[R-G] Cyrus Bina: Bubbles, Risk, Crunch and War
critical.montages at gmail.com
Tue Jul 15 10:55:13 MDT 2008
Jun 21, 2008
Bubbles, risk, crunch and war
By Cyrus Bina and Fernando Dachevsky
Cyrus Bina, distinguished research professor of economics at the
University of Minnesota and author of The Economics of the Oil Crisis,
discusses with Argentinean journalist Fernando Dachevsky the "unique
and universal" economic crisis confronting the world, from its
underlying causes to the "practical joke" solutions offered to the oil
crisis by President George W Bush and Republican presidential
candidate John McCain.
Fernando Dachevsky: In your opinion, what are the actual magnitude and
perspectives of the current economic crisis?
Cina Bina: The present economic crisis is both unique and universal.
It is unique in that it expresses concrete contradictory dynamics of
capital accumulation and its manifold contingent effects that are
violently overflowing from one sector of the economy, namely the
subprime mortgage industry in the United State, through the so-called
structured investment vehicles and hedge funds which ultimately feed
into the new infectious domain of fictitious capital, known as
"securitization" - to the remaining realm of economic activity
Here, the concrete magnitude of the crisis is not only a new chapter
in the actual history of modern capitalism but also speaks loudly on
the real meaning of transnationalization of capital and its global
transmission in today's interconnected world.
This crisis is immanently universal in its effects and in its
manifestation. It is about the polarization of wealth and, by
implication, polarization of class, and the simultaneous tendency
toward international and intranational dissonance and thus worldwide
standardization of the working class. Let me take this occasion to
reiterate that in modern capitalism, value theory is not only a theory
of price formation but also simultaneously a theory of class
polarization. The common feature of the system, aside from hitherto
evolutionary stages, is one of renewal and destructive creation.
Although there have been a number of avoidable circumstances in this
debacle - for instance, [through] careful regulation of the subprime
housing market or precise legal guidelines for "securitization" of
risky financial assets - the bundling of the "collateralized debt
obligations" with the so-called asset-backed commercial paper, which
leads to awesome turnover of capital based on ad hoc creation of
fictitious credit upon fictitious credit (that is, IOU upon IOU) for
the purpose of rapid profit gains and little or no cushion for
security - [there also] is also the question of deliberate stretch
that, in turn, jeopardized the safety of the entire financial system.
The classic definition of what is known as risk (that is, calculated
risk) refers to a phenomenon that should effectively lend itself to
calculation based on the probability theory and thus a known
probability distribution prior to its occurrence.
However, the unconstrained piling up of risk upon risk is the stuff of
uncertainty as opposed to risk which does exhibit non-linearity with
chaotic patterns and which would not readily submit to probability
theory, thus defying the conventional probability calculation.
Therefore, for future references, both the individual agents and
private and public institutions in this case need be alerted to
actions (or inactions), policies (or lack thereof) that are gravely
replete with unintended consequences - on top of what [Joseph]
Schumpeter aptly identified as "instability of capitalism."
By focusing on a handful of the world's largest banks - from US
investment banks such as Merrill Lynch, Citigroup and Morgan Stanley
to others including HSBC, UBS, IKB Duetsche, Credit Agricole, Credit
Suisse, Deutsche Bank, Canadian Imperial and Societe General - one can
clearly see that the write-downs of risky securities (that are so far
in tens of billions of dollars) will certainly continue for quite
sometime. In the first quarter of 2008, the profit of big investment
banks on stocks, bonds, and syndicated loans tumbled by more than 45%.
This experience has now opened a revealing window to the fully
developed concept of fictitious capital, a phenomenon that in its
embryonic stage was identified by Marx nearly 150 years ago. Today,
the role of "fictitious capital" is either confused with the creation
of surplus value or worse, deemed (axiomatically) as "phony,"
"unnecessary," or "superfluous" in respect to the actual process of
capital accumulation even by certain sophisticated and self-proclaimed
Yet, such an interpretation overlooks the reality of
quasi-cannibalistic tendency of capitalist competition associated with
the accumulation of capital worldwide. This criticism is also relevant
to those (for instance, those within the Monopoly Capital School) who
draw an exact parallel between the era of pre-globalized capital,
classical trusts and administrative pricing (that is, early in the
internationalization of finance capital a la Hilferding and/or a la
Lenin) and that of contemporary globalization.
Moreover, the traditional left uncritically speaks of the so-called
dominance of finance in accumulation, thus invoking rather
anachronistically the political and economic descriptions that were
once relevant to embryonic transnationalization and that are now unfit
for the present epoch.
Also, speaking of capitalist competition here, it has nothing to do
with the fiction of pure competition that has been portrayed in
neoclassical textbooks and that has falsely taken as a point of
departure by the majority of heterodox economists throughout
profession. In my view, competition is a battle of capital against
capital as eloquently argued by Schumpeter and, long before him, by
Karl Marx. The present battle in the realm of finance capital is about
the stretching of value, which has already been created in the realm
of production and which is now about to be devalued and destroyed via
the fast-paced synthetic process of creative destruction (a la
Schumpeter) and destructive creation (a la Bina).
Finally, some of these critics have neither the necessary
methodological capacity nor adequate technical training, nor the
instinctive imagination to look at the economic crises in a holistic
manner, thus commencing with capital as an undivided whole (that is as
a social relation) before attempting to examine its unavoidable
division into commodity, money, and productive forms.
For instance, in my opinion, "financialization" - currently a vogue
term used by left-leaning heterodox economists - while hoping to
describe the crisis at the same time tends to obscure the roots of
volatility intrinsic in the very accumulation of capital, accompanied
by destructive creation of fast-paced, hypercompetitive technological
This, as I have long contended, retreats from the reality of the
workings of the law of value in the age of hypercompetitive
globalization. I believe "financialization" is a side-track that
obfuscates the desperate attempt at preservation of value in the
sphere of circulation, which often leads to the weapon of mass
competition in terms of shenanigans that we are now rather painfully
witnessing in the course of the present crisis.
Today's economic crisis (and its very glimpse in terms of
hyper-speculative activity) manifests itself acutely in the realm of
finance in which the tendency to stretch the preservation of value is
matched by its fast-paced destruction in the production process. It is
in this context that contradictions between and within the spheres of
production and circulation render perceptible and, however
discursively, come within the global view.
FD: How is the crisis going to affect the United States? Which
economies, do you think, are going to be the most affected in the
short-run and in the medium-term?
CB: This crisis first appeared just like a hurricane in the US
subprime housing market and then gathered strength before
reverberating throughout the financial system worldwide. The
proverbial US housing-market bubble has been waiting to be burst for a
long time, as a number of keen observers, such as Dean Baker, had
already forewarned, despite hollow optimism, if not shallow idealism,
espoused by Alan Greenspan, former chairman of the Federal Reserve -
who did not even listen to some of his colleagues who warned him to
that effect as early as 2001.
The fallacy of supply-side economics and the myth of self-correcting
markets, therefore, culminated in idealism of benign neglect and the
straightjacket practice of neo-liberal ideology. The resultant
speculative bubbles in the US real estate, mortgage institutions,
collateralized debt market, asset-backed commercial paper market, and
debt-obligation insurance market sequentially burst in the face of US
authorities, before they hit the public and surpassed the boundaries
of the United States - via the transnational channels.
The full consequence of this, for the US economy and world economy as
a whole, has not yet been realized, as the crisis is still unfolding.
This is the classic sign of unfolding of an economic crisis from
potential to actual, and as such the battle ground between the
maintenance of value, on the one hand, and its wholesale destruction
before the next round of new accumulation.
This also speaks to the fragmented neoclassical economic orthodoxy
(and its eclectic following in the heterodox tradition), whose
macroeconomic theory is misconstrued through the fallacy of
composition, thus falling back on the reduction of axiomatic micro
counterparts (so-called micro-foundation) devoid of institutional
significance. Today, therefore, we must recognize two different kinds
of crises: (1) the periodic crisis of capitalism and (2) the
intellectual crisis of bourgeois economics.
According to the International Monetary Fund (IMF), the US economy is
predicted to grow not more than 0.5% and 1.6%, respectively, in 2008
and 2009. The IMF, however, misses the point that this is not an
ordinary recession, given the staggering default in the US housing
market, the augmented domino of derivatives in the financial system,
the anticipation of further banking collapse, and inadequate policy
action on the part of the Bush administration.
The projected growth for Chinese and Indian economies is respectively
at 9.3% and 7.9% in 2008, which would be below 11.4% and 9.2%,
respectively, in 2007. This, of course, is apart from the creeping
asset bubbles that are momentarily gaining strength in the Chinese
financial market. The forecast for European growth, in 2008 and 2009,
is somewhere around 1.4%, compared with 2.6% in 2007. Africa and Latin
America are expected to maintain robust rates, yet disguised
unemployment and creeping inflation in energy and food sectors are the
likely occurrences that lead to abject poverty and intense class
polarization. In the meantime, the global economic growth is likely to
weaken somewhere between 3.5% and 3.7%, from 5% and 4.9, respectively,
in 2006 and 2007.
The European Union is now trying to deal with the aftereffect of the
US financial debacle. European banks attempted to write down more than
US$200 billion of debt obligation, following the US mortgage defaults,
thus revealing the tiny tip of the liquidity crisis in view of tight
credit market. To date, the write-downs for a few major banks in
Germany and Switzerland are some $23 billion, and they certainly will
increase by the time the dust settles.
FD: In your opinion, how effective will the ongoing economic stimulus,
such as decrease in the interest rate, be in preventing the economy
from slipping into recession?
CB: There is no question that the US economy is now in recession. The
added danger, however, is the banking crisis in the midst of collapse.
On the top of all this, there is a considerable decline in the value
of the US dollar relative to other global currencies. This decline is
persistent and its magnitude is consistently reflective of a
significant increase in the price of gold, metals, crude oil, and
basic food staples - to name a few.
The US economy is sneezing in cold sweat but at this time -
notwithstanding the financial contagion - the world economy is not
even uttering: "bless you." Here is the belated distinction between
the transnationalization and the so-called Americanization in respect
to today's global economy - and, by implication, the defunct American
This crisis is symptomatic of the need for a clear distinction between
the ideology of neo-liberalism (and thus neo-liberal policies espoused
by the US government and its so-called Western allies) and the epochal
meaning of globalization as an all-encompassing structure beyond the
conventional notion of imperialism and/or nationalism. With this
preamble, we now focus on some concrete issues.
The US government proposal for refinancing US mortgages falls
somewhere between $300 billion and $400 billion. The Federal Reserve
has already extended $30 billion to bail out Bear Stearns (the
fifth-biggest investment bank), which had about $33 debt for every $1
of assets it held. Wachovia, the fourth-largest US investment bank, is
also on the edge of unexpected loss. Write-downs at Merrill Lynch
amounted to $9.7 billion in conjunction with 4,000 layoffs just in the
first quarter of 2008.
The multiplicative effects of the subprime debacle appear to be
wreaking havoc with the financial system on a continuous basis. Lehman
Brothers too had to shave more than $2.8 billion from its books. The
bubble also reached into the oil futures as well - by dropping the US
dollar and grabbing crude oil virtually with fiat (by only 6% down)
and no intention of keeping it as transaction demand.
The Federal Reserve extended emergency loans to major Wall Street
investment banks. The Fed also offered $200 billion in Treasury
securities to a select number of investment banks known as "primary
dealers" that are regularly party to its open-market operation. What
are the collaterals in certain of these cases? They are hard-to-sell,
privately issued, risky mortgage-backed securities that for all
intents and purposes are not worth the paper they were written on. US
subprime mortgages are about 21% of the total.
Defaults in this segment of the market have led to a potential default
of the mortgage-holding institutions and, in due course, to the
underwriting of the asset-backed commercial papers that had insured
the amalgam of these collateral risks in the first place.
All this has come full circle, first leading to a substantial decline
in home prices across the board, which translated into instant
devaluation and thus evaporation of equity all over the place, and
then was passed on and spread to the layered network of financial
institutions that reluctantly had to write-down hundreds of billions
of dollars on their books.
The US financial system faces potential losses of well over $1,000
billion as a result of the credit crisis. Hence, credit crunch is the
form in which this particular financial crisis manifests itself here
in the US and throughout the globe.
Finally, the market for real-estate is now beginning to exhibit its
universal effects on vanishing equity around the globe, from Ireland
To treat the symptom of the crisis, namely the subsequent "credit
crunch". the Federal Reserve, under Ben Bernanke, cut the federal fund
rate seven consecutive times, from 5.25% to 2.0% by April 30, 2008 - a
substantial reduction of 62%. One might be reminded that further
reduction in the discount rate toward the vicinity of 1% (similar to
the one, in 2004, under Greenspan) should scare any economist who has
written a PhD dissertation worth the paper written on.
The unintended consequence can be the lack of interest-elasticity of
investment and the ineffectual monetary policy - which, in addition to
the ongoing credit crisis and banking debacle, are potentially the
stuff of the Great Depression.
In the face of this, the Bush administration extended a $168 billion
stimulus tax-rebate in order to beef-up consumer spending. This
package, which is too little and too late, does not even extend the
duration of unemployment insurance, from, at present, six months to,
say, a year, in order to cushion the massive layoffs that are now
beginning to take effect across the American economic landscape.
Besides, the bulk of money in this package is directed toward
business, in the hope that some day it will trickle down in the
On the financial side, the new Treasury Department plan, the hallmark
of which is the merger of Securities and Exchange Commission and
Commodity Futures Trading Commission, is designed to primarily
overhaul the competitiveness of the financial system by focusing on
Wall Street institutional investors rather than on the well-being of
the system as a whole, including the Main Street investors.
Moreover, this plan is neither a measured prescription for
safeguarding the dominos associated with limitless fabrication and
multiplication of risks nor a deliberate remedy for regulating the
epidemic distribution of derivatives and their contagion across the
global financial system nor even an immediate response to the current
crisis in which a huge number of ordinary people will certainly go
FD: How is the crisis going to result in the magnitude of petroleum
prices? Will the prices keep growing?
CB: The transmission of the subprime crisis in the housing market has
resulted in default in the mortgage market and then through the
collateralized asset market wreaked havoc with the underwriters of
such amalgamated risky debt obligations in one sweep. The forced
write-downs of these assets in the investment banking sector, on the
one hand, and the slowdown in the pace of economic activity, on the
other hand, stirred the US economy toward recession. At the same time,
the continuous decline of the US dollar since 2002 against the euro
and other significant international currencies revealed the structural
shift and moribund status of the United States relative to what it
used to be under the Pax Americana.
In the last meeting of the World Economic Forum at Davos, Switzerland,
even sympathetic liberals and social democrats realized, rather
belatedly, that the American economy is no longer functioning as the
engine of the world economy. Their lexicon was "decoupling", signaling
rather aptly what I have already foreseen, despite the pageantry of
Reaganomics and the pomposity of "the only superpower," well over two
Meanwhile, Bernanke, as chairman of the Federal Reserve, responded to
the crisis (what is manifested as credit crunch) by cutting the
short-term (discount) interest rate, thus discouraging the inflow of
portfolio investments, curtailing the demand for the dollar, and
consequently furthering the decline in the value of US currency.
Fearful investors seeking shelter pushed the price of gold above
$1,000 an ounce, registering yet another decline in the value of the
US dollar. An increase in the price of metals more or less followed
the same mechanism, thus created tendency for bubbles in the market
for these commodities. The price of agricultural products (food) has
also increased, in part due to the heightened global demand and, in
part because of competition between food and fuel - thanks to the
ethanol hype - that is now being recklessly promoted by the populist
governments and self-promoting interest groups in both the United
States and Latin America. The food crisis has already manifested
itself in a number of food riots around the globe, from Bangladesh to
Finally, the global oil value - the long-run center of gravity around
which the market fluctuations tend to gravitate - has been set based
upon the highest cost oil region, the USA. However, the $130-plus oil
and what is driving the price globally have something to do with a
combination of factors: (1) continued demand from the United States
(4.5% of the world population consumes 25% of world's oil
consumption), plus increasing global demand, including China (with
double-digit growth rate), and, somewhat similarly, India along with
the rest of the growing developing countries; (2) a tendency toward
speculation and propensity for asset-holding activities; (3) a
sizeable decline in the value of denominating currency, the US dollar;
(4) political events of relevant significance.
Concerning the last point, the very drumbeat of war by the Bush-Cheney
administration against Iran, despite George Bush's incredible denials
to the contrary, is not only influencing oil prices but also causing
It appears that the US fiasco in Iraq is about to be obscured by yet
another potential fiasco, this time much more devastating, in Iran.
The replacement of Admiral William Fallon, commander of the US Central
Command in the Persian Gulf, with a careerist and seemingly
neo-con-friendly military officer, army General David Petraeus, is
indeed not the kind of information that could simply escape the minds
of those who have set their eyes on the prize in Wall Street.
At the same time, the precipitous decline in the value of US dollar
gives rise to two separate effects in the price oil: (a) the direct
effect via the nominal value of oil in dollar and (b) the indirect
effect via flight from dollar to oil due to speculative asset-holding
or exchange value. The impending global recession, of course, will
have ceteris paribus [all else being equal] a moderating effect on
demand, thus a possibility of moderation in price in real terms.
However, the flight from the dollar does not readily lend itself to a
predictable outcome, due to its uncertain speculative nature.
FD: Since oil is an essential input to the production of a great
number of products, what could happen if the price of oil keeps
growing as the US economy slows? How much of the actual problems in
the US industry are consequences of the high petroleum prices?
CB: Crude oil, its most significant joint-product, natural gas, and
its manifold derivatives, such as gasoline, jet fuel, home-heating
oil, and so forth are not only constituent components of the energy
sector as a whole but also inputs to essentially a whole host of
production processes that are defining the bulk of production
Yet it would be a grave mistake to focus exclusively on the use-value
of crude oil. For, while the physical (input-output aspect) and thus
material requisite of oil is necessary, it is by no means sufficient
to speak of oil as a commodity without focusing on its exchange-value,
that is its value formation and thus price determination in
conjunction with the social dimension of value.
In other words, the same processes that obtain their negative impact
from increasing price, soon or late, tend to adapt to the situation by
reinventing the production process and cutting demand, much like the
adaptability of the biological species in nature. However, we must be
careful not to label them as natural but social, at the very heart of
which lies the historically specific socioeconomic system.
Therefore - by focusing on dynamic interactions of the economy as a
whole - the fact that the price of oil is increasing beyond the
expectation of the public is itself an indicator of sorts for the
primary influence of the turbulent economy and not the other way
around. In other words, it is not only utterly false to replicate the
textbook message of supply-side economics that "supply shocks" (such
as the oil crises since the 1970s) are responsible for past US
recessions, thus reversing the direction of causality, but it is also
misleading the public as to the physical (that is external), and not
social (internal), origin of economic crises.
To be sure, in a grand loop of dynamic interaction the $130-plus oil
will undoubtedly reinforce the decline of the US economy and, for that
matter, shunt the world economy toward deep recession. Consequently,
if we draw a parallel between the present economic crisis
(respectively, in the US and the world) and the gravitational fields
in astrophysics, we may be able to perceive how the quantitative
result of the oil price hike, which itself is an outcome of the
dynamics of the world economy, in turn obtains its effect on the
gravitational field of the latter.
Hence, the prognosis of both the right (the orthodoxy), and the
liberal/radical left (the self-proclaimed "heterodoxy") does not seem
to hold water in this case. The significance of high oil prices is,
therefore, inseparable from the dire need for reorganization, if not
restructuring, of the US and world economy via the present crisis.
Finally, the proposals that would push the envelope toward US domestic
oil exploration - such as the one by the Bush administration in regard
to drilling in the Alaskan National Wild Refuge (ANWR) and his recent
calls for more extensive drilling of US coasts - do not alleviate the
pressure of supply even by a long shot but also create an impression
that all these problems are due to the lack of self-sufficiency, thus
relying on public fear to achieve their end.
It's also imperative to note that the recent proposal by the George W
Bush administration - concerning high gasoline prices - to lift the
moratorium on the exploration of oil and gas from the long disputed
Outer Continental Shelf on the coats of California and Florida is not
only silly but a smokescreen. This proposal has no validity and is a
wishful thinking in the view of the fact that production from these
fields will come to market no later than 2030 - according to an
unimpeachable comprehensive study.
Therefore, Bush's pitching, and Republican presidential candidate John
McCain's catching, over this crucial matter are essentially practical
jokes. Any reasonable policy should rather seriously look into the
development of alternative sources of energy as well as alternative
system of transportation (that is, public, clean, safe and renewable)
in the United States.
Focusing on oil demand/supply alone is a mirage; global oil price
formation is the most complex issue in economics. In the meantime,
while fear mongering in both domestic and foreign policy is the sine
qua non of the Bush administration, the hoax of "energy independence",
particularly in today's interdependent world, is the hallmark of the
US Democratic Party candidates in the present election year.
FD: How is the crisis going to affect the oil producing countries,
such as Venezuela?
CB: The present crisis is multidimensional, thus its impact is
wide-ranging and varying from country to country. Oil exporting
countries, particularly the developing countries with a relatively
sizable population (such as Iran and Venezuela), are potentially
subject to high food prices, which would translate into the loss of
sizable foreign exchange due to the importation of basic staples, such
as corn, rice, wheat, etc. Prices of other food items that are
dependent on these commodities are also expected to rise.
This situation is in part due to a new US phenomenon (production of
fuel from corn, and so forth), which is ostensibly motivated by the
fiction of energy self-sufficiency and the fabrication of so-called
"national security", which then unwisely is replicated by countries
like Brazil - despite the apparent double-injury reflected in the high
price of food and inexhaustible source of pollution against the
environment with its implication for global warming. Hence a potential
crisis is on the horizon through the competition of food and fuel.
On the other hand, the high price of crude oil can be translated into
added oil revenue for oil exporting countries, such as Iran or
Venezuela. This may offset the negative effect of high food prices in
these countries. Yet, due to a significant decline in the value of the
US dollar - the denominating currency - the real price of oil is not
as high as it appears, which in turn speaks to the real level of oil
revenues of the exporting countries, such as Venezuela and Iran.
This is particularly significant for Iran and Venezuela, whose
respective governments do not see eye to eye with the Bush
administration (particularly in the case of the latter, which is under
severe embargo), whose bulk of foreign exchange may be in euro or, if
in US dollars, does not entirely lend itself to a shopping spree in
the US goods market.
To all this, we may add the impact of an impending global recession
and its moderating influence on the worldwide demand for oil. Thus, in
the final analysis, in the absence of structural change and the
persistence of the center of gravity (of production), a change in the
price of oil (and, by implication, change in exporting countries' oil
revenues) is subject to the complex set of contradictory factors that
are spelled out above.
Cyrus Bina is distinguished research professor of economics at the
University of Minnesota, Morris, USA. He is the author of, among
others, The Economics of the Oil Crisis (1985)and co-editor of Beyond
Survival: Wage Labor in the Late Twentieth Century (1996).
This is an edited and updated version of an interview of Cyrus Bina by
Argentinean journalist Fernando Dachevsky originally published April
(Copyright 2008 Cyrus Bina.)
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