Lehmans, animal spirits and the failure of the progressives

It’s coming up to ten years this September since the US investment bank Lehman Brothers was allowed to go bust in the depth of the Great Recession of 2008-9.  Actually, the financial crisis really began in August 2007 when the first losses took place for investment banks in Europe. But the fall of Lehmans is the usual marker for Americans. To commemorate this unedifying event, former employees of Lehmans are apparently holding a reunion party to see how they have all got on since!

Several writers have published accounts of why Lehmans went under and what caused the greatest global financial crash in the history of capitalism so far. The most comprehensive is Crashed by Adam Tooze, which I recently reviewed.  But there have been other accounts by financial journalists like Gillian Tett at the Financial Times, a close observer of the run-up to the disaster, as investment banks expanded their ‘financial engineering’ with new and exotic forms of securities and ‘derivatives’.

For her, financial crises like that of Lehmans share two things. “First, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks. Second, when the crisis hits, there is a sudden loss of trust, among investors, governments, institutions or all three.”  Hubris turns into its opposite; or what Keynes called ”animal spirits’’ suddenly disappears.

Tett quotes Paul Tucker, former deputy at the Bank of England, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again.” So for Tett, financial crises occur over and over again because of recklessness and greed and presumably lack of regulation.  But she offers no deeper reason why this is a recurring flaw in finance capital; or why ‘animal spirits’ suddenly turn into their opposite.  It just does.  And it will happen again, says Tett casually.  And she echoes this blog, when pointing out that “between 2007 and 2017, the ratio of global debt to GDP jumped from 179 per cent to 217 per cent”.  But this time, the “borrowing binge has not occurred in the areas of finance that caused the last crisis, such as subprime loans. Instead, the debt boom is among risky companies and governments, ranging from Turkey (which already faces a financial crunch) to America (where borrowing has accelerated under the administration of Donald Trump.)”

Tett offers no underlying cause of crises.  But then that is the story of all mainstream explanations, including Keynesian ones, as I have outlined before in various posts and papers.  We get an even more superficial account from Keynesian economic journalist, Larry Elliott, in the UK’s Guardian.  Rather than explain the crash (for which he has no other explanation than the usual Keynesian one), he tells us that real tragedy was that the ‘progressive left’ failed to explain it or do anything about it.  The ”progressives” for him appear to be Obama in the US and Blair/Brown in the UK – hardly ‘progressive’, in my opinion.  But Elliott reckons that ‘progressive’ Obama “deserves a bit of sympathy” because he had no clear ‘narrative’ or theory to turn to, Keynesian or Marxian, unlike, say Roosevelt in the 1930s. Actually history shows that Roosevelt also rejected both those ‘narratives’.

Elliott’s complaint is that the progressives have since failed to ‘break up the banks’; tax financial speculation; or do anything about climate change. Leaving aside the dubious premise that these ‘progressives’ would ever do anything to threaten the interests of finance capital, Elliott’s progressive ‘solutions’ anyway fall well short of what would be needed to stop future financial crashes.  Why break up the banks instead of bringing them under public control and ownership?  Why just tax speculative investment rather than ending it and turning banks into a public service like other essential services?  Such alternative policy actions (from the ‘Marxist narrative’) that I have discussed in this blog on numerous occasions are obviously ‘too progressive’ for the likes of Keynesians like Elliott.  As for another thing that Elliott wants, namely ‘winning the battle of ideas’ and ‘taking back control of how economics is taught’; that will improve just as inadequate (see my posts here). 

Also interesting are views on what has happened to the major capitalist economies since the end of the Great Recession and Lehman’s collapse.  In my last post, I outlined how, finally after ten years, the US economy in 2017-18 has made a relative recovery (if only from the near-recession of 2015-6), with real GDP growth reaching nearly 3% a year-on-year, while the official unemployment rate at a record low, and with corporate profits rocketing up from Trump’s tax cuts, leading to a modest revival in business investment.  I argued that this won’t last.  But others are unsure which way it will go.

Noah Smith, a Keynesian economist, who writes for Bloomberg, reckons that the US economy is definitely having a boom, but he is not sure why.  He reckoned that there were “no definitive answers”.  You see Fundamentally, economists don’t know why booms happen.”  But he had a go at guessing.  It could be due to a credit boom fuelled by low interest rates “which tends to juice investment.”  Or it could be “Donald Trump’s tax cuts”.  Or it could be “what John Maynard Keynes called animal spirits, and what modern-day economists call sentiment — potentially random fluctuations (crises are random apparently!- MR) in the optimism and confidence of business people and consumers.”

Smith is worried that all these possible causes of the current ‘boom’ are set to dissipate and “the current boom is simply the tail end of the long recovery from the Great Recession…If loose monetary and/or fiscal policy is driving up demand, then it will likely eventually cause inflation to accelerate, prompting a clampdown by the Fed. If animal spirits are responsible, it could lead to over-borrowing and an eventual debt crisis and crash — indeed, corporate debt is looking worrisome, as levels of risky debt rise and credit spreads narrow.”

He concludes by going for the usual mystic Keynesian explanation : “If I were forced to pick one leading explanation for the boom, I would go with animal spirits. Exuberant business sentiment and the build-up of risky corporate debt seem indicative of good times that won’t last.”

The good Keynesian that he is, Smith generally rejects ‘supply-side’ explanations of the apparent boom, like technical innovation delivering higher productivity; or rising profits being the result not only of tax cuts but also the suppression of real wages by anti-trade union laws and wage caps (Trump has just announced that he wants to block the planned wage rise for federal government employees).

And yet one of the interesting contributions made at last week’s summer symposium of central bank governors at Jackson Hole, Wyoming was by Alan Krueger, the Princeton economist.  Like Jerome Powell, the Federal Reserve Chair, did in his speech, Kreuger pointed out that usually in ‘booms’, wages rise as the labour market tightens.  But not this time: mainstream economic laws like the Phillips curve (falling unemployment comes with rising inflation) are just not operating.  Profits have risen, but not wages – instead, in Marxist terms, the rate of exploitation or surplus value has jumped.

Kreuger pointed out that one factor causing this has been the destruction of trade union power in the labour market.  According to Krueger, a quarter of the work force in 1980 belonged to unions. That’s when income inequality in the US was at its lowest.  Today, union membership in the US is down to 10.7% and if you subtract the public-sector unions, it’s more like 6.5%.

The Jackson Hole symposium also heard papers from various economists on the rise of ‘market power’ (ie the concentration and centralisation of capital) in the hands of a few mega corporations.  These mega corporations like the FANGS, Facebook, Amazon, Netflix, Google, Microsoft etc control their markets, keep out rivals and mop up all the profits.  Thus we have weak unions on the one hand and thus ‘monopsony’ (buyers monopoly) in the labour market and strong ‘monopoly’ companies in commodity markets.  That is a recipe for high profits for the ‘winners’ in capitalist competition and for high rates of surplus value (eg. hundreds of thousands of Amazon workers on minimum wages while CEO Jeff Bezos ‘earns’ more than anybody else in the world).

But what one paper by John Van Reenen showed was that the huge profits of the FANGS are not really the product of ‘monopoly’ due to de-regulation or lack of anti-trust laws, as many leftist economists claim, but just the result of ‘globalisation and new technologies’ – a conclusion that I have offered in previous posts.  It is not ‘imperfect’ competition under capitalism that is the cause of inequality of incomes and high profits, but what Anwar Shaikh has called ‘real competition’.  The capitalist economy should not be viewed as a ‘perfect’ market economy with accompanying ‘imperfections’. Real competition is a struggle to lower costs per unit of output in order to gain more profit and market share.  In the real world, there are capitals with varying degrees of monopoly power competing and continually changing as monopoly power is lost with new entrants to the market and new technology that cuts costs.  Real competition is an unending struggle for monopoly power (dominant market share) that never succeeds in total or forever.

The policy conclusions from all this are that more regulation or the breaking-up of banks or big corporations and the removal of anti-labour legislation may help to reverse somewhat the trends of rising inequality and ‘monopoly’ power.  But, as the global financial crash and the Great Recession showed and the subsequent Long Depression has confirmed, such measures will not stop another crash and recession, when ‘animal spirits’ disappear and boom turns into slump again.  And anyway, there are no ‘progressives’ around to implement such ‘reforms’.

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11 Responses to “Lehmans, animal spirits and the failure of the progressives”

  1. Jenny Clegg Says:

    Progressives blew a ‘golden opportunity’ after the crash, says Larry Elliott. No they didn’t, at least not in China. https://www.counterpunch.org/2018/08/31/the-decade-of-a-rising-china-10-years-after-the-financial-crisis/

  2. Boffy Says:

    “And yet one of the interesting contributions made at last week’s summer symposium of central bank governors at Jackson Hole, Wyoming was by Alan Krueger, the Princeton economist. Like Jerome Powell, the Federal Reserve Chair, did in his speech, Kreuger pointed out that usually in ‘booms’, wages rise as the labour market tightens. But not this time: mainstream economic laws like the Phillips curve (falling unemployment comes with rising inflation) are just not operating. Profits have risen, but not wages – instead, in Marxist terms, the rate of exploitation or surplus value has jumped.”

    Wages were rising in the period ahead of the Financial Crash in 2008. You might remember Alistair Darling appearing on TV to warn workers not to push ahead with large pay claims, especially after tanker drivers got a 14% rise after a very short strike, and so on.

    However, the important fact is, as I described recently, if you go back to the similar period in the last long wave cycle, i.e. back to the early 1960’s, you will see that unemployment in the UK fell to a low of 1.2%, and its high for 1963 was only 2.6%.

    https://boffyblog.blogspot.com/2018/08/uk-inflation-wages-and-unemployment.html

    So, today’s unemployment rate is still way above what it was at that point in the previous long wave cycle. In fact, the UK figures flatter the current position, because in the 1980’s, Thatcher introduced 20 changes in the way the figures were calculated so as to hide the actual rise in unemployment.

    States and central banks since 2008 have done all they can to try to limit economic growth via ridiculous measures of austerity, because they learned the lesson of 2007/8, that if economic growth rises to quickly, and employment rises, wages will, rise and that will begin to squeeze profits as it did in the 1960’s, and 70’s. But, as that economic growth, and especially as the demand for wage goods rises, as the volume of wages rises, so firms need to invest so as to meet that rising demand, which means they must borrow more, as their profits do not rise as quickly as their demand for capital.

    That causes interest rates to rise, and rising interest rates cause asset prices to crash, which is what happened, in 1962, and again in 1974, and again in 2007/8. Because the private wealth of the top 0.01% is now almost exclusively held in the form of fictitious capital and property, and because over the last thirty years they have increasingly come to see their revenues aas deriving from capital gains on that wealth rather than from yield, the state and central banks have tried to keep those asset prices inflated, by keeping official interest rates low, depressing economic activity to that effect via austerity, using money printing via QE to manipulate bond prices, and property prices, and thereby also encouraging companies to divert profits away from investment into financial speculation, share buybacks and so on.

    They have come to the end of the road. The strength of the underlying economic dynamic is pushing through again as it did between 1999-2008, which led to the financial crash, and it is leading now to an even bigger one.

  3. Mike Ballard Says:

    I’d argue that removing anti labour legislation would result a lower rate of profit and more control by workers of the collective product of labour. It’s up to workers to make it so by electing politicians who promise to pass such legislation and backing those politicians up with union power. Tax cuts for business just increases the rate of profit but does nothing for wages. Electing conservative, ‘trickle-down’ economics politicians will ensure that the working class remains on a toboggan ride to wretchedness, especially as the bourgeois ghouls in the debt market come around for their cuts to public health, education and welfare. The real problem we face as a class is our lack of understanding that we produce the wealth of nations and that we damn well deserve to socially own and democratically manage the collective product of our labour.

  4. mandm Says:

    Clear enough!… to make Keynesians giggle their way, with their short pants full of change, back to their candy stores. I haven’t read your book on the Great Recession (I will), but isn’t this long depression (as you name it), following the greatest financial crash in history (as you point out) SPECIAL? Of course every crisis is special in some way. But this doesn’t seem to be your average crisis.

    You have made it clear that you do not accept the concept of “super-exploitation”, as it would seem from a marxist perspective* almost a contradiction of any labor theory of value. I follow Samir Amin and think not. Marx’s labor theory of value is the opposite of classical political economy’s because it’s application of use value allows us to look outside the bourgeois law of value (which is fictitious) and see how capitalism really works. It was a common enough practice in industrially organized slave plantations throughout the Americas (even well into the 1800’s)–but when slaves were cheap and plentiful, as is the case now among western credit-dependent, comprador capitalists in the neo-colonial countries employing uprooted, cheap as dirt wage slaves backed by a global reserve army whose numbers are more than twice as large as can be employed.

    Your focus is necessarily on the economics, which, as a marxist, you contextualize historically. But sometimes not enough. If the current “long depression” is not the negative expression of the construction of a Great Chain of Surplus Value connecting and valorizing the product of super-exploited labor in the peripheries with the US-led militarized, financial centers of this latest phase of imperialism, then what is special about it?

    Only capital as money and commodities (use+exchange value) are free to travel and integrate. Workers as such live in segregated political prisons called nations.

    *I’ve argued against Boffy, that he often conflates the point of view Marx adopts (mostly in Capital but elsewhere) when he assumes ideal market conditions and a bourgeois posture (but strategically wielding surplus value), in order to show the inherent contradictions in the capitalist system as such, with his actual, historical materialist point of view–which is never Boffy’s!–from which point of view market conditions are exposed as never ideal, but tending towards disequilibrium, crises and “recoveries” which actually worsen underlying conditions, and, rather sooner than later, reappear, worsened.

  5. Nadim Mahjoub Says:

    Micheal, I think I asked this before: how would you defefine a “profressive” and “to what extent is capitalism developing the productive forces, if it is”?

    • michael roberts Says:

      A ‘progressive’ is in the eye of the beholder. For me, it is someone who works for the interests of labour; for the many not the few.

      Capitalism is finding it increasingly difficult to develop the productive forces if we measure that by growth in the productivity of labour.

  6. Dionysios Perdikis Says:

    “Real competition is a struggle to lower costs per unit of output in order to gain more profit and market share. In the real world, there are capitals with varying degrees of monopoly power competing and continually changing as monopoly power is lost with new entrants to the market and new technology that cuts costs. Real competition is an unending struggle for monopoly power (dominant market share) that never succeeds in total or forever.”

    I am fine with this statement but I wonder if it is only or, even, mainly, through new technology that a monopoly tries to capture more of the surplus value produced.

    Today that some of these monopolies gather more wealth and power than several of the states in the world, it is evident that they have the motivation, and the opportunity to use this power to be or stay among the winners of “real competition” for much longer times and to a larger degree that it would happen otherwise (if they relied only on their technological advances).

    The IP laws is a characteristic example of using this political power in “real competition”. Tax, currency or public budget policies and other state-monopoly regulation are also such examples. Political and military imperialism of the imperialistic powers that work for the interests of such monopolies, is also evident.

    I remind here the work of John Smith, who suggested transferring production processes to the developing countries is an alternative strategy to investment in technology aiming at reeping superprofits.

    In total, I believe that imperialism is exactly the stage in the development of capitalism, in which deviations from the principle of a fair price (and consequently for an average profit rate and an average exploitation rate/superexploitation) become more and more important for capitalistic (re)production.

    From a historical perspective, imperialism is a decaying capitalism, one where relative surplus value is harder and harder to extract due to the higher and higher organic composition of capital, as you demonstrate very well in your blog, and thus, capitalism that reverses the historical course of economical liberalization, back towards forms of oppression characteristic of pre-capitalistic modes of production. It is a reactive capitalism…

  7. ucanbpolitical Says:

    If capitalists get high (animal spirits) its only because they snort profits. And when profits fail, they snort on fraud, and when fraud fails, they collapse. The psychological should not be ignored and it should never be removed from the underlying material conditions with which it interacts.

  8. VK Says:

    Yes, Economics has already crossed the Rubicon: it’s all pure senseless ideology now. Beyond repair. It’s Marx or nothing at this stage (after gruesome 150 years of intense propaganda warfare — from Jevons to Friedman; from Mises to Keynes –, but we made it).

    Now it’s up for bare-faced politics to take the reins. Gloves are off. Trump has already made the first step, essentially treating his “allies” for what they really are: clients. He’s in full brute-force (blackmailing) mode now, and the recent renegotiations with NAFTA and the NATO summit show that.

  9. ucanbpolitical Says:

    Now here is an excellent article on animal spirits or as Hussman puts it, “the eternal sunshine of the spotless mind” https://www.hussmanfunds.com/comment/mc180904/
    Not all capitalist analysts are fools and there are some we can learn from.

  10. Anti-Capital Says:

    Animal spirits? Don’t blame the animals. As Ripley put it in Aliens:

    “You know Burke, I don’t know which species is worse. You don’t see them f*****g each other over for a goddam percentage.”

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