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The Causes of the Current Financial Crisis

by Steve Martinot
December 23, 2008

In the current financial crisis, there are three major factors that can 
be used to map the trajectory of what is happening:

the rise in land and real estate prices, which is not
unrelated to IMF and World Bank policies of privatization of land
around the world, as a condition for corporate domination;

the government's adoption of an ideology of non-responsibility 
for its citizens

the decline of the dollar internationally because it
depends on the financialization of oil, and oil is subject to
national sovereignty;

The second two contextualize the first. And all three express
facets of the internal contradictions in corporate globalization,
which is the situation in which this crisis is unfolding. Let us
look at these in reverse order.

The salient fact about the dollar is that it has been, up
to now, the currency of stability (the currency of account) for
multinational corporate operations. Previous to the end of the
Vietnam War, the dollar was backed by gold in Fort Knox. This
gold reserve was drained during the late 1960s due to enormous US
military spending, as well as oil importation. This outflow of
dollars flooded international money markets and foreign bank
reserves. These foreign banks then sought to exchange those
dollars for gold (under the Bretton Woods treaty). By 1971, that
drain threatening to deplete the gold reserve beyond the level
required by law to support the domestic currency.

When the dollar came off the gold standard in 1973 the
multinational corporations (MNCs) went into crisis. A stable
international currency is their bloodstream; it is what enables
them to coordinate their operations in different countries. To
restabilize it, the dollar was placed on an oil standard through
Kuwait in 1979. Kuwait amassed international dollars, invested
them in industrial enterprises, and guaranteed their value
through its own oil reserves. The 1991 war on Iraq was in reality
a move to take control of Kuwait, a strategy that had beenun
feasible while the USSR provided an international balance of power.

The dollar has again gone into crisis for a number of
reasons. First, there is the rise of the euro economy, offering
competition to the dollar as a currency of account. Second, Iran
has proposed to open an oil bourse (for trading oil contracts) in
the euro. This would seriously threaten the dollar's ability to
use oil as its backing. Third, there is the extreme over-extension 
of the dollar debt structure, making it very unstable.
But most important, there is the ever-present threat of a nation
taking control of its own oil resources, and thus undermining the
overall control of oil reserves that is essential for stabilizing
the dollar. One need only mention Venezuela, Russia, Iran, and
the Iraqi resistance against US occupation. Russia has
nationalized most of the Caspian oil fields and its productivity.

The principle of national sovereignty thus becomes a threat
to the an oil backed dollar. It was not for a gold backed dollar,
since the gold was stored in Fort Knox. Bu oil can be reclaimed
by those who live on that land that contains it.

Much that has happened in terms of US wars and foreign
policy in the last decade has been to bolster or sustain the
dollar through control of oil reserves. The invasions of
Afghanistan and Iraq, and US involvement in the Orange revolution
in the Ukraine were all focused on geo-political positioning with
respect to the Caspian oil fields. The invasion of Iraq was also
designed to provide control over Iraq's oil. To control the oil
is to control the industrialized world, as well as to provide the
necessary economic stability for the MNCs.

What this amounts to is a financialization of oil to
maintain the dollar as the international currency. It is not the
use of oil that is at stake in the present US oil wars, but the
control of its reserves.

In sum, the real contradiction in the dollar is the
contradiction between neo-liberal corporate control of the
world's economy and the national sovereignty of other countries.
The terms of the crisis of the dollar are the rise of the euro,
the success of the Iraqi resistance, and the move toward national
sovereignty on the part of many countries throughout the world.
This move is, as we shall see below, also a threat because it
involves the control of the land by the people who live on it.
All this contests the hegemony that the US had attempted to
establish for itself and the dollar through corporate domination
of local economies around the globe (the real meaning of
privatization).

The second contextual dimension of the financial crisis is
the US government's ideology of abjuring and abandoning all
responsibility for its citizens. It has replaced that
responsibility with a responsibility toward the corporations
(financial, military, banking, insurance, productive, service,
all), prioritizing the MNCs.


The major forms this derogation of responsibility have taken
are the dismantling of the social safety, the subsidizing of
runaway shops, deploying the budget for military purposes, wars
of aggression, disregarding health care and underfunding
education, tax cuts for the rich, and the deregulation of the
economic domain: energy, environmental protection, transportation
and communications, lending and mortgaging, banking, and other
industries. Deregulation has played a key role in the present
crisis by fostering the housing bubble, by legitimizing
speculation in oil, and by legitimizing the fraudulent mortgages
and derivatives securities that have been at the center of the
current economic collapse.

The policy name for this ethical failure is Supply-side
Economics (SSE). It was instituted as policy in the 1980s. SSE
inverted the Keynesian program of using government spending for
increasing aggregate demand (for instance, through social welfare
programs). Instead, it aimed government spending at putting money
in the hands of corporations and corporate investors to use as
they saw fit. If they invested in production, it would increase
production, and ostensibly (hopefully) create jobs. But in a
global context of over-production such as emerged from the 1990s,
productive investment was not highly profitable, and much of this
money went (and still goes) into financial speculation.

In reality, this shift of government responsibility from
humans to corporations was the logical extension of raising
corporations to the level of persons (1886). To have given global
citizenship to corporations has the concomitant effect of
rendering real humans more or less irrelevant (as the social
inverse of government abrogation of social responsibility); that
is, humans have become irrelevant except to the extent they work.
Indeed, this ethos of abrogation is itself a reflection of the
inherent nature of the corporation, which was devised to insulate
investors from any responsibility for what the corporation did in
its own name. What it means is that humans in the US do not have
a structural connection to the government, neither through
elections nor representation nor popular movements -- which is
why the two party system seems so unresponsive to popular needs.
The corporations have a structural connection, and for them,
there are not parties, but one Congress, and one executive.

This replacement of human citizens with corporate
citizenship has another effect. The economy has become divided
between two levels, that of productive economic activity, which
is the level of human beings, and the level of unending economic
exchange, which is the level of corporate accounting, the stock
markets -- the trading in stocks, bonds, and other contracts and
securities. For humans, that financial level of economic activity
seems ephemeral and fictitious. For humans, it is the level of
productive activity that is real; it is where the value of one's
living standard is determined. For the corporations, the stock
market is the real economic activity because it is where the
value of their assets is determined. They enter into material
production only in order to have securities to sell on the stock
market; if they can enter that market without material production
(as did the dot-com industry), the effect is the same.

The economy of stock and security trading has become
primary, as an extension of having raised the corporations to the
level of citizen. For the corporations and the government, human
economic activity (production, meeting people's needs,
maintaining social standards of labor conditions, environmental
protection, health care and education) has been reduced to a
wholly ancillary consideration.

Originally, the regulation of industry was to preserve the
stability of the economy for the benefit of humans. Deregulation
of the economy was to open all avenues of making money to the
corporations through securities trading, including land and
resource contracts. Under deregulation, humans are no longer of
account. They do not enter into a securities marketing (free
market) economy. In the context of governmental abrogation of
responsibility, it is natural that bailout funds will be used
only for corporate interests -- though there is enough money at
stake to provide for the housing, health care, and education of
"human" citizens for years to come. The bailouts are consistent
with supply-side economics.

The two aspects of contemporary economy examined above (the
reliance of the dollar on the financialization of oil, and the
primacy of the securities economy over human economy) come
together in this financial crisis. That is, the real political
contradiction revealed by this financial crisis is the
contradiction between the human level of productive economy and
the corporate level of finance, stock market operations,
contracts and securities, which politically becomes a
contradiction between the people and the government. The crisis
has been caused by these two levels of economy coming into
contradiction with each other and clashing; the place where the
clash occurred was the housing market. But it is not simply the
US housing market; the clash involved the international character
of the dollar and its weakening, and the global drive to
privatize and corporativize land and real estate, which had its
reflection inside the US.

The neo-liberal policy advanced by the IMF of privatizing
social services and resources, principally land, opened up vast
new markets in land and construction for the exploitation of
resources and labor by the multinational corporations. And it
drove up the prices for land and real estate by greatly
increasing the demand for land. As a natural concomitant to this
increase in demand, there was an extensive increase in land
speculation. (One effect of years of excessive land speculation
was the collapse of the Four Tigers -- South Korea, Singapor,
Taiwan, and Hong Kong -- in the late 1990s.) Global speculation
in land was the context for the extreme increases in real estate
values in the US. The process began in the early 1980s when the
policy of privatization and economic control by the MNCs was
institutionalized. In the US, land speculation was aided by the
deregulation of real estate financing.

One of the results of the domestic rise in real estate
prices was a decrease in demand, and a slowing of the mortgage
market. Fewer and fewer people could afford to buy a house. To
compensate for the housing market contraction, the banks invented
mortgage schemes that lower middle class and working class people
could ostensibly afford. Here too they were aided by
deregulation; lenders did not have to be as detailed about the
future unfolding of their loans. Among these newly invented
mortgages were the subprime, the variable rate, the no-down-
payment loans, etc. Some of these newly invented mortgages were
actually forms of predatory lending. The idea was to suck more
people in.


What characterized these loans was that their very low
interest rates were strictly temporary. They would stay at a low
rate for a year or two, and then jump to make up the deficit. The
banks knew that this was unstable, and that a sizable proportion
of these mortgages would go into default and foreclosure. They
knew that ahead of time. So they hedged the loss that they would
face at that future moment by packaging these mortgages in a new
(and fictitious) security that could be sold and resold on an
open market. By doing so, they got the money up front that they
would have lost by waiting for default and foreclosure, and the
securitized mortgages would be traded down the line so that when
default actually occurred and the mortgages became worthless, the
securities they were packaged in would be far away. These
securities (called collateralized debt obligations -- CDOs) were
supposed to protect the banks against losses, which is why they
are called a hedge. And the investment institutions that handled
them were what were called hedge funds.


But what these invented securities did was greatly expand
debt. They were used as stable collateral for other loans, though
they were unstable. Passed down the line through endless trading,
they increased the possibility of collateral for loans at each
step; and those loans were in turn transformed into new invented
securities (derivative CDOs) in the same way. The sale of CDOs,
originally profitable, easily became overextended. It got to the
point where the total book value of these CDOs outstripped the
GDP of the entire world economy. Thus, when the foreclosures did
start to occur, and the CDOs started to become worthless, it
wasn't only the holders of the CDOs that lost; the other loans
that had been based on them, and turned into derivatives in turn
also became worthless. And the overall effect was catastrophic.

What started the crisis in 2005 and 2006 was the fact that
the Federal Reserve raised its prime interest rate because the
economy seemed to be in good shape, owing to all the money being
made on the housing bubble and these fictitious securities. That
raise in rate caused a jump in interest rate throughout the
economy, and in particulat, for all the variable rate mortgages.
Foreclosure started getting out of hand. Many banks and
investment houses started losing a lot of money.

At first, they tried to stem the market contraction in value
by speculating in oil. The hope was that by speculating in oil
contracts, driving up the price of oil (and gas), it would bring
in enough money to cover the losses suffered by the loss of value
of the CDOs as they collapsed. But the rise in the price of oil
weakened the dollar whose stability depended on it, and the
decline in dollar value caused more financial losses
internationally, again generating parallel losses inside the US
(recall, the debt structure is global). The rise in oil prices
also decreased demand at the level of human economy, thus
aggrevating the stress on the debt structure at the financial
level, since most human consumption had been extended through the
extension of debt.

Because the speculation in oil failed, the government, in
its responsibility to the corporations, has had to turn to
bailouts.

One could call this financial crisis a crisis of over-
production because it was caused by the over-production of
speculative securities. But that over-production caused a crisis
not only because of the fragility of the debt structure. It was
caused by the instability of the dollar (the financialization of
oil), and the fact that more and more countries are joining the
move toward retrieving national sovereignty by taking back from
the corporations control of their own land and resources. This
move has been led by the nations of South America and by Russia
(which is why Russia is now a major enemy of the US).

The hapless deregulation of the financial economy by the US
government, the over-development of fictitious securities, the
failure of their role as hedges, the decline of the dollar, the
bursting of the housing and real estate bubble, the failure of
oil speculation, have all come together. The result is the fall
of stock market prices, the fall in corporate asset values, and
the stoppage of real economic activity. This is the crisis now in
effect.

If the bailout money could be used to support people's
needs, it would provide free education and health care, rent
subsidies and public transportation for the entire nation for
years, with a lot left over to aid those thrust into starvation
internationally by IMF and World Bank policies. Furthermore, if
the money was used in this fashion, the increase in employment by
the institutions and services as well as industries that connect
to people's welfare would end unemployment. Criminal speculators
would lose, but humanity would gain.

These are not even distant concerns for a government
operating according to SSE and an abrogation of responsibility to
its human citizens. The government is on the other side of the
contradiction between the corporate financial economy and the
human economy. If the people do not have a structural connection
to the government, then they cannot control that money throug
the government. Thus, the real question confronting the people of
the US is how to gain control of that money; that is, how to take
it out of the hands of the government. Making proposals directed
at the government for its better use is useless, because the
government thinks and operates at the level of finance, and not
at the level of the human economy.

What this crisis also points out is that the corporate
structure itself is negative and destructive, as well as amoral
and unjust. To resolve this crisis, and the contradiction between
finance economy and human economy, the corporation as a structure
would have to be expunged.

Ultimately, what corporate globalization cannot live with,
and which is the primary weapon against it, is political and
economic sovereignty on the part of subaltern nations, peoples,
and regions. Sovereignty is the necessary precondition for
democracy. All interventions in other countries by the US make
democracy impossible because they destroy the sovereignty of the
other country. And for us in the US, nothing will change until we
begin to form our own organizations and movements, and assume a
sovereignty over our own lives that will construct institutions
for which we are not irrelevant.

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