THE CRISIS THIS TIME - Socialist Register 2011: Leo Panitch, Greg Albo, Vivek Chibber; LeftWord Books, 12, Rajendra Prasad Road, New Delhi-110001. Rs. 350.
During the past four decades and more, a group of committed analysts, admittedly with Left leanings, have been bringing out an annual publication, Socialist Register, to make available their interpretation of pressing contemporary problems. The latest in the series deals with the global economic crisis that surfaced in 2008-09 and is still running its course in the United States, Europe, and many other parts of the world.
Even general readers now know that the crisis has been associated with sub-prime lending and the rapid growth of derivatives. What this volume attempts to convey is that the crisis has some systemic features and that it may indeed presage a new phase in the development of capitalism.
Derivatives
Take derivatives, for instance. Thanks to the widespread use of the term, it is common knowledge that derivatives derive their value from other debt-related instruments. But, as financial instruments, what is their special feature, and how do they impact the economic system as a whole and the lives of ordinary people? Are they indeed “financial weapons of mass destruction,” as a writer claimed?
One thing is clear: though derivatives appeared on the financial scene only in the 1980s, now they are the most traded among financial instruments and the latest means of acquiring and holding wealth. The amount of derivatives outstanding currently is multiple times the capitalisation of the world stock markets. Indeed, derivatives are redefining what wealth is. Insofar as they are bought and sold, they are commodities or traded goods. If they are traded, they must have value of some sort, on the one hand, and the right of ownership, on the other.
In an earlier era these two attributes coincided: only goods that had some value of their own — grain, cattle, precious metal, land, etc. — would be considered as wealth or assets. The second phase was when claims to wealth such as paper money, deposit certificates or shares would also be treated as wealth and would become standard forms of holding assets. Derivatives announce the beginning of yet another phase of accumulating and holding wealth. Derivatives are contingent claims on the changes in the future price of an asset without any claim to the asset itself.
Financial instruments
A concrete example will make this clearer. Since the end of World War II, a major issue was to ensure the stability of national currencies to facilitate international trade. Till the early 1970s, what ensured stability was the fact that the US dollar, which remained pegged to gold, was freely convertible into any other currency. Once this dollar-gold link was snapped in 1971, the values of currencies began to fluctuate, opening up an opportunity to make profits by trading in currencies. Then it became possible to trade in the anticipated variations in the prices of currencies — a sort of derived trade — and derivatives emerged as the financial instruments for such transactions. Since these transactions were on anticipated variations that might or might not happen, they were subject to big risks. In fact, they made risk a commodity to be traded and extended such trade to equities, debts, metals, oil, real estate, etc., and even to such things as the weather, movements of wages and so on.
In all these instances, the ownership (that which one sells) is exposure to the performance of items, including assets, without ownership of the item itself (some of which, like weather cannot even be owned). Evidently, it is easier, and can be more profitable, to trade ownership of an oil derivative than a barrel of oil.
Derivatives, therefore, constitute a new form of trade, a new form of ownership, and a new means to make profit. One of the writers in the volume puts it more technically: derivatives are ‘meta-commodities' and ‘meta-capital'. The commodification of risk permits diversification of risk portfolios and the proliferation of transactions.
Profit-making
Profit-making via risk-trading is the essence of derivatives. They, thus, create new sites for accumulation mainly for those who already have the advantage of large scale ownership — the big corporations (banks, investment firms. etc.) and their top operatives, hedge funds, and the top wealth-owners. But the ‘small man' gets drawn in too — through his growing dependence on debt — voluntarily, thanks to the convenience the credit cards offer, for instance, but more so involuntarily because only by borrowing can he ever hope to have a house of his own, or educate his children. And often, without his knowledge, his pension fund becomes a big player in derivatives-chasing. Thus, those at the top become wealthier; those at the other end go into debt.
What is more alarming is that while individuals may find it possible to pass on the risk, the cumulative burden of risk may turn out to be too big to avoid a collapse as it happened in 2008-09. This is particularly so because the big players know that the public authorities will bail them out. Once it is done, the train will again be back on the rails till another derailment comes sooner or later. Details may differ, but the basic issues will be the same, perhaps become more intense.
If you find this terse summary of the basic argument interesting and helpful, get to the volume itself which deals with how the crisis this time found expression in the U.S., the United Kingdom, Europe, Japan, and South Africa, and wait for Socialist Register 2012, which promises to deal with Asia, West Asia, and Latin America.
