The Banking System
A View from Karl Marx
Masters of Money
Four years after World War II we could be pretty sure Karl Marx was wrong. Where you had capitalism, it was working pretty well. You could talk about a rising tide lifting all boats, but you look at the global economy today and I think you see capitalism that Karl Marx would recognise. It’s lifted hundreds of millions out of poverty in China, but for most ordinary people in the West, the system is not working at all. For them, capitalism is not coming through on its side of the deal.
It’s an analysis that rings true even for the leader of the world’s biggest economy.
President Obama “Long before the recession, jobs in manufacturing began leaving our shores. Technology made businesses more efficient but also made some jobs obsolete. Folks at the top saw their incomes rise like never before. But most hard-working Americans struggled with costs that were growing, pay cheques that weren’t and personal debt that kept piling up.”
Marx would say this squeeze on wages was the root cause of the huge economic crisis that we’ve been living through. But you might see a problem with the Marxist explanation.
If it was all down to low wages, you’d expect the crisis to have started where people spend their pay, out in the real economy.
One way or another, that is how most of the recessions since the war have got started. But this time it wasn’t the high Street that sank the city – it was the other way round – the banking system. The explosion that rocked the global economy in 2008 was detonated deep inside the banks.
So, how would Marx link low wages to troubled banks?
The answer is – he saw capital as endlessly adaptable. It could solve one problem – low wages – but only at the cost of creating another.
Remember, Karl Marx didn’t underestimate capitalism. He thought it was fundamentally flawed. He didn’t think it was stupid. If large parts of the population weren’t being paid enough to support demand, well, he wouldn’t have been at all surprised to hear that capitalists had come up with a brilliant solution, the credit card..
With consumer credit, people can carry on spending, even if they haven’t got the money. The economy stays afloat, and the capitalists still make their profit.
So, credit provided an answer to all of capitalists woes. But only for a while. Remember, Karl Marx thought the system was fundamentally flawed. They might be very clever, these capitalists, but now, more than ever, they were living on borrowed time.
As we know, it went well beyond credit cards. What ultimately brought the crisis to a head was the billions borrowed on mortgages. People thought the value of their house would keep going up for ever.
Professor Raghuram Rajan “Housing credit is beautiful because if your house price is increasing and your borrowing against the increase in value of your house, you don’t feel your borrowing your way into debt.”
But, of course, you are. In America, it happened on a massive scale. There has been a boom, the capitalists were getting richer and richer. They couldn’t spend all of their extra money. Driven, as ever, by the desire to make more profit, they lent it out in riskier and riskier ways. The name given to this lending might well be familiar. Sub-prime.
Joseph Stiglitz “What we did is, as the incomes of most Americans were stagnating, or even declining, we said, don’t let it bother you. Keep spending as if your income was going up. And they did that very well.”
Raghuram Rajan “I mean, who would oppose it? The banks who are making money? The households who are getting their house? The politicians who have happy constituents? There is nobody who is going to be unhappy in this process until it collapses.”
And we all know how it ended. In retrospect, it seems obvious. Lending to people who couldn’t afford it wasn’t a lasting solution to anything. It led to a housing bubble which burst, threatening some of the world’s biggest banks, and thanks to our integrated world, what started in the United States spread and infected the entire system, causing a global recession.
So, here’s the Marxist explanation for the crisis we’ve just seen. You’ve got a global economy with businesses getting better and better at squeezing wages and pushing up profits. But there is a problem. They are producing a lot of stuff that the workers can no longer afford, and a lot of profits looking for a new home. A global property bubble provided an answer to both those problems. The system was kept afloat on a mountain of debt but it was only a matter of time before it all came crashing down. Capitalism is only ever as strong as its latest, temporary fix.
It’s an extraordinary tale and a lot of people would say it’s completely wrong.
PJ O’Rourke “Marxism doesn’t actually work, but it keeps coming back, because it makes for a good story.”
Madsen Pirie “I don’t think low wages played any role at all in causing the crisis. The crisis was caused by governments and banking system flooding the market with cheap credit and cheap money because politicians don’t like the downturn in an economy that throws people out of work.”
Gavin Kelly “I think it may have, to some degree, increased the level of indebtedness that people went into the crisis with, which, I think, intensifies how deep the crisis became, but it wasn’t the underlying cause. It was a contextual factor which made it a bit worse.”
But the idea that low wages may have contributed to the crisis is gaining ground, even if the name Karl Marx is as toxic as ever. George Magnus is a senior economic adviser to one of the world’s leading banks.
You’ve been writing quite a lot about Marx since this crisis started. How did you come to look at him again?
George Magnus “Actually it was on this trading floor. It was probably the weekend before Lehman’s went bust, and it’s normally a little bit noisy, but at the time it was… You could hear a pin drop, it was that deathly quiet and I could almost feel, you know, that the global system was frozen. And it was quite a scary thought. It took me back to a lot of the things I used to read about and study when I was much younger – the days when I actually read Karl Marx for fun.”
And you wrote about that, but what was the reaction?
George Magnus “I did get a lot of hate mail, I have to say. There are a lot of people who were quite opposed to the idea that anything that was socialist or Marxist, you know, could be at all considered serious in the mainstream. A lot of this hate mail, I have to say, came from the United States and I was accused of being, you know, an Obama clone and…”
President Obama – the well-known Marxist.
George Magnus “Very mysterious forces. So, there was a lot of negative reaction from, I think, people are probably predictably, you know, had already tied their own ideological colours to the mast.”
