Financialisation provided a substitute motor, in the form of debt, for the world economy in the decades after the US arms economy lost a good part of its effectiveness. The permanent arms economy had to be supplemented by the debt economy. But by its very nature a debt economy could not be permanent. The massive profits that banks make during any bubble represent claims on value produced in the productive sections of the economy. When there is a sudden decline in the prices of the assets they have previously bid up (in the housing, property, mortgage and share markets) they discover those claims are no longer valid and that they cannot pay their own debts unless they get cash from elsewhere. But the very process of trying to raise cash involves selling further assets; as all banks do so, asset prices decline still more and their individual balance sheets deteriorate further. The bubble bursts and the boom turns into a crash.
As Marx put it:
All this paper actually represents nothing more than accumulated claims, or legal titles, to future production whose money or capital value represents either no capital at all. . . or is regulated independently of the value of real capital which it represents . . . And by accumulation of money-capital nothing more, in the main, is connoted than an accumulation of these claims on production.34
What happened through the early and mid-2000s was that the banks assumed that these claims were themselves real value and entered them in the positive side of their balance sheets. A chastened Adair Turner, former head of the British employers' CBI and former vice-chairman of Merrill Lynch Europe, recognised after the event, "The system in total has become significantly more reliant on the assumption that a very wide range of assets could be counted as liquid because they would always be sellable in liquid markets" .35 Profits were measured according to "mark to market" valuations of assets-that is, according the level to which competitive bidding had raised them. But once there was a decline in the mortgage and property markets, financiers had to try to cash their assets in if they were not going to go bust-and found they could not. This is what the process which goes under the name of "deleveraging" was about.
Financialisation and the Bubbles That Burst
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