In the tradition of Foucault, the state is not understood as a rational agent located outside of society, aiming to serve dominant class interests. It is rather a source of power diffused within institutions and social practices. In this respect, what the state does as a legislator, as institutional practice and through the specific actions of agencies of all kinds, is or may be viewed as a set of power relations diffused within the state and society according to the specific premises of governmentality1, a process of permanent restructuring of the methods and forms of governance. At the same time, there is always a gap between declared goals and/or means and actual practices. In any case the state has to be examined within a broader framework that focuses on power and the ways that such power structures are diffused in social practices. Class interests are part of this process, but function within a spectrum of conflicting interests, administrative practices and ideas that tend to produce contradictory outcomes.
This perspective, which Foucault used in his studies on madness, sexuality and prison, seems to be of little relevance to our economic enquiry. Nevertheless it may become a very helpful method in comprehending the role of the state in the neoliberal era, as well as the “return of the state” as a response to the current crisis.
One of the major characteristics of the neoliberal era is that the state was discredited as a producer of goods and services, a process that led to massive privatisations, at the same time as it continued to control a large percentage of GDP, as it had done in the past. Public expenditure and obviously public income, raised through taxation, remained at a level of 45-50% of GDP in most developed capitalist economies. Even more secure economies, the US being the primary example, enormously increased their public debt. Thus, there was a drastic change in the ways the state functioned in the economy. Significant changes in the composition of public spending or the raising of public income may have taken place, yet nowhere was there a strong tendency to a “retreat of the state”.
The state came to do four different things:
This neoliberal state demanded anti-inflationary policies. These were applied by nearly all governments around the world in the name of attracting capital and investment. The IMF, back in .the 1990s, pursued such policies and in this respect exercised great power. As the financial sector took over the business of managing the international flow of commodities and money, any retreat from the dominant “dogma” could be penalised by the providers of international funds
Yet in reality the developed economies, while preaching the neoliberal dogma, were piling up debts, which was a major contradiction. This paradox began in the Reagan years and continued uninterrupted (with a short break in the Clinton administration) until today. This paradox constitutes a major characteristic of the era not only in the US, but also in many European economies.
This growing debt implies that the state rather than becoming less important continued to play a central role in the accumulation process, quite different from the period of regulatory capitalism of 1930-1980. The state was central in the analyses of radical schools of thought, either those which view capitalism as in a permanent state of stagnation, or those which emphasise the falling rate of profit, or the profit squeeze2.
Economic crisis, during the last two centuries, has always been international, not national. National crises may have occasionally taken place, but they either have a strong international element, or they are derived from very specific circumstances. In any case, they are of little relevance to the current crisis.
International economic crises are the result of a major disturbance between the international flows of commodities (international trade) and the international flow of money (financial network). The international flow of commodities produces in each and every historical period national economies that are running either a surplus or a deficit in their trade with the rest of the world. The flow of money has to move in the opposite direction in order to balance the system. A national economy like the Greek economy, which is permanently running a large trade deficit, has always depended on a positive inflow of money, generated by shipping, tourism, immigrants’ remittances, foreign investments and most importantly, foreign loans.
The international system regulating these two flows always had a specific set of rules. In the 19th century, under British hegemony, it was the combination of free trade and the “gold standard”. The “gold standard” was reintroduced for a while in the interwar period (1926-1931), a move that proved disastrous and contributed to the 1929 crisis. In the postwar period, Bretton Woods (1945-1971) was a system of fixed exchange rates, in which gold was replaced by the dollar and the US, as the major economy running a trade surplus, was the major provider of money, through various forms, to the rest of the world.
This perspective was used in Kindleberger’s classic study of the 1929 crisis3. The recession of the 1930s is explained through the unstable arrangements that followed the First World War. The system that emerged included the heavy war reparations that Germany had to pay (which Keynes was so quick to criticise), and the arrangements regarding the overvalued British pound and the French franc. This led to a permanent instability of the international system, which the Americans were ready to finance through loans only up to a certain point. The return to the Gold Standard in 1926 made things even worse. The US was unwilling, and Britain unable, to sustain the system, and so it collapsed.
In the Keynesian period following the War, the US became the central provider of funds supporting the Bretton Woods system. After the 1970 crisis, a number of changes took place. From 1980 on, there has been no regulatory framework for the international financial system. In addition, the US became, from the mid-1980s, an economy with a growing trade deficit, requiring a constant inflow of money from the rest of the world. Finally, the exchange rates of the various currencies became negotiable in the international markets, and the financial markets where deregulated.
Such developments produced a permanent fluctuation in the exchange rates of major currencies; it encouraged speculative moves and quite often led to major financial crises (Mexico 1995, South East Asia, Russia, Brazil, 1998, Argentine 2001). A whole range of strategies were gradually formulated in order to protect economies from such fluctuations. The European Union adopted a common currency, China opted for “dollarisation”, while other economies (Brazil and most of the Latin American economies) retreated from “dollarisation” in order to avoid major crises.
Since 1990 and after the huge geopolitical changes that were associated with the collapse of the Eastern bloc and China’s change of course, the global economy entered a phase of intense growth of the international flows of commodities, investment and money. In industrial production, China became the rising world power. Russia regained its position as a major supplier of energy. Europe implemented the Monetary Union, expanded towards the East and the Balkans and remained an economic area with trade surplus, primarily due to German exports. Money flows were centralised in New York and London, managing a great part of world savings and moving from there in all possible directions in the form of investment, loans and speculative capital.
The growth of the global economy was based on the combined effect of technological change (increased productivity in the US, Europe and Japan), the availability of abundant and cheap labour forces (in China, India and other countries where urbanisation was intense) and the growth of the world market. Developed capitalist economies became service economies (in the US agriculture employs 3% and industry 12% of the population). Industry moved to the developing world. Practically everywhere in the Third World rural economies collapsed, with migration affecting great numbers of people. Almost 1.5 billion people moved either to the urban megacities or to other countries.
Despite the continuing growth and the improvement of most economic indices of the global economy, social inequities in the developed world increased enormously, large sections of the populations remained completely marginalised (as in Latin America), while international inequality increased, as certain areas (sub-Saharan Africa) had no growth at all.
The role of the US economy, where the current economic crisis emerged, is strategic in the global economy. It represents 23% of the global economy, a slightly smaller percentage than the European Union (25%). Together with Japan and other developed economies, where 1 billion people live, its share is almost 80% of the global income, with the remaining 5 billion having just a 20% share.
From the mid-1980s, the US started running a trade deficit. Up to 1980, it was a relatively “closed” economy with imports and exports in the range of 3-5% of the GDP. Since then, imports increased to something in the range of 15-17% of GDP and exports to around 10%. US exports primarily include armaments, agricultural products and technology. In addition, a lot of capital was involved in direct investment or speculative activities. For the last 20 years, the trade deficit has been constantly increasing.
This deficit has been financed in two ways. From 1980 to 1995 the sale of government bonds was the primary source. This implied a strong dollar and high interest rates in order to attract world savings. After 1995, the policy shifted towards “structured notes” of all kinds. The so-called “financial revolution” introduced a huge range of new titles and was accompanied by the explosion of consumption and housing credit in the US.
The real-estate boom took place after 1998 (credit reached 40% of the US’s GDP). It was related to the take-over by the banks of the “fridge banking” market. These were parallel systems of micro-finance serving the poor population, estimated at 20% of the American population, which had no access to the banking system. Yet in the new era what attracted the banks was the higher interest rates of these parallel systems.
The banks took over these high-risk activities and insured the loans to the insurance companies; these titles were then split into smaller units, mixed with other titles of all kinds, and then Wall Street investment banks sold them to both the US and the global market. From Athens to Manila, buyers were attracted by the high interest rates offered by Lehman Brothers’ various structured funds, not knowing what the source of these rates were. As the market grew, the banks back at home were ready to provide loans to poor populations irrespective of their ability to pay back, as long as there was demand for these titles around the world. In a period of low inflation and interest rates, this system was ready to invest in high-risk titles, as long as it had “high yield” products to offer.
The “loans to the poor” reached one trillion dollars. Another trillion was accounted for by the short-term loans of the big corporations which get credit directly from investors, and not from the banks. Another trillion consisted in loans to the public organisations (local authorities, universities and others). These 3 trillion were part of the financialisation process that produced all kinds of titles.
Altogether they represented 25% of the American GDP or in global terms almost 5% of the global income. In real terms, they became the most important “export sector” of the U.S. economy.
In parallel, these new financial instruments were used even in traditional areas of credit. Many of the Eastern European countries, for example, were receiving typical short-term state loans from international banks, but in the form of swaps. When their currencies were undervalued in the middle of the crisis they had to repay their loans in predetermined exchange rates, which was practically impossible.
The “financial revolution” seemed to provide benefits to everybody. As long as home prices were increasing, the “poor” found themselves in a position of annual gains. The banks, besides their traditional activities, found a new economic area in trading loans and insurance policies and therefore sought abolition of the 1933 legislation that prohibited their involvement in investment activities. The legislation was first revised in 1998 by Clinton in exchange for the provision of loans to the “poor”, and then was abolished by the Bush administration in 2001 and 2003. Wall Street was in the midst of the greatest euphoria ever.
In his second term, Bush promised “a new home for every American family”, irrespective of the stagnant wages and the cuts in social benefits, and Greenspan presented himself as the creator of the new “American miracle”. For more than a decade, the growth of the economy was based on new construction and on booming consumption. Greenspan defended the endless expansion of the trade deficit and was less concerned with the budget deficit (which included the costly war in Iraq). In effect, as long as the rest of the world was pouring money into the American economy through these “financial products”, the system seemed to work quite efficiently.
As happens in these cases, a crisis arises when one indicator starts to fall. It was the decline of the price of homes at the end of 2007 that signalled the reversal. The “asset bubble” broke nine months later. Greenspan said that “a number of mistakes” had probably been made, as the system was overdependent on the availability of credit at an extremely low cost. The stock markets fell by 40-50% around the globe. The crisis acquired a name, which fairly accurately captured what was happening, that is, “the credit crunch”. Gone was the idea that financial markets are, or may be, self-regulating.
While the credit crunch may be viewed as a phenomenon of “irrational” strategies pursued by specific interests in Wall Street, such speculative strategies are only possible in periods of real economic growth, in periods when the real economy, and in this case the global economy, is in a growth phase. They are not possible the other way round. Thus the speculative boom of the last decade was made possible by the real growth in the global accumulation of capital. Yet this process takes place under very specific historical conditions, where the strongest economy is unable to balance the international flow of commodities and money and is actually the main factor in producing new imbalances. The US is unable to sustain the existing system of the global economy.
The “credit crunch” led to the “evaporation of wealth”, as Marx showed in the past. Various forms of wealth attached to the “assets bubble” (Arab investment funds, Russian millionaires, Third World bourgeoisie) saw the value of their investments diminish. The American middle class found out that all its invested wealth (home, stock market, private insurance) lost half its value within two months.
Corporate America, identified with the banking conglomerates, the big insurance companies and the largest 500 companies, was facing a collapse of their stock-market value. Even worse, banks and insurance companies were unable to balance the books. The troubles of corporate America originated in its deep involvement in the “asset bubble”.
A crisis in the financial sector does not necessarily lead to recession. The real economy remained relatively unaffected on a number of occasions in the last 30 years. Yet as soon as the financial crisis of 2008 began, the “ghost of 1929” re-emerged. This showed that 2008 was not perceived as an ordinary bubble.
In 1929, it was the spread of the stock-market crash to the real economy that produced the greatest recession in modern history (1930-1933). 1929 has become the landmark in economic theory. It gave rise to Keynesianism (1930-1980). The monetarists (Friedman et al.) worked extensively on the issue. The key aspect of monetarism’s interpretation is that 1929 did not represent a failure of private markets, as Keynes had insisted, which required that the state permanently regulate the system. Rather it was the misguided policies of the state institutions (the monetary authorities) that led to the recession. Practically, it was the fact that they let the banks to go bankrupt, thus reducing the supply of money in the economy and therefore leading to the contraction of the real economy.
The impact on 2008 is straightforward. Most governments in the world responded to the 2008 crisis by trying to “save the banks” at any cost. The prevailing monetarist dogma of the neoliberal era dictated the response to the crisis, certainly in Western Europe, less so perhaps in the U.S. Obama’s government seemed ready to expand state intervention in the economy by both monetary and fiscal means, rather than sticking to the “save-the-banks” and “increase- the-money supply” dogma.
In 2009, the recession gained momentum around the world for three main reasons: