Notes on the "Bailout" Financial Crisis George Caffentzis

0. These notes on the political-financial crisis were written in the last month while many US financial corporations were, in effect, nationalized in response to the bankruptcy of several major investment and commercial banks. The notes have been prompted by the fact that there has been remarkably little political activity in the streets, union halls, retirement communities of the country demanding a resolution of the crisis in favor of the millions of workers who are now losing wages, houses and pensions. Certainly not even the most compliant unions and the retirement associations were invited to participate in the negotiations that were carried on concerning the legislation.

Is this lack of attention to workers' interests due to the "shock" tactics that the Bush Administration used to push the "bailout" legislation? Perhaps, but we also think that money and the financial sector of capitalism that deals directly with it have been inherently opaque to working class political analysis and action for more than a century. (The last time there was a self-conscious working class debate on a national level concerning the money form was the 1896 election when the fate of the gold standard hung in the balance.)

The purpose of these notes is to present in outline a way of understanding this crisis as developing out of class struggles taking place in the US and internationally in the last decade. This can be useful, I believe, since if class struggles had the power to create the crisis, then understanding them might guide us to the path that would lead us out of the crisis with more power.

1. Financial crises are difficult to understand from the point of view of class politics, for our model of class struggle to this day is still the factory where the workers' labor power is bought (through the payment of a wage) by capitalist firms and put to work along with machines and other inputs to produce a product that is sold for a profit. The workers are worked harder, longer, more dangerously and/or more productively in order to make a larger profit. They respond to this work regime by a combination of means, from compliance to a thousand and one ways of passive resistance to strikes to factory take-overs, while the capitalists devise strategies to resist this resistance. This struggle can take a myriad of forms (sometimes involving the most refined application of social and psychological sciences and sometimes the most brutal forms of assassination and torture), but the factory model is categorically straight forward: workers resist exploitation and capitalists resist their resistance; with profits and wages most often moving inversely. It is all apparently simple, but it can become complex because in a struggle there are many deceits and tricks each side plays both on each other and on observers (present and future).

When it comes to money and the financial corporations that operate with it (banks, mortgage loan corporations, and other money market firms) this model of class struggle seems not to operate. Why? There are at least three primary reasons.

First, money is quite a different "product" than either physical things like cars or services like massages. It is a bit mysterious. Words that combine the philosophical and necromantic like "magical," "abstract," "fetishistic," and "universal" are often used to describe money and to immediately give the impression that, compared to other commodities, the usual rules do not apply. For example, money is a unique kind of commodity, for it exchanges with all other commodities, a role that no other commodity plays.

Second, while industrial or commercial firms require the production and sale of a non-monetary commodity in order to "make money," financial firms make "money from money." They seem to operate in an abstract realm without a spatial location. This adds to the weirdness of the financial firms that during the history of capitalism have always attracted both fascination and hostility from other capitalists and workers.

Third, they claim a different form of income than other capitalists and workers: Interest. When it comes to making money they make it in the form of interest on loans to capitalists (who pay interest out of their profits) and workers (who pay interest out of their wages). In other words, the money financial firms "make" is created "elsewhere" by workers working for non-financial capitalists. The workers of the financial firms themselves may be exploited--e.g., be forced to work long hours and get paid in worthless stock bonuses--but the income that the firms' owners receive does not derive from these employees' efforts in producing a product. It comes from the profits and wages of those who received loans who are, in most cases, not their employees.

Where does the right to earn interest come from? How is it determined? These kinds of questions haunt our understanding of financial firms, since it appears that in a society where work is the source of value, interest appears to be like "creation out of nothing"!

2. On each of these counts then, financial firms do not fit into the factory model of class struggle. There undoubtedly is a form of struggle that financial firms in their nature are involved in that has an ancient origin: the struggle of debtor versus creditor. For when a firm lends out money to a person or firm, the debtor makes a promise to repay this loan with interest at some time in the future. The failure to do so in ancient times often led to slavery or mutilation, i.e., the famous "pound of flesh" the creditor was allowed to cut from the body of the defaulting debtor. In contemporary capitalism, besides criminal sanctions in the most egregious cases, default on loans leads to bankruptcy for capitalist firms and liens on the property and future income for workers. This kind of struggle (to pay or not to pay the debt) is based upon the threat to violate contracts, not upon the fundamental nature of the wage contract itself in which is inherently exploitative.

There is clearly a struggle going on in the US today concerning money and finance, but how best to understand it? Workers versus Capitalists, Debtors versus Creditors, or some new way? What are the political demands that are being voiced in this crisis?

3. To answer these questions we must get back to the basics and how they apply to contemporary capitalism. Before examining the particular elements of the "bailout" legislation, however, let us look to the elements of capitalism that are involved: F, the financial sector; I, the industrial and commercial sector; and W, the working class. We recognize that this might look like dry stuff from the outside, but we have two things to say about our style: (1) however dry, the contents of this analysis concern the fate of millions of people, including our own, and (2) the pace of this analysis has been deliberately made to take one step at a time to slow down the speed of thought concerning this crisis in order to combat the artificial acceleration the Bush Administration and their allies have imbued it.

There is, undoubtedly, a more fine-grained analysis in the future that will ultimately be required, recognizing that the working class has many divisions and hierarchies and that capitalist firms are not only divided into sectors but also in many different sizes and scales. Most important, we need to recognize that the workers involved in this story are not simply those in the territorial US.

Given these elements, we will have to look at the relations and struggles between F-I, the finance sector and industrial and commercial sector; F-W, the finance sector and the working class; and, of course, W-I, the working class and the industrial and commercial sector. Thus there is an intra-class and well as an inter-class struggle, i.e., one between wages and profits and wages and interest, but also one between profits and interest. The entrance of wages into the class equation concerning finance is very important because there has been a profound shift in the 20th century concerning our notion of interest. (That is one reason why, although very important, Marx's work in Capital III is only of limited assistance in this period.) In the 19th century and before, workers were never important direct players in the financial world, since they had almost no property that could be used as collateral to take out loans from financial institutions and they had almost no savings to be used as deposits in banks. In fact, the many mutual aid and credit union organizations that sprang up in the 19th century were due to the fact that banks and other financial institutions considered themselves as having solely capitalists (large and small) as their customers or that workers were too suspicious hand over their hard earned savings into the hands of financial capital. This is no longer the case. Consequently, when we speak of financial crisis in the 21st century, we must speak of inter-class conflict as well as conflict between factions of capital.

4. What is the source of the financial crisis and the "bailout"? At first, it appears like every other financial crisis in history: the inability of debtors to pay back old loans and the inability of financial firms to make new loans. Instead of money creating money out of nothing, we now have money creating nothing.

There are two reasons why this crisis is a contemporary one: (a) it has its roots in the condition of the US working class and (b) it has its roots in globalization of financial flows.

The inability to pay back has much to do with working class home owners instead of capitalists not being able to sell their production for a profit large enough to pay the interest on their loans (which was the usual crisis scenario in the 19th century). In this case, the workers' wages were not large enough to pay the interest and principal on the loans they took out to purchase their homes. If workers over the last few years were receiving substantial wage increases, then there would not have been a financial crisis in the Fall of 2008. They would have been able to keep up with increasing payments required by the often bizarrely variable rate mortgage loans they negotiated. However, this was not the case. Indeed, there was a bout of real wage stagnation at the very moment when the housing market was booming and housing prices bubbled. So, in an important sense, the inability to sustain a successful wage struggle in the US of the 21st century is at the heart of the present financial crisis.

The second aspect of the crisis is the restriction in the flow of new investment funds into the US financial system. It was through vast flows of capital into the financial sector (especially from China) that led to US financial firms to offer mortgages and extend credit to US capitalists and workers. And here the word "flow" is important, for as long as there is new capital coming into the sector, "bad" loans could be "rolled over," and payments delayed without any serious problem. However, when there are significant constraints in these flows the mechanisms of deferral cannot be used and loans are defaulted on while new loans cannot be transacted.

I hypothesize that China was the major source of restriction of flows into the US for two reasons. The first is the recent reduction of the growth rate of the Chinese economy that indicates that there has been a decline in the average rate of profit in China. The second reason is that the Chinese workers have recently been able to dramatically increase their wages and better their working conditions. This has lead to increased Chinese investment within China itself and the cultivation of the domestic market in government planning. These trends have recently negatively affected the flows of Chinese foreign investment into the financial sector of the US and have been part of the reason why the US government has to make up for the short fall.

Thus we see how the mortgage crisis in the US is the effect of two proletariats: (1) the US proletariat's inability to increase wages (there have been almost no strikes of significance in the US in the last few years) and workers’ reliance on credit and equity to satisfy their subsistence needs (traditionally the attributes of rentiers) and (2) the Chinese proletariat's success, thorough thousands of strikes and protests, in increasing wages and forcing more investment in its social reproduction.

5. Given these causes rooted in class struggle, let us examine the "bailout" legislation as a set of "deals" between different elements of contemporary capitalism (coordinated by the state). By a "deal" we mean something like a tacit agreement that sometimes appears in but often underlies the official legislative formulation of a social contract. We use this language to indicate that the concept of a social contract is too formal and irenic (i.e., peaceful) a structure to capture the often unspoken aspects of these agreements to disagree that are dependent on the state of power relations and grow out of a protracted and open-ended struggle. Antagonists can agree on the rules of the struggle until the rules come up for struggle.

Let us take each of these sectors and examine the deal that is being offered by the state to them in outline:

F (the financial sector): This sector agrees to still-to-be announced government imposed open-ended restrictions on their freedom of action and government regulation of their money capital movements. It also agrees to at least temporary nationalization of certain branches of the industry. In exchange it will get a large-scale "socialization" of debt losses across the board (not just in so-called subprime mortgage loans). Implicitly there is an assumption that this socialization will not be adversarial (i.e., the personnel involved in choosing the debts to be purchased by the government will not be looking out only for the government's interest).

I (industrial and commercial sector): This sector agrees to support the "rescue" of the financial sector in exchange for a government guarantee of a continuous access to credit (the end of the "credit crunch") and an implicit indication that the principle--"too big to crash"--that was used to judge which firms in the financial sector would be "bailed out" would also be applied to this sector.

W (the working class): This class agrees to a dramatic wage decrease either through debt-inspired inflation and exchange rate devaluation or the theft of the Social Security Fund or both in exchange for a return to relatively full employment relatively quickly.

The configuration of the relations between F, I, W in the immediate future is described below:

F-I (the relation between interest and profit and financial and industrial capitalists). This coming period will repose the eternal conflict between the financial sector (and its claim to interest) and the industrial and commercial sector (and their claim to "the profits of enterprise") after a period of hegemony of the financial sector. Economic rhetoric will be filled with snide remarks about pure money magicians and rocket scientists who land their projectiles in teacups and the need for "real" investments (especially in the energy sector).

F-W (the relation between wages and interest or working class and financial capitalists). The coming period will be, on the one side, in the face of a tremendous downward pressure on wages, replete with demands for debt cancellation or Jubilee and, on the other, draconian sanctions for breaking loan agreements, for falling behind the mortgage schedule, and for sending money to cover the credit card statement TOO LATE.

I-W (the relation between wages and profits, and between workers and industrial and commercial capital). The Bush Administration's "ownership" society will begin to look quaint. As a consequence, the efforts by workers to regain their previous levels of income will no longer rely on finding a "financial" exodus (through stock ownership or house purchasing) and will have to confront capital directly around wage struggle.

All classes and sectors, however, agree that much of the ideology and some of the practice of neoliberalism will be turned into relics. "Government" is now trumping "governance" on all levels of the economy (not, of course, that the state was ever aiming to wither away as some postmodern thinkers were led to believe during the last decade.) Just as developments after September 11 like the invasions of Afghanistan and Iraq showed that the centerless and "flat" world of globalization was more an advertising gimmick than a reality, just as the return of the surveillance state with the "war on terrorism" showed that the internet was no field of open communication, then so too events this September and early October have shown the era of the symbolic, future-centered economy operating at light speed has reached its limits in a meteor shower of falling stock prices, bankrupt investment houses, foreclosed homes and tent cities.

It is also clear that the bailout deal is only as strong as the results it produces. There is no guarantee that either buying up hundreds of billion of dollars of “toxic” loans will be adequate to "restore" confidence in the financial sector, or that the credit flows will resume to the extent that will make an economic upturn possible, or that there will be a return to historically normal levels of employment after a period of "turbulence." Moreover, some parts of the system might eventually reject the deal previously accepted when confronted with demands that were merely implicit in the initial offering. For example, how will workers respond to the demand by the next administration that the Social Security fund be invested in stocks after just seeing the latest of a series of stock market crashes? Will the financial houses balk if they are regulated too stringently? Will the collapse of neoliberalism lead to a more powerful anti-capitalist movement in the US or something resembling what we would call "fascism"? These are the kind of questions that will be central to understand the class politics of capital's "exodus" from neoliberalism that is taking place now.

6. Critics of neoliberal globalization might take a moment to gloat about the destiny of its antagonist...but only a moment, for the consequences of this "bailout" are momentous and need to be considered carefully from the point of view of the state and from the point of view of the proletariat.

The great debate with China that the US government was engaged in for more than a decade concerning the role of the state in capitalism has been won by the Chinese (at least for this round). This is an important strategic outcome of the "bailout" and is often referred to when the international fall-out of the crisis is discussed. The bailout is an ideological blow of major proportions. How can the US government seriously push financial de-regulation at the very moment when it is practicing the exactly opposite policy? It is true that consistency is not to be expected in the world of power. After all, the US government has been preaching the abolition of agricultural subsidies to the governments of Africa at the very moment when it has substantially increased its subsides to its own farmers! But there are limits to political hypocrisy and, moreover, the countries like China that the US is preaching financial de-regulation to are exactly those who have the capacity to resist its embrace.

On the contrary, the Chinese model of strong state control of the financial sector and the exchange rate has proven the winner in this period not only over the Russian transition from Communism to Capitalism but now, apparently, in the US transition from Neoliberalism to a form of Financial Socialism. But this victory also has consequences for the development of a full political economy. What will the re-entrance of the state into the micro-organization of the economy mean for the whole system? Neoliberalism has been a political and a cultural paradigm as well as an economic one. It will require much research to anticipate how these areas of life will be affected by its collapse. How would a Chinese-like economic model bleed into US politics and culture?

Finally, is the US working class ready to lead world society out of this cataclysm of neoliberalism? The electronic assault on the politicians in Washington via the internet and the telephone system that led to the first defeat of the bailout bill gave many around the world some hope, but it was not followed by a more sustained resistance and was defeated in one week. By the wavering political response to the Bush Administration's "blitz," then, the immediate answer must be "No." Talk radio and internet petitions were ultimately weak tokens in this particular struggle. Indeed, by taking "sub-prime" mortgages as the cause of the crisis, the working class demands for reliable housing and income security have been branded to be systematically “toxic” to the credit system (to use the reigning metaphor of our day). The blockage of the credit route out of the long-term stagnation of the wage will have major strategic consequences. Since capital will not allow the US working class to be a class of rentiers (living off the ever increasing value of their stocks and of the equity on their homes), workers must return to the hard terrain of the wage in the coming era, however unpropitious it appears.