Bert Olivier
Bert Olivier

Tracking the aftermath of the financial crisis

In Aftermath: The Cultures of the Economic Crisis (Oxford, 2012), Manuel Castells, Joôa CaraÇa, Gustavo Cardoso (editors) and a number of colleagues from the social sciences set out to provide some insight into the financial/economic crisis that flared up in 2008 (and has still not run its course). More than that, as the title of the book intimates, they also uncover the “cultures” that have grown up in the wake of the crisis, to be able to get a sense of where the world is moving to. And they conclude that we may very well be in a major transitional phase towards something new. In the editors’ words (Introduction):

“The crisis of global capitalism that has unfolded since 2008 is not merely economic. It is structural and multidimensional. The events that took place in its immediate aftermath show that we are entering a world with very different social and economic conditions from those that characterised the rise of global, informational capitalism in the preceding three decades. The policies and strategies developed to manage the crisis – with mixed results, depending on the country – may usher in a sharply different economic and institutional system…”

One of the historical ironies that they draw attention to, concerns the rise of the “culture of freedom” after the 1970s, on the one hand, and the entrepreneurialism that grew from the individualism that eschewed collective social action as well as bureaucracy, on the other. Together with the technological innovations emerging from university campuses at the time, this anti-corporate establishment “culture of freedom” laid the groundwork for a new kind of economic system (compared to the preceding Keynesian capitalism), marked by privatisation, liberalisation and deregulation – in short, all those economic practices that launched free market capitalism in its globalising, informational guise, which would (and here is the irony) breathe life into new kinds of multinational corporations. This was further enabled by the new computer technologies which formed the basis of global financial exchanges along increasingly globalised informational networks.

The social structure that emerged in tandem with these developments was theorised by Manuel Castells in a trilogy of books on The Information Age (the first of which, The Rise of The Network Society, appeared in 1996), the continuing conceptual relevance of which is borne out by its explanatory power in relation to the recent financial crisis. In the Preface to the second edition (Blackwell, 2010) of the first volume Castells puts this to the test, as it were, and confirms that the salient developments of the last decade do indeed bear out the accuracy of his structural analysis of major social trends in 1996. Specifically, as far as the global financial crisis goes, he points out that it “…was the direct consequence of the specific dynamics of this global economy”, as earlier analysed by him in The Rise of The Network Society.

Castells reminds his readers that, taken together, six factors generated the crisis: One, “the technological transformation of finance,” referred to earlier, which gave financial institutions the “computational capacity to operate advanced mathematical models” (instilling a false sense of confidence in these institutions, as it turned out) supposedly capable of “managing” the mind-boggling complexity of the interconnected global financial markets via directly effective electronic transactions.

Two, the liberalisation and deregulation of the world of finance, mentioned earlier, seriously undermined the ability of national regulators to control the global flow of capital. Three, the “securitisation” of all economic activities, assets and organisations had the effect of elevating financial valuation to the pre-eminent position of global standard for assessing the value of companies, of governments and even of countries’ economies (taking Marx’s insight into the reduction of use-value to exchange value by capital to a new level). The financial technologies in question generated the invention of what Castells describes as “numerous exotic financial products” (such as securitised insurance, including credit default swaps, futures, derivatives, and options), which, given their intertwinement, increased in complexity to the point where virtual capital made transparency so problematical that “accounting procedures became meaningless”.

Four, the “imbalance” between capital accumulation in developing countries such as China, and capital borrowing on the part of rich countries (such as the US), resulted in excessive lending practices involving consumers, cultivating a culture of debt and increasing the financial vulnerability of the lending institutions. Five, in light of the interpenetration of financial markets and securities, the mortgage crisis that started in the US in 2007 had a ripple effect throughout the global financial system (partly because financial markets only partially obey the logic of supply and demand, being mainly driven by what Castells calls “information turbulences”). Six, the economy (as well as their own bonuses) was “pumped up” by adventurous, if not reckless brokers because of the absence of supervision of financial practices such as securities trading.

In the Introduction to Aftermath Castells and his co-editors (backed up by numerous references to other researchers’ work) can therefore state confidently that:

“…the current crisis stems from the destructive trends induced by the dynamics of a deregulated global capitalism, anchored in an unfettered financial market made up of global computer networks and fed by a relentless production of synthetic securities as the source of capital accumulation and capital lending. Furthermore, the combination of deregulation and individualism as a way of life led to the rise of a new breed of financial, corporate managers focused on their own short-term profits as the guiding principle of their increasingly risky decisions…They rationalised their interests by building mathematical models to sophisticate, and obscure, their decision-making process while disregarding the interest of their shareholders, let alone those of society, or even capitalism at large…The ‘me first’ culture is now a key ingredient of business management…”

They further point to the irony, that the implosion of this type of capitalism that started in 2008 was only arrested by the intervention of the state (despite it being earlier relegated to oblivion by the defenders of “market fundamentalism”), which entailed re-regulation of financial institutions. The rest is fairly well known – the end of easy credit (all too familiar in SA, too), a consequent drop in consumption and demand, economic recession, an increase in unemployment, emergency stabilisation of the financial system by governments with tax money and (ironically) loans from financial markets, in the process incurring colossal public debt. The further irony is that the financial institutions that have been revivified by public money, have refused to lend to governments which are caught in a “budget deficit spiral”, or have demanded an exorbitant “risk premium” in addition to market interest rates. Castells (et al) summarises the causally linked events as follows:

“In short: a financial crisis triggered an industrial crisis that induced an employment crisis that led to a demand crisis that, by prompting massive government intervention to stop the free fall of the economy, ultimately led to a fiscal crisis.”

And the authors of this important book leave one in no doubt that this fiscal crisis is still deepening, straining governments’ ability to control or manage it, and giving rise to a variety of “cultures”, including that of recurrent social protests, populist movements and the culture of “defensive individualism”, which, in its turn, exacerbates racism and xenophobia (think of the fundamentalist “Golden Dawn” party in Greece). At the same time, however, they draw attention to the emergence of “cultures of hope” for a new social dispensation alongside of the “cultures of fear”. This should not surprise anyone, given that, unavoidably, people have to adapt their way of life to “the constraints and opportunities arising from the crisis”.

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    • Wynand

      @ Unzola,

      From your source:

      “The push of the Reagan administration for deregulation made it harder to catch the fraud. This had two effects: Most obviously, it meant that the fraud continued longer and substantially increased the economic losses involved. Secondly, it attracted “opportunistic” control frauds who were looking for businesses they could subvert into Ponzis.”

      “The deregulation not only allowed thrifts to offer a wider array of savings products (including adjustable rate mortgages, which fixed one important problem), but also significantly expanded their lending authority and reduced supervision, which invited fraud”

      “Such policies, combined with an overall decline in regulatory oversight (known as forbearance), would later be cited as factors in the collapse of the thrift industry”

      In fact, the entire article is full of similar instances such as the above.

      I suspect you’d want to throw out the baby with the bath water. Austria, Germany and Finland also have building societies and had low interest rates before the crisis and still do now, but did not have housing bubbles.

      Joseph Stiglitz puts it nicely in this video:

      The Fed failed in its role as regulator before the current crisis.

      @ S Ferguson, wasn’t it oil supply shocks that caused the inflation?

    • Sterling Ferguson

      @Wynand, the ten year war in Vietnam and massive spending by the government on social programs in the US without raising the taxes led to inflation. The same thing is happening today with the US spending T of dollars on two wars without raising taxes to pay for these wars so, the government is borrowing the money. If the US didn’t have these two wars, the US would have a budget surplus instead of a deficit.

    • Garg Unzola

      Most people would disagree with me. Especially the economists whose jobs rely on being regulators. They’re trying to hoard cats.

      Again, please read the articles in their entirety. Right before your cherry picked bit, you’d notice how regulations before the deregulation already provided a “criminogenic environment” for the S&L crisis. Reagan’s deregulations made it harder to detect fraud, sure. But there was already a problem that was not prevented by the regulations in the first place.

      Would the S&L crisis have been prevented if the deregulations did not occur? What about the recent subprime mortgage crisis? Would that have been prevented had they not repealed Glass-Steagall?

      Looking at the aftermath of the S&L crisis, is it not possible that these regulations contributed to subprime lending, with or without Glass-Steagall?

    • Wynand

      @ Unzola

      Of course deregulation is not the only problem, bad regulations are too. Like I’ve pointed out before, building societies exist in many other advanced countries that have not had housing bubbles, even with low interest rates. The fact that a combination of bad regulations and deregulation led to a crisis in some countries does not mean that universally the public institutions are the problem. They were badly managed. Get rid of the bad managers and bad regulations, not the entire institution itself.

      This goes to the heart of market fundamentalists’ attack on government and its agencies as institutions. They use isolated instances (across the advanced world) of bad management of public institutions (and even the market fundamentalist politicians running those institutions deliberately run them badly) to prove their point that the institutions themselves are the problem, so they can get rid of them.

      The Popular Party in Spain has done this to public institutions (for example, the public health services in the community of Madrid and in the autonomous region of Valencia (where I live) where they’ve ruled for decades) and the Bush administration in its repsonse to Hurricane Katrina to claim that government is bad.

      From your last reference:

      “FIRREA gives both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.”

      Yet, the vast majority of sub-prime delinquencies were in the private sector.

    • Garg Unzola

      I didn’t blame building societies, nor do I suggest that we should get rid of them.

      Of course the vast majority of sub-prime delinquencies were in the private sector. Let’s say government helps you to buy a house. But you’re already a subprime mortgage candidate. What’s the first thing you’re going to do? Wild guess: you’re going to take out a mortgage on your house to get spending money for Christmas. In short, you’re going to use your assets as security for more debt. That’s the joy of free money.

    • Wynand

      @ Garg

      “What’s the first thing you’re going to do? Wild guess: you’re going to take out a mortgage on your house to get spending money for Christmas. In short, you’re going to use your assets as security for more debt. That’s the joy of free money.”

      And how are you supposed to do that? Does any bank/lender automatically give you money regardless of your financial position? If they do, they are first incompetent because creditworthiness is a very important factor to consider before issuing a loan. If they deliberately engage in predatory lending, it’s a failure of a combination of bad regulations and/or deregulation and criminal in my opinion, as I consider all loan sharks to be.

      Cheap money by itself does not necessarily result in malinvestment on the scale we’ve seen in this crisis, because the vast majority of European countries had access to cheap credit before the crisis yet did not have asset bubbles on the scale seen in Ireland and Spain.

      In a real free market (no laws or regulations, because insofar as there were laws they wouldn’t be enforced because that would be the same as regulating who can lend to whom and how they choose, which is inimical to the workings of a true free market) loan sharks would abound even if money weren’t cheap, because it will always pay to have debt slaves.

    • Garg Unzola

      Regardless of your financial position, if you have an asset – especially one that is immobile – one would be more likely to give you a loan. Especially see the role of Fannie and Freddie in the financial crisis. With or without banking regulations…

    • Wynand

      @ Garg

      More likely is not the same as automatically granting a loan. People with assets can also be underwater, which I don’t think can be all that hard for a lender to find out. It’s as simple as looking at the prospective borrower’s income and the percentage of that income that is already going to servicing debts, such as that owed on the asset offered as security for the new loan. The borrower’s credit history and size of existing debts should also be factored in. It really can’t be that hard for a serious lending institution to come by this information.