This book by Edemilson Paraná carries out a rare feat. It deals with the promiscuous relations between “financialization” and the nature of technical progress in the recent period. Edemilson analyzes the acceleration of time and the shrinking of space, twin phenomena that Marx unveiled in the movement of real abstraction generated in the bowels of the capital regime.
In Grundrisse and in Capital, Marx performs the works of the negative dialectics: the negation of direct exchange; the negation of the generalized exchange of commodities in the absence of the commodification of the labor force; the negation of the valorization process in the absence of the capitalist productive forces.
At the same time, in their unfoldings, the implicit negations in the transmutation of the simplest or elementary relations constitute new positivities that move in an admirable dialectic of forms. The more developed forms subordinate and rearrange the position and meaning of the most elementary forms. The positions of the categories change: the realization of the value form, in the affirmation of its empire, is assuming more concrete configurations throughout the process of real abstraction. It is not a conceptual game engendered in the mind of the investigator. The movement of real abstraction accompanies the theoretical “construction” of Capital. This mode of exposure is exemplified in Marx’s treatment of the development of money as a form of value and universal expression of wealth.
A careful reading of Grundrisse and the three volumes of Capital will show that money turned into capital – the origin and purpose of capitalist circulation and production (Money-Commodity-Money) not only requires real submission of labor to the domain of productive forces but also imposes on workers (and on owners of capital-value) the dictates of the incessant process of accumulation of abstract wealth. The accumulation of more money through the use of money to capture more value in the form of money is at the same time a movement of real abstraction that culminates in the “developed” (and more concrete) forms of interest bearing capital, of credit money and fictitious capital. In these forms, money-capital performs its concept of “value which valorizes” and tries to add its value without the mediation of the commodity labor force. M-C-M’ converts to M-M’.
Karl Marx treated interest-bearing capital and fictitious capital as the most developed forms of capital. Most developed because the most abstract. Marx works within the simultaneity of two movements: the reiteration of the basic mechanisms of economic and social reproduction of capitalism and the transformation, the change, driven by the incessant impulse to overcome these limits
Financialization is not a deformation of capitalism, but a “perfectioning” of its nature. This “perfectioning” exacerbates its contradictory movement: in the ceaseless pursuit of “perfection”, that is, the accumulation of money from money, the capital regime is bound to devalue the labor force and to expand fixed capital beyond the limits allowed by the relations of production, which not only engenders the periodic crises of realization and over-accumulation, but also transforms, in its inexorable dynamics, the labor on “a miserable basis” of the process of creation of value.
It is through the financial form that capitalist competition takes place, that is, it becomes possible to “thaw” the immobilized capital in the various spheres of production, in search of the best opportunities and the most profitable applications. Competition must be understood as the imposition of rules governing production methods, the labor process, imposing on workers the dictatorship of socially necessary labor time and, at the same time, dictating to the capitalists the compulsion to reduce it. Capital, Marx says, is the contradiction in process.
The Finance of the Neoliberal Era
The typical precautions of the so-called Keynesian era, the stage of “financial repression”, was aimed, in particular, to attenuate the instability of the markets for the negotiation of securities representing wealth and income. Monetary and credit policies were oriented toward securing favorable conditions for the financing of productive expenditure, public or private, and to mitigate the effects of the fictitious valuation of wealth on the current spending and investment decisions of the capitalist class. The aim was to avoid over-valuation cycles and catastrophic devaluations of existing financial wealth stocks.
Sociologist and economist Wolfgang Streek, director of the Max Plank Institute, points to the origin of the “transfer of power to the markets” in the stagflation of the 1970s. At this point, the social and economic arrangement of the previous decades was broken up in the name of removing barriers to free operation of the markets.
The financial deregulation of the neoliberal era has allowed the demarcated borders after the crisis of the 1930s between commercial banks, investment banks, insurance companies and savings and loans to be erased.
Transformed now into financial supermarkets, banks took care to advance the securitization of loans and engage in the financing of positions in the capital markets and in off-balance sheet operations involving derivatives. This was
The advancement of these interrelations was supported by the expansion of the global interbank market and by the improvement of payment systems. Investment banks and other shadow banks have moved closer to the monetary functions of commercial banks, fueling their liabilities in the “wholesale money markets”, backed by short-term investments by companies and households. In the 2000s intra-financial debt as a proportion of USGDP grew faster than household and corporate indebtedness.
Without pretending to be exhaustive, it is necessary to enumerate the trends that have since defined the metamorphoses of global finance: (1) the greater weight of financial wealth in total wealth; (2) the increasing power of managers of the mass movable assets (Mutual Funds, Pension Funds, insurance) in defining the ways of using “savings” and credit; (3) the free movement of capital between financial markets and the adoption by national economies of floating rate regimes and inflation targets; (4) risk rating agencies assume the role of courts, with a view to judging the quality of national assets and policies; (5) the expansion of futures markets and the generalization of the use of derivatives give greater elasticity to credit.
In the genesis, development and configuration of the expansion cycle that culminated in the crisis of 2008 is the rearrangement of portfolios, a financial phenomenon: the gross flow of private capital from Europe and the Periphery to the United States. Financial interpenetration led to the diversification of assets on a global scale and thus imposed the “internationalization” of wealth managers’ portfolios.
The United States, benefited by the attractiveness of its broad and deep financial market, has absorbed since the mid-1980s a volume of foreign capital that has surpassed the current account deficits.
In a world where capital mobility prevails, the determination does not range from the current account deficit to “external saving”. It is the high liquidity and high “elasticity” of the global financial markets that sponsor the exuberant expansion of credit, asset inflation and the indebtedness of hyper-consumer households.
At the epicenter of the transformations of the last decades is the exceptional growth of the gross capital flows destined for the United States and intermediated, above all, by the European banks. This means that the changes in debit and credit relationships, and therefore in the assets of banks, companies and households, were much more intense than those reflected in the current account deficit.
In the context of the new “Sino-American” relations, the production-income-consumption circuit can be presented in the following stylized form: gross capital flows – expansion of domestic credit in the United States – acceleration of US consumer spending – additional generation of employment and incomes in emerging China – Chinese trade surplus supported by exports of manufactures – accumulation of reserves (financial savings) – “final financing” of the US current account deficit.
Financial innovations and the global integration of credit institutions promote the exuberance of household consumption financing, which leads to reckless indebtedness and, obviously, the deterioration of the quality of the balance sheets of financial institutions and debtor households. It is this “arrangement” that generates the current account deficit in the balance of payments, not the other way around.
The dominance of the financial sphere was associated with the incessant search for new “competitive” areas by the block of leading companies and their suppliers. This alliance imposed on the global economy a dramatic increase in the productivity-wage ratio in the manufacturing of emerging Asians. The capital movement irrigated the American financial market and allowed the maintenance of low interest rates on long-term securities. The offer of cheap funds was important to finance the productive metastasis of the great American, European, and Japanese enterprise to the Pacific of “small tigers” and “new dragons”.
The new manufactures are produced in the economic space built by the Asians around the “big Chinese automaker”. The huge reserve of labor, devalued foreign exchange, and abundance of foreign direct investment allow China to establish a virtuous division of labor with its neighbors. At the same time, the shifting of American, European, and Japanese subsidiaries in search of global sourcing forces the US national economy to expand its degree of trade openness and generate a growing trade deficit. It becomes imperative to accommodate the manufacturing and commercial expansion of the new partners, produced largely but not exclusively by the displacement of large American capital in the pursuit of greater competitiveness.
The chronic imbalance of current account balances between China and the United States was therefore not an “anomaly” of the Sino-American model, but a constituent factor in the dynamism of the global economy of the Third Millennium.
The global competitiveness game has aligned itself with new corporate governance standards to focus power in the hands of shareholders and financial wealth managers. Companies have significantly expanded the ownership of financial assets, not as a capital reserve for future fixed investments, but as a way of altering the strategy of managing retained earnings and indebtedness.
The objective of maximizing the cash generation determined the shortening of the business horizon. The expectation of variation of the prices of the financial assets began to play a very important role in the decisions of the companies. Financial profits outperformed operating profits. Corporate management was thus subject to the dictates of short-term “patrimonial” gains and financial accumulation imposed its reasons on investment decisions, those generating employment and income for the masses.
Treasury and Central Bank in the Financial Crisis
In the aftermath of the crisis, the carnal relations between money, public finances and private financial markets in contemporary capitalism came to light. The modern credit system, when creating deposits, that is, means of payment – whose unit of account is defined by the State – operates as a private monetary administration center. Banks (and other non-bank institutions that supply their liabilities in the wholesale money markets) define the rules for access to liquidity, credit and the payment system. Such rules impose constraints on the conditions of production and competition of undertakings.
In the period of euphoria that preceded the crisis, commercial banks, investment banks, pension fund managers, mutual funds, private equity funds, not to mention sophisticated hedge funds, escaped the standards of rationality and risk assessment proclaimed by the Efficient Markets Hypothesis. They succumbed, in fact, to the impersonal forces of competitive mimicry, referred to in the vulgar language of merchandising as “herd behavior”. They all consolidated their conviction that they were armored against market, liquidity and payment risks.
The “confidence” climate, as usual, spread the systemic risk that the “wise men” imagined had been diverted by the use of derivatives. In recent years, the decline in asset and currency price volatility and increased liquidity have fueled the exasperation of “leverage”, from demented consumers to hedge funds based on bank lending.
This is the crucial paradox of contemporary finance: the “private centralization” of money and credit in “too-big-to-fail” institutions has spread – in the wake of the global integration of financial markets – the competitive process of generation and distribution of assets backed by real estate (asset backed securities) whose enigmatic pricing was supported by the infamous Risk Rating Agencies.
Euphoria causes collapse. When the wheel of fortune turns falsely, the collapse of asset prices imposes state “centralization”, under penalty of destruction of credit and currency, that is, of the market infrastructure.
The stability of the monetary economy therefore depends on the complex relationships between the collective funds administered by the private credit assessment committees and the state’s ability to guide the behavior and expectations of private agents engaged in the field of abstract wealth accumulation. These works of the state are executed by the monetary policy of the central bank in conjunction with the management of public debt by the Treasury. In a financial crisis, such as the one we are going through, government bonds in the dominant countries reveal their nature as “assets of last resort”, a shelter where the anguish that seizes the souls of private owners and controllers of wealth is cooled.
The crisis was triggered in the United States has seriously affected its financial markets. However, the bailout sponsored by the Federal Reserve and the Treasury to institutions “too big to fail” has elicited a “flight to quality”. This avid quest for quality denounces the exorbitant privilege of the managing country of the reserve currency and the hierarchy of currencies in the international system.
Until yesterday damaged in their credibility by their own exploits, the “markets” were reinvigorated by formidable cash injections, a spectacular “inflation” of central bank monetary liabilities. The money was distributed generously in an “atypical” form of cooperation between the once independent central banks and the formerly austere national treasuries. The former housed the subprime financial scum and its surroundings, set up programs for the exchange of bad debts for liabilities of their issue, that is, money, while treasuries issued public bonds to protect private wealth in a perilous state.
At the height of the crisis, the central banks of the capitalist cusp fulfilled their mission. In addition to their classic lender-of-last-resort functions, central banks promoted the implicit transfer of ownership of debt-credit relationships, without allowing the principles of private wealth ownership to be violated, even though individual owners had been sacrificed.
Luiz Gonzaga de Mello Belluzzo1
Professor, Economics Institute at the University of Campinas (Unicamp) and Faculties of Campinas (Facamp)