David Harvey on the recent financial crisis

In his recent book, The Enigma of Capital and the Crises of Capitalism (2010), David Harvey — Distinguished Professor at City University of New York and one of the world’s most cited thinkers — puts paid to any idea that anyone may have had, that the most recent global financial crisis, that started in 2008 (and is far from over), is something “unprecedented”. Far from it, in fact — his scrupulous research uncovers what he calls “some inherent connectivity at work here”, in as far as it was not the first time that a financial upheaval could be traced back to property markets and urban development.

He places the book in the following context (p. vii): “In trying to deal with serious tremors in the heart of the body politic, our economists, business leaders and political policy makers have, in the absence of any conception of the systemic nature of capital flow, either revived ancient practices or applied postmodern conceptions. On the one hand the international institutions and pedlars of credit continue to suck, leech-like, as much of the lifeblood as they can out of all the peoples of the world — no matter how impoverished — through so-called ‘structural adjustment’ programmes and all manner of other stratagems (such as suddenly doubling fees on our credit cards). On the other, the central bankers are flooding their economies and inflating the global body politic with excess liquidity in the hope that such emergency transfusions will cure a malady that calls for far more radical diagnosis and interventions.”

This, the latest of Harvey’s books, is one such (very knowledgeable) intervention, which has the aim of bringing some insight into the “flow of capital”. It is impossible to provide a précis of a book (short of repeating it) that encompasses a great deal regarding an economic way of life that most people take for granted (without much insight into its often hidden mechanisms), so I will concentrate on distinguishable issues instead, starting with the first, called The Disruption. In this chapter Harvey’s reconstruction of the stages in which the most recent financial crisis unfolded is a sad reminder that people never learn from past mistakes, and further that ordinary people have usually paid for the mistakes of the rich and powerful. As he puts it (pp. 10-11): “One of the basic pragmatic principles that emerged in the 1980s, for example, was that state power should protect financial institutions at all costs. This principle, which flew in the face of the non-interventionism that neoliberal theory prescribed, emerged from the New York City fiscal crisis of the mid-1970s. It was then extended internationally to Mexico in the debt crisis that shook that country to the core in 1982. Put crudely, the policy was: privatise profits and socialise risks; save the banks and put the screws on the people (in Mexico, for example, the standard of living of the population dropped by about a quarter in four years after the financial bail-out of 1982). The result was what was known as ‘systemic moral hazard’. Banks behave badly because they do not have to be responsible for the negative consequences of high-risk behaviour. The current bank bail-out is this same old story, only bigger and this time centred in the United States.”

Harvey’s account of the recent financial crisis (of 2008) and the subsequent bail-out of the banks makes riveting reading, and is backed up by evidence of thorough research, down to authoritative comparative graphs (from various agencies) of US home ownership, residential mortgages, foreclosures, and so forth. He points to the fact that signs of the coming upheaval started appearing in 2006 already, in the rising number of housing foreclosures in cities like Detroit and Cleveland, which were, however, ignored by authorities and media because they involved low-income households. But once foreclosures started affecting the white middle class in 2007, from Florida to California, mainstream media began to take notice. By the end of that year, almost two million people had lost their homes, with another four million imperilled by the threat of foreclosure. It is hard to imagine the sight of the “tent cities” that mushroomed in California and Florida, and of people crammed into motel rooms — after losing their homes they had to find somewhere to stay — in a country known for its wealth.

Astonishingly, however, the institutions that had financed what Harvey calls “this mortgage catastrophe” seemed unaffected at first. At the beginning of 2008 bonuses on Wall Street amounted to $32-billion — “a remarkable reward”, observes Harvey (p. 2), “for crashing the world’s financial system”. Was it mere coincidence that this amount of gain on the part of the rich roughly equalled the losses of those at the bottom of the social pile?

It did not remain like this, however, but eventually, later in 2008, the so-called “subprime mortgage crisis” resulted in the “fall” of many of the major investment banks on Wall Street, some through bankruptcy, others through coerced mergers and others through a drastic change in their status. When Lehmann Brothers tanked, it sent a wave of panic through the financial world. Ironically, Harvey observes, ex-chair of the Federal Reserve, Paul Volcker, had forecast financial catastrophe five years earlier, unless the US government forced the bankers to rehabilitate their practices.

Given the interconnectedness of the world’s financial systems since 1986, these developments, which led to the financial calamity in the US, had a domino effect on other countries across the globe. In addition, because a colossal amount of “toxic” mortgage-linked securities was at the very basis of the problem, the major US mortgage institutions, Freddie Mac and Fannie Mae, had to be rescued by nationalizing them, while large insurance companies like AIG were bailed out. Every financial institution was adversely affected, so much so that the only means of “restoring confidence” in the system, in the end, was a massive government bail-out.

Interestingly, Harvey remarks (p.30) that the description, “national bail-out” is inaccurate. “Taxpayers,” he points out, “are simply bailing out the banks, the capitalist class, forgiving them their debts, their transgressions, and only theirs. The money goes to the banks but so far in the US not to the homeowners who have been foreclosed upon or to the population at large. And the banks are using the money, not to lend to anybody but to reduce their leveraging and to buy other banks. They are busy consolidating their power. This unequal treatment has prompted a surge of populist political anger from those living in the basement against the financial institutions …”

To add insult to injury, the $700-billion bail-out demanded by the financial institutions, and eventually granted by the Bush administration (because they were deemed “too big to fail”), was given to the banks “without any controls whatsoever”! The net result was, ironically, that in a world in which abundant credit was available not long before these events, there were now abundant houses, offices and shopping malls available, together with more surplus labour than could be imagined.

Harvey lists all the most important institutions and economic areas that were caught in the ripple effect of this financial-economic disaster, from General Motors (which was handed a temporary bail-out by means of taxpayers’ money), through housing construction, retail sales, burgeoning unemployment, stores and other manufacturing plants, as well as other countries such as Britain, Spain, Ireland, and Iceland, which hit total bankruptcy. It did not end there, either. Early in 2009 already, world economies (including China, Taiwan, Japan and South Korea) where exports were dominant, were seriously affected, with exports falling by 20% in two months. (Around 20-million people unexpectedly found themselves unemployed in China alone, and in Spain the figure rose abruptly to over 17%.) Raw materials producers were not unaffected, either. Deeper into 2009 colossal figures relating to the destruction of asset values worldwide, were released by the IMF and the US Fed, and the World Bank was predicting the first negative growth year since 1945. And all of this had been triggered in one area of financial-economic activity — banking and dodgy property-financing in the US.

“This was”, says Harvey (p. 6), “undoubtedly, the mother of all crises. Yet it must also be seen as the culmination of a pattern of financial crises that had become both more frequent and deeper over the years since the last big crisis of capitalism in the 1970s and early 1980s”.

He enumerates and elaborates on these crises (there have been hundreds of financial crises all over the world since 1973, in comparison with very few from 1945 to 1973), pointing out that among these, several were triggered by property and urban development markets — for example the first full-blown global crisis of capitalism after WW II, which was sparked by a global property market implosion that dragged several banks down with it, and put huge financial stress on cities like New York City, necessitating its bail-out. There have been many others, such as the Swedish banking system collapse in 1992, which resulted in its nationalisation, within a broader Nordic crisis brought about by irresponsible dealings in property markets. In east and south-east Asia (1997-98), too, it was the hyper-development of urban areas that resulted in financial collapse.

In the face of a similar, long drawn-out US commercial property-crisis that cost American taxpayers around $200-billion (between 1984 and 1992), in 1987, the American Bankers Association was threatened by the then chairman of the Federal Deposit Insurance Corporation, William Isaacs, with nationalisation of the banks unless they abandoned their irresponsible behaviour — something that speaks volumes in this haven for speculative financiers.

In light of all of this, Harvey points out (pp. 8-10), that: “Crises associated with problems in property markets tend to be more long-lasting than the short sharp crises that occasionally rock stock markets and banking directly. This is because … investments in the built environment are typically credit-based, high-risk and long in the making: when over-investment is finally revealed (as recently happened in Dubai) then the financial mess that takes many years to produce takes many years to unwind.”

From this he concludes that the recent financial crisis (and its continuing aftermath) is nothing unusual, especially regarding its causal links with property and urban development markets. It has many precursors, and one could add that it will probably happen again in the future, as long as the promise of easy millions to be made beckons tantalizingly on the horizon in the direction of investment bankers.

There is much more that could be extracted from this part of the book, but that will have to wait. Suffice it to conclude with the following caveat by Harvey (p. 11), which is strangely reminiscent of the “architect’s” warning to Neo in the second of the Matrix movies, that “saviours” like Neo are necessary for the system, the Matrix, to perfect itself by uncovering its irrationalities or weak spots: “Financial crises serve to rationalise the irrationalities of capitalism. They typically lead to reconfigurations, new models of development, new spheres of investment and new forms of class power. This could all go wrong, politically. But the US political class has so far caved in to financial pragmatism and not touched the roots of the problem. President Obama’s economic advisers are of the old school …”

Harvey’s book goes a long way towards uncovering the “root of the problem”, at least as far as understanding it is concerned.