While technological obsolescence and spatial reorganization are both general features of capitalist growth, they are accelerated by financialization. Financialization increases the rate at which investments move from old to new industries and old to new locations. The result of this is not only technological and economic change, but also human displacement. Rapid urbanization in developing countries and decaying industrial cities in older core countries are two sides of the same process. With declining profits in manufacturing, European and American companies in a range of industries responded by demanding that workers take cuts in compensation, introducing new technologies, insisting that governments provide tax breaks or outright subsidies, and/or relocating manufacturing to other countries. Sometimes relocation came even after corporations benefited from subsidies and wage cuts, in defiance of commitments to stay put. Neoliberal governments aided corporations in breaking the power of unions to resist these changes. This helped bring about the loss of good jobs that Collins sees as a long-term threat, but it is important to see that the reasons were not all technological. Financial capital enabled the rapid relocation of industrial production.
Fluid financial resources also fuel asset price bubbles. The long, international real estate boom of the late 20th century is an example. This brought dramatic housing price increases, especially in cities and tourist areas. This often added to economic imbalance and produced other distortions, but crucially it knit real estate and construction, the personal savings of homeowners and the once-prudent operations of local banks into a gigantic international system. It was this linkage that generated the systemic risk that led to crisis in 2008–2009.
This systemic risk was enhanced by new techniques in financial engineering and investment. Hedge funds and derivatives took on central economic roles, aided by failures of regulation. Basically this meant developing a host of new financial instruments, many of them knitting different economic actors together in a web of mutual obligations like debt and insurance, and attracting unprecedented amounts of money to those new sorts of investments while deploying this money in trades largely hidden from public view. A host of seemingly stable local assets—like home mortgages—were bundled into securities traded globally by investors unable to assess their underlying quality. Even though many of the new instruments were designed to reduce risk and make capitalism more predictable, they became objects of largely speculative trading. Risk became more concentrated and dangerous. It became harder for specific firms to know how much they were exposed and to whom.
Derivatives—essentially securities based on bets about the eventual price of an underlying asset—were used as insurance to offset other risky investments. They also became high-risk but potentially high-payoff investments, not least by hedge funds. By the 1990s, capital in such “alternative” investments had passed $50 trillion and it reached about $600 trillion by the 2008 crisis. This may have encouraged fund managers and other investors to believe risk had been tamed, but recurrent failures of hedging suggest otherwise. Sudden liquidity shortages and political actions could trigger massive failures. As Raghuran Rajan, former IMF chief economist, remarked in light of the Russian government debt default in 1998: “A hedged position can become unhedged at the worst time, inflicting substantial losses on those who mistakenly believe they are protected.”
Completely eliminating these problems would end capitalism as we know it. We would no longer have capitalism if capital could not be moved among investments seeking greater return, and absent the demand for reinvestment in pursuit of greater productivity that drives innovation and accumulation. Regulation that attempted this would undercut dynamism and wealth creation. On the other hand, some level of regulation combined with well-organized government spending may be crucial to recovery and resilience. And economies with more widespread entrepreneurship may fare better than those that remain dominated by finance capital. In any case, it is sobering to consider that regulatory improvements since the financial crisis began have been minimal. Almost nothing has been done to reduce the potential for systemic risk.
THINKING FROM THE CRISIS
In March 2008 stock markets plummeted; retirement savings were wiped out. Major banks failed, especially in Britain and the United States. Other banks were judged “too big to fail” (in a process we now know to be partly a matter of insider-dealing between corporate executives and government officials). They were bailed out on a massive scale, turning public revenues not only into a compensation for excessive private risk-taking but also a direct source of private wealth. Some industrial companies were also kept alive by bailouts but by far the largest subsidies went to the finance industry where they were turned directly into capital without passing through the circuits of job creation or relief for homeowners struggling against foreclosure. Had governments not provided this support it is possible capitalist financial markets would have spiraled much further down, still more deeply damaging global capitalism.
The United States made enormous countercyclical investments both in infrastructure and in direct subsidies to the financial industry (yet possibly not as large as were required). Britain chose a program of fiscal austerity by imposing even more cutbacks on itself than credit markets demanded. And Europe’s North—especially Germany—imposed austerity on its South, bringing the European Union near to a breaking point.
Continental Europeans thought their institutions had weathered the crisis better than those of Anglophones until the public finances of several EU member states began to collapse under strain. Banking bailouts, especially in southern Europe, turned the crisis of the private for-profit financial industry into a fiscal crisis of states. Greece, Ireland, Portugal and Spain all teetered on the brink of bankruptcy even after severe austerity programs had been imposed. Financial crisis exposed weaknesses in the very constitution of the EU and the eurozone—which were, in large part, products of the era of financialization. Intensified global competition seemed to call for a larger Europe to compete effectively with China and the United States—a logic not dissimilar to that which led Citigroup and the Royal Bank of Scotland in their rushes to expansion. The desire for a common currency—attractive to financial and business leaders in Europe—had led to its introduction without mechanisms for effective common financial governance or in general the political institutions to back it up. The European Central Bank was governed by a board representing different national governments with competing interests. Different countries pursued different fiscal policies and practices. And as the EU expanded beyond its original core states, European integration linked very disparate economies. Commitments to redistribution that were tacitly tolerated in years of growth became points of contention in the midst of crisis.
The futures of the Euro and the eurozone remain uncertain. Spain and Portugal have gained minimal stability only for Italy to wobble and Cypus enter a tailspin. No one knows how far the European crisis will spread: perhaps to old member Belgium or new member Slovenia, perhaps to the EU itself, endangering the very common currency agreement. Meanwhile, austerity programs seek macroeconomic rectitude by rolling back state provision of services and security. In varying combinations cutbacks were nationally self-imposed responses to market pressures, and the result of external imposition not unlike the structural adjustment policies the IMF demanded of debt-ridden Third World countries in the 1980s. States were harnessed to save investors from losses and global markets from deep depression. Though it was investors and the transnational financial industry that reaped the huge profits of the bubble era and most directly benefited from bailouts and government-provided liquidity, the crisis and remedial actions are discussed in terms of nation-states. Of course, trying to grasp all this as a matter of profligate Greeks and prudent Germans obscures the central role of financialization itself (and of course the construction of the financial crisis narrative in overwhelmingly national terms reinforces other aspects of nationalist ideology, including increasingly widespread xenophobia and especially Islamophobia). Profits made by financial institutions encouraged the European Union to expand and to turn a blind eye to fiscal problems in member states. Now the citizens of EU countries with stronger banks and balance sheets complain about having to bail out other nations, straining the European Union itself, and forgetting the extent to which the benefits of bailout went to the financial industry and those with large capital assets.