Chris Harman


Market madness

(October 2008)

From Socialist Review, October 2008.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Website.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

The ruling classes of the US and Britain are reeling in the face of the economic meltdown of their system and the real character of capitalism is exposed, writes Chris Harman

On Sunday 7 September the most right wing Republican administration in the US for three quarters of a century carried out the takeover of the mortgage giants Freddie Mac and Fannie Mae. It was then what appeared to be the “greatest nationalisation in the history of humanity”, as Nouriel Roubini, professor at New York University and former US government adviser, described it.

On Sunday 14 September the same administration broke with the pattern of three quarters of a century and allowed a major financial institution, Lehman Brothers, to go bust. In doing so it caused a panic to sweep through the tens of thousands of people across the world with sufficient wealth to invest in banks, hedge funds and the derivatives markets about whether they were going to lose more of it. They also caused hundreds of millions of not so rich people to wonder what would happen next to their savings, their pensions, their homes, their jobs and even things they had already paid for, like holidays and insurance premiums.

Meanwhile, the world’s media focused its attention on the bankers, politicians and government officials in the US who were in almost continuous session trying to work out how to stop the US insurance giant AIG following Lehman Brothers into bankruptcy. The Bush administration eventually decided to bail it out by lending $85 billion in exchange for an 80 percent stake in the company – an even greater nationalisation than that of Freddie Mac and Fannie Mae. It followed this with a $700 billion package to buy the bad loans that are creating havoc in the market.

No wonder the press called 15 September Black Monday. The credit crunch effects had seemed previously to be mainly about esoteric events in the upper reaches of the financial system – after all, even those who saved with Northern Rock did not lose money in the end. Now it suddenly seemed closer to having an impact on everybody’s everyday experiences.

The events marked a massive ideological watershed, one of those occasions when the ideas that people were meant to take for granted were thrown into question on a massive scale. For three decades people had been fed with the message that the untrammelled private pursuit of profit is the only way to undertake the essential tasks of producing the things we all depend on for our livelihood.

There was always a huge dose of doublespeak to this neoliberal ideology. The most powerful nation states worked closely with the giant corporations based within their borders. They provided them with lucrative arms contracts, billion dollar subsidies and repeated tax cuts. They fought the opposing interests of rival nationally based multinationals at the World Trade Organisation, and they worked together through the IMF to cajole Third World countries to give in to their demands for free trade, unrestricted investment and endless debt payments. Free markets were for others to suffer from, not the biggest capitalists of the most powerful countries.

But the voices of those who spoke about this reality were drowned most of the time by the massive chorus of those repeating the neoliberal message.

On 7 September the sheer scale of the financial crisis blew that cover apart. Such were US capitalism’s fears of the financial crisis that the Bush government had to intervene very publicly in the economy, using state capitalist measures it has always denounced as “socialist”.

Yet a week later, the head of the Federal Reserve, Ben Bernanke, and the US treasury secretary, Hank Paulson, stood back and let the collapse of Lehman Brothers take place. This shows they have no clear way of dealing with the crisis that has forced them to overturn their own ideology.

A Financial Times editorial spelt out their reasoning: “Allow a Fannie Mae to collapse, and the US economy might well collapse with it. Yet bailing out anyone who asks nicely is a recipe for promoting (even more) recklessness and yet another crisis in the future.” Pouring money in to rescue firms like Lehman Brothers would encourage other bankers to think they could gamble, knowing the state would cover all their losses – the “moral hazard”. Following such a course might damage the dollar and would eventually create problems with the credit worthiness of the US state itself. So Lehman Brothers was forced into bankruptcy in the hope that the rest of US capitalism might gain from its demise through “survival of the fittest” profiteers.

But, as the Financial Times also noted, the decision to allow a massive bankruptcy was “hugely risky”. How risky was shown within hours, by the turmoil over AIG and the fall in the stock exchange value of banks throughout the world. The US state had to forget about “moral hazards” just as rapidly as it had remembered them the day before.

Such erratic behaviour is not an accident. It flows from the acuteness of a crisis which sets capitalist against capitalist, with none of them clear about what to do, but all of them worried about what they might lose if others get their way.


It shows how intractable are the problems their system faces. These do not arise, as even columnists on the left, like Larry Elliott, claim, simply from a failure of regulation, the undoubted greed of financiers or the sheer ease with which they can suborn governments. They have deep roots in the structure of the system itself.

Capitalism has always been prone to crises. Periods in which it was claimed things were going well and that it was the best of all possible systems have always ended in it causing suffering to millions of people as they lose their jobs, their livelihoods and, all too often, their homes. Things could not be otherwise, since the only coordination between the firms that oversee the production of the necessities of life (and the means of delivering instant death) is through their blind competition with each other. Karl Marx spelt this out in Capital 140 years ago in a way which mainstream economists refused to recognise for nearly another 60 years. What is more, in the years after Marx wrote, as the system spread out to embrace the whole world and the size of the biggest firms got ever larger, the crises grew greater, until the early 1930s experienced a slump such as had never been known before.

At that point the more farsighted supporters of capitalism came to the conclusion that only intervention by the state, with at least a partial turn to state capitalism, could prevent the system’s self-destruction. This seemed to work from the early 1940s through to the mid-1970s. Capitalism boomed as never before and responsibility was ascribed to the ideas of the economist who had theorised the turn to the state, John Maynard Keynes. What was barely noticed was that it was not Keynes’s liberal ideas but the sheer scale of spending on the US war machine that pulled the rest of the global economy forward.

Then in the mid-1970s the supposedly magic formula of the post-war years suddenly stopped working. Attempts to use Keynes’s methods to deal with the first big post-war recessions, in 1974 and 1980, did not work. The methods did not lead to a return to the high growth rates and low unemployment of the previous decades, but to inflation as well as recession. Capitalists and states turned away from Keynes’s view that the state could ward off crises to the opposite view, put forward by monetarist and neoliberal economists, that only the removal of state intervention could.

That did not work either. It gave a justification for cutting into welfare benefits, passing anti-union laws, forcing workers to compete with each other for their jobs through marketisation, and reducing taxation on companies and the rich. For these reasons it was a welcome ideology for capitalism, allowing a limited improvement in profit rates from 1982 onwards. But it did not restore the system to its old health.

There was some recovery from the economic crises of the early 1980s, the early 1990s and the early 2000s, but to a large extent it was on the basis of financial speculation. Banks, investment funds and hedge funds made huge profits by lending as never before. A rising tide of debt enabled people to buy things they could not otherwise have afforded, and this pulled the whole economy forward. It was as if the permanent arms economy of the post-war decades had turned, at least in the US and Britain, into a permanent finance economy.

But it could only ever bring temporary relief to the system as a whole. Financial institutions do not make anything. They merely give those who run them or work in them money to buy things supplied by others. A point was bound to arrive where supposedly fabulous profits made by the turn to speculation melted away, precipitating renewed crisis.

The response of governments and central bankers was to turn to doses of the state capitalist, “Keynesian” medicine they were denouncing in their speeches. They poured money towards financiers and industrialists while preaching “we are all in this together” sacrifices to the mass of people. In this way problems caused by a financial bubble in the 1980s were temporarily overcome with a bigger financial bubble in the mid to late 1990s, and the problems that led to were overcome with the even bigger bubble of 2002-2007. But each time the average level of debt at the heart of the system became greater. And it was this that enabled industry, not only in Europe and the US, but also in the newly expanding economies of Asia, to find markets.

The credit crunch of August last year signified a sudden realisation that much of the mountain of debt could not be repaid. Banks and hedge funds were now in danger of not even being able to pay their own bills, and since they have lent to each other, if one went down others would suffer. Now the high priests of capitalism fear a catastrophic meltdown of the financial system. And they know that such a meltdown is bound to affect the rest of the economy, where real wealth is produced, since it was only the financial bubbles that had kept the real economy growing.

The world’s biggest states, with the US at the fore, are faced with the choice between unprecedented dollops of state capitalism to encourage further, and ultimately still more dangerous, bubbles, or allowing giant firms to go bust even though this risks bringing about a crisis on the scale of the 1930s. The fact that they have tried doing both shows how precarious the situation is. If they somehow succeed in preventing the worst happening, it will be through luck, not judgement, at best creating yet another bubble which bursts even more disastrously.

Their confusion, their divisions and the shock they have caused to millions who used to believe in them provide us with an opportunity to explain the real character of capitalism and the necessity to replace it. As their crisis develops it will also provide innumerable occasions for mounting resistance. We have to seize those opportunities, knowing that while their class may suffer a little from the crisis, ours can suffer massively if it does not fight.

Roubini commented, satirically, in his article on Fannie Mae and Freddy Mac,

“Comrades Bush, Paulson and Bernanke have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street, a socialism where profits are privatised and losses are socialised with the US taxpayer being charged the bill of $300 billion.”

We have to seize the opportunity provided by their ideological somersault to put the argument for genuine socialism, in the interests of those who work and suffer under this system. And we have to be part of the myriad forms of resistance people will put up as the combination of recession and inflation hits them.

Last updated on 3 May 2014