• The Return to Primitive Accumulation. Using Complex Financial Instruments

  • By Saskia Sassen | 20 May 09
  • One of the marking features of the period that begins in the 1980s is the use of extremely complex instruments to engage in new forms of primitive accumulation. 

    Global firms that outsource hundreds of thousands of jobs to low-wage countries have had to develop  complex organisational formats, using enormously expensive and talented experts. And for what? To extract more labour at the cheapest possible price, including unskilled labour that would be fairly low in the developed countries as well. The insidious element is that millions of saved cents actually translates into shareholders gains. 

    Finance has created some of the most complicated financial instruments in order to extract the meagre savings of modest households by offering credit for goods they may not need, and, even more serious, promising the possibility of owning a house. The aim is to secure as many credit-card holders and as many mortgage holders as possible, so that they can be bundled into investment instruments. Whether people pay the mortgage or the credit card matters less than securing a certain number of loans that can be bundled up into “investment products”. Once thus bundled, the investor is no longer dependent on the individual’s capacity to repay the loan or the mortgage. Using incredibly complex sequences of “products”, investors have made trillions and trillions of profits on the backs of modest-income people. This is the financialisation logic that has become so dominant since we entered the neoliberal era in the 1980s.

    Thus, in the US, which is ground zero for these forms of primitive accumulation, everyday an average of 10,000  homeowners have been losing their home to foreclosures. An estimated 10 to 12 million households in the US will not be able to pay their mortgages over the next 4 years and, under current conditions, would lose their home. This is a brutal form of primitive accumulation: presented with the possibility (which is mostly a fantasy, a lie) of owning a house, modest-income people will put however little savings or future earnings they have into a down payment. 

    This type of complexity aimed at extracting extra value form whatever stratum –the small and modest and the big and rich – also explains why our financial system is in permanent crisis. Thus what we are calling a crisis is actually part of how this financialised capitalism works – it is business as usual. The financialising of more and more economic sectors, that we saw since the 1980s, has become both a sign of the power of this financial logic and the sign of its self-exhaustion. When everything has become financialised, finance can no longer extract value. It needs non-financialised sectors to build on. The last frontier is taxpayers’ money – which is real, old fashioned, not financialised money.  

    What makes the current crisis different is precisely that financialised capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialisation. It has penetrated such a large part of each national economy in, especially, the highly developed world, that the parts of the economy where it can go to extract non-financial capital for its own rescue have become too small to provide the amount of capital needed to save the financial system. The global value of financial assets (which means: debt) in the whole world by September 2008, as the crisis was exploding, was three and half times larger (160 trillion dollars) than the value of global GDP. The financial system cannot be rescued by pumping in the money we have. 

    This, in turn, also makes legible the extreme abuses of whole economies made possible through extreme forms of financialisation. For instance, before the current “crisis” the value of financial assets in the US had reached 450% of GDP (McKinley Report 2008), that is to say 4.5 times the GDP. In the European Union it stood at 356% of GDP. The total value of financial assets in Germany, for instance, was 9 trillion dollars in October 2008. More generally, the number of countries where financial assets exceed the value of their gross national product more than doubled from 33 in 1990 to 72 in 2006. 

    Leaving aside the question of whether we want to live in a capitalist economy, let me say that even capitalist economies do not need financial assets that are 4 times the value of GDP. Thus even within a capitalist logic, giving more funds to the financial sector in order to solve the financial “crisis” is not going to work.  It would just continue the vortex of financialising economies. Financialisation in Europe has grown faster than in the US over the last decade, mostly because it started from a lower level: it grew at a compound annual growth rate of 4.4 % from 1996 through 2006, compared with the US rate of 2.8%.  

    Yet another way to portray where we find ourselves is the different orders of magnitude involved in banking and finance, respectively. For instance, in September 2008, when the current phase of the crisis exploded into the open, the value of bank assets amounted to several trillion dollars; but the total value of credit-default swaps, which was the straw that broke the camel’s back, stood at almost 60 trillion dollars, more than global GDP; these were debts that were due, and the money was not there. More generally, and to give a sense of the orders of magnitude that the financial system has created over the last two decades, the total value of derivatives (a form of debt), the most common financial instrument, stood at over $ 600 trillion. Financial assets have grown far more rapidly than any other economic sector.1

    These numbers illustrate that we are now at an extreme situation, but it is not anomalous nor is it created by exogenous factors, as the notion of “crisis” suggests. It is the normal way this particular type of financial system functions. And every time we have bailed out the financial system since the first crisis of this phase, the New York stock market crash of 1987, our governments have given finance the instruments to continue its leveraging stampede. We have had five bailouts since the 1980s, the decade when the new financial phase took off. Every time, taxpayers money was used to pump liquidity into the financial system. And every time, finance used it to leverage. The end of the cornucopia is near – we have run out of money to match the enormous needs of the financial system.   

    One of the major challenges we face in moving out of our current capitalism is to definancialise our economies. The level of debt  in the US today is higher than in the 1930s depression. For the US, debt was about 150% of GDP in 1929, and 260% by 1932.  In September 2008 the outstanding debt due on credit-default swaps, a made-in-America product, (and only one type of debt), was over 400% of GDP. Globally, the value of debt in September 2008 was 160 trillion (which is 3 times global GDP), and the value of outstanding derivatives is an almost inconceivable $640 trillion, which is 14 times the GDP of all countries in the world.  

    Definancialisation will require focusing on some very basic facts. The current estimate is that global unemployment stands at 50 million. This is tragic for those affected. But it also shows how limited this number is when we think of the 2 billion people in the world who are desperately poor. However, when we consider how many “jobs” would be created if there were a system that aimed at housing and feeding those 2 billion, the world would need those 50 million currently unemployed to go to work and then another billion workers.   

    Could our financial crisis serve as one of the bridges into a new type of social order?

    It could help us refocus on the work that needs to be done to house all people, clean our water, green our buildings and cities, develop sustainable agriculture, including urban agricutlure, provide health care to all, and so on. It would employ all those interested in working. When we consider all the work that needs to be done, then the notion of mass unemployment makes little sense. 

    History suggests that a market economy driven by profit maximisation does not get us there. But history also shows us that some mixes of well working markets and a strong welfare state have produced the best outcomes yet, as is the case in the Scandinavian countries. Although these  societies, too, are becoming more unequal, there is a strong ground beneath which the governments will not let people fall. 

    Thinking in terms of the work that needs to be done means entering an economic space that is radically different from that of high finance. For instance, the current debate in Western Europe and in the US about rescuing the financial system seems to consider only a financial solution. Financial solutions in our current world involve trillions, many trillions, of dollars or euros or pounds. But growing our economies requires (only) billions. 

    Even in a vast country like the US, looking at the crisis through the eye of the economy is in terms of billions, not the trillions of high finance. And the US starts from a rather low level, an economy where one third of workplaces are substandard, putting the US at 47th among countries for workplace injury, including fatal injuries. Its infrastructure is ranked between mediocre and bad. For instance, by 2007, 26% of the nation’s 599,893 bridges were rated structurally deficient or functionally obsolete: it would take $20 billion to fix them. In contrast,  we have extended $8 trillion to our banks and it has made no difference to the financial crisis. Even with the mediocre infrastructure in the US, the basic needs to upgrade it are in the billions of dollars, not in the trillions.2

    In the last few decades we have had the technology to eliminate diseases that affect millions and the capacity to produce enough food to feed all. But the opposite has in fact happened: millions and millions die from preventable diseases and even more go hungry. Poverty has become more radical: being poor used to be about having a plot of land that did not produce more. Today it means only having your body. We see a type of radical poverty in the global south but also in the rich countries. And we have seen heightened inequality, with a new global class of super-rich and the impoverishment of the old middle classes. Profit maximisation is the dominant logic in sectors like the pharmaceuticals and corporate food producers. The increase in the financialisation of market economies over the last twenty years has further sharpened the negative effects of profit-maximisation logic. 

      

    Notes

    1. More detail can be found in my “A Bad Idea: A Financial Solution to the Financial Crisis”, www.huffingtonpost.com/saskia-sassen/a-bad-idea-using-a-financ_b_145283.html
    2. See on this a partial list in my http://www.huffingtonpost.com/saskia-sassen/the-billions-of-our-econo_b_170009.html