Thursday, March 12, 2009
As I said the other day, I try to avoid substituting survivalism for political and social analysis. But that doesn't mean that we shouldn't consider the possibility of some dire outcomes as a result of the current financial crisis. Apparently, there is an old adage that financial market bears are too early and too optimistic. Unlike many, I knew that the housing bubble, and the subsidized credit that created it, couldn't be sustained. Even so, I failed to perceive the catastrophic consequences that would ensue when it burst.
For example, I didn't believe that home prices in Sacramento County, a housing bubble epicenter and my county of residence, would fall almost 50% from their peak in the summer of 2006. Nor did I realize that the worthlessness of subprime mortgage debt issued to purchase these homes here and elsewhere was the equivalent of an infectious disease that would contaminate the global financial system, paralyzing its ability to extend credit. I didn't anticipate that the deleveraging of this debt, and the derivatives associated with it, would spread exponentially, requiring the injection of hundreds of billions, if not trillions of dollars, in an attempt to arrest a deflationary spiral that would push the global economy into a protracted recession.
My anxieties were initially limited to a belief that we would experience a slow, grinding sub-proletarianization of America, as the lives of the lower middle class and many within the middle class are increasingly characterized by economic insecurity through foreclosures, job losses and the lack of access to credit. Collectively, this transformation will result in an alarming degradation of the quality of life within many American communities. More recently, I pondered whether the crisis was being manipulated for the purpose of consolidating the power of the dominant capital class. I am now, however, beginning to wonder if we are facing something much more serious.
Over the last 30 to 35 years, the expansion of the money supply through credit has been an essential feature of the neoliberal economic order constructed by Reagan, Thatcher, and, less commonly known, Deng Xiaoping. It is generally recognized that this expansion constituted a temporary substitute for stagnant wage growth during this period. Less emphasized is the extent to which it also facilitated the creation of a global system of finance, transport and telecommunications. Emerging markets, and the corporations within them, better known to us on the left as lesser developed countries, were now able to access capital through the issuance of debt, equity and the privatization of state controlled resources and services.
Transportation and communications systems were constructed out of this massive pool of capital as the architects exploited new technologies, such as the personal computer and fiberoptics. Two important things happened along the way. First, everything was fragmented, meaning any business enterprise, including those associated with the transportation and communications spine of the global economy, relied upon goods, services and skills that were dispersed, if not across the globe, then, at least regionally and continentally, as there was a merciless exploitation of the most efficient division of labor, which could now be accessed hundreds, and even thousands, of miles away.
Second, all of these enterprises relied upon business models that necessitated the use of significant sums of short, intermediate and long term debt, obtained directly from capital markets. Funding such activities through monies obtained through operations and state subsidy was out of the question, as the costs of this new infrastructure was too great, and, anyway, it was pretty much prohibited by the arbitrators of the global economic system, the IMF and the World Bank. Both the fragmentation of operations and their expansion through access to debt required reliable access to funds on capital markets at cheap rates. With the passage of time, it became an anomaly for any business enterprise to be able to conduct its day to day operations without perpetual recourse to short term credit.
Of course, the creation of this global system of finance, transportation and communication has not been a smooth one. It has proceeded in fits and starts. There has been much turbulence. After the euphoria of the fall of the wall, there was the 1995 peso crisis, the 1998 one involving a highly leveraged hedge fund, Long Term Capital Management, and, of course, the bursting of the NASDAQ bubble. Lesser ones afflicted individual countries and regions. But none of these crises, as serious as some of them were, threatened the ability of the enterprises to access the capital they needed to continue operations, or, perhaps, it can more accurately said that they did not do so to such a degree that they threatened to impair the functioning of the overall system. There were liquidations, consolidations, mergers and retrenchments, but the movement toward integration proceeded, with the inevitable jerkiness associated with neoliberal capitalism.
Now, it feels different, very different. Financial institutions are not doing business with one another, even for short periods of time. Lending to businesses, including the transnationals, is either drying up or becoming cost prohibitive, even if the duration of these loans is short. If this persists, the consequences could be very severe. Commerce can only sharply contract when its participants cannot access the funds they need to operate. If they are subjected to significantly increased costs for accessing it, they may be forced to reduce the scope of their activities, and passively permit the degradation of their equipment and services.
If we were living in the 1930s or the 1960s, Keynesian stimulus measures would probably suffice to overcome the problem. But we don't. Remember the two major consequences of credit expansion in the neoliberal era: fragmentation of goods, services and skills within the business enterprise and increased dependence upon access to credit markets to conduct operations. A prolonged period of lack of access to credit risks the unraveling of the global network. Communication and transport collapse. It becomes impossible to bring together, sometimes materially and sometimes virtually, the goods, services and skills necessary to manufacture an array of consumer products like cars, flat panel televisions, personal computers, and even furniture, clothes and other textiles. It becomes impossible to ship them to retailers, impossible to market them to the public.
Obviously, the more likely outcome is that credit is going to beome more costly as opposed to unavailable. Even so, we shouldn't be too reassured about the outcome. If credit becomes too expensive, under new, more rigorous standards, then there will still be a substantial reduction in the scope of service, creating the prospect that, in more and more places, global transport and communication will operate erratically, if at all, with similar outcomes as already described. Accordingly, while it would not lead to the systemic collapse provoked by a loss of access to credit, it could result in less reliability in the provision of consumer goods, somewhat reminiscent of the old USSR, but probably not as pronounced. It would also ignite the reversal of the neoliberal globalization process, as corporations would be forced, through application of a remorseless cost-benefit analysis, to decide whether more concentrated or atomized production platforms were more appropriate. In some instances, they would decide that shutting down production entirely was required.
If one has a particularly survivalist bent, one can imagine all kinds of deliciously nightmarish scenarios, with people around the world unable to purchase clothes and baby formula, much less computers and blackberries. Social order breaks down as people formerly used to effortlessly buying clothes and food from thousands of miles away can no longer reach others 150 miles away to obtain them. Farmers purchase automatic weapons to deter hungry urbanites and suburbanites intent upon seizing their organic blueberries. A flourishing black market in bicycle tires enriches a generation of anarchist bike repair geeks.
I wouldn't go so far as to say that such scenarios are impossible. But I still believe that they are not very likely. I do believe, however, that we are about to experience a serious decline in the quality of life, if one defines we as the middle and upper middle class of the developed world. The relaxed assurance that comes with knowing that the system works for us, and will continue to effortlessly convey consumer goods to us to fulfill our daily needs, whether real or perceived, is about to end. In other words, we are about to discover how the vast of majority of the world has lived under neoliberalism, and even the more benign aspects of it that we will experience are not going to be very pleasant.