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Issue # 1399      18 February 2009

No paradox in bailouts and nationalisations

The following is the text of the speech that Sitaram Yechury, member of the Politburo of the Communist Party of India (Marxist), delivered at the sixteenth Lal Bahadur Shastri memorial lecture on “The Global Crisis and the Indian Response” on January 11, 2009 at National Museum in New Delhi.

The current crisis of international financial capital that spearheaded globalisation in the last two decades is, by many estimations, far graver than any other crisis in the history of capitalism, including the great depression of 1929. The crisis is still unfolding and its full ramifications will be realised only much later.

Many beleive that we, as Communists, must feel resoundingly vindicated that Karl Marx’s penetrative analysis of capitalism has, once again, proven itself to be true. Marxists do not derive satisfaction for the vindication of their analysis at the expense of the ruin and misery of millions of victims of this capitalist crisis. We work to ensure that the common working people are not subjected to such inhuman trepidations being at the mercy of the rule of capital. This shall, however, happen only when we “change the world”, not remaining satisfied with the correctness of our “interpretation of the world”.


Capitalism, in the wake of this crisis, has embarked on a spate of nationalisations that would have surprised the former socialist USSR. When the time to defend capitalism from such a crisis comes, all ideological attacks against the state, public property or nationalisation with the accompanied extolling of the virtues of private capital and their laser-beamed God – the market – are mercilessly abandoned.

Britain, which heralded modern privatisation, has socialised most of its banking sector. (Recollect that Margaret Thatcher once said, “It is not the business of the government to be in business”.) The USA is pumping in an overall US$2.5 trillion of tax payers’ money to shore up its financial system [all amounts in US dollars]. France’s Nicholas Sarkozy, says, “Laissez-faire is finished”. There is a profound paradox here. Defending capitalism, in this present crisis, means greater state intervention. The paradox, however, is only superficial. The fact remains that the capitalist state has always defended and enlarged the avenues for private profits. These bailouts, as the future will testify, are designed precisely to first save and then to create new avenues for profit generation.

Neo-liberal globalisation

This crisis is an inevitable consequence of the path of globalisation that was unfolding in recent decades.

Globalisation and its ideological underpinning – neo-liberalism – arose under conditions of gigantic levels of capital accumulation and the emergence of globalisation of finance capital (correspondingly as capitalism develops, there has been a centralisation and concentration of capital).

The current crisis has specific features. The present process has not seen a nation-state based finance capital engaged in struggling with “rival” finance capitalist in “rival” national states. In a sense, it has transcended the nation-state. This, however, is not to suggest that the relevance of the nation-state and its sovereignty has ceased, as some would argue.

Present day finance capital is globally instantly mobile, sucking in finance capital from individual countries dominated by finance capital originating in the advanced countries. Further, this finance capital is more pre-occupied in its search for quick speculative gains than in joining in the pursuit of industrial capital to economic development. Finance capital, therefore, truly represents the parasite that thrives at the expense of real economic growth.

The emergence of this finance capital is an important factor that explains the relatively low growth rates accompanied by high unemployment rates in the advanced countries over the last decade or so. This happens because in order to appease international speculators, there is a competitive reduction in tax rates and restrictions on the size of the fiscal deficit. In other words, governments are forced to cut back expenditures and thereby deflate both employment and domestic demand leading to lower rates of growth.

This, in turn, leads to a situation where the advanced countries turn to the third world economies looking for greener pastures. The imposition of neo-liberal policies serves the purpose of removing obstacles to the free operation of internationally mobile finance capital. In addition, it seeks to impose a new form of international division of labour, this time not through direct colonial occupation but through coercing third world economies to dovetail to their interests. It is the consolidation of this process over the last decade that laid the basis for the current crisis.

Two important features of globalisation, however, require attention to understand the present crisis. First, this process has been accompanied by growing economic inequalities both within countries between the rich and poor, and between the rich and the poor countries. Secondly, globalisation has given rise to the phenomenon of “jobless growth”. This is so because the trajectory of profit-maximisation invariably replaces human labour by investing more in developing technology rather than developing human resource capacities. The growth of employment during this period has always been lower than the GDP growth rate globally.

Both these features put together mean the purchasing power of the vast majority of the world’s population has been declining. Now, capitalism inevitably plunges into a crisis when what is produced is not sold. Under these circumstances, the only way that capitalism can sustain its levels of profits is by encouraging people to procure loans, so that spending maintains levels of economic activity. However, when the time comes to repay these loans, there is the inevitable default.

The banks

This is precisely what happened in the USA in the current sub-prime crisis leading to large scale defaults (loans given at interest rates lower than the prime rates initially to lure borrowers, only to be re-set higher later or loans given to borrowers whose credit worthiness is suspect).

Defaults should not have really come as a big surprise. The Wall Street Journal reported on October 12, 2007 that the wealthiest one percent of Americans reportedly earned 21.2 percent of all income in 2005. This increased from 19 percent in 2004 and exceeded the previous high of 20.8 percent in 2000. In contrast, the bottom 50 percent earned 12.8 percent of all income which was less than 13.4 percent in 2004 and 13 percent in 2000.

The consequence of such growing inequalities will lead, according to Merrill Lynch, to a fall of $360 billion in consumer spending during 2008-09. Obviously, Merrill Lynch, now emasculated, did not take its own assessment seriously, busy as its executives were in giving themselves handsome perks and bonuses.

Capital, in search of higher profits, continuously creates new commodities through which it expands its market operations. As Marx said, “Production not only creates objects for the subjects, but also creates subjects for the objects”. The present day advertising industry is testimony to this. Under the rule of international finance capital, capitalism creates new financial commodities. One of these that has played havoc and generated the current crisis is known as the “derivatives”.

Derivatives are shadow financial instruments that include futures, options, forwards trading etc. If one buys or sells a share in the stock market, then it is actual trade. However, if one buys or sells the option to buy or not to buy a share, then it is derivative trade. The seller of the option, believe it or not, need not own that share. Likewise, the buyer need not pay the full money for the share.

According to the Bank of International Settlements, as of September 2008, the total value of derivative trade stood at a staggering $600 plus trillions. This has grown from US$100 trillion in 2002. Thus, this shadow economy is 10 to 12 times larger than global GDP ($50 to 60 trillion) and more than six times larger than the actual trading in shares in the world’s stock exchanges ($100 trillions).

While these are the figures from the official commodity exchanges, it is variously estimated that the total value of financial exchanges included in derivatives, whose trade takes place even outside of the commodity exchanges, was a staggering 40 times the total global GDP. It is this speculative financial bubble, pumped to inflate to infinity, that had to burst, and it did.

Reams of analysis seek an explanation for this crisis (obfuscating the systemically inherent dynamics of the capitalist system) in the greed of a few, a violation of some ethical norms, a la Nobel laureate Paul Krugman’s “moral hazard,” or, the lack of transparency and the weakness of regulatory mechanisms and failures of credit rating agencies.

Capitalism hanging itself

In Das Kapital, Marx concludes his chapter on the genesis of the industrial capitalist states: “Capital comes dripping from head to foot, from every pore, with blood and dirt”. He buttresses this with a quote, in a footnote, from a worker and trade union leader TJ Dunning : “With adequate profit, capital is very bold.

“A certain 10 percent will ensure its employment anywhere; 20 percent will produce eagerness; 50 percent, positive audacity; 100 percent will make it ready to trample on all human laws; 300 percent and there is not a crime at which it will scruple, nor a risk it will run, even to the chance of its owner being hanged.” It is this pathological drive to maximise profits at any cost, the inherent character of the capitalist system and not the individual greed of some or weakness of regulatory mechanisms that is the root cause for the present crisis.

If profits were reemployed into enlarging productive capacities, then through the consequent employment generation, the purchasing power of the people will grow leading to larger aggregate demand, which, in turn, would give a further impetus to industrialisation and growth of the real economy.

The gigantic accumulation of international finance capital, however, given the inherent laws of capitalism, supersedes this process, seeking predatory profits through speculation. In fact it decimates this process by enveloping it under the speculative financial bubble. This is similar to when monopoly capital, emerging from free competition, decimates the latter completely.

To summarise: under globalisation, with a sharp decline in the purchasing power in the hands of the majority of the world’s population (like the growing gulf between “shining” and “suffering” India), finance capital, in its eagerness for quick profits, chooses the speculative route of artificially enlarging purchasing power by advancing cheap (sub-prime) loans.

Profits are made while these loans are spent but when repayment is due comes default, ruining the loan taker, also crippling the system. To put it simply, as seen above, this is precisely what happened on a gigantic scale. Capitalism’s supreme diabolic irony lies in the fact that in the name of protecting those who have already been ruined, the banks and financial institutions are bailed out using tax payer’s resources! Indeed, privatisation of profits and the nationalisation of losses!

In the meanwhile, independent sovereign countries like India are protected only by insulating ourselves from such massive speculation. To a large extent, if India has been spared a full throttle devastation, it is because the Left parties prevented the current UPA government, during the last four years, from embracing greater financial liberalisation. Even our worst detractors are forced to admit this, though most reluctantly!

It would, indeed, be suicidal if the government embarks, as it appears to do, on a path of relaxing the regulation on the flow of international finance capital in the name of injecting greater liquidity into our economy. This is expected to generate greater expenditures and, hence, boost aggregate demand, thus, fuelling growth. This process cannot be done through importing speculative capital. This needs to be done through greater public investments generating employment and, thus, feeding the cycle of demand led growth.

The manner in which the crisis is tackled defines the priorities. Recollect, some ways of emerging from the 1930’s depression led to the rise of fascism! One way to resist such horrifying possibilities is to put people before profits while tackling the crisis. The current bailout packages announced across the globe, however, do the opposite.

People’s Democracy

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