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# Zombie Capitalism Global Crisis and the Relevance of Marx

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This rise of finance was accompanied by a great increase in the frequency of financial crises. As Andrew Glyn said in Capitalism Unleashed, "Crises involving banking crises, which had almost died out in the Golden Age, reappeared in strength from 1973 onwards and became practically as frequent after 1987 as during the inter-war period". 12 Martin Wolf noted " 100 significant banking crises over the past three decades" .13 Yet after each crisis the system as a whole seemed to revive again, so that on the eve of its greatest crisis there was talk of record growth rates and predictions of ever faster growth in the future. Finance, in fact, acted like a drug for the system, seeming to give it great energy and creating a sense of euphoria, with each brief hangover being followed by a further dose until the metabolism as a whole suddenly found itself being poisoned.

The debt economy and the great delusion

The growth of finance was never something separate from what was happening to the productive core of the system, but was a product on the one hand of its internationalisation, on the other of the long drawn out slowdown in accumulation.

The first big growth of international finance in the 1960s was a result of the way the growth of international trade and investmentand US overseas military expenditure associated with the Vietnam War-led to pools of finance ( "Euromoney") which had escaped the control of national governments. The next big growth came with the recycling of massively expanded Middle East oil revenues through the US banking system-revenues that were a product of the increased dependence of productive capital on Middle East oil.

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The restructuring of productive capital took place increasingly, as we have seen, across national borders, even if mostly it was regional, not global, in scope and did not measure up to much of the hype about globalisation. But industry could not restructure in this way without having financial connections across borders. It required international financial networks if it was to repatriate profits or establish subsidiaries elsewhere in the world. An important source of profit for some sections of financial capital lay in the fees to be gained by overseeing acquisitions and mergers of productive firms, and that meant there was a gain to be made in operating multinationally before they did. As in Marx's description of finance in his day, it led the way in encouraging productive capital to reach out beyond its established bounds.

Multinational productive capital, in turn, opened up new vistas for multinational financial transactions. The success of the Japanese car industry in penetrating US markets in the late 1970s laid the ground for the flow of Japanese finance into both productive investments (car plants) and real estate speculation in the US. And the flows of funds and commodities within multinational corporations provided conduits by which financial transactions could if necessary escape governmental control.

As chains of buying and selling grew longer than ever, so did the chains of borrowing and lending-and with them the opportunities grew ever greater for financial institutions to make profits through borrowing and lending that had no immediate connections with processes of production and exploitation. This took place in a wider context which made the search for profit through finance increasingly attractive to capitalists of all sorts-the fall in profit rates from their level in the long boom (as described in Chapters Eight and Nine). Capitalism internationally went through nearly four decades in which profitability was substantially lower, even in its period of recovery, than that which had enabled it to expand production and accumulate so rapidly previously.

Profitability did not collapse completely, and there was a continuous growth of a mass of past surplus value seeking opportunities

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for fresh profitable investment. But there were not nearly as many of these in productive sectors as previously. One consequence, as we have seen, was a general slowdown in the level of accumulation and decline in average growth rates. Fairly fast growth of productive sectors would occur in one part of the world economy or another-in Brazil and the East Asian NICs in the late 1 970s, in Japan and Germany in the 1980s, in the US and the East Asian NICs again in the mid to late 1990s, in China and to a lesser extent the other BRICS in the 2000s. But profitability was not sufficient to raise productive accumulation throughout the system as a whole to its previous levels.

There were increased competitive pressures on individual firms to undertake large individual investments so as keep ahead of rival firms, but there was less certainty than before about being able to make a profit on those investments. Firms, wealthy individuals and investment funds reacted by being cautious about committing themselves to such investments lest it leave them without ready cash ( "liquidity" in financial parlance) next time there was a crisis. The result was an inevitable tendency for the average level of productive investment to fall.

Growth of private sector real non-residential capital stock in industrial countries 14

1960-69 5.0 percent

1970-79 4.2 percent

1980-89 3.1 percent

1991 -2000 3.3 percent

These figures, it should be noted, understate the slowdown in productive investment, since a growing share of investment went into the non-productive financial sphere. And it was not only in the old industrial countries that a falling share of surplus value went into productive investment. The "tigers", the NI Cs and the BRICS drew a sharp lesson from the Asian crisis of 1997-8. They were not willing to risk being stuck again with a shortfall of ready cash the next time international instability hit their markets, and built up surpluses on foreign trade that they saved rather than invested domestically. Even China ended up with an excess of saving over investment equal to 10 percent of its national income, despite its virtually unprecedented rate of accumulation.

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Globally this meant there was a growing pool of growth of money capital-money in the hands of productive as well as nonproductive capitals-searching for outlets that seemed to promise higher levels of profitability. Hence the pressure on firms to deliver short-term rather than long-term profits. So too the succession of speculative bubbles and the repeated "Minsky" shifts from speculation to Ponzi schemes in which financiers used the money entrusted to them by some investors to pay off other investors and line their own pockets.15 All sorts of speculative, unproductive activities flourished, from pouring money into stock markets or real estate to buying oil paintings by old masters. In each case, the rush of speculators into buying things in the expectation of rising prices was, for a time, a self-fulfilling prophecy. As they outbid each other, prices did indeed rise. In this way the ups and downs of the productive part of the system found a magnified reflection in the ups and downs of various other assets. The financial system expanded as a consequence, since it played a key part in collecting together the funds for speculation, and could then use the assets whose value had increased because of speculation as collateral for borrowing more funds.

There developed a mass of capital wandering round the world looking for any opportunity where it seemed there might be profits to be made. Already in the economic recovery of the late 1980s:

Financial activity became frenetic, with stock and share and property values soaring upwards . . . Property speculation rose to new heights, and private borrowing reached record levels in the US, Britain, and Japan . . . There was real industrial growth, but it was dwarfed by the expansion of the property markets and by various forms of speculative activity . . . General business investment grew considerably faster than manufacturing investment-in sharp contrast to the 1960s and early 1970s, when manufacturing grew at the same speed. The growth of manufacturing investment was about a third lower in the US and Japan, and about two thirds lower in Europe, than in the earlier period. 16

Robert Boyer and Michael Aglietta have accurately described what happened during the next US boom, in the mid and later 1990s:

Overall demand and supply are driven by asset price expectations, which create the possibility of a self-fulfilling virtuous circle. In the global economy, high expectations of profits trigger an increase in asset prices which foster a boost in consumer demand, which in turn validates the profit expectations . . . One is left with the impression that the wealth-induced growth regime rests upon the expectation of an endless asset-price ap-<sup>17</sup>prec1at10n . . .

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The growth of multinational finance increased the instability of the system, but did not cause it. Enhanced instability in turn encouraged productive firms to seek speculative profits in a way that further boosted the financial sector and added still more to the instability.

A prime example of this was the rise of the derivatives markets. Their original function was to provide a sort of insurance against sudden changes in interest or exchange rates. This was an extension of the long established practice of buying and selling "forward"-agreeing now on a price to be paid at some specified point in the future for some commodity. Now derivatives developed into elaborate systems of payments for options to buy and sell currencies or to lend or borrow money at various rates at different times in the future. In doing so, they provided productive firms with some protection against their calculations of future competitiveness and profitability being upset by sudden changes in various markets-and became an integral part of normal business for many companies.18 But that was not the end of the matter. The derivatives that provided that protection could themselves be bought and sold, and it was then possible to gamble on changes that would take place in their prices if exchange or interest rates went up or down. Hedge funds, working with money provided by rich individuals putting in a few million dollars each, found they could make very large profits by borrowing in order to make such bets, assuming (as every poor gambler does) that they were bound to win.

The reliance on derivatives was not the only way in which the boundaries between productive capital and the financial sector were eroded. Many industrial concerns began to look to finance as a way of profit making. In the 1990s both Ford and General Motors turned towards financial activities such as "leasing, insurances, car rental", so that "during the boom 1995-98 a third of the [Ford] group's profit accrued from services" .19 The Economist has told of the US's currently biggest manufacturing firm, General Electric, that its "profits grew with the sort of predictable consistency . . . made possible by . . . making good any unexpected shortfall with last-minute sales of assets held by the firm's notoriously opaque finance arm, GE Capital," which was responsible for "40 percent of GE's revenue". 20

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As capitalism in all its forms turned to financial operations to complement productive operations from the early 1970s, governments came under pressure to abandon controls imposed on financial transactions. For a time governments still committed to the state capitalist or Keynesian notions of the previous period attempted to hold the line against the way finance could well over national borders. But one by one they gave up the attempt, partly because they saw old controls of currency and capital movements as ineffective, partly because, accustomed to adjusting their horizons to what capital said was possible, they were won over to the idea that this was the only way to achieve a new cycle of capital accumulation. The approach of those who had started off on the social democratic left was that if you could not beat them, then join them.

Usually the speculation was in non-productive spheres-repeated stock exchange and real estate bubbles. But occasionally it focused on some area where they believed there was profit to be made by productive investment. As the Financial Times told of the late 1990s:

Spending on telecoms equipment and devices in Europe and the US amounted to more than \$4,000 billion. Between 1996 and 2001 banks lent \$890 billion in syndicated loans . . . Another \$415 billion of debt was provided by the bond markets and \$500 billion was raised from private equity and stock market issues. Still more came from profitable blue chips firms that drove themselves to the brink of bankruptcy or beyond in the belief that an explosive expansion of internet use would create almost infinite demand for telecoms capacity. The global financial system became addicted to fuelling this bonfire. Nearly half European bank lending in 1999 was to telecoms companies . . . about 8 0 percent of all the high-yield, o r junk, bonds issued in the US were to telecoms operators. Five of the ten largest mergers or acquisitions in history involved telecoms companies.21

The fact that there was a productive element to this boom added to the great illusion that it could go on forever. But the boom was based on speculation, ascribing massive exchange value to products for which the current use value was very limited. So much "band width" had been created, the Financial Times said, that:

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if the world's 6 billion people were to talk solidly on the telephone for the next year, their words could be transmitted over the potential capacity within a few hours . . . [only] 1 or 2 percent of the fibre optic cable buried under Europe and North America has even been turned on. 22

The telecoms boom inevitably collapsed, causing widespread disarray. By the beginning of September 2001 (before the 9/1 1 attack which is usually blamed for that year's recession) the "stock market value of all telecom operators and manufacturers" had "fallen by \$3,800 billion since its peak in March 2000" and "probably \$1,000 billion" had gone "up in smoke" .23

Faced with the collapse of this bubble into productive investment, it is perhaps not surprising that the next bubble would be around something that seemed to be . . . "as safe as houses" . During the recovery from the 2000-2 recessions those with money (old fashioned banks, newer financial groups such as hedge funds, and rich individuals with a few million in ready cash) found they could expand their wealth by borrowing at low interest rates in order to lend to those prepared for, or conned into, paying higher interest rates. Bits of various loans were then parcelled together into "financial instruments" to be sold at a profit to other financial institutions which in turn would sell them again. Those at one of end of the chain of lending and borrowing would not have the remotest idea where interest was coming from at the other end. In fact, many of those expected to pay it were poorer sections of the American population desperate to get somewhere to live but previously regarded as uncreditworthy. They were lured into taking out mortgages with "tickler" fixed term low rates of interest which could then suddenly be increased after two or three years. Rising house prices were supposed to make lending to them safe, since if they defaulted on their loans their homes could be repossessed and sold at a handsome profit. The fact that it was precisely the willingness of financial institutions to bid against each other to offer loans to buy houses that was raising the prices-and that prices would inevitably fall if they all began repossessing-was something that escaped the notice of the geniuses who ran these institutions.

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The more corporations inflated their wealth by losing touch with reality the more they were honoured. The British bank Northern Rock was "the toast of a glitzy City dinner where it was heaped with praise for its skills in financial innovation" .24 Gordon Brown praised the "contribution" of Lehman Brothers "to the prosperity of Britain" .25 Ramalinga Raju was named India's "Young Entrepreneur of the Year" and awarded the Golden Peacock award by the World Council for Corporate Governance just months before it was revealed that he had defrauded his own company of one billion dollars.

Again it has to be stressed that the speculative ventures of these years did not just involve financial capitalists. Industrial and commercial capitalists took part. More than half the supposed growth in the worth of the whole of the non-farm, non-financial corporate sector of the US in 2005 had been due to inflation in its real estate holdings.26

The finance-led bubbles were not, however, just important as a source of profits for the supposedly productive sector of the economy. They were also central in ensuring it had markets that neither its own investment nor what it paid its workers could provide. This was true of the bubbles of the 1980s and 1990s. The combination of reduced investment and attempts to hold down wages in the old industrial countries (and success in cutting them in the US) made consumer debt increasingly important in providing demand for output. It was even truer in the early and mid-2000s. Without the "housing" and "subprime mortgage" bubble there would have been very little recovery from the recession of 2001-2.

These were years in which the real earnings of workers in the US, Germany, France and some other countries tended to fall. They were also years in which productive investment was low in all the "old" capitalisms. "Investment rates have fallen across virtually all industrial country regions", said one IMF study.27 Another report, for JP Morgan, told in 2005:

The real driver of this saving glut has been the corporate sector. Between 2000 and 2004, the switch from corporate dis-saving to net saving across the G6 [France, Germany, the US, Japan, Britain and Italy] economies amounted to over \$1 trillion ... The rise in corporate saving has been truly global, spanning the three major regions-North America, Europe, and Japan.28

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In other words, "instead of spending their past profits", US businesses were "now accumulating them as cash" .29

A low level of investment combined with falling real wages would, in normal circumstances, have resulted in continued recession. What prevented that was precisely the upsurge of lending via the financial system to American consumers, including the recipients of subprime mortgages. It created a demand for the construction and consumer goods industries-and via them for heavy industry and raw materials-that would not otherwise have existed. Recovery from the recession depended on the bubble, what the Italian Marxist Riccardo Bellofiore has aptly called "privatised Keynesianism" .30

The productive capitalists who were the beneficiaries of the operation were not just to be found in the US and Europe, but also across the Pacific in East Asia. Japanese industry, still suffering from the decline in profitability in the early 1 990s, staged some recovery by exporting hi-tech equipment to China which then used it (along with components from the other East Asian states and Germany) to build up ever greater exports to the US. And it was the surpluses on their trade with the United States that Japan, China and the other East Asian economies deposited in the US, which helped finance the bubble and so provided a boost to the whole world economy, including their own part of it.

As Martin Wolf rightly commented, "Surplus savings" created "a need to generate high levels of offsetting demand" ,31 and lending to poor people provided it: "US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something changes elsewhere";32 "The Fed could have avoided pursuing what seemed like excessively expansionary monetary policies only if it had been willing to accept a prolonged recession, possibly a slump" .33 In other words, only the financial bubble stopped recession occurring earlier. The implication is that there was an underlying crisis of the system as a whole, which could not have been resolved simply by regulating financiers.

Wolf and others who emphasised the imbalances in the global productive economy did not locate their roots in problems of profitability. To have done so would have required at least half a turn from neoclassical economics to classical political economy, and especially to Marx. But low profitability was, as we have seen, behind the slowdown in productive accumulation in North America, Europe and Japan, while the partially successful attempts to sustain profits at the expense of wages were responsible for the increasing dependence of consumption on debt. It was also the attempts to maintain profitability in the face of an ever greater piling up of fixed capital that led to the holding back of consumption in China-and, as part of doing so, efforts to stop any rise in the international value of the yuan. And the memory of the crises of the 1990s taught the other BRICS and NICs that their own economies' profitability was not high enough to protect them from global instability, leading them, too, to pile up surpluses. In general, it can be said that the different sectors of world capitalism would not have become dependent on the bubble had profit rates returned to the levels of the long boom.

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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.

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