Martijn Konings presents an assortment of radical attempts to understand and analyse the crash, exposing the lack of a single, consistent framework that radical economists could offer to challenge mainstream orthodoxy.

The Great Credit Crash, ed. Martijn Konings (Verso 2010), xvi, 398pp.

The consequences of the global financial crash of 2007-9 are still with us. More than this: the shape of current politics is formed in its shadow. If September 11th, 2001 opened a decade of war, September 15th, 2008 – the collapse of Lehman Brothers – opened years of crisis. The NICE (‘non-inflationary, continuous expansion’) years are far behind, based as they largely were on a set of delusions. The prospect now is one of stagnation and deep economic dislocation. Nothing will be the same again.

Martijn Konings presents an assortment of recent, radical attempts to understand and analyse the crash. A range of different perspectives from critical economics are presented, from post-Keynesians like Gary Dymski to the late Marxist Peter Gowan. This is, in many ways, a strength of the book: the fact that competing explanations can exist is a challenge to an orthodoxy that has by now largely centred on a familiar story of inappropriate or absent regulation allowing ‘excesses’ to develop. What the contributors share is concern to demonstrate that the causes of the crash lie far deeper than the relatively simple tale of policy errors and inept management.

But in herding together a range of views from critical economics, the weakness of the radicals is exposed. Unlike those offering orthodoxy, overwhelmingly dominant in academia and wider policy circles, economists outside the mainstream do not have a single, consistent framework to offer. Instead, a Babel of different voices compete: from post-Keynesianism, to neo-Marxism, via the assorted variants of economic sociology, and stretching on occasion (but not in this collection) to the hard-right of the Austrian School: militant supporters of the free market, but committed opponents of conventional theory. Where the mainstream has both a huge institutional advantage and a core intellectual clarity, its opponents have been broken – at least over the period of neoliberalism’s triumph, from the late 1970s onwards – into a thousand contending schools of thought, each fighting their own corner in increasingly inglorious isolation.

Outside the mainstream

None of this detracts from the fundamental advantage of any critical, non-mainstream approach. Step outside the orthodoxy, and you do not have to believe in the magic of rational individuals and perfect financial markets to get your theoretical apparatus to work. And with the Heath Robinson contraption of neoclassical economics blowing a spectacular gasket over the credit crunch, cogs and springs flying, the opportunity to present working alternatives has not been so great for decades. At the very least the disparate essays here are evidence of continuing life in the anti-neoclassical traditions. There is, perhaps, even the potential to move from fighting a nobly doomed rearguard action against what Ben Fine has rightly called the ‘economic imperialism’ of the neoclassical school, and onto a full-blown offensive against the monstrous clanking thing. At least a few of the articles have that IED quality: assembled under the enemies’ noses from workaday ingredients, planted to devastating effect.

Anti-imperialist Peter Gowan’s contribution is written with his customary panache – but also his usual reduction of relevant causal factors to the machinations of Washington and New York. Whatever happens in Gowan’s world, the US – and US finance in particular – pretty much always wins: although Gowan, in fairness, indicates the serious challenge to the ‘New Wall Street Regime’ now being mounted by China and East Asia. But nonetheless he overstates the extent to which financialisation – the great turn of the US economy away from manufacturing and towards services, accompanied by the expansion of credit – was a deliberate strategy for the US ruling class, rather than the product of a series of ad hoc, often ill-conceived measures to deal with a changing economic environment. The credit boom that erupted from around 2001 onwards, and that culminated in the spectacular crash of 2007/8, is not easily bolted onto an alleged prior plan, or well described as a continuation of the boom of the 1990s. The dramatic expansion of securitisation over the last decade – of the repackaging and reprocessing of debt, particularly that originating from consumer borrowing – points to a different kind of boom and crisis, rather than a simple continuation of liberalisation. The techniques of modern risk management, centred on the combination of computing power and advanced (if, as it transpired, thoroughly inept) statistical models represented a deepening of financialisation, rather than its simple expansion. A qualitative change took place in financial institutions, given legal form in the now-notorious US repeal of the Glass-Steagall Act in 1999, allowing banks to run well and truly off the proverbial leash.

Anastasia Nesvetailova and Ronen Polen use Hyman Minsky’s thesis of ‘financial fragility’ to place the crash in its context. They describe the shift in banking functions from the provision of simple liquidity into sustaining the ‘liquidity illusion’ through the creation of ever-more complex financial products, most notably the ‘securitisation’ of debt into neat packages to be bought and sold in growing markets. They note that after a laggardly start, relative to trailblazers in the US and UK, European banks took to securitisation as if to the manner born, with traditionally reticent Swiss banks leading the charge. As what was amusingly called ‘financial innovation’ gathered pace, and reported asset values diverged more from any meaningful economic basis, the whole structure came to resemble a giant Ponzi scheme. Named after a notorious US confidence trickster of the early 1920s, this was Misnky’s way of describing how in a credit bubble, debt can beget more debt. The original Ponzi scheme – latterly adopted with such aplomb by Bernie Madoff – depended on paying existing investors cash provided by a ready supply of new suckers, eager to believe that the fat returns being promised were the just reward for shrewd investment, rather than a fat con.

Ponzi finance, in Minsky’s description, performs the same trick: new credit is created on the basis of rising asset values, to the point where debtors can only pay their debt through the creation of new credit. It is a method, as Nesvetailova and Polen say, ‘of financing new debt with old’, and it depends critically on asset values rising rapidly forever more. Fairly obviously, this cannot happen – or presumably at some point soon everyone’s house would be worth more than the entire universe – and the scam collapses. Arguably, at the heart of the credit crunch was something approaching a giant Ponzi scheme, in which the inflated asset values of complex new financial products allowed the creation of more debt, fuelling rises in asset values, allowing more debt to be created… and so on until doubt crept in, and the inverted pyramid of digital bullshit came crashing around the bankers’ heads. Legality aside, the really major difference between Madoff and the investment banks, on this version of events, was that even $65bn fraudster Madoff never quite became too big to fail. He should have aimed higher.

Cynicism in action

Cynical? Perhaps. But a close inspection of the credit crunch invites it. The best single essay is perhaps ‘Too Big To Bail’ by Thomas Ferguson and Robert Johnson, a forensic dissection of the few, fervid months of crisis leading up to the US election in November 2008. It delivers the story behind the theory, revealing the low corruption, high politics and often brazen incompetence at the heart of US financial power. Originally intended for publication in a volume being put together by Joseph Stiglitz and others for Oxford University Press, the authors were asked to remove the names of a number of mainly Democratic politicians mentioned in their narrative. They refused, and a veritable rogues gallery is left for our perusal. It is interesting to note, for example, that the two giant household mortgage providers, the Federal National Mortgage Association (‘Fannie Mae’) and Federal Home Loan Corporation (‘Freddie Mac’) over the period prior to their nationalisation in 2008 diverted a chunk of their eye-watering profits into political donations. The three biggest recipients were Democrat Chair of the Senate Banking Committee Chris Dodd, Senator John Kerry and an otherwise little-known Senator from Illinois, one Barack Obama, who received $126,349 from these generous benefactors. Ferguson and Johnson tell us why.

Fannie Mae was once a proud legacy of the 1930s New Deal intended to assist low-income Americans find homes by improving the supply of mortgages, subsequently privatised by a cash-strapped President Lyndon Johnson in 1968. Freddie Mac was established in 1971 to provide ‘competition’ to Fannie Mae’s monopoly. Their shared control of the American secondary mortgage market began to break up in the 1980s, as financial deregulation kicked in. New competitors, jealously eyeing up the fat market shares and implicit government support of Fannie and Freddie, began to lobby for their break-up or elimination. Fannie and Freddie, just starting to feel the cold pinch of competition, responded as they knew best: seeking out their friends in and around government, heading to Washington with bags of cash to ‘buy influence’. A certain breed of Democrat was besotted with the pair, which ‘began to function as a kind of political machine’ for the party’s right-wing. Clinton’s former staffer, Rahm Emmanuel, latterly Barack Obama’s Chief of Staff, was appointed to the board of Freddie Mac as Clinton left office, for example, while Harold Ickes, Clinton’s own Chief of Staff, made his way to the same board.

While these two giant corporations, among the largest in the US, greased open palms, they also learned to exploit the same deregulation that was costing them their earlier privileges. As the noughties’ property bubble blossomed, it spawned freakish financial mutants. One of these new species was the now-infamous Collateralised Debt Obligation (CDOs), a cocktail of high- and low-risk debt, carefully mixed to disguise the ‘toxic waste’ while keeping the pleasant, syrupy taste of AAA-grade loans. A standard set-up would be to mix in chunks of top-notch US government bonds with sub-prime mortgages, the Treasury bonds covering up the risks of the dodgy home loans. CDOs could be traded amongst financial institutions, but, before they were, someone had to vouch for their questionable contents.

The underlying mechanism was comparatively simple. Cowboy mortgage vendors like Countrywide mis-sold mortgages to customers otherwise unable to get hold of them – those on very low incomes; even, on many occasions, those without any income at all. The ninja (‘no income, no job’) deals worked if, and only if, house prices continued to rise, allowing borrowers to roll over their mortgages on the basis of the increased value of their homes. These sub-prime mortgages were then repackaged by the banks into juicy, glistening CDOs, and sold on. As the bubble expanded, intense shareholder pressure on Fannie and Freddie to avoid losing market share led them to lower their own approval standards for mortgages. They underwrote a vast volume of sub-prime mortgages as a result, helping fuel the sub-prime boom and by mid-2008 owned directly or underwrote some 56 per cent of the $15 trillion US mortgage market.

The major financial institutions could not get enough of CDOs, which promised high returns for seemingly minimal risk. But largely because CDOs were a cocktail of different financial products, it was impossible for them to really tell what was safe – and what was poisonous. When US house prices dipped in 2005-6, sub-prime mortgages began to default. And when they started default, all those well-mixed CDOs turned into deadly sludge. By mid-2007, panic over the bad mortgage debts banks had mistakenly acquired led to the freezing of the inter-bank lending market – which, in turn, brought down the bloated former building society, Northern Rock.

Beneath all this well-known drama, however, Ferguson and Johnson describe the ‘shadow bailout’. Under cover of the public actions by US authorities that culminated in October 2008’s spectacular $700bn bailout, the Federal Reserve and the US Treasury quietly arranged assistance for the sub-prime lenders through the auspices of Fannie Mae and Freddie Mac. Around $40bn in new sub-prime loans was underwritten as the crisis unfolded and lending standards were deliberately loosened still further. Exploiting the two underwriters’ unique, semi-public status, assistance was provided to the collapsing mortgage market: to no avail, since as toxic assets continued to emerge on the major banks’ balance sheets, private mortgage firms virtually melted away from the secondary mortgage market, leaving Fannie and Freddie exposed. Their share prices entered into a tailspin, with markets beginning to believe the two were approaching insolvency. The Federal Reserve put in place measures to nationalise both in July 2008, taking them back into government hands in early September, under heavy pressure from overseas investors that included the Chinese government.

Revealed in microcosm is how the close relationships between financial institutions and government blossomed in the pomp of neoliberalism; and how those nominally on the centre- and liberal-left, had convinced themselves that not only would the bubble inflate forever, but that it could be harnessed to winsomely noble objectives, like housing for low-income families. The grubby reality Рof fat political donations made by short-sighted gamblers mistaking a lucky run for financial élan Рonly emerged after the debacle, as its dazed participants fished about for public money. That the bailouts were so forthcoming, and that the old order reigns once more in the financial markets Рgorging again on swollen bonuses, with our own Coalition government unwilling or unable to intervene Рis a stunning tribute to the immense power of finance.

The danger from the right

The narrative, however, needs its context. The errors and the corruption were not – and are not – the result of personal faults, or inept decision making. They were – and are – absolutely integral to the kind of economy we have. Weak regulation, poor management and plain corruption help tell the story. But they are second-order explanations of the crisis; symptoms, more than causes, integral to the narrative of the crisis, but not causal in themselves. That the British Conservative Party now receives over half of its donations from the City is of course important in understanding why they are so utterly, embarrassingly feeble at taking on the bankers. However, leading lights in the City were once similarly fawned over by New Labour; indeed Brown, in his last Mansion House speech as Chancellor, just before the crisis broke, was busily praising the assembled financiers for their ‘efforts, ingenuity and creativity’ at the ‘beginning of a new golden age for the City of London’.

How the mighty are fallen; the former Iron Chancellor reduced, post-crash, post-election, to being deprived of his plum IMF job by the Eton veto of the current Prime Minister. Bourgeois history will, one suspects, end up absolving Brown: he acted fast to prop up crumbling finance – and, in doing so, prevented the disintegration of the investment banks becoming a social cataclysm: savings destroyed, banks closed, ATM machines switched off. The contrast with the backhandedness, slipperiness, and often sheer incompetence of the US administration over the same period is notable.

But in mobilising the powers of the state to replace the banks’ fake, valueless assets with cold hard cash, he and the other world leaders over late 2008 and early 2009 only shifted the location of the debacle. They borrowed on an heroic scale, turning private losses into public debt. From a disaster on the private balance sheets of banks has come a calamity on the public side: most spectacularly in Europe, where the sovereign debt crisis is threatening to spark a further financial meltdown.

And it is that public debt crisis that has helped produce, in part, a ferocious reaction from the right. Ferguson’s and Johnson’s account, while recognisably written from a radical perspective, stresses the political corruption of high office – and of those, nominally on the left, who tried to cosy up to high finance. It could easily dovetail with those critics of the radical right who in the bailouts and the public debt see nothing other than a grand, liberal scheme by big government to defraud the honest taxpayer.
A common trope on the US right is that liberal pressure to promote ‘affordable housing’, using government policy to relax mortgage standards, led directly to the crisis. The efficient operation of the market was distorted, and so – inevitably – the Great Correction arrived, and mighty was its vengeance. Not deregulation, but regulation was to blame, and a version of this story is popular amongst Republicans, reinforced by some more academic work. On the further reaches of respectable politics, where twitchy-fingered Teabaggers and paranoid birthers meet dead-eyed libertarians and socially diffident devotees of Ayn Rand, we find the Maine Republican Party pushing for ‘a return to the principles of Austrian economics’, no less. The Austrians, again: radical right critics of the mainstream, scourges of ‘Keynesianism’ in all its forms, and promoters of a return to sound (deregulated) finance – up to and including the privatisation of money.

It’s not just the (fluoridated?) water in Maine, either. In Europe, the ‘True Finns’ secured nearly 20 per cent of the vote on an anti-bailout, anti-EU, anti-immigrant platform; the anti-immigrant, anti-EU, anti-bailout French Front National are polling ahead of Sarkozy; the Austrian FP√ñ are also rebounding in the polls, their leader loudly denouncing the ‘Euro rescue’.

There are numerous factors behind this. But there is no reason for the left to assume it has a monopoly in opposing the bankers’ bailouts. The right is making hay – and the left has, in truth, yet to present a convincing alternative. Yet there are no reasons why it should not. The great merit of Konings’ collection is its demonstration that those on the left of the mainstream have at least plausible accounts of What Went Wrong. It will repay reading, even where its chapters’ analyses might be faulted, or disagreements raised on details. The task for the left in general, now, is to turn them into a compelling story, of the kind that will mobilise hundreds of thousands more people: of creating a campaign that can oppose the cuts, but also challenge the rule of finance and capital. Nothing is the same after the financial crisis. Huge possibilities are open.