2000s >> 2008 >> no-1245-may-2008

Bubble troubles

The intoxicating US housing boom has come to an end. Now the economic hangover has arrived.

With the collapse of the housing boom in the US what is likely, at the very least, is a prolonged crisis of the credit system. And as credit greases the wheels of capitalism this is no laughing matter for the capitalist class.

The Federal Reserve has been doing its best to ease the pain—the pain for the investment banks, that is. Barkeeper Ben Bernanke announced on March 11 that the Fed intends to generously fund the banks “rehab,” loaning them the incredible sum of $200 billion in return for the tainted “mortgage-backed securities” as collateral. This is very much like a doctor who prescribes a little hair of the dog to an alcoholic as a “cure” for a hangover. At best, such bailouts will probably only buy a bit of time.

And not very much time at that—judging from the recent string of collapses in recent weeks. On March 7, the investment fund Carlyle Group Corp. announced that it was unable to meet $37 million in margin calls from its lenders and a few days later it was reported that the 85-year-old investment bank Bear Stearns, which suffered huge hedge fund and mortgage-related losses, is being bought out by JPMorgan Chase in a fire sale, with money loaned by the Fed.

Far from calming the financial waters, the actions of the Fed have drawn attention to the severity of the crisis and also accelerated the decline of the dollar. Somehow, the system as a whole—the once inebriated economic body and its battered financial organs—will have to expel the vast quantities of toxic loans that are clogging it up. When other countries face this dilemma, the US has always the first to prescribe a bit of shock therapy, making use of capitalism’s natural function of regurgitation. For some reason or another, though, the US policy makers are sentimental when it comes to their own venerable financial institutions.

The US government that hasn’t lifted a finger to assist the massive number of workers who face foreclosure, but has acted quickly to pump money into the accounts of those who have made a good living picking the pockets of those workers. The direct impact of the crisis involving “subprime loans” (once more accurately referred to as “predatory loans”) has already led to hundreds of thousands of foreclosures, with the overall number of foreclosures up 79 percent in 2007 alone. Clearly, the US policy makers have every intention of shifting as much of the pain from the crisis onto the working class as is economically and politically possible.

Empty wealth

Some cold comfort to workers from the crisis, however, is that it rips great holes in some of the smug arguments that economists and politicians have tried to pass off as “common sense” (and which seemed plausible enough during the long speculative boom in the US that basically stretches all the way from the mid-1990s until recent months). For instance, it is becoming increasingly self-evident that the prices of many “commodities” lack any real basis and are thus “fictitious” prices to a large extent.

There is an important distinction, in other words, between the products of labour, which are the basis of any society and happen to take the form of commodities in a capitalist society, and the wide variety of things that have a price and thus take the commodity-form but are not the product of labour and thus lack intrinsic value. When capitalism is humming along, no one is very concerned with whether what is being bought and sold has intrinsic value or not, so long as it can be sold on the market. Thus, “mortgage-backed securities”—to take one example—were as good as gold for many years.

Now that the housing bubble has collapsed, however, such securities are being shunned, as it is clear that a great number of borrowers will be unable to meet their mortgage payments. The “value” (=price) of this commodity has plummeted, wiping out a vast amount of wealth that existed on paper, while leaving a hard lump of debt behind.

It is hardly surprising that people flock to gold during a crisis. That behaviour is not motivated by a human love of shiny metal objects. Rather, gold has served as the “general equivalent” or money historically precisely because gold has intrinsic value as a product of labour and that that value exists in a form that is inherently more durable and divisible than most other products of labour. 

In short, a crisis reveals the crucial distinction between commodities in the fundamental sense (as the capitalistic form of products of labour) and commodities in the purely formal sense (as anything with a price). Call it the revenge of the labour theory of value.

There is some irony in the collapse of the housing bubble revealing the distinction between intrinsic value and mere price. Because one of the initial attractions of the housing market to investors, after their dizzying experience with stock-market gambling, was that it appeared to be terra firma. After a vast amount of paper wealth was wiped out of 401k (retirement) plans and mutual funds circa 2000, it seemed that real-estate was a secure investment in a tangible asset.

But to describe a house as having intrinsic value turns out to only be a half-truth. Sure, the house itself has intrinsic value, like any other commodity in the fundamental sense just described, according to the socially necessary labour expended to produce it. In other words, the house’s value (as a structure) stems from the value of the building materials used and the amount of labour expended to assemble them.

However, in addition to the house itself, the price of the land upon which it is built represents a large part of the overall price—and the bulk of the price in the case of large urban areas. And that land has no intrinsic economic value (apart from whatever labour was necessary to clear trees or previous buildings out of the way so that construction could commence), only a price determined, since its supply is fixed, by the paying demand for it. In this sense, real-estate prices are a reflection—more than anything else—of the purchasing ability of the prospective buyers. So it is no surprise that those prices rose rapidly along with the increasing abundance of cheap credit.

Buyers in each particular housing market tried to convince themselves why the price of their own house would never fall (whether because of the desirability of their neighbourhood, the solid construction of the house itself, the strong local economy, or some other reason), but in fact there is no intrinsic value around which the price must gravitate, meaning that there is much room for the price to rise, or indeed, fall.


Another central (but often ignored) fact which a crisis helps shed some light on is the origin of profit. During a speculative bubble, when mutual funds or housing prices are steadily rising, profit seems to arise magically from the very act of investment. No one is too bothered to ponder how this feat of alchemy is achieved. When the bubble eventually bursts, it may dawn on some that the actual creation of profit—rather than the mere transfer of money from one wallet to another—involves more than simply letting go of funds and then waiting for an even bigger sum to return in boomerang-like fashion.

And if the person bothers to investigate the matter further, it would become clear that profit is generated in the production process. It is there that surplus-value is generated as the difference between the value of the labour-power the workers sell to capitalists in return for their wages and the value those workers add to the commodities produced through their actual labour. In contrast, much of the profit that appeared to be created during the boom was in fact an expression of the expansion of debt.

The housing boom, like the stock market boom that preceded it, was praised as a way for workers to move up the social ladder, and it seemed that there was enough profit to go around to swell the ranks of the capitalist class. From today’s perspective, however, we see that workers are left in a worse situation than ever following the speculative boom, facing foreclosures and wiped out retirement funds. The only upward mobility in the end was for the money itself, which was coaxed out of the pockets of workers to pad the salaries of the much heralded “financial wizards.”

Granted, in any speculative bubble the expansion of consumption goes hand-in-hand with an increase in productive activity, but it is certainly not the case that the enormous gains made through speculation in certain activities reflect or correspond to an expansion in surplus-value created via production. Rather, the increase in the “value” (=price) of real-estate, stocks, or whatever the mania is centred on is fed by the speculation itself. Prices go up as more money is thrown at the object of speculation, and with those rising prices even more money is invested. But there is nothing to sustain the high prices once the speculative demand dries up. This is quite different from an increase of investment in productive activity that results in products containing surplus-value that are sold to realize a profit.

A comparison to eating, rather than the earlier hangover analogy, may highlight the distinction between mere speculation and investment in production. Simply put, speculation is not all that different from a person who consumes a large amount of food without performing any physical activity whatsoever. The result, unless the person enjoys a remarkable metabolism, is weight gain.

During the housing boom, the economy swallowed a tremendous amount of credit that for the most part was not directed towards productive activity, and this inevitably led to a flabby result. The speculative feast was good fun for those who partook of it, but now the heavy debt burden is making it hard for the capitalist economy to function, with the credit crisis also hindering investment in productive activities.

But it is not as if a “muscle-bound” capitalism is a lovely state of affairs either. As mentioned earlier, the surplus-value that arises from productive activity is nothing more than unpaid labour extracted from the working class. So there is no profit without exploitation.

A “fundamentally strong” capitalism (as it is called by those critical of finance capital but enamoured by capitalism itself) may conjure up an image of a healthy organism, but really it is more appropriate to picture a young Arnold Schwarzenegger prancing around the stage of a Mr. Universe contest clad only in his over-inflated muscles and surreal suntan. It is not true health or strength, but just the appearance of it. And just as Arnie worked out incessantly in the pursuit of muscles for their own sake, without any concern for their actual use, the productive activity under capitalism is only a means of building bigger and bigger profits, rather than being primarily a way to produce material wealth to meet the needs of society’s members in accordance with their collective and democratic will. There are all sorts of side-effects from the mad pursuit of profit, both in the short- and long-term, similar to how Mr. Schwarzenegger’s steroid-fuelled body-building in his younger years resulted in open-heart surgery by the time his muscles had sagged with age. 

Workers cannot be indifferent to a crisis, no matter how much we are disgusted by the predictable pendulum swing between “boom” and “bust” (and the sudden mood swings it causes among our capitalist rulers), because our lives can be directly influenced by today’s financial turbulence. But at the same time, we have no interest whatsoever in thinking up ways to put capitalism “back on track” or make it “healthy” again. Even when the system is in tip-top shape it works directly counter to the interests of workers.

The crisis will not miraculously or mechanically turn every worker into a socialist, as some pseudo-Marxists fervently hope, but it does at least create a situation where socialists may find workers more willing to consider an alternative to capitalism. It is up to us, as socialists, to present that alternative in a convincing way based on our understanding of the essential nature and limitations of the capitalist system.


Leave a Reply