Jean Parker begins a series on issues in economics by looking at credit and banking
The collapse of investment bank Lehman Brothers in September 2008 was the event that triggered the global economic crisis. Pointing to the financial sector as the creator of the crisis, many argue that we must tame the credit system.
But Marxists argue that financial regulation will neither fix nor prevent economic crises. This is because financial crises are merely a symptom of a wider crisis of profitability in the whole economy.
Credit is essential to the functioning of capitalism. Even when Marx was writing in the mid 19th Century, companies had already grown to the point where they required credit in order to invest and expand their businesses.
The scale of investment in new machines and buildings needed could no longer be funded simply by the money made from their own profits in previous rounds of production. To stay in the game capitalists had to borrow money.
Other companies found that they had pools of profits lying idle which they did not yet need to fund their own investments. These capitalists realised that they could profit by loaning it to another firm and charging interest. As capitalism developed this lending and borrowing became run by banks and finance capitalists specialising in lending.
Banks and other credit providers are capitalists too and need to make a profit to stay afloat. But unlike those of other capitalists, bank profits don’t come from the direct exploitation of workers. The bankers’ profits—interest—are made by taking a slice of the profits made by other capitalists.
As we saw in the sub-prime housing bubble, lending to workers for mortgages and credit cards has also become a huge market for financial institutions. But for a time this credit too contributed to the expansion of real production. This is why the US government allowed the housing bubble to grow so big. The housing boom led to a boom in construction, and consumer credit allowed consumption in places like the US and Australia to support the growth of industry in export-focused economies like China.
But the “interest-bearing capital” that banks and other credit-providers specialise in has another strange feature. Credit is a gamble, a claim made on future profits that may or may not eventuate.
When a business cycle starts capitalists are able to expand and make high profits. Banks too are happy to lend, on the bet that when products are sold and profits wash in they will get a cut of the spoils.
But when all this new production comes on-line the anarchy of the market starts to bite. Suddenly capitalists realise that too many firms have begun producing the same products and the market is saturated. They are therefore unable to sell all the products they expected to. Some firms go bankrupt and are unable to repay their debts.
Banks that accumulate too many bad debts can collapse, unable to repay the people who have deposited or loaned money to the bank. Other banks may refuse to lend any more money, worrying that they will not be repaid.
This is what happened when Lehman Brothers collapsed. A credit crunch saw banks refusing to lend money, and the whole economy ground to a halt. There was a round of bank collapses and government bail-outs to save banks with bad debts.
While the credit crunch appeared to be the cause of the economic crash in 2008, it was actually a manifestation of the crisis of profitability that dominates the global economy. But the financial crisis also compounded the underlying crisis and even profitable companies were threatened by the failure of the banks.
Both in China, the EU and the US, part of governments’ response to the crisis has been to underwrite more cheap credit—desperately trying to kick-start a new boom. This is central to why governments refuse to seriously regulate the financial system—they understand that access to credit is essential to production under capitalism.
Credit doesn’t create booms and busts, but it is pro-cyclical, meaning it intensifies the highs and the lows of capitalist production. As Marx put it in Capital:
“The credit system … accelerates the material development of the productive forces and the creation of the world market… At the same time, credit accelerates the violent outbreaks of this contradiction, crises…”
As the Occupy movement rightly fights to hold banks and predatory lenders to account for throwing people out of their homes and into bankrupcy, we need to understand that the financial system is not an optional part of capitalism. The devastation it wrecks is fundamental to capitalist production itself.