The $700 billion bailout by the US federal reserves is nearly twice the GDP of the apparently roaring economy of India! While investment banks are in the business of making money out of nowhere, these do have an impact on the real economy since industries depend on investments by what is ultimately speculative finance capital for sustenance and growth. The whole web of finance transactions is said to be so complicated that the bankers themselves have lost track of the sources and direction of transactions.
It is good to remember at this point, briefly, the genesis of these banks. Investment banking was limited in nature till the 1973 oil crisis when petro dollars began to find their way into the New York banks, which then fed these dollars back into the economy initially by lending and later by investing in companies. As part of the programme to invest these amounts- because it is necessary for capital to continue to accumulate- it cannot remain constant in a capitalist economy- third world countries got huge amount of loans in the 1970s and 1980s at high rates of interest. When many of these countries began to default in their payments, these countries were asked to open up their markets so that this finance could be invested directly, bypassing the governments.
This picked up speed particularly in the 1990s though the process had begun much earlier in the 1980s- in UK under the iron lady Margaret Thatcher and in the US under Ronald Reagan. This push to what came to be called neo- liberalism also coincided with the collapse of another competing form of economic organization- the so- called “socialist” states and leading to an immediate triumph of the neo- liberal world view, whose most well remembered intellectual expression is the hyperbolic The End of History associated with Francis Fukuyama. The victory, as critics, especially Marxists know, was bound to be pyrrhic. The collapse of the banks last few days is an expression of the most recent crisis of world capitalism.
It was Marx who had analyzed the phenomenon of capitalism when it was still nascent- foretelling its demise not so much because it was his wish, but pointing out that that the system is inherently unstable and full of contradictions. The Marxist conception of the State as an expression of class power is again vindicated by the manner in which the federal governments in leading capitalist countries- the US, UK, Japan, Australia and even the puny India- has stepped into the rescue and “buy” back sunk investments. It suits these governments to step out of business activities when it suits the latter, and step in when it suits them too, that is having the cake and eat it too! Noam Chomsky once called the US (that’s true of most capitalist countries) – socialism for the rich.
This of course, is not unprecedented. Again it was Marx (or Engels) who commented in the preface to the second edition of Das Capital, that the crisis of the capitalism system of production (not to say of distribution) is inherent because while production grows in geometrical progression, markets expand only in an arithmetic progression. Since then, the web of conflicts and contradictions within the capitalist system has only grown more complex.
The First World War, the great crash of 1929, the second world war- these are all expressions of the capitalist system as it lurches from one crisis to another. The period between 1945- 1973 was the most stable one, with some controls forced upon by what was then a very successful alternative programme implemented in the Soviet Union and some of whose elements were borrowed and implemented by “welfare states” in the countries of advanced capitalism.
One of the early responses to these crises, starting particularly in the early part of the 20th century and illustrated by the Soviet Union but not only by it- was the wave of nationalizations and the rise of the public sector. It was held that the latter are accountable to the people at large because governments are accountable to the people in democracies (and in case of the formerly socialist countries, the state itself was said to be an expression of the interests of the working people) and hence offered a better alternative to a system driven by pure greed and controlled by a small coterie of individual capitalists and the investors on the stock market. This alternative system, called by various names (“mixed- economy” in India) dominated till the 1980s and offered a relatively more stable form of capitalist development.
This, of course, was not, and could not have been a Marxist solution (though it was identified closely with its 20th century incarnation), which envisages an economy managed and accountable to the working people. As the sad history of the Soviet Union shows 20th century nationalization was hardly a socialist solution given the class nature of the state- even the second greatest leader of its revolution Leon Trotsky was being generous when he called the USSR a “degenerate workers’ state”. Still, nationalization was successful in forestalling uncontrolled capitalism. That it can still be a practical solution in certain contexts is well borne out from the nationalizations underway in Venezuela and Bolivia- and even in Russia to some extent. The government takeover of investment banks in the last few days is another. In the case of nationalization by the state, who gains by it, depends on the class nature of the state. The .7 trillion dollar bailout is an indicator that in the advanced capitalist world, there are now no longer even to pretensions of the nature of the state and whose class interests it serves.
Let there be no illusion that the biggest collapse of the Wall Street translates into a collapse of world capitalism, but it is very likely that the nature of globalization driven by investments that traverse the world over the network of communications and computers, will change. In what direction it is difficult to envisage and will depend partly on the actions of governments and the response of capitalist financial institutions. It is unlikely to be reversed only because of this crisis but it is an indicator that we can expect a new phase in the rise (and fall) of neo- liberalism.