The capitalist (financial) crisis and the return of history

[Hannah Bell]

By David North
26 March 2009

...As presented in the media, the capitalist system is the victim of sundry and indistinctly identified malefactors — reckless speculators, poorly regulated banks, excessively-leveraged hedge funds, greedy and overpaid executives, and even the self-indulgent American consumer — to whom the talented Mr. Obama, the new chief moralist of the United States, delivered a stern rebuke in his inaugural address.

...Back in 1989...the dissolution of the USSR in December 1991 was declared to be the irrefutable demonstration that socialism was economically unviable, and that, henceforth, no rational person could even imagine an alternative to capitalism. Mankind had arrived at, in a phrase popularized by Francis Fukuyama, the "End of History."

...But here we come to the double-standard: If the crisis of Soviet Union and Eastern Europe signified the failure of socialism (leaving aside the non-socialist character of these regimes), why is it that the present crisis of the American and world economy is not interpreted as a crisis and failure of the capitalist system?


History

The United States played the decisive role in the world capitalist system in the 20th century. By the end of World War I, the US was the industrial powerhouse of the world...

The destruction caused by (WWII) created...the conditions that made possible a new systemic capitalist equilibrium necessary for long-term economic growth and stability...The most important element... was a US-dollar-based international monetary system...the dollar would function as the world reserve currency...

However, it was inevitable that the system would come under mounting stress as the reemergence of European and Japanese industries undermined American dominance...these fears were justified by the collapse of the Bretton Woods system...when the Nixon administration, without warning, suspended the convertibility of the dollar into gold.

This act... unsettled the financial equilibrium that had made the post-war expansion of global capitalism possible. In the aftermath of August 1971, world capitalism became increasingly susceptible to destabilizing shocks...


Impact of economic crisis on US corporations:

Among the most significant innovations introduced by American capitalism in the early years of the 20th century was the creation of the industrial corporation.

Chandler: "Scale and Scope: The Dynamics of Industrial Capitalism":

"Until well after World War II, both the managers with little equity in the enterprise (the inside directors) and the representatives of the major stockholders (the outside directors) agreed that retained earnings should be reinvested in facilities and personnel in industries where the enterprises had developed competitive advantages based on its organizational capabilities. They agreed that such investment carried lower risk and higher probability of a satisfactory rate of return than making comparable investments in industries where the firm did not have such advantages."


In light of contemporary conditions, the scene drawn by Chandler may appear almost idyllic. What, then, led to its breakdown?

First...the overall deterioration in the position of the United States in the world economy...Second...deterioration in the rate of profit.... in the 1960s and early 1970s.

According to one study, the profit rate in the advanced capitalist countries fell by one-fifth in the business and manufacturing sectors between 1968 and 1973 (Capitalism Since 1945, by Philip Armstrong, Andrew Glyn and John Harrison).

...Growing pressure on global profit rates, increasingly apparent by the mid-1960s, intensified international competitive pressures, which further weakened the global standing of US industry. This led to significant changes in the strategic orientation of American corporations.

"As increased competition," writes Chandler, "threatened to lower profits and reduce opportunities to reinvest earnings in industries where firms' organizational capabilities gave them competitive advantages, their managers began to seek new ways of growth and devise new ways of management".


Mergers and acquisitions waves:

Among the strategies employed...was the use of diversification through mergers and acquisitions.

Prior to the 1960s, there had been two significant "waves" of mergers and acquisitions.

The first began in the aftermath of the protracted profit depression of 1873-1895 and reached its climax 1898 - 1904. This was the period of historic horizontal mergers, in which competitors within a single industry were consolidated into a massive monopolistic structure, (e.g.) US Steel, which eventually accounted for 75 percent of US steel making capacity, DuPont, Standard Oil, General Electric, Eastman Kodak and American Tobacco...

The second wave occurred 1916 - 1929...a greater percentage of mergers were "vertical" rather than "horizontal"...they combined firms which had a buyer-seller, or vendor-supplier, rather than competitive, relationship.


The "third wave" of mergers and acquisitions:

...The aim of the third wave (1965 - 1969) ...was to maintain growth and build profits by aggressively buying companies only remotely related, or not related at all, to the industry in which the corporation making the purchase was historically rooted.

This new strategy reflected deepening pessimism...about the profit potential within core industries.

A result of this mania was the development of a powerful new business enterprise: the buying and selling of corporations...The merger and acquisition wave was followed by a divestiture wave, as corporations sought to sell off "underperforming" components of their organizations....Prior to 1970, divestitures were quite rare. In the course of the 1970s, it became common...

Long-term investment in securities, which had been the norm prior to the mid-1960s, was replaced by strategies that sought to maximize short-term returns. Banks, representing finance capital, had played a significant role in American business throughout the 20th century. But, as Chandler documented, that role was exercised within the framework of a long-term business strategy, generally related to the achievement of competitive advantages in different branches of industry...

"Before the acquisitions binge of the late 1960s," writes Chandler, "almost no investment banking house had merger and acquisition departments. Very soon such specialized departments became their banks' largest money makers".


The "fourth wave" of mergers and acquisitions:

The significance of the stock exchange in American (and, subsequently, international) business was particularly evident in the fourth wave of mergers, 1984 - 1989. It was during this period that the essentially parasitic, destructive and criminal modus operandi of the new finance-driven corporate model was firmly established.

Mergers, as Patrick Gaughan points out,

"were a great source of virtually risk-free advisory fees for investment bankers. Merger specialists at both investment banks and law firms developed many innovative products and techniques designed to facilitate or prevent takeovers".

Under the guidance of investment bankers, the "hostile takeover" — though hardly unknown in the history of American capitalism — assumed unprecedented and staggering dimensions.

The hostile takeovers of the 1980s saw the triumph of the very personification of financial parasitism: the "corporate raider," whose main source of income was the proceeds generated by the attempted takeover. Enrichment did not depend on the success of the effort, let alone on the long-term viability of the company in the aftermath of the takeover attempt.


The leveraged buyouts and Merchants of Debt:

Mergers during the fourth wave were financed with immense amounts of debt:

"Kohlberg Kravis helped develop and popularize the LBO concept...In most cases, Kohlberg Kravis financed up to ten percent of the acquisition price with its own capital and borrowed the remainder through bank loans and by issuing high-yield bonds...using the tangible and intangible assets of the target company as collateral... Following the acquisition, Kohlberg Kravis would help restructure the company, sell off underperforming assets, and implement cost-cutting measures. After achieving these efficiencies, the company was usually then resold at a significant profit"

The operations of firms such as Kohlberg Kravis were not merely the product of personal greed. Rather, the decay of the industrial base of American capitalism found expression in the destructive activities of "Merchants of Debt" such as Kohlberg Kravis...

While, as is shown by every index of economic activity, the global position of US-based manufacturing continued to decline precipitously, financial speculation became the principal means by which the American bourgeoisie enriched itself.

In 1980 only 6 percent of corporate profits were realized in the finance industry. By 2005, the finance industry generated 40 percent of corporate profits.

That is, the fastest way to accumulate wealth was not by engaging in production, but by staying as far away from it as possible.

This is borne out by another statistic: Between 1981 and 2008, the aggregate debt of the US financial sector went from 22 percent of GDP to 117 percent! Speculation has proved a far more reliable means of getting money, than the arduous and uncertain process of industrial production.

The fourth wave of mergers and acquisitions ended amidst the collapse of the junk bond market and the Savings and Loan scandals on the late 1980s...

The US economy slipped into recession in 1990-91. The recovery from that recession, which triggered the explosion in the market indices, set into motion the fifth wave of massive mergers. Once again, mergers were seen as the fastest means of realizing profits.


The "fifth wave" of mergers and acquisitions:

A distinct feature of this fifth wave, which began in 1992 and seems to have continued up until the eruption of the global crisis of 2008, has been the use of corporate equity to finance acquisitions. This was facilitated by the wildly inflated share values in the stock market boom of the 1990s.

In reality, many of these deals made during this period — though hailed in the media as creating efficiencies and "synergies" — lacked any substantive economic rationale beyond the immediate financial gains eagerly anticipated by the investment bankers, law firms, big shareholders and corporate executives.

The results of many of these speculative transactions were disastrous... Between 1998 and 2001, the shareholders of firms acquired through mergers and acquisitions lost the staggering sum of $240 billion...

The fifth wave of mergers has been significant in yet another respect. It is international in scope. Though it began somewhat later than in the United States, the value of European transactions were, by 1999, almost as large as the American deals. Asia also has participated significantly...

The history of merger "waves" tracks the rise, decline and fall of American capitalism.

The first two waves (1898-1904 and 1916-1929) were part of the rise of American corporations to a position of global dominance.

The third wave (1965-69) arose as a response to declining profit rates and the initial manifestations of the deterioration in the global status of American capitalism.

The fourth and fifth waves (1984-89 and 1992-2008) have been socioeconomic phenomena of decline, decay and extreme parasitism.

The last waves have been powered by massive debt, the growth of which proceeded alongside, and demanded, the destruction of the real productive forces. The essential purpose of these transactions has been to destroy social wealth in the interest of investors' profit and private wealth accumulation.



The social and economic consequences of parasitism:

The phrase "creating shareholder value" is a social euphemism that is employed to conceal and justify the brutally exploitative, socially destructive and essentially criminal character of these financial transactions.

The merger and acquisitions wave of the 1980s required and could not have succeeded without a massive assault on the social position of the working class in the United States. The policies implemented by the Reagan administration... created the necessary political framework for the operations of the corporate raiders. Paying down the huge debts incurred in the leveraged buyouts of the 1980s required intensified exploitation of workers...and the outright elimination of hundreds of thousands of jobs.

The repeated occurrence of economic disasters cannot be explained as unfortunate accidents which might have been avoided had investors been less greedy, executives more responsible, administrators more watchful, etc.

Every five years or so since the 1980s, there has been a major disaster. In the 1980s...there was the Savings and Loans scandal, the junk bond mania, and the 1987 Wall Street crash. In the 1990s...the Mexican peso crisis, the dot.com bubble, the Asian crisis, the ruble crisis, and the collapse of Long Term Capital Management. In 2001 Enron collapsed almost overnight...

Underlying all these speculative operations is the decay of the real productive foundations of American capitalism, the separation of the ruling class's self-enrichment from the processes of production and the creation of real value...

The rampant financial speculation, fueled by debt, is not the cause of the crisis, but, rather, a manifestation of deep-rooted contradictions in the American and global economy... the enduring impact of this crisis will be a long-lasting and deeply painful deterioration in the living standards of the working class in the United States.

Moreover, if history teaches us anything, it is that an international systemic breakdown of capitalism leads inexorably to violent political convulsions. Capitalism in crisis becomes the breeding ground of political dictatorships and rampant militarism....


The social physiognomy of the American ruling class:

To recognize the dangerous implications of the unfolding crisis is not alarmism, but political realism. There is no reason to believe that the ruling elites will respond in the first and second decades of the 21st century to the breakdown of capitalism with any less brutality than they did in the 1930s and 1940s...

If any conclusion can be drawn from its initial response to the bankruptcies and collapses produced by its own policies, it is that the ruling class is determined to make the mass of the population pay for the cost of the crisis.

Observing the response of the ruling elite in the United States to the economic crisis, one cannot help but note the parallel to the French aristocracy on the eve of the revolution that erupted in 1789. Every effort to find a rational solution to the financial crisis that confronted France was blocked by the aristocracy, which was determined to exploit the crisis in its own interests. The nobility would not tolerate any measures that threatened to undermine its wealth, status and prerogatives...

The brazen contempt for public opinion...is typical of a society in which the rich, intoxicated by privilege, believe that they can do what they wish, unencumbered by legal, let alone moral restraints. President Obama's Treasury Secretary Tim Geithner, a multimillionaire (like many other members of the administration), cheated on his taxes — with no legal or professional consequences. Paying taxes, as we were once told by a real estate mogul, "is for little people."

One is struck by the degree to which the American ruling class has acquired the characteristics of a decadent aristocracy...

"The history of all hitherto existing society," wrote Marx and Engels in 1847, "is the history of class struggle." Underlying all the claims that Marxism had been refuted and that the egalitarian aspirations of socialism were irrelevant to the modern world, was the complacent belief that the "class struggle" belonged to the past...

The one undoubtedly positive feature of the economic crisis is that it is laying bare the real social relations of modern capitalist society, exposing the irreconcilable conflict between the interests of the working class and the capitalist aristocracy...



http://www.wsws.org/articles/2009/mar2009/dnor-m26.shtml

[heliomx]

1. And that's not all of it

Great article! But I think there is more to the capitalism crisis. The productive sector is also part of the problem because it is related to the consumption culture that is widely enforced, propagated and adopted. More than ever people are working and even contracting debts just to consume more.

It's also linked to the environmental crisis: From a different perspective, our industrial sector is acting more like a garbage-and-pollution production sector. Almost nothing is made to last more than a few years.

Maybe it's the "End of History" as we know it.

In my opinion there will be an alternative for the capitalism. We simply have no choice but to imagine something else.