At a time of historically unparalleled intellectual oversaturation it was surely inevitable that dissecting the financial crisis would become something of a cottage industry within academic publishing and highbrow journalism. What’s surprising is how long it has taken for a full range of authors to get in on the act. We’ve seen the business journalists, the political commentators and the economists: now it’s time for the philosophers and political theorists. Hot on the heels of Slavoj Zizek’s treatment of the crisis comes Alex Callinicos’s Bonfire of Illusions, an intriguingly pacey and readable analysis of the crisis from one of Britain’s most accomplished Marxist academics. The book is framed through the identification of two concurrent crises (the ‘credit crunch’ and the brief Russian-Georgian confrontation over South Ossetia) and how their fall out has changed the world we live in. As Callinicos respectively titles the two essay length chapters, we now see ‘finance humbled’ and ‘empire confined’.
As might be expected in a world of 24 hour news cycles and an enormous proliferation of political commentators, a number of common narratives have emerged about the genesis of the financial crisis. Most commonly it is argued that it began with the growth of the subprime mortgage market in the United States. Some claim that the seed of the crisis were sown with the Thatcher government’s ‘big bang’ liberalization of financial markets in the 1980s. Alternatively many place the blame on a ‘culture of greed’ within global finance and the moral failings and cavalier outlook of a reprehensible banking elite. In contrast to these narratives, Callinicos offers an analysis of the crisis as being symptomatic of “a much more profound and long-term crisis of over accumulation and profitability.” He argues that neoliberalism, as a political agenda and legislative framework, itself stood as a response to this deeper underlying crisis and that rather than our present circumstances being indicative of any sort of breakdown in capitalism as such, they are best understood as political and economic events bringing the underlying structural contradictions within the neoliberal settlement to the fore.
This analysis rests on the claim that all three main centres of advanced capitalism (North America, Western Europe and Japan) have undergone a significant decline in their rate of economic growth relative to the boom years of the 50s and 60s. Callinicos places the onus for these two decades of growth on the ‘permanent arms economy’ which developed in both the USA and the USSR. He argues this offset increasing labour costs until the Nixon administration slashed arms spending at the end of the 1960s. This seems to be the weakest point in his analysis, as it is a surprisingly monocausal explanation for someone who is both a Marxist and a Critical Realist. For instance it ignores the 1973 oil crisis, the expansion of containerization and new communications technology.
Callinicos argues that once US arms spending ceased to offset the pressure of rising labour costs, the long term tendency for the rate of profit to fall began to reassert itself. This invited aggressive attempts by business to reduce labour costs through confrontation with unions which was buttressed by the efforts of new right political administrations in the US and the UK. Again his argument seems to miss a crucial step here as an expansion in off-shoring and inward migration simultaneously placed a downwards pressure on working class wages. However unlike industrial confrontation the roots of this were structural rather than agential. Nevertheless the result was further wage-repression. As Callinicos quotes Robert Brenner:
“Between 1979 and 1990, real hourly compensation in the private business economy grew at an average annual rate of 0.1 per cent. The trend in these years for hourly real wages and salaries alone (excluding benefits) for production and non-supervisory workers was worse, falling at an average annual rate of 1 per cent. At no time previously in the twentieth century had real wage growth been anywhere near so slow for anywhere near so long.”
In western economies increasingly reliant upon consumer demand for their growth, wage repression engenders an increasing structural contradiction: the same workers whose wages are under attack to ensure profitability must also keep spending on consumer goods. This engenders an increasing degree of financialisation which extends throughout the economy, as debt-financed consumer spending comes to take centre stage as the engine of economic growth. These processes reached their apotheosis in the recovery that followed the burst of the dot com bubble at the start of the 21st century. The Federal Reserve slashed interest rates as a response to the twin crises of the dot com crash and the 9/11 attacks which had the effect of fostering a climate of overly easy lending and an ensuing frenzy of consumer demand. At one end of the spectrum American workers were “encouraged to borrow in order to sustain their basic consumption at a time when their real wages have actually fallen”. Whereas at the other soaring house prices massively buttressed the disposable income of the upper middle class:
“households, encouraged by the rise in property values and rock-bottom lending costs, increased borrowing and spending. In 2005, US households extracted $750 billion against the monetary value of their homes, two-thirds of which was spent on personal consumption, home improvements and credit-card debt. The resulting surge in personal consumption (along with a sharp increase in public expenditure fuelled by the war on terrorism and a rise in American competitiveness thanks to the fall in the dollar promoted by the Bush administration) pulled the US out of recession and helped to put the entire world economy on a boom path.”
However it was a boom sustained by an even greater bubble (compounding existing trends present throughout the neoliberal era) than the dot com bubble which caused the recession it was designed to counter. This bubble sustained a new era of speculative finance. As Callinicos puts it “the drive was to take advantage of the cheap credit conditions to build up leverage as high as possible and thereby to maximize profits”. He notes how this involved soaring leverage ratios (loans to equity) of x25 at Goldman Sachs, x29 at Lehman Brothers, x32 at Merrill Lynch, x33 at Bear Stearns and Morgan Stanley. It also involved an enormous increase in subprime mortgages with the top 25 US originators thereof (responsible for $1000 billion in subprime mortgages between 2005 and 2007) have spent $370 million on lobbying since the late 1990s. The political influence of finance capital reached its peak at the same time as the bubble became rampantly unsustainable. As mortgage defaults began to increase sharply in 2006-2007 the house of cards began to fall and “banks, worried about their own losses and suspicious of others’ plight, stopped lending to each other”.
The second chapter looks at the geopolitical ramifications of the crisis. The most interesting aspect of this section is its discussion of the internal politics of the European Union and how the financial crisis brought longstanding rifts to the fore. While monetary policy had been centralised through the institution of the European Central Bank there was no such equivalent for fiscal policy. This asymmetry suddenly became hugely problematic when it suddenly became imperative that response to the financial crisis be coordinated:
“The power to tax, borrow and spend remains firmly with the member states. But, as we have seen, this was a crisis in which fiscal policy took centre-stage, both to recapitalize the insolvent banks and to compensate for the fall in effective demand with greater government borrow and spending.”
With the benefit of hindsight it seem obvious that not only was this structural discrepancy unsustainable but that the problems it causes would be compounded by the resurgence of diverging national interests at a time of global crisis. Callinicos hints at the EU’s future being contingent upon its successful resolution. However what form could this take? Recent defeats in national referendums suggest a pervasive absence of will for a move towards the federalised EU which would be necessary for fiscal policy to be centralised with any degree of democratic legitimacy. If this antipathy towards European federalism holds true and the restaged Irish referendum is left as the anomaly it looks likely to be then the only obvious alternative for the preservation of the EU is the non-democratic centralisation of fiscal policy.
Can we make sense of the European wide spectre of ‘financial austerity’ on this basis? It certainly seems to shed light on events in Greece, as an empirically dubious sense of alarm within the bond markets (fuelled by partisan politicians, politicised mass media and overly powerful rating agencies) led to a realistic possibility that the country might default on its sovereign debt. The EU stepped in with a billion-dollar bailout but only on the condition that the Greek government effectively subordinate its economic sovereignty to the demands of EU technocrats: raising the retirement age, freezing or cutting pensions, freezing public sector pay and raising VAT. A radical fiscal agenda likely to undermine the long term stability of the Greek economy is being imposed through the agency of pan-European institutions against a domestic backdrop of furious protest and resistance.
It is frustrating that Callinicos only addresses the politic of austerity tangentially given that his own analysis elucidates the relevant dynamics so clearly. This is forgivable in a book of little over one hundred and fifty pages. Likewise it is inevitable given that recent events were developing while the book was in press. However it does hint at the one flaw that nevertheless defines this excellent book: it’s simply too brief. I was left throughout with the impression that this could have been a magnum opus where the author drew on a lifetime’s learning to comprehensively take stock of our contemporary predicament and offer plausible pathways out of it. As it stands Callinicos gives very little space to crucial subjects. For instance climate change is given less than a page. It’s a very interesting section, replete with insight about collective action problems and the ecological consequences of competitive capital accumulation but it is, nonetheless, less than a page. As a whole such brevity is a crying shame because in practice it means that far from offering a ‘bonfire of illusions’ Callinicos has handed us a few firelighters and pointed us in the direction of a conflagration yet to be. Even so this is a superb book which exhibits engaging though authoritative scholarship of a kind which is sadly too rare.