In August 2007, the first tremors of the credit crunch were felt when BNP Paribas suspended its sub-prime funds because of an evaporation of liquidity. Within six months, credit tightened and inter-bank interest rates soared, as banks suffered massive losses on the derivatives they were profiting off from the US housing boom.
By September 2008, US investment bank Lehman Brothers went bust, ushering in a protracted global economic contraction unlike anything seen since the Great Depression of the 1930s.
G-20 countries responded with a mobilisation of over 50% of their GDP in an emergency bid to resuscitate a financial system on the brink of asphyxiation, as all budgetary and monetary channels were employed to restore circulation and save globalisation.
While staring into the abyss, a multitude of international conferences and summit meetings followed hot on each other’s heels, as liberal injections of fiat money kept economies above water. And yet, stagnation of growth, vast indebtedness and rampant inequality continue to persist as tripartite-concussion symptoms plaguing the global economy.
A decade on since the birth pangs of that cataclysm, it is worth assessing how the system was driven towards the precipice, the institutional response to the crisis and how its consequences have saturated our precarious present.
Genealogy of a long downturn
The general tenor of the commentariat during the height of the recession focused on denouncing inadequate regulation and gluttonous “banksters” as primary causal components. While not wholly misguided, these were but symptoms; that the crisis concealed a composite genealogy was far less scrutinised.
In What is Good for Goldman Sachs is Good for America, economic historian Robert Brenner traced the fundamental source of the crash to the diminishing vitality of the advanced economies spanning the last three-decade business cycle. Brenner claimed the long-term weakness of capital accumulation and of aggregate demand was rooted in the declining profitability of capital, stemming from an oversupply in global manufacturing.
The severing of the post-war Bretton Woods monetary system in 1971 signalled the profitability crisis of industrial capitalism’s Fordist ruling contract was coming under acute stress. Unfettered by borders and buoyed by technological innovation, capital began to colonise on a global scale.
The 1980s ushered in a new structural arrangement by advanced economies to combat the ongoing turmoil of stagflation of the 1970s. Embodied by the Raegan-Thatcher regime, this period was the arrival of neoliberalism – broadly speaking, a set of market-centric policies and governance strategies that were steadily implemented. Long disciplined under the regulatory thumb of the state, an unshackled financial sector witnessed an unprecedented expansion of activity and growth in profits, as it leveraged its power over the economy.
Governments pushed deindustrialisation, higher unemployment, and austerity measures, as they sought to alleviate crisis by resorting to greater borrowing (both public and private) and subsidising demand. However, stability was achieved while stagnation intensified and debt escalated, and a wave of financial crises rocked economies throughout the mid-1990s.
To stop the bleeding, the Federal Reserve Bank intervened with a remedy that the Japanese pioneered under similar circumstances: rather than government, it would be corporations and households that would take centrestage in the economy through massive borrowing and deficit spending, facilitated by an incessant supply of cheap credit to fuel asset markets.
The 1997-98 East Asian crisis and the bursting of the tech-bubble by the turn of the millennium stood as dress rehearsals of the catastrophe to come. What was being performed was the astonishing spectacle of a global system lubricated by an astonishing speculative surge, first in equities and then in housing. And then wheels came off. As former Greek finance minister Yanis Varoufakis said: “What crashed and burnt in 2008 was the post-war mechanism by which global capitalism reproduced and stabilised itself.”
Monetary stopgap, Chimeric recovery
The catastrophic causal chain that materialised by 2007-08 saw Wall Street and the city of London plummet back to earth. In a panic to save them, bailout packages were swiftly approved amidst public outcry.
Central banks first addressed the crisis by injecting enough capital to absorb the faltering value of mortgage bonds for banks to stay afloat. Then came a substantial liquidity pump by the Fed, with European banks benefitting from short-term dollar funding. And finally, to stabilise a swollen banking system that was “too big to fail,” a coordinated pressure-release valve of “swap lines” was embraced. This enabled the greenback-starved ECB and BOE to deposit euros with the Fed in exchange for dollars.
This was an extraordinary development: the Fed had established itself as a lender of last resort to the entire financial system. It had ensured that the global banking crunch did not cascade into a crisis of the dollar. What the central banks had effectively accomplished was to stage their Bretton Woods 2.0.
After a short-lived Keynesian experiment in 2009, the restatement of austerity and structural liberalisation reforms were swiftly adopted. Since 2010, governments slashed public spending, with G-7 countries trimming their deficits from an average of 6.6% in 2008 to 2.7% in 2015.
By mid-2013, the Bank of International Settlements (BIS) declared that quantitative easing, while necessary in having prevented financial collapse, must come to an end. The goal was now to return still sluggish economies to sustainable growth. However, this was beyond the remit of central banks. All they had done was borrow time.
Social backlash began to reach a tipping point, with popular insurgencies activated: Revolutionary upheavals from the Maghreb to the Levant, and the anti-austerity protests of Occupy to Los Indignados, began to pepper the political landscape.
Nevertheless, state managers succeeded in absorbing the costs of finance capital into national accounts, transferring the consequences of crisis onto citizens. International institutions reinforced their hegemony, as witnessed by the fiscal waterboarding of Greece and the Syriza government’s subsequent capitulation to the Troika in 2015.
The lax monetary policy that followed up till 2016 allowed for the preservation of fictitious capital accumulated on the financial markets. However, the protraction of low rates has incentivised investors to procure risky assets, cementing the probability at another go-around of bubblenomics.
Beyond the macroeconomic conjuncture, the past decade has also accelerated a tendency toward greater economic concentration. In other words, the return of monopoly capitalism: having profited from a flush of low-cost liquidity, firms began multiplying their merger and acquisition operations.
This tendency also filtered down to shareholders, who executed uniform strategies seeking short-term maximisation of returns while curbing investment. Further concentration of economic power came from barriers to innovation related to a rise in patents, along with a stockpiling of Big Data. Such is the paradox of the economic present: firms are gorged on liquidity but remain investment-shy.
The post-crash logic that emerged was clear: the policies of austerity, private enclosures of the commons, and the carceral state had manifested as entrenched ruling-class imperatives to manage the aftershock of the crisis. Immiseration of the masses continued with little regard for the optics of democracy, as the top 1% of income earners appropriated the fraction of economic gains that followed.
While far from being a structural breakpoint for neoliberalism tout court, the crisis did call into question the triumphalism of market-oriented dogmas. A bankrupt neoclassical model of economic thought was ideologically disarmed, while Marx – capitalism’s notorious diagnostician – was resuscitated.
Once-stable ruling bargains in advanced economies have begun to atrophy, as the postwar settlement between capitalism and democracy teeters toward painful divorce. In a tragic twist, the most effective challenge to capital’s impulse to internationalise was met not by a horizon pregnant with the possibility of justice and redistribution, but one of ethno-nationalism and closed borders.
The consequential electoral fragmentation duly fermented the meteoric rise of reactionary populist contenders from Narendra Modi in India to Donald Trump in the US, as the accumulating dysfunctions of the political centre become ever more starker.
Our historical moment, then, is marked by a great indeterminacy between phases of transition: the refutation of a previously insecure arrangement, which has given way to a radical assortment of social actors looking to transcend the status quo.The trans-Atlantic axis has so far managed a temporary containment of crisis. But whether a central bank fix is sustainable, or indeed wise as the foundations of a new global order begin to emerge, is a much larger gamble altogether.
And so the question becomes: following ten years of anemic growth, global trade, and profitability in the overall business cycle, coupled with ongoing political instability, are we due soon for another collapse?
Given this context, the spectre of 2008 continues to haunt us – and its ghosts are unlikely to be exorcised in the coming decade.
Amar Diwakar is a freelance writer and research consultant.