Cedric Durand's Fictitious Capital offers a lucid analysis of the growth of finance and its significance for capitalism. In this essay, originally published by Open Democracy, Durand surveys the current state of the global financial system.
It’s now ten years since the start of the great financial crisis, and, on the surface, waters stand still. In the US, exuberant stock markets have celebrated the advent of Donald Trump’s administration with a 12% rally since the US presidential election and the Federal Reserve feels sufficiently confident to move to normalise its monetary policy, announcing a series of interest rate rises, and is considering reducing its $4.5tn balance sheet.
In Europe, uncertainties are still running high, but the election of a former investment banker as the head-of-state in tumultuous France is icing on the cake for cheerful financiers, who have already embraced the enthusiastic mood of their US counterparts. As seen from the stock market, the wounds of the financial crisis have long been repaired and investors are betting on the next expansion.
But, deep down, all is not so rosey. Far from being resolved, the underlying contradictions that caused 2008 financial meltdown have, if anything, grown stronger in the past few years. Beyond the current deceiving calm, a tectonic socio-political shift is on its way, waiting for a minor incident to unleash a new wave of financial turbulences and draw a caesura of historical magnitude.
Fortunately, the 2008 crisis was not allowed to run its course. Ordinary people suffered a lot, but government and central bank interventions succeeded in averting a complete economic collapse. In doing so they not only intercepted the debunking of many unsustainable financial claims but also opened the way for increasing financial risk.
Indeed, as public management successfully mitigates financial catastrophes, investors take extra risks as they put their faith in the ability of government to save them again when something bad occurs. In the meantime, regulators, if they are not simply overconfident, are neither strong nor determined enough to rein in their appetite for greedy financial innovations.
This has led to far more risk-taking by private investors – why should they be prudent? – and deficient regulation and oversight, which are both key ingredients for an even more violent tremor in future. This is the main lesson taught by the great post-keynesian economist Hyman Minsky, briefly remembered at height of the crisis, although forgotten again now. Private finance saved by public money is now strong enough to push the Goldman Sachs-staffed US administration to reverse the timid regulation of the Obama years and to convince the European Commission to promote securitisation, the very kind of network finance that produced the 2008 rout.
The illusion that financial assets can create value “as it is the property of pear-trees to bear pears” is nowadays much more vivid than in Marx’s times. This fetishisation of finance and its empowerment are the reasons why the main avenue to roll back the danger of a debt-deflation spiral was a huge monetary stimulus. As acknowledged by Claudio Borio, a prominent figure at the Bank of International Settlement, rich economies became addicted to low interest rates and central bankers have dramatically increased the dose in the past few years with near zero or even below zero key interest rates and assets purchase programs.
The outcome of this sequence is an outrageously unsustainable dynamic: on the one hand, financial fragility is on the rise again, in particular with excessive corporate debt in the US, persistent bank fragility in Europe, and overvalued stock markets. In the real economy, this monetary stimulus has not delivered much: growth rates are anaemic, underemployment endemic, productivity sluggish and investment hardly sufficient to prevent a productive involution throughout the developed world.
It seems, then, that there is no recovery but only a renewed financial assertiveness backed by highly biased policies. But as the hard data brings more bad news, of the kind of the dramatic slowing of the US economy to an annual rate of 0.7 in the first quarter of 2017 or the rebound of unemployment in France in March, disruption is just around the corner.
The elementary forms of finance capital – stock-market capitalization, credit to the private non-financial sector, and public debt – now represent more than 350% of GDP on average in the major high-income countries compared to 150% in the early eighties, and 330% before the crisis. In order to be sustained, the value of these financial claims require that the expected financial incomes fall in due time: debt must be honoured, interests paid, dividends disbursed.
But how can that be in stagnating economies? The first possibility is just ponziying further: as more debt floods in, everything moves smoothly. But this puts central banks in a deadlock. If they move back to more usual monetary policies, they will trigger a recession and increasing financial distress. The fact that long-term interest rate in the US are still trending downward in spite of recent Federal Reserve rises indicate that markets do not believe in a normalisation of monetary policy. However, if central bankers do not move forward, financial imbalances will continue to build up, favouring misallocation of resources and increasing the amplitude of the next crash.
Indeed, when the future upturn ends, as surely it will, could the global economy see, to use Freud’s term, a return of the repressed? What would this be? It is necessary to exploit labour to create value and for this to be captured to sustain financial incomes. Yet this financial, or “fictitious”, capital has ceased to be a dynamic factor in accumulation, instead becoming a dead weight on the whole social reproduction process. Financial hegemony dresses up in the liberal trappings of the market, yet captures the old sovereignty of the state all the better to squeeze the social body to feed its own profits. This ruse of liberal reason allowed financial hegemony to survive a few additional years in intensive care – but now is the time to say farewell.
The next crash won’t be a repetition of 2008: this time the credibility of central banks will be at stake, with the risk of a full blown monetary crisis. The left should be prepared for this predictable unfolding of events. It should already make clear that private finance will not be saved again, that delirious financial claims of the wealthiest over the work of the rest of us won’t be anymore validated by government intervention. Meanwhile agitation for the socialization of the banks, debt jubilee, universal pension, education and healthcare systems, ecological investment planning and open data should be deployed to prepare this forthcoming historical window of opportunity. Freeing our societies from the financial time-bond will require a new ability to engineer the future.
This article was originally published in the independent online magazine www.opendemocracy.net