Anatomy of a crisis

The global financial and economic crisis which began in 2007 has unquestionably been the most severe to have afflicted the world economy since that of 1929–33. The latter marked the start of the Great Depression of the 1930s – a disaster which was only finally ended by the stimulus of massive destruction and armaments production induced by World War II. The huge scale of wealth and livelihood destruction caused by the present disaster – which is ongoing at the time of writing (summer 2009) – is reflected in the fact that the market capitalisation of the world's major stock exchanges fell by 47 per cent in value (a loss of $29.4 trillion – equal to about half of global GDP) in the twelve months to December 2008. To put this in perspective, the proportionate scale of loss not only dwarfed that in any previous calendar year on record (at least since World War II) but compares with a net decline of only 35 per cent over the whole of the previous market collapse (from end 1999 to end 2002).

One of the most striking phenomena of the unfolding crisis has been the uniformly superficial nature of the analysis of its causes presented by mainstream observers, whether government officials, academics or business representatives. Thus it is commonly stated that the crisis was caused by a combination of imprudent investment by bankers and others (often incentivised by reward structures appealing to extreme greed) and unduly lax official regulation and supervision of markets. Yet the obvious question begged by such explanations – of how or why such a dysfunctional climate came to be created – is never addressed in any serious fashion. This omission is all the more remarkable when it is well known, for example, that

• the US Glass-Steagall Act – enacted in 1933 in order to outlaw many of the conflicts of interest and excesses in the financial markets that had led to the Wall Street crash of 1929 – was repealed in 1999 by the Clinton administration with bipartisan support in Congress, thereby facilitating a reprise of the more or less criminal practices of seventy years earlier and thus contributing greatly to the present financial market implosion;

• the Commodity Futures Modernization Act of 2000 – also enacted by President Clinton with strong Republican support – legalised forms of speculation (in commodities and financial derivatives such as credit default swaps – see below) that were previously classified as illegal gambling.

The inescapable conclusion, therefore, is that the crisis was the product of a conscious process of facilitating ever greater risk of massive systemic failure. At the same time, given the competitive, profit-maximising climate in which financial institutions are operating, and the creation of incentive and reward structures encouraging the pursuit of short-term gain at all costs – individual agents effectively had no choice but to exploit every loophole to push risk-taking to the limit of what was allowed – and often beyond it.

Moreover, the power of the vested interests behind this compulsion has been revealed by the lack of will on the part of regulators such as the Securities Exchange Commission in the USA and the Bank of England and Financial Services Authority in Britain to enforce those rules that remained in force – such as the laws against fraud. Given the obvious culpability of the ruling establishment revealed by this line of enquiry it is perhaps only too unremarkable that mainstream analysts do not wish to pursue it – all the more so as it serves to highlight the fundamental unacceptability of a system dependent on sustaining impossibly high levels of economic growth.

If this anarchic situation was deliberately contrived, one might suppose that those now ostensibly seeking ways to order affairs better in future would try to discover why such a high-risk policy has been consciously pursued. To this question there can be only one plausible answer (which obviously cannot be spoken in mainstream circles): the compulsion to find ever more outlets for the rising volume of investible funds generated by the inexorable expansion of accumulated profits as the global economy has continued to grow over the years (albeit at a progressively slower rate from the 1970s). This in turn points to a recognition (if only unconscious) on the part of the ruling establishment that the historic source of capitalist instability – the business cycle of boom and bust, linked to the phenomenon of the falling rate of profit, first identified by Karl Marx – was reasserting itself.

Consistent with their general reluctance to apportion blame, there has been little attempt in establishment circles to expose the serial dishonesty of such key officials as Alan Greenspan, chairman of the US Federal Reserve Board, 1987–2006. The latter, having famously warned of the 'irrational exuberance' of stock-market investors as prices on Wall Street soared in late 1996, nevertheless sought to justify them in 1999 at levels which by then had doubled again, on the manifestly spurious grounds that rapidly rising productivity in the USA meant that they were indefinitely sustainable - even though such a consideration was at best irrelevant, bearing in mind that weak demand in a slowing world economy was a decisively negative factor of far greater significance. Linked to this argument, the chairman also gave his blessing to the view that the so-called New Economy – based on the wonders of electronics, cyber-technology and enhanced telecommunications – could somehow provide the basis for sustained rapid growth. When shortly afterwards the related 'dotcom' bubble burst with disastrous consequences for the markets, Greenspan and his colleagues at the Fed proceeded to cut interest rates to 1 per cent in a determined and successful attempt to generate a speculative revival in asset prices. When this resulted in a manifestly unsustainable real-estate bubble, whose collapse in 2007 (after Greenspan had left office) was to be the catalyst of the present crisis, he quite falsely claimed throughout that it was impossible to identify the existence of such bubbles until after they had burst. So far from denouncing this systematic falsehood and betrayal of the public interest, politicians of both Republican and Democratic parties for years uniformly lauded Greenspan as a 'national treasure' and indispensable guarantor of economic prosperity.

The roots of disaster

In truth this tendency of the global establishment to engage in escapist fantasy may be considered understandable in view of the political realities that had become established after World War II. For it was a political article of faith for long after the war that Western governments – at least...