context, also seem to have lost their efficacy: tax breaks and monetary policy. Tax breaks have already been tried out and does not seem to have worked; reeling under mountains of debt, the tax break (or refund) cheque is often used by households not for making new purchases but for reducing the outstanding debt. The second alternative, monetary policy action, is also rapidly reaching the point where it will become totally ineffective. For it is almost certain now that the US economy is already stuck in what John Maynard Keynes long ago called a liquidity trap, a situation where the Central Bank can no longer boost aggregate demand by reducing interest rates. The Fed has already reduced the target federal funds rate to 1 percent and reducing it further to 0 percent, the lowest it can go, will possibly not help. Even if confidence in the financial system is restored and nominal interest rates lowered, this might not increase borrowing by firms because of their bleak forecast of falling demand for the goods they produce. Monetary policy has reached it’s limits; the only option to ward off a severe recession and decrease the pain on the working class seems to be aggressive fiscal intervention in terms of direct expenditure on goods and services by the US government.
(To be continued.)
The fact of Democrat Barack Obama being the clear favourite in the US presidential race has been the source of a range of progressive expectations. But beyond the immense symbolic import of the moment, it is debatable whether an Obama win will radically alter US paradigms, more so abroad than at home.
That said, even the purely symbolic significance of the event is truly momentous. In a country where racial segregation is still within living memory, and deprivation for ethnic minorities still a reality, having the first black President would still send out a clear signal of change within the US.
Indeed, the Democratic Party, on the face of it, seemed to represent sweeping change in this election, what with Obama’s intense fight for the nomination being with the first-ever female candidate, Hilary Clinton.
There will certainly be a welcome move away from the George Bush legacy, with many Americans seeing it has having endangered their constitutional rights and battering the image and prestige of the US abroad.
Obama has been able to project a transformative aura, giving rise to hopes of a break with the neocon tradition of trampling over international institutions and increasing global strife.
However, even as an Obama presidency might rethink some foreign policy issues like Iraq and relations with Latin American nations, there is unlikely to be any structural readjustment in Washington’s policies. India can hardly get a President as keen as George Bush was on cementing strategic partnerships.
And there is hardly any variation between the Democrat and Republican positions on critical, and deeply divisive, issues like the larger West Asian policy. Indeed, Obama has had to singularly disavow any possibility of change here.
It is also indicative of the more disturbing aspects of the public consensus in the US that Obama had to repeatedly insist that he was, indeed, not a Muslim. Breaking away from the lobbyism that so deeply shapes US politics, as well as from the hold of the military-industrial complex, would need much more than Democratic symbolism.
Courtesy: The Economic Times
Anti-immigration laws are enforced not to stop but control new settlements and to legitimise the use-and-throw logic that characterises neo-liberalism. This increases labour vulnerability economically and politically — by differentially including the immigrants and ghettoising the local consciousness against them.
Throughout the world — in Maharashtra, in Assam, in the US, everywhere — the same ghettoised psyche comes coupled with the trans-politicisation of economy, which has relegated people to passive receptors of global mobility of capital.
Specific identitarian conflicts today are various realisations of the competitive ethic that underlies a market-oriented political economy. With the entrenching of this ethic in every corner of the society under globalisation, such conflicts are bound to multiply.
What the market does essentially is that it perpetuates fragmentation and individuation, thus posing every division in a horizontal competition. Even those conflicting interests, which could be resolved only by structural transformation, are preserved through their metamorphoses into competing groups and lobbies.
Arguably the greatest Indian philosopher, Muhammad Iqbal understood this when he said, “Fanaticism is nothing but the principle of individuation working in the case of group”. In other words, regional/national fanaticism that defines anti-immigration today is the product of individuation that competition necessarily poses.
Under neo-liberal globalisation, I agree, the “global village” has become a virtual reality. However, in this village citizens are reduced to “much as potatoes in a sack form a sack of potatoes”. They are thrown into a large “stagnant swamp”, where they desperately try to save themselves and stand up in whatever way they can — even if at the expense of others.
So anti-immigrant upsurge and its legitimacy are nothing but a vent to this desperation. It is a commodified deformation, in the socio-political market, of structural conflicts.
Hence, the question is not whether globalisation impedes labour mobility, but how through various means it impedes labour’s ability to challenge capital.
Courtesy: The Economic Times
Link to “Global Economic Crisis-I”
Short-term: The Sequence of Events
Even though the credit crisis attained dangerous proportions only in mid-September, it had already announced itself in the early part of the year with the collapse of Bear Stearns, one of the five famed investment banks that defined Wall Street; today none of those five investment banks - Bear Stearns, Goldman Sachs, Lehmann Brothers, Merril Lynch and Morgan Stanley - exist, an indication of the depth of the crisis. Faced with a fierce run on it’s dwindling reserves and it’s stock plummeting, Bears Stearns was forced to sell itself off to J P Morgan Chase (one of the largest commercial banks in the US) on March 16, 2008. The next three months could be best described in terms that the police often use in India: tense but under control. On July 01, the next piece of bad news emerged and shattered the uneasy calm: Country Wide Financials, the largest mortgage seller in the US, collapsed and was acquired by Bank of America (one of the largest commercial banks in the US). Following closely on the heels of this event, IndyMac bank failed - the second largest bank failure in US history - and was taken over by the Federal Deposit Insurance Corporation (FDIC), one of the institutions responsible for monitoring the health of the banking system in the US. IndyMac was, unsurprisingly perhaps, part of the Country Wide financial family.
Things started speeding up in September. On September 08, Freddie Mac and Fannie Mae, the two government supported enterprises (GSE) operating in the mortgage market was nationalized, with assets of the two entities totalling to more than $ 5 trillion. On September 15 another of the five famed investment banks, Lehmann Brothers, filed for bankruptcy; Lehmann’s assets were a little over $ 600 billion and this made it’s bankruptcy filing the largest in US history. Next day, the Fed stepped in with a $ 85 billion loan to prevent American International Group (AIG), the largest insurance firm in the US from going under. These two events, Lehmann’s bankruptcy filing and AIG’s rescue, sent shock waves through the world financial system. The result was a rapid erosion of faith in the financial system leading to a veritable credit freeze: financial institutions stopped lending, to other financial institutions, to businesses and to consumers.
The next thirty six hours, from the morning of September 17 to the evening of September 18, accelerated the credit crisis to extremely dangerous proportions and convinced the US Treasury and the Federal Reserve that government intervention of unheard magnitudes (at least since the Great Depression) would be necessary to prevent total financial collapse. Ben Bernanke, the chairman of the Federal Reserve (the US Central Bank), was famously reported as saying, at one point during this 36 hours, that if the government did not save the (financial) markets now there might not be any financial markets in the future. So, what happened during those crucial 36 hours?
The crucial 36 hours
The first indication of a severe stress in the financial system was a shooting up of credit default swap (CDS) rates, especially on Morgan Stanley and Goldman Sachs (two of the famed five Wall Street investment banks) debt, during the early hours of September 17. Credit default swaps are insurance contracts that can protect bondholders against the possibility of default. For example if an investor has bought bonds worth $ 1 million issued by firm A, then the investor can also buy CDS - typically issued by financial institutions like large commercial banks, investment banks or insurance companies - to protect herself against a possible loss resulting from firm A defaulting on it’s bonds; the premium that the investor pays for the CDS is called the “rate” or “spread” and it is typically around 2% of the amount insured (the “notional value”). So, in the case of this example, the investor would pay $ 20,000 to buy CDS and if firm A were to go under, then the “counterparty” to the CDS contract (i.e., the financial institution that issued the CDS to the investor) would step in to pay the investor $ 1 million and the interest on that amount.
CDS rates (i.e., the premiums that are paid on the insurance contracts) are, thus, an indication of the market’s belief about the possibility of default of some institutions; CDS rates on bonds issued by firms are typically low when the market thinks the probability of default of those firms are low and high when the market thinks the probability of default are high. Thus, on the morning of September 17, when CDS rates went through the roof, this provided evidence of severe loss of faith in the financial system.
When investors lose faith in the financial instruments issued by private parties, they turn back to those issued by the government and that is what happened when CDS rates multiplied by close to a factor of five. Investors let go of private financial instruments like hot bricks and rushed into US government securities, a phenomenon often described as “flight to safety”. The US government, i.e., the US Treasury department, issues three primary kinds of securities: T-bills, T-notes and T-bonds (where the “T” stands for Treasury), where bills mature in less than a year, notes mature between one and ten years and bonds are of longer maturities than a decade. When investors lost faith in the private financial system, they rushed in to US T-bills, the short-run heavily-traded ultra-safe US government securities. This huge rush into T-bills pushed up the price of T-bills and drove the yield (i.e., interest rate) on T-bills down. At one point in time, during this 36 hour period, the yield on T-bills was pushed down all the way to zero (the lowest it can ever go to) implying that investors were willing to hold T-bills even though the nominal return was zero and real returns were negative (because the inflation rate was positive).
As private investors were madly rushing into the safety of US T-bills, another important event was unfolding in the mutual funds market. Money market mutual funds (MMMF) are financial institutions that have become popular over the last three decades, especially in the US. They typically work as follows: investors put their money in MMMF’s by purchasing shares in the MMMF’s stock; thus the MMMF becomes a mechanism for pooling huge amounts of money and then using those large sums for investing in a very diversified portfolio of financial assets, thereby making the investments extremely safe. Thus MMMF’s were, till September 17, thought to be as safe as a deposit account in a commercial bank, and the added advantage was that the money invested in MMMF shares would give a positive rate of return as opposed to a deposit account which is usually non-interest bearing. On September 17, one of the oldest and largest MMMF’s, Reserve Primary Fund, “broke the buck”, i.e., it made losses on it’s investments such that it could not guarantee a positive return to it’s shareholders. Every dollar invested in Reserve Primary was now, by it’s own admission, worth less than a dollar. This was an unheard of event and as news of Reserve Primary Fund’s losses spread, investors started pulling money out of MMMFs.
This had a very negative consequence for the real economy because of the serious involvement of MMMFs in the commercial paper (CP) market. Businesses typically need to constantly borrow short-term funds to keep their operations going; these borrowed funds go towards funding payroll, paying suppliers, maintaining inventory, etc. Firms, at least the big ones, usually borrow short-term funds in the US by issuing commercial paper (which is essentially a bond with a short maturity of about a week or a month). Who buys commercial papers? The most active institutional investors in the CP market are the MMMFs; some of the largest chunks of commercial papers are bought by the MMMFs. So when the MMMFs faced an increasing spate of withdrawal, in the wake of Reserve Primary Fund’s breaking the buck, they stopped buying commercial paper. This, essentially, meant that the CP market ground to a halt. Thus businesses were no longer able to borrow the short-term funds that they need to keep operating. The economy, by all means, shut down.
Adding to and going hand-in-hand with these processes were the growing problems in the interbank (lending) market. Commercial banks typically lend and borrow banking system reserves (roughly the sum of currency in the banks’ vaults and the amount they hold in their account with the Central Bank) among themselves for very short periods, usually overnight periods. The interbank lending market that is most closely watched is the London interbank market and the rate at which loans are made in this market is the London Inter Bank Offered Rate (LIBOR). The most important characteristic of loans in the interbank market is that they are unsecured, i.e., they are not backed by collateral. Thus, a bank can get a loan in the interbank market only if other banks consider it financially sound; thus when the LIBOR jumps up suddenly it provides evidence that the largest and the best banks in the world have lost faith on each other. On September 17, the LIBOR shot up giving indication of increasing strain in the interbank market.
It was these sets of events - CDS rates shooting up, closing down of the CP market, increasing strain in the interbank market - that spooked the US administration and convinced them of the necessity of the most extensive government intervention in the financial markets since the Great Depression. These crucial sets of events were precipitated by the string of big financial failures that the US economy had witnessed over the first two weeks of September: the failure of Fannie and Freddie, the bankruptcy of Lehmann and the near-collapse of AIG. It was these failures that led to a rapid loss of faith in the financial system and heralded a full-blown credit crisis. And why did Fannie and Freddie and Lehmann and AIG fail? All these financial institutions failed because at crucial points in time they could no longer raise money from the market to finance their assets, i.e., they could not borrow money or roll over their short-term debt; financing, for these institutions, had dried up. And why did financing dry up for these big and reputed financial institutions? Because each of these, in their own ways, were exposed to the subprime mortgage market and took huge losses when the subprime mortgage market started unravelling. As news of these failures spread, investors, fearing losses, became increasingly unwilling to lend money to these institutions.
(To be continued.)
Capitalism Hits the Fan: A Marxian View from UVC-TV 19 on Vimeo.
Lecture by Professor Rick Wolff, Department of Economics at the University of Massachusetts - Amherst on October 7, 2008.
The global economic crisis currently underway is, by all accounts, the deepest economic crisis of world capitalism since the Great Depression. It is necessary for the international working class to understand various aspects of this crisis: how it developed, who were the players involved, what were the instruments used during the build-up and what are it’s consequences for the working people of the world. This understanding is necessary to formulate a socialist, i.e., working class, response to these earth shaking events. In a series of posts here on Radical Notes, I will share my understanding of the on-going crisis as part of the larger collective attempt to come to grips with the current conjuncture from a socialist perspective, to understand both the problems and the possibilities that it opens up.
The Big Story
The current crisis can possibly be fruitfully understood if measured against different time scales: the short-term, i.e., in terms of days and weeks; the medium-term, i.e., in terms of months and years; and the long-term, i.e., in terms of decades. This analytical compartmentalization into three different time periods is useful because it demonstrates how long-term trends silently but inexorably created the conditions for the medium-term problem to explode into the short-term problem that has buffeted the economy since mid-September, 2008.
In the short-term, the current financial meltdown is a severe credit crisis, a situation whereby financial institutions have become unwilling or unable to lend and borrow among themselves thereby freezing the flow of credit in the entire economic system; this credit freeze is largely fuelled by a serious loss of faith in financial institutions and in the financial system as such and came to the fore most forcefully in the middle of September, 2008. It is also possible that the credit freeze, and the underlying loss of faith, might explode into a full-blown banking crisis: banking panic leading to run on even healthy and solvent banks.
In the medium-term, the crisis is the unravelling of a stupendously leveraged speculative bubble on real estate that built itself up for about seven years from the beginning of this decade (and century); this speculative bubble was mediated by fancy financial instruments fashioned by Wall Street, running all the way from sub-prime mortgages, asset backed securities (ABS) and mortgage backed securities (MBS), collateralized debt obligations (CDO) to credit default swaps (CDS); this speculative bubble led up to and culminated, when it finally burst in the middle of 2007, in the credit crisis that the US, and gradually the global, economy finds itself in.
From a long-term perspective the present crisis is, of course, more than just about Wall Street and finance and banking; it is a full-blown crisis of the neoliberal turn in capitalism inaugurated the 1970s. Neoliberalism (or the neoliberal counterrevolution) was a response to the structural crisis of capitalism that emerged in the late 1960s. It was a response from the point of view of the upper fraction of the capitalist class, a fraction especially dominated by financial interests. The neoliberal counterrevolution ushered in a capitalism firmly under the sway of finance capital; the neoliberal policy turn was geared towards breaking the power of labour vis-a-vis capital that had gradually built up during the two decades after World War II. The result was stagnant real wages, slow but growing productivity, and hence growing profit incomes especially of the financial sector, increasing financialization and a deregulated economy for finance to operate in.
Stagnant wages created the demand for debt from a working class used to growing consumption spending; huge profit incomes and the shredding of all regulation on finance created the supply. The result was a growing role of debt in the lives of the working class which, over time, led to a huge debt overhang on the entire economy. As the ratio of outstanding debt to income rose, with stagnant incomes for the majority, the financial fragility of the entire system increased; and it is this systemically fragile financial architecture that finally cracked under the weight of the bursting housing bubble. Thus, the long-term build-up of debt in the US economy resulting from the neoliberal counterrevolution, which increased the financial fragility of the system, created the conditions in which the bursting of various asset price bubbles could lead to a severe credit crisis and loss of faith in the entire financial system.
Impact on the Real Economy
Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending. The financial storm, comprising a severe credit crisis and even a possible banking crisis, will only deepen the slowdown and might even push the US and the rest of the world into a prolonged and painful recession, possibly even a decade long L-shaped recession like the one that Japan witnessed during the lost decade of the 1990s. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. An aggressive fiscal intervention by the US government and other governments around the world, in terms of direct expenditure on goods and services, will be necessary to prevent the slide into a prolonged recession. It is in the interests of the working class to push for such intervention even as it works towards re-building it’s political, social and economic institutions.
(To be continued.)