How i-bankers' foul-ups turn into recessions

I hope to write more in the next couple weeks about the growing economic crisis, but for now I just want to point out this article: Worried Banks Sharply Reduce Business Loans. This is how a disaster in the financial sector gets transformed into a disaster for the entire economy.

Up until now the collapse of the housing bubble, which had been inflated thru an incredibly complex trade in mortgage-backed securities and other forms of glorified gambling in the financial sector, has mainly hurt the banks themselves, those they tricked into taking out loans they couldn't afford, and the thousands of eager young private college graduates who had been dreaming of a job in arbitrage or securities for the last four years. If you haven't been following the news closely, you might not even be aware that the entire financial system came perilously close to complete collapse, and has been saved only by the major and repeated interventions of the US government and huge capital injections from the investment funds of foreign governments. But now we're moving into that part of every capitalism-induced crisis where problems in the credit markets infect the real economy - that part where people make things and serve human needs rather than trading in fictitious capital.

Businesses rely on bank credit for everything from everyday expenses to investments in the expansion of production. When that credit dries up, they have to forgo expansion, fire people, or even go out of business. Even those businesses that can still get loans have to pay higher interest rates. What constrains or destroys one business inevitably has an impact on the whole supply chain. In the same way, consumers find it harder to borrow for big purchases, further reducing effective demand. This is what the American economy is now facing.
Earlier this year, credit extended by banks to companies and consumers was still growing at double-digit rates compared with three months earlier, according to an analysis of Federal Reserve data by Goldman Sachs. By mid-June, bank credit was declining at an annualized pace of more than 6 percent.
The liquidity crisis arises from the fundamental laws of capitalism: at the end of every speculative expansion, all loans become suspect as banks must rapidly increase their capital base to cover their losses in the markets. People interviewed in the article talk as if bankers are behaving irrationally in denying loans to solid businesses. But this pattern has been well-established for several hundred years, and even mainstream economists will tell you it's built into the business cycle. Massive irrationality is certainly present, but at a much more profound level than the decisions of an individual loan officer.

Add the emerging credit crisis to rising costs for food and energy, the big drop in state and municipal spending that will unfold over the next few months, and the possibility of some spectacular failure in the financial sector, and we have the worst economic crisis in a generation. It's hardly a surprise - capitalism produces these kinds of crises every thirty or forty years. The interesting question is whether the crisis will reshape the basis of capitalist accumulation, and with it all the economic, political, and cultural formations that are based upon it.

1 comment:

chris said...

this essay inspired me to write my own take on this subject--in hindi. we'll see what my professor thinks of it.