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The Blood of the Black Sheep

Crisis and Catharsis. Capitalism begins its great self-purging to remain what it is. The Wall Street boys and girls have not forgotten how to make money amid crisis. The speculation bubbles burst. The fictional wealth dissolves in thin air thanks to falling home prices and stock prices.

Crisis and Catharsis. Capitalism begins its great self-purging to remain what it is

By Michael R. Kratke

[This article published in: Freitag 46, 11/13/2008 is translated from the German on the World Wide Web,  http://www.freitag.de/2008/46/08460901.php. Michael R. Kratke is a professor of economics at the University of Amsterdam.]

New York has a new tourist attraction. A tour "Wall Street Panics and Crashes" leads past the sites of the latest mega-bankruptcies where hair-raising stories are told about adventurous financial maneuvers. A clever young woman who recently lost her high-paying job at Morgan Stanley organized the whole thing. The Wall Street boys and girls have not forgotten how to make money amid crisis.

On the other hand, the heavyweights of the financial world who don't know any job worries are partly speechless. Before the US Congress, Alan Greenspan expressed "shock and disbelief" about the extent of the disaster that he and his cohorts inflicted. Explanations from the inner circle of prestigious think tanks are subdued. Unfortunately they had no presentiment about what was coming and how to proceed. Even the super-human statesman Joschka Fischer, a Galion figure of the ex-left who crawled before the supposed omnipotence of the financial markets, now waffles. "Was Karl Marx right?" the Times asks its readers. A good 48 percent think so.


The disaster is not over. The worst is to come. We experience the first real world financial crisis seizing all countries and financial markets of the world in which the exchanges and bank crashes in one region almost immediately trigger exchange- and bank crashes in other regions.

The inner dynamic of this crash is very brutal and can be described as follows: the speculation bubbles burst. The fictional wealth dissolves in thin air thanks to falling home prices and stock prices. In the US, Great Britain and many other countries, private households are hopelessly over-indebted - thanks to stagnating or falling real wages. When debtors become insolvent one after the other, the banks become very shaky. Multinationals totter that like General Motors, Ford or Enron were long de facto banks or security traders and sold cars or energy on the side.

In the American "financial industry," at least 150,000 jobs were lost in one year and tens of thousands will follow. These losses are a foretaste of what we are in for when the crisis takes hold of the whole "real" economy - when the high tech world market industries follow the crashes in the building trades and the auto industry.

Counter-measures are imperative. Central banks and governments in bailout actions will spend seven trillion dollars worldwide. This is only the beginning. Up to now, hardly half of the actual losses have been written off. The main part of the crisis is still hidden in the books of banks, insurances and funds.

The next financial bubbles are already being enormously inflated. The credit card crisis, the crisis of auto-financiers and credit insurers cannot be repressed any longer. The concentration of financial capital occurs in leaps and bounds. Many of the 8500 officially registered banks in the US and 8000 in Europe will not survive the year 2009.

Nationalization, mergers and state assistance is a last anchor. Part of the shadow- economy and of the shadow-banking system - many times greater and more dangerous than the informal underground work and freelance work system - will also fall victim to the crisis. At lightning speed, the world stock exchanges mutate into transnational conglomerates.


The whole world now cries for regulation and for the state as rescuer from great distress. In no time, hundreds of billions of dollars will be mobilized to bailout the imploding Wall Street and the European banking system from shipwreck. State debts and central bank credits are the only anchors of the capitalist world economy. Countries like Iceland and Hungary, banks like Bear Stearns and Northern Rock and insurances like AIG can be kept above water but not the capitalist world economy. Neither the G20 nor the IMF can stop a world economic crisis. Even in the distress, some long-held dogmas will not be thrown overboard. For the first time, the IMF gives credits without demeaning clients with the usual neoliberal panaceas. For the first time, the European central bank overcomes the long shadows of its monetarist dogmas and lowers interest rates.

We are hammered with several crises, not one. A world financial crisis, a crisis of the real economy, that is a classical over-production and over-accumulation crisis, a world trade crisis, a world agricultural- and hunger crisis and an ecological crisis narrow the possibilities for any crisis policy. This system crisis of capitalism as we knew it is also a legitimation crisis of the best of all worlds. Under these circumstances, the central salvation messages of the everyday neoliberal religion no longer sound so dashing. Neoliberalism was enfant terrible of the establishment.

The propaganda machines are running full steam ahead - as though the socialist world revolution were at the door. The lobbyists of financial management hammer for "free" financial markets, praise speculation and derivatives, preach organized but voluntary "self-regulation" and conjure gloom about the danger of "over-regulation." Only a few years ago enormous PR-campaigns funded with billions of dollars urged that trade with credit derivatives in the US be free from all control and regulation.

To believe the neoliberal hegemony is over or that capitalism will disappear from the stage is very rash. During and after the dot-com crisis, the accountants and managers took the rap as scapegoats. Today the rating agencies and managers are held out as scapegoats. If necessary, the blood of the black sheep will flow in streams to calm down the feeble-minded people. Bonuses will be capped, salaries limited and managers fired. Sacrifices are necessary so an insane economic system survives and produces even more losers.


Social democracy reassures itself for the time being with the idea that too little "regulation" and the "unbridling" of the markets were responsible for the great mess. That is a comfort for people with weak minds and weak nerves since the way out of the crisis then seems clearly identified. With new regulation and new monitoring authorities for a new "embedding" of the markets, we will come out of the vale of tears. In the worst case, we must pass through a decade of stagnation, the "Japanese" solution to the real estate- and banking crisis on a world scale this time. That is impossible since we cannot wait ten years until the banks have recovered from their losses and the insane claims of owners of capital and property (several times the world social product today) are downgraded to an unreal "standard norm." A new edition of the New Deal, a new Bretton Woods, a new world economic- and financial order is necessary. But they cannot be had cheaply. Wall Street is grievously assailed but its political power is broken just as little as the City of London.

What will the capitalist world system look like after this great crisis? The US - the greatest debtor nation of the earth today - will not survive as a financial super-power. The dollar regime completely dependent on US state credit will be over. The euro will be the dollar's heir as world money on many world markets and the City of London will be Wall Street's heir. The US type of financial market capitalism will be replaced by another European or Asian variant. The threshold countries will be free at last from their dependence on the US. International financial markets and speculation will continue as before but without the undisputed dominance of the financial markets.


Will the temporary end of neoliberalism be exploited politically? That is the crucial question. Since the daily survival in capitalism is always harder for millions of people than in the past, the sector of the alternative solidarity, self-governed economy will grow. Since the state now bails out banks, the surrender of public goods to private concerns cannot continue at the same tempo as before. The public sector will grow again - outgrowing capitalism.

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