The finance crisis that gave its first signals last year is growing and deepening. It is useless to compare it with the crisis of 1929.  It is clear that present crisis is just as powerful but, how deep it is going to be is not clear. Every economic crisis starts with an event but the meaning and its implications cannot be explained by that event alone.  This last crisis, which started as a mortgage crisis, has knocked out the biggest “investment banks” of America. As the finance crisis spreads around the world like an ink stain it also jumps to the “real economy”.

This crisis has started with the bankruptcy of the “investment banks”. American capitalism had masked their real face by giving them such a fancy name. These so called banks, in reality, are financial institutions living only with speculations.  American economist P. Krugman has correctly called this system “shadow banking”.  For these banks it is not necessary to have corresponding safety nets in opening credits. For years US took pride of its system. This “flexible” and “quick money finding” system has proved its “creativity” by bringing new “products” into the market.  Credit leverage of these bankrupt giants has ranged between 26 to 1 or 80 to 1. A credit of eighty dollars has a dollar in the bank. This system of creating “flexible” money has swelled in prosperity days and because this prosperity could not have lasted forever, the balloon has burst. 

A couple of numbers can perhaps show the horror of this ballooning. World great gross production is about 60 trillion dollars but the dept in the global economy has reached 700 trillion dollars. The stock exchange specialist Max Keiser evaluates it: “This crisis is a doomsday scenario for England and US which have lived for generations from loans.” (Max Keiser, Al Cazira Web, 15.09.08)  The two characters that have forced neo-liberalism to the world are Anglo-Saxon capitalists (England and US). They started speculating as they start losing positions in the production,  London and New York stock exchanges have become the Mecca of money. Carrying this on for years, they ended up in speculation and debt swamp. 

The character of the debt meanwhile has changed due to the qualities of neo-liberalism. “Meanwhile, financial-sector debt, only a tenth of the size of non-financial-sector debt in 1980, is now half as big." (The Economist, Wall Street’s Crisis March 19, 2008)  Thus the finance sector has grown enormously against the real economy and attracted the credit sources. 

Another proof of how speculation has surrounded the economy is the “the sources of company profits”. In 1980’s 10% of US firm profits came from financial sectors. This ratio has reached the peek of 40%. (The Economist, What went wrong, March 19, 2008)  Almost half of USA firm profits come from financial speculations.  Profits of USA finance sector doubled between 1994 and 2000. 75% increase of firm profits was the financial sectors and this ratio has increased to 80% between the years of 2000 and 2003. (Robert Went, The Deep Structure of the Present Moment). 80% of profit increases in the years of 2000 came from the financial performances. Increasing the “creativity” in the financial performances has been much easier then producing it. This cancerous tumor in the economy has grown constantly in the last twenty years.

There is also another aspect to this cancerfication. The workers of the finance sector which bring in the 40% of profits make up about only 5% of the total service sector workers. This number is a good proof of how profits have broken off from production as well as surplus value. This also explains the enormous wages of US firm managers. Now as they live extravagantly with the money they have swallowed, the US Treasury is trying to figure out how it is going to sell this to its fellow citizens.  This is called the rescue operation. 

As a result, the first wave of the crisis has knocked down the US “shadow banking” of the giant institutions in the financial speculation.  It is being discussed whether this will also hit the “real economy”.

Expert and experienced speculator Soros says that “more severe wave is on its way”.

US has intensified neo-liberal politics with then president, Ronald Reagan in 1980s. The first striking result of these policies was the 1987 stock exchange collapse. Down Jones index has lost 22.6 % in one day. This was the biggest drop since 1914 December. They called it “Black Monday”. But this drop did not deepen into the economy. There are two reasons why this crisis was overcome without recession in those days when neo-liberalism was much credited and only the foam of financial speculation busted out. First, one of the root causes was that Soviet Union’s collapse period had started and trust in the US economy was very high. 2. Second, the “new economy” (information technology) was in its development phase. At this period US information industry made big leaps. At the end, the excessive investment illness of capitalism had also hit this sector (dot coms) and US economy plunged into the real crisis with the NASDAQ index collapse in 2001. The speed, the “new economy” brought to the US economy lasted a little more than ten years and this shining period finished with the 2001 crisis.

It seems improbable that the US economy can come out of this present crisis in such a short time as it did in 1987. Neo-liberal policies are much more advanced. 40% of monopoly profits are realized through the financial performances. In the middle of 1980s profits of financial speculations were only at the level of 12%. On the other hand, especially since the 2000, almost every daily event has proven that US is not a “super power” anymore. As the Iraq war brought the US into the marsh, China, Russia and even India and Brasilia have developed in this period. It appears that the spreading of the financial crisis into the real economy is inevitable, but how long the recession is going to last is hard to predict.  

US Economy Paying the Price of Sliding towards Finance

In its development history capitalism has gone through structural changes. Every structural change has also changed its periodical crisis. Classical periodical crises have appeared in 19th century. The first big crisis (1873-93) has changed its classical structure. To understand the structure and the possible results of the crisis, it is necessary to look at the changes US economy has gone through after the years of 70s.

In the beginning of 1970s, the US economy has experienced two important simultaneous changes. First, capitalism was going into a new period, “the information age”.  It was advancing from fabric capitalism to information-service capitalism. Second, due to the pressure of the conditions it began to slide toward finance. In 1973, the famous “petrol crisis” has been the end of the “golden age” of capitalism. Keynesian economy politics have been abandoned in favor of the early neo-liberal politics. Rivals of US in those days, Japan and Germany, started squeezing it in the production sphere. Also, at that time, the Soviets did not seem to be collapsing. It was expensive for a nation to be a world leader. On top of that, since World War II, the “American way of living” was everyone’s dream. The US had to maintain this dream. Under these conditions the US leaned towards making easy profits by financial speculations rather then painfully producing goods. Its economical philosophy started changing totally and quickly. 

Melman describes this best:

“Until a few years ago, general manager of the country’s largest shipyards was a man with a long and distinguished career as an engineer specializing in shipbuilding. He then retired, and his successor came into office with a team of bright Masters of Business Administration (MBAs) from one of the prestigious graduate schools of business.  Almost the first act of this new management was to draft a letter that was signed by the incoming general manager and addressed to the administrative and technical staff of the enterprise. The key sentence stated:  ‘I remind you all that we are not here to make ships. We are here to make money’.”  (Seymour Melman, Profits Without Production, 1983, page 54) 

“The esteemed school of business world”, MBA’s, has spread out quickly since the 1960’s. These schools were teaching the philosophy and the ways of making money from finance. “It was important to make money, not the ships!” This key sentence summarizes magnificently the inclination of the US economy toward finance after 1960’s. The US economy has lost position to its rivals almost in every sphere except aviation, weaponry and space systems. Taking the advantage of the dollar being the world currency and naturally the US being the commander of capitalist ships, it directed itself to finance. It tried to run away from the burden of production and create ways to make money from money.  It has now come to this day.

The reason for this course of change in US economy in 1970’s naturally is not only its subjective selection but it also has other implications. It is not only the skill of Chicago school. If we look at the history of capitalism, we see that this is the rule of capitalist development worldwide. 

In the development history of capitalism, the inclination to go towards finance rather than industrialization started first with Holland and later England. In 1970s it was US’s turn:

“This second reading is implicit in Braudel’s characterization of ‘financial expansion’ as a symptom of maturity of a particular capitalist development.  In discussing the withdrawal of the Dutch from commerce in the middle of the eighteenth century to become ‘the bankers of Europe,’ Braudel suggests that such a withdrawal is a recurrent world-systemic tendency. The same tendency had earlier been in evidence in fifteenth-century Italy, when the Genoese capitalist oligarchy switched from commodities to banking, and in the latter half of the sixteenth century, when the Genoese nobili vecchi, the official lenders to the king of Spain, gradually withdrew from commerce. Following the Dutch, the tendency was replicated by the English in the late nineteenth and early twentieth centuries, when the end of ‘the fantastic venture of the industrial revolution’ created an oversupply of money capital.

“After the equally fantastic venture of so-called Fordism-Keynesianism, US capital followed a similar path in the 1970s and 1980s.” (Giovanni Arrighi, The Long Twentieth Century, Page 6)

The typical consequence of Holland’s and England’s turn towards finance at the top of their development is “non-industrialization”.  In other words they have lost their power of competition in this sphere.

“Inclination towards finance has brought total collapse neither to Holland nor England but resulted in the loss of historical opportunity to be leaders of capitalist world. They have increased their profits temporally but weakened greatly their compatibility in the production. There is an interesting paradox hidden in this development. To be able to give weight to finance it is necessary to be the strongest at the time and at the same time have a strong capital accumulation.  But these maneuvers, made to increase the profits, result in loss of position because the capitalist system has a production character of continuous development and renewal. At the end, this energy brings down the financial capital from its throne. This competition costs a lot to the system and humanity.” (Mehmet Yilmazer, Structural Change of Capitalism, p. 210)

It is very clear that it is United States' turn to lose position.  But what price humanity is to pay is not easy to foresee. In the 21st century the US had begun experiencing what Holland, in the middle of 18th century and England, in the beginning of 20th century experienced. The US has profited the most from the financial speculations of neo-liberal policies. But if we take 1970 as a starting point, after forty years the tumor has now embraced the whole body.

Naturally the position of the US differs from that of Holland’s and England’s. It is so huge against its rivals that no such other national economy (in volume) exists today. But still this position does not change the realty of its losing power and position. While it is such an enormous economy and has such strong military power, the effects of the change in world balance will inevitably be a great disaster, as never before seen, for the whole capitalist economy.

The Big Crisis and the Last 

Although it is not clear how deep the evolving crisis will be, it is evident that collapse is going to be huge. What can we say, comparing it with the previous ones?

Capitalism has lived through three “big” crises. The first one happened in 1873-93. The most remembered second one is the 1929-39 crisis. After long stable years came the third 1973-83 crisis. Big crises go hand in hand with important turning points and structural changes of world capitalism.

1. The first big crisis is also the end of famous competitive capitalist order. At that time, monopolies had evolved and in addition, imperialist market wars had started. It was a “big” crisis due to its length. Similar to the classical periodical crisis, it was not over in a couple of years. There are a couple of reasons for that. Monopolies were new and healthy enough to resist the crisis. They did not collapse like the medium companies of free competitive markets. They tried to resist the diminishing demand by reducing the production and keeping the prices static. So capitalism’s structural changes were also creating a new type of crisis functioning.
   
   But still there is another reason to the length of the crisis. In those years, the working class movement was comparatively high; international unions were created, and also the Paris Commune was experienced. During that crisis, the class struggle did not step back and could resist harshly against the big pay reductions.
   
   Another reason was, as Engels put it, English superiority in the world economy was going though its first big crack. France, Germany and USA were gaining positions against the English rivalry. Lastly, although capitalism’s crisis was over in 1890, the problems continued to accumulate deep underneath and World War I came to the door. 
   
   
2. The second big crisis is remembered the most because it was very harsh. Monopolistic economic structure was deeper and stronger. US capitalism became powerful enough to challenge England by the mass production of “changeable part production” and Taylorism. As the giant monopolies resisted, the crisis persisted. On the other hand devaluation of money value had created a new type of harsh rivalry between the nations.  Also, with the start of the crisis, all nations raised their borders, dissolving the sacred God, the market.  That is why the anger of the market was terrifying. The biggest lesson drawn from 1929 crisis by the capitalists is: “When the crisis begins, the market should not be broken to pieces!”
   
   This second crisis also lasted longer because the world economy had lost its conductor. England had weakened a lot although US was not strong enough to conduct it. There was no leader to orchestrate the crisis. 
   
   Another reason why the crisis was so harsh is the fact that the worker class struggle had gained important positions. Now there was the Soviet Union and in addition, all the colonies were rebelling. Just before, during and after the crisis, important class struggles were experienced and fascism rose to the world scene after the worker class revolutions were defeated.
   
   The big crisis of 1929 had also brought another change to the capitalist history. Adam Smith’s classical economy politics had collapsed Keynesian policies of strong government interventions to the economy had started to give its first signs. Like the first, this second big crisis has also laid the way for another world war.
   
   
3. The 1973-83 crisis was not as strong as the first two. But it is still important because first, it came after long, non-crisis years; second the assumption of “crisis free capitalism” was forever over and third, it brought important structural changes. The crisis that started with the oil shock was in reality the real critical base of the fall in the profit percentages. For the first time the US position of capitalist world leadership was eroding just as England’s eroded in 1870’s. Its strong rivals, Japan and Germany, were driving US goods out of the market. The crisis in the middle of 1970’s was important because it showed the limits of US leadership in world economy.
   
   Monopolist economies showed again their known resistance to this crisis. They tried to protect the prices by lowering their production. Also the working class had created strong organizations in the “welfare countries” since the end of 1940s and had gained important rights with the founding of Soviet Union. In the crises 1973-83 the reduction of wages as seen in classical crises did not happen and on the contrary they had increased with the working class struggle. Capitalism tried to overcome this crisis by raising inflation. As known, inflation became the problem of the capitalist world in those years. Inflation helped to overcome the loss of profits due to under-capacity-production and also to lowered workers wages.

The present crisis is experienced with two important changes of the capitalist economy. The first one is the abandoning of fabric capitalism and start of the information-service capitalism in the leadership of US. This period that is also called “Information age” constitutes an important structural change. On the other hand Keynesian economics that had created the monopolist state capitalism was abandoned. Cursing the state, praising the God of free market, all the restrictions limiting the movement of money have been abandoned, one by one. The link between dollar and gold had been broken and regulations on exchange rates had been lifted. These were the years in which the US economy has systematically slipped to speculation. As known, in the beginning of 1980s these factors led to neo-liberal policies in the leadership of the US and England. The course that started with the 1973 crisis ended in 2008.

The Present Crisis
 

The present crisis has hit the financial side of the US economy which has two different sides, real and finance economy. Giant finance companies are either bailed out or nationalized. The media is even joking, “The US is building socialism!”  Analyzing the history of changes and crisis of the US, we shall look at the meaning of these last crises for the world.

The US Treasury is getting ready to carry out the country's biggest “bailout operation”. With the $700 billion dollars, worthless papers will be bought and made valuable in this bailout. Of course if it functions! Why are these papers not permitted to go bankrupt? These papers of bankrupt and nationalized investment banks belong to China, Japan, oil rich Arab nations and Russia.

The US economy’s need of nearly $700 billion is mainly financed by these countries. If the US allows these “valuable” papers to become worthless, then the capital flow to the economy will be stopped. As a matter of fact when bailouts began, China and Russia announced their inclination to change their reserve combinations. If these events advance in this way, dollar will lose its status as world currency. This will mean the collapse of US economy with a big bang. 

On the other side, the purchaser of these papers in the nation is the pension funds. The value of these funds was about $13 trillion in the 2000s. These “static money pools” became the biggest stock exchange characters as the US economy switched to finance. To allow these papers to become worthless would mean to darken the future of US citizens. The US government cannot take such a big risk. As a result, instead of darkening the future of its citizens today the Treasury has decided to put its hand in the citizen’s pockets. We are going to see the result of this operation in the near future. The strength of the crisis can be temporarily eased but the solution of the problem will be postponed to become even deeper in the future.

Since the money is going to come from the US Treasury the losers will be US tax payers. On the other hand the “moral hazard” this will cause has already created heavy discussion. If there is still a morality left in the neo-liberal economy, then this operation, rewarding the ones that caused this bankruptcy at first place, will corrupt the tissue of the economy even further. The US has two alternatives: either to endure all the consequences of this fall or to postpone it to the future with deepening effects. With this big bailout plan the second seems to have been chosen. But the other partners to this, those nations that have bought these papers, must also trust this attempt to solve the problem. Otherwise this operation will kick back.

Capitalism’s good luck today is the weakness of worker class struggle or rather, its being in a crisis situation. As the history of three crises has shown us, one of the factors that made them longer, stronger and more painful was the strong worker class struggle. As well known, the collapse of the Soviet Union and structural changes of capitalism was a big blow to the organizations of working class. We don’t know what kind of advantage this will bring to the crises-ridden capitalism. It may increase its boldness and fearlessness. Maybe the history will be written in the opposite. This crisis may also give a push to the weakened working class struggle.

Conclusion
 
Important results can be drawn from the present crisis. By relying on the US dollar’s supremacy and taking the same road Holland and England took before, the US has come to the end of making money through speculation (not with production). Its finance economy has collapsed. This also means the collapse of the neo-liberal economy policies. If we take the 1973 big crisis as a starting point, worship of free market economics, deregulation, privatizations have lasted only a little more than thirty years. Thus, capitalism’s ideology, which it praised so much as Socialism was collapsing, is wounded. Now the US government is the giant, indisputable actor of the American finance markets. Who would have thought of it!

The second important conclusion is the possibility of ending of dollar’s function as reserve money. The US is trying to postpone this destiny with all its power. But the color of the dollar is now pale.

Third, the US dream of unipolar world has been lost in the desert storms of Iraq war. The crisis reminds us of this once more in its own language. The first crack in English supremacy started in 1870s but seventy years passed until it actually lost its leadership. Forty years has passed since the first crack of US in 1970s. With this new crisis the process has deepened. 

Lastly, will capitalism go back to new Keynesian economy period with the bankruptcy of neo-liberalism? Capitalism had begun this period of government, being active player and regulator of the world economy, after the 1929 crises and World War II. But at that time, there was not only rubble left from the capitalist ruins but also the Socialist System had risen. And passing over to Keynesian policies was only possible with two big reconciliations among capitalist countries. Capitalist centers had accepted the US leadership and took regulatory measures to minimize the ruination. The Bretton Woods agreement is one of them. The second, also as important as the first, is the reconciliation with the worker class promising them a “welfare society.”

Can the current crisis produce such reconciliations in the present world balance of power? Definitely not! In the capitalist world there is no leader as powerful as the US of 1950s. Besides, the capitalist world is divided roughly as West and East or in their word as “democratic capitalist nations” and “totalitarian systems”. The US is no longer a rising power. It is at an altitude of losing power which desperately tries to attract accumulated capital to finance its enormous debt. On the other side, the working class and working masses are not strong enough to force it to reconciliation - yet. Capitalism knows this well and keeps on taking all of its gains to maximize profits.

As a result, in today’s world the two reconciliations that form the base of Keynesian economy, cannot be achieved. The present crisis is inevitably going to increase the competition and struggle between the power centers. If this crisis deepens as much as the old crises, this may be a catastrophic scenario for the whole capitalist world. With its enormous debt and its continuing drive to attract world capital into its black hole, the US may bring the world capitalism once again to the edge of abyss.

As the capitalist history shows us, preventive measures bring limited relaxations to the crisis. Following the big crises capitalism had brought us two world wars.

Capitalism's free market God has been cursed once more. Now the times for the world’s poor to curse the capitalism is approaching.

Author: Mehmet Yilmazer; Translated from Türkish into English for Axis of Logic by Aysel Onur; Revised by Les Blough, Editor

1. What Happened to the “Age of Passing to Socialism from Capitalism”? Published in 2000
2. Strategic Inclinations of Power Centers.  Published in 2002
3. The Structural Changes of Capitalism.  Published in 2007