The sub-prime crisis
Platypus Review 4 | April—May 2008
Crisis is the condition of everyday life in capital. Capitalism kills in silently effective ways without necessary recourse to spectacle, through institutional mechanisms like patent controls on life-saving drugs. This is why everyday squalor in the Middle East is equally, if not more, fitting a symbol for Marxists than Muslims in the ‘state of exception’ on Guantanamo Bay.
In this respect, calling the current wave of defaults in sub-prime mortgages and the collapse of the secondary market for securities underwritten by mortgages a ‘crisis’ is politically misleading. For whom, exactly, is this a crisis? Certainly turmoil among the bourgeois carries consequences for all of us. And no doubt, many first-time property owners from working and lower-middle income classes (“aspiring bourgeoisie”) will find themselves facing greater indebtedness.
But this is above all a possible crossroads for the bourgeoisie and their neo-liberal banking project. A very rough historical context helps. Prior to the dawn of capitalism, banks as we know them did not really exist. What existed were moneylenders and depository institutions though not the combination; moneylenders lent on interest but did not take deposits, while depository institutions made loans only as brokers between parties entering personalized contracts. By the nineteenth century, capitalism had created the bank as an institution for pooling the resources necessary to launch global enterprise and to support the debt of governments protecting it. Legal limits on the rate of interest (usury) were substituted for prior, and more radical, religious prohibitions on interest tout court. Most significantly, the arbitrage activity of taking deposits at a lower rate of interest than charged on loans (“asset transformation”) crystallized as the core activity of capitalist banks.
Starting in the late 1960s, capitalist banks changed as a consequence of spiraling inflation in OECD countries, a problem partly created by the monetary mismanagement of Central Banks. More than a decade of inflation reduced the real return on loan assets held by banks and the real rate of interest paid on deposits. With deposit interest rate ceilings and usury laws restricting banks in various OECD countries from raising nominal rates, many depositors withdrew their funds and put them into newly created, higher yielding institutions (e.g. money market mutual funds) and instruments (e.g. derivatives). A crisis in bank profitability resulted.
The restoration of bank profits above and beyond their pre-crisis level beginning in the 1980s was one of the great achievements of neo-liberalism. The two key factors affecting this outcome were (1) regulatory changes successfully lobbied for by the banking industry and (2) changes in the composition of banking practices. First, repeals in usury laws and the development of contracts like adjustable-rate mortgages freed banks from restrictions on interest, giving them greater flexibility in the face of changing macroeconomic conditions. Additionally, other regulatory changes allowed banks to expand the scope of their business beyond the core activity of asset transformation.
So-called off-balance sheet activities such as currency and derivatives trading and brokering services surged from comprising a negligible part of bank profits to approximately half.
The process of securitization was among the central techniques of the neo-liberal banking project. Applied to mortgages, banks essentially packaged and sold mortgage payments as bonds to investors. Specifically, collateralized mortgage obligations (CMOs) were designed that sliced up mortgage payments according to factors like FICO credit scores (‘prime’/’sub-prime’) into tranches, allowing investors to hold higher or lower yielding assets according to credit risks posed by the underlying mortgages (risk of default statistically determined by class factors). Securities backed by sub-prime mortgages (mortgages of borrowers with FICO score lower than 660 on a scale of 800) in particular found demand among bourgeois in pursuit of high profits. Banks were happy to oblige. They could now limit the interest and default risk they faced from holding loans, as well as earn off-balance sheet fees for selling them to investors. With markets now available for the sale of CMOs and other loan-backed securities, banks appeared to have expanded their lending activities in new and riskier ways, knowing they no longer faced the primary risk from loan defaults.
Thus what might have appeared as the democratization of credit must instead be viewed from the other side of the ledger as an expansion of debt consistent with the classed hierarchy of capital. This is the profound truth expressed by Rosa Luxemburg to which Platypus returns. For Luxemburg credit not only reproduces the antagonisms of capitalist classes but accentuates them: its sudden extension, not its shrinking, is the cause of commercial crisis (Reform or Revolution?). In the last twenty five years, the extension of credit to Americans at high interest rates has occurred in the context of stagnant real wages. The rising proportion of debt payments to capitalist lending agencies as a percentage of total income must be viewed then as an intra-class transfer; as a consequence persons without financial stakes in these institutions have actually lost ground.
Now the bourgeoisie up the ante by increasing the costs to the public by bailing out investment banks exposed to CMOs like Bears Stearns -and this may be only the opening move. Bourgeois are actively lobbying for further bailouts and are likely to get them. As Myron Scholes—Nobel Laureate, famous for helping create the Black-Scholes formula for pricing options, infamous for having his own hedge fund bailed out by a consortium of Wall Street investors organized by the Federal Reserve— recently told the Wall Street Journal: “They [the government] should at least be thinking about it. If you’re going to do it anyway, why not do it sooner?” (March 13, 2008) To echo Marx in Capital Volume 1, it is characteristic of bourgeois enemies of government to seek in times of their crisis recourse to government.
For Marxists, crises have often been seen as moments of opportunity for revolutionary class action, but if the 1960s teaches us anything it is that such moments also provide the opportunity for the bourgeoisie to become a ‘class for itself,’ as everyday competitors come to realize their shared predicaments and explicitly reconstitute their social relationships to maintain the capitalist order. Already the Federal Reserve has taken the unprecedented step of allowing security dealers to borrow at the discount (interest) rate, a privilege previously reserved for commercial banks. To call this a crisis for capital is a mistake. It only becomes one if we make it. |P