The Great Financial Crisis: Causes and Consequences
by John Bellamy Foster, Fred Magdoff
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Book Summary Information
Author: Fred Magdoff, John Bellamy FosterEdition: Paperback
Audio: English (Unknown); English (Original Language); English (Published)
Published: 2009-01-01
ISBN: 1583671846
Number of pages: 144
Publisher: Monthly Review Press
Book Reviews of The Great Financial Crisis: Causes and Consequences
Book Review: Marxist analysis of the financial crisis in real-time
Summary: 5 Stars
Mainstream economic theory has always assumed that so-called free markets are self-regulating. In contrast, Marxist economics places the question of expanded reproduction at the center of analysis: how can a system based on competition, market anarchy and class struggle maintain stability and growth? In "The Great Financial Crisis," John Bellamy Foster & Fred Magdoff draw on a rich tradition of Marxist political economy to present a compelling analysis of the financial crisis that began in the fall of 2008 in the United State and continues to engulf the advanced capitalist economies in a deep, ongoing recession.
The analytical framework applied by the authors is a `stagnation-financialization' theory developed in the 1960s and `70s by American Marxist economists Paul Baran, Paul Sweezy and Harry Magdoff. Baran & Sweezy argued that the normal state of monopoly capitalism, which began at the end of the 19th century, is stagnation. In a mature economy with increasing productivity and an associated growing surplus, the capacity of the system far outpaces effective demand. With the opportunities for productive investment severely curtailed due to sufficient existing means of production (factories and equipment) and overcapacity, investment increasingly took the form of speculative finance. Thus began a trend toward debt buildup and increasingly serious financial bubbles.
The analysis begins with a capitalist contradiction. The economy depends on wage-based consumption to support growth and investment, but accumulation depends on keeping wages low. Despite decades of stagnating wages, however, overall consumption has continued a steady increase, made possible by growing consumer debt, primarily from home mortgages. Rising housing prices, along with the Fed's slashing of interest rates after the 2000 stock market crash, helped replace the stock market bubble with a housing market bubble. With an average of 81 percent of production capacity used over the last 30 years, financial capital increasingly turned from productive investment to speculation. With the increasing financialization of the economy, banks began to borrow to increase their speculative bets. Financial sector debt rose from 10 percent of total debt in the early 1970s to nearly a third by 2005. Through new financial instruments, including the securitization of mortgages, lending banks were able to transfer the risk of defaults, thus encouraging ever more questionable loans.
In the remaining four chapters, Foster & Magdoff trace the relations between persistent stagnation in the real economy and the growth of the financial economy. They argue that we have entered a new phase, monopoly-finance capitalism, in which financialization provides a set of tools to help monopoly capitalism--prone to stagnation due to chronic overcapacity and lack of effective demand--reproduce itself. The financial economy has provided an outlet for the concentrated surplus of corporate and individual wealth, but the financial system has become increasingly complex and leveraged. The growth of new and increasingly esoteric financial instruments provided a way to expand money capital. But no matter how much the financial sector expanded, it could not overcome the stagnation of the production sector.
Foster & Magdoff provide a detailed, insightful analysis of the financial crisis. Their book has many benefits, chief among them a real-time analysis of the unfolding of this world-historical event using a clear and systematic theoretical framework. In addition, Foster & Magdoff provide extensive data to back up their arguments about financialization, and an excellent survey of the mainstream discourse surrounding the build-up and outbreak of the crisis.
Summary of The Great Financial Crisis: Causes and Consequences
In the fall of 2008, the United States was plunged into a financial crisis more severe than any since the Great Depression. As banks collapsed and the state scrambled to organize one of the largest transfers of wealth in history, many?including economists and financial experts?were shocked by the speed at which events unfolded.
In this new book, John Bellamy Foster and Fred Magdoff offer a bold analysis of the financial meltdown, how it developed, and the implications for the future. They examine the specifics of the housing bubble and the credit crunch as well as situate current events within a broader crisis of monopoly-finance capitalism?one that has been gestating for several decades. It is the "real" productive economy's tendency toward stagnation, they argue, that creates a need for capital to find ways to profitably invest its surplus. But rather than invest in socially useful projects that would benefit the vast majority, capital has constructed a financialized "casino" economy that neglects social needs and, as has become increasingly clear, is fatally unstable. Written over a two-year period immediately prior to the onset of the crisis, this timely and illuminating book is necessary reading for all those who wish to understand the current situation, how we got here, and where we are heading.
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