Return to the Real Economy

I haven't posted in a while as we are in a period rife with mystery as well as terror of impending economic collapse. As I tend to be on the cusp of change, I was among those layed off (if not officially fired to avoid my taking unemployment comp) last March and have yet to be able to find work. Also, I am at present working on the next issue of the Blue Collar Review which takes a great deal of my attention.

There are many theories bantered about regarding the cause (and therefore who to blame) for our unfolding economic disaster. The most comprehensive explanation I've yet found is an article by John Bellamy Foster and Fred Magdoff; Financial Implosion and Stagnation, Back To The Real Economy in which they write:
Our argument in a nutshell is that both the financial explosion in recent decades and the financial implosion now taking place are to be explained mainly in reference to stagnation tendencies within the underlying economy. A number of other explanations for the current crisis (most of them focusing on the proximate causes) have been given by economists and media pundits. These include the lessening of regulations on the financial system; the very low interest rates introduced by the Fed to counter the effects of the 2000 crash of the “New Economy” stock bubble, leading to the housing bubble; and the selling of large amounts of “sub-prime” mortgages to many people that could not afford to purchase a house and/or did not fully understand the terms of the mortgages.

Much attention has rightly been paid to the techniques whereby mortgages were packaged together and then “sliced and diced” and sold to institutional investors around the world. Outright fraud may also have been involved in some of the financial shenanigans. The falling home values following the bursting of the housing bubble and the inability of many sub-prime mortgage holders to continue to make their monthly payments, together with the resulting foreclosures, was certainly the straw that broke the camel’s back, leading to this catastrophic system failure. And few would doubt today that it was all made worse by the deregulation fervor avidly promoted by the financial firms, which left them with fewer defenses when things went wrong.

Nevertheless, the root problem went much deeper, and was to be found in a real economy experiencing slower growth, giving rise to financial explosion as capital sought to “leverage” its way out of the problem by expanding debt and gaining speculative profits. The extent to which debt has shot up in relation to GDP over the last four decades can be seen in table 1. As these figures suggest, the most remarkable feature in the development of capitalism during this period has been the ballooning of debt.

In essence, much of the shift from a productive economy imbalanced by overproduction and stagnant wages to an economy based on debt-leveraging and speculation, as well as the basic flawed nature of capitalism are at the root of this disaster. They point out that the bailouts based on the theory of governments as the lender of last resort will only exacerbate the problem of debt and set the stage for even worse disasters. As they summeraize:
in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”

This article is vital to an understanding of where we are. Admittedly, it is not for the lazy reader but it is well worth the effort.