Marxist conception of the financial crisis

[Clark]

As in the title, I'm talking about the recent economic crisis that has hit global capitalism.

Are there any good, thorough marxist publications about it? Like, articles, or papers that deal with the issue at hand?

Would be of a great help.

[KC]

Capital, Vols I-III

Hilferding's Finance Capital actually has been hitting this one on the head.

[Jose Gracchus]

Capital, Vols I-III

Hilferding's Finance Capital actually has been hitting this one on the head.

http://www.youtube.com/watch?v=qOP2V_np2c0

David Harvey's recent work conceptualizes Marxian economics specifically in the 1970-present day incarnation.

[KC]

Yes. I mean the problem with a "Marxist analysis" of crisis is that you have to first start with a Marxist analysis of capitalism as it has developed, and so I don't really think there are going to be any good Marxist critiques written specifically about the crisis simply because it is pointless without showing it is a systematic problem.

So most Marxists today just say "yeah see Marx and Lenin were right".

[Dean]

Yes. I mean the problem with a "Marxist analysis" of crisis is that you have to first start with a Marxist analysis of capitalism as it has developed, and so I don't really think there are going to be any good Marxist critiques written specifically about the crisis simply because it is pointless without showing it is a systematic problem.

So most Marxists today just say "yeah see Marx and Lenin were right".

What particular functions described in Capital do you think were at work in in the 2008-9 crisis?

[S.Artesian]

What particular functions described in Capital do you think were at work in in the 2008-9 crisis?

Overproduction. Fall in rate of profit.

[ar734]

What particular functions described in Capital do you think were at work in in the 2008-9 crisis?

Overproduction of housing--McMansions...speculation in mortgages...resulting in fall of price of housing...mass unemployment, bankruptcies, consolidation of banking into even fewer gigantic banks: Chase, Wells Fargo, Citibank...I think something like 80% of U.S. banking is now controlled by six banks.

Finally, the banking industry was saved by a direct, gigantic, unapproved transfer of wealth from the American people via their "democratically" elected representatives. I think even Marx would have been astonished by the scale of this robbery.

Here are a couple of quotes from Capital, Vol III, Chapter 30:

"On the other hand, the whole process becomes so complicated [i.e. complex derivatives], partly by simply manipulating bills of exchange, partly by commodity transactions for the sole purpose of manufacturing bills of exchange, that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders [Bernie Madoff]and partly of swindled producers [Lehman Brothers]. Thus business always appears almost excessively sound right on the eve of a crash [the stock market at 14000 and climbing.]

"Not every augmentation of loanable money-capital indicates a real accumulation of capital or expansion of the reproduction process. This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. [Banks are sitting on mountains of cash but are not lending it.]

[Oswy]

As in the title, I'm talking about the recent economic crisis that has hit global capitalism.

Are there any good, thorough marxist publications about it? Like, articles, or papers that deal with the issue at hand?

Would be of a great help.

I'd strongly recommend David Harvey's The Enigma of Capital if you haven't already read it. Also covering the crisis with Marxist analysis is Alex Callinicos's Bonfire of Illusions. Harry Shutt's The Problem With Capitalism was published in 1998 but it's also an excellent read as it pretty much anticipates what happened in the latest crisis. There's also Shutt's Beyond the Profits System, published 2010 but this is a relatively light work and is split between some explanation of the crisis and some ideas about how a post-capitalist economy could be organised along Marxist terms.

[Oswy]

What particular functions described in Capital do you think were at work in in the 2008-9 crisis?

Harvey puts a lot of emphasis on the overproduction of capital itself and makes several references to what he calls the 'surplus capital absorbtion problem' as being at the core of the meltdown. Basically, too much accumulated money desperately chasing too little investment opportunity in profitable production activity and inevitably directed into ever riskier and uncertain speculation.

Shutt in particular adds the technological dimension - new sectors are often proving to have relatively low investment needs, things like social networking systems or iPhone apps.

[S.Artesian]

As in the title, I'm talking about the recent economic crisis that has hit global capitalism.

Are there any good, thorough marxist publications about it? Like, articles, or papers that deal with the issue at hand?

Would be of a great help.

If I may be so obnoxiously self-promoting:

http://thewolfatthedoor.blogspot.com/2008_07_01_archive.html

and

http://thewolfatthedoor.blogspot.com/2008/08/shipping-news-2.html

and

http://thewolfatthedoor.blogspot.com/2008_09_01_archive.html

and

http://thewolfatthedoor.blogspot.com/2009/07/paper-scissors-tiger-dragon.html


and

http://thewolfatthedoor.blogspot.com/2008_10_01_archive.html

and

http://thewolfatthedoor.blogspot.com/2008_11_01_archive.html

and

http://thewolfatthedoor.blogspot.com/2009/10/yesterdays-news.html

and

http://thewolfatthedoor.blogspot.com/2009/10/yesterdays-news.html


and, if you're not completely sick of reading this stuff by then, you can always check out Insurgent Notes at http://insurgentnotes.com (http://insurgentnotes.com/)

[bricolage]

Aufheben have written a two part analysis of it, which I think is all on libcom. Well the first part is here (http://libcom.org/library/return-crisis-part-1) but not so sure about the second bit. I've only read the first part which was just explanations of how the crisis emerged, the second half is where they give their analysis. The main conclusoon seems to be, 'Hence, we might tentatively conclude that the nature and significance of the financial crisis is not that of a decisive turning point leading to an economic downturn or the end of neoliberalism as many have supposed, but more of a point of inflection pointing to a new phase in the long upturn.' Make of it what you want, I'm far too economically stunted.

[Dean]

Overproduction. Fall in rate of profit.

I would interpret "overproduction" as referring to the transfer of investment to finance, in other words industries which cater to accumulated, centralized wealth and a shifting away from production to wide-scale, lower class consumers.

I think the incentivization for speculation shifts capital away from the more useful forms of production - but in any case, this 'overproduction' seems to refer to a shift in the dispersal of capital throughout different industries - a shift toward Marx's "false capital."

[S.Artesian]

I would interpret "overproduction" as referring to the transfer of investment to finance, in other words industries which cater to accumulated, centralized wealth and a shifting away from production to wide-scale, lower class consumers.

I think the incentivization for speculation shifts capital away from the more useful forms of production - but in any case, this 'overproduction' seems to refer to a shift in the dispersal of capital throughout different industries - a shift toward Marx's "false capital."

My view is a bit different, and perhaps more "traditional" in that I argue that there was a real expansion of the means of production between 1992-2001-- fed by improvements in technology-- real boosts in productivity, output, and accumulation in telecoms, industrial products, mining, oil, communications, transportation, semiconductor fabrication, cement, etc. in large part driven by applying computerized, digital controls and increases to production processes.

Think for example, of the boost in the mass value of the means of production in say railroads that could be animated by much less labor power as signal systems were integrated and automated across thousands of miles allowing concentration and consolidation of control locations. Then there's the improvement in locomotive tractive effort and wheel adhesion allowing for longer trains to be hauled with fewer locomotives and reduced crew sizes.

In semiconductors, there's a veritable leap in the fabrication technology leading to dramatically improved processor power at dramatically reduced cost.

All of this drives overproduction-- the overproduction of the means of production as capital-- and is itself the product and producer of the fall in the rate of profit.

So comes the recession of 2001-2003-- from which the bourgeoisie extricated themselves, although very, very weakly, by drawing down and not replacing fixed assets, with depreciation actually exceeding capital investment until 2005 or 2006. Wages were also beaten back in this period. And then there's the little item of the invasion of Iraq, driving up oil prices and pushing another round of petrodollars through the US economy.

With industry restraining capital spending, and not tapping the financial markets, banks looked somewhere else, were forced to look somewhere else to achieve returns on their liquidity streaming in from petrodollars, corporate cash holdings etc.-- that somewhere else was housing, embarking on the great "liquidity" liquidation of household assets.

In 2006, industry is forced to resume higher levels of capital spending, with coincident declines in the rate of return. Enter the beginning of the deflation of the housing bubble, as liquidity streams are no longer sufficient to float the gigantic ship[wreck] called residential housing and commercial real estate.

2007 sees continued increased investment, declining rates of return, triggering the frenzied speculative blow off in the oil markets.... and with a hop skip and a bump, here we are, knock knock knocking on Bernanke's door.

That's the nutshell version.

[Lyev]

The Current Crisis

The Great Financial Crisis - Foster and Magdoff
Zombie Capitalism - Chris Harman
The Persistent Fall in Profitability Underlying the Current Crisis - Andrew Kliman
The Violence of Financial Capitalism - Christian Marazzi

Crisis Theory in General

Limits to Capital - David Harvey
An Introduction to the History of Crisis Theories - Anwar Shaikh
Explaining the Crisis - Chris Harman
The Economics of Global Turbulence - Robert Brenner

The History of Capitalism

Adam Smith in Beijing - Giovanni Arrighi
The Boom and the Bubble - Robert BrennerThis is from the resources section of Revleft.

[bricolage]

The Persistent Fall in Profitability Underlying the Current Crisis - Andrew KlimanOk so this article is long but from what I can gather from the conclusion the key bit of the argument is this;


6. The dominant cause of the fall in the rate of profit, by far, was the tendency of the rate of profit to fall toward a lower incremental rate of profit determined by the growth rate of employment and the share of profit that is reinvested. Changes in the profit share of income, and in the relationship between nominal prices and the real value of commodities as determined by labor.
How does this sound to you lot?

[S.Artesian]

Ok so this article is long but from what I can gather from the conclusion the key bit of the argument is this;


How does this sound to you lot?

I honestly don't know what he means. Does he mean the profit share invested in constant capital [fixed assets and circulating] was proportionately greater than the share expended on wages?

[Widerstand]

David Harvey is quite good on everything related to urbanization, especially on the relation between Crisis, Property Markets, and Gentrification.

I recommend this article: http://www.newleftreview.org/?view=2740

[Amphictyonis]

Overproduction. Fall in rate of profit.

The mindless one track drive to accumulate wealth/overproduction. Yes. Everyone acting in "their own self interests" damn the consequences. Make money and make money now while you can! Produce, sell, inflate the bubble! PROFITS! NEED MORE PROFITS! Over analyzing it all just confuses people and obfuscates the simple truth. Don't tell that to a bourgeois economist though.

[Lenina Rosenweg]

Okay, a somewhat dumb question, but could it be the root of the crisis is more an over accumulation of capital desperately seeking to maintain profitably, though much increased exploitation of the working class rather than over production? Of course these two categories are linked. As far as I understand them, both David Harvey and Mandel seem to be pointing in this direction.

[Lenina Rosenweg]

The mindless one track drive to accumulate wealth/overproduction. Yes. Everyone acting in "their own self interests" damn the consequences. Make money and make money now while you can! Produce, sell, inflate the bubble! PROFITS! NEED MORE PROFITS! Over analyzing it all just confuses people and obfuscates the simple truth. Don't tell that to a bourgeois economist though.

"Accumulate, accumulate, that's Moses and the prophets" Okay but its not lack of foresight or morality but the system which forces capitalists to act in this fashion.

[S.Artesian]

Okay, a somewhat dumb question, but could it be the root of the crisis is more an over accumulation of capital desperately seeking to maintain profitably, though much increased exploitation of the working class rather than over production? Of course these two categories are linked. As far as I understand them, both David Harvey and Mandel seem to be pointing in this direction.


That's exactly what overproduction is... an overaccumulation of the means of production as capital unable to maintain profitability because the expanded means of production cannot exploit labor at the intensity necessary to offset the tendency of the rate of profit to fall.

[Widerstand]

Okay, a somewhat dumb question, but could it be the root of the crisis is more an over accumulation of capital desperately seeking to maintain profitably, though much increased exploitation of the working class rather than over production? Of course these two categories are linked. As far as I understand them, both David Harvey and Mandel seem to be pointing in this direction.

The way I see it you can't separate overproduction from overaccumulation. Accumulated capital is dead unless reinvested. Dead capital kills capitalists. The only logical conclusion of overaccumulation is overproduction or directing capital left overs into the secondary commodity market (property speculation).

[bricolage]

I honestly don't know what he means. Does he mean the profit share invested in constant capital [fixed assets and circulating] was proportionately greater than the share expended on wages?
I've no idea, I was hoping you would know!

Am I right in saying David Harvey seems to think the issue is underconsumption?

[S.Artesian]

I've no idea, I was hoping you would know!

Am I right in saying David Harvey seems to think the issue is underconsumption?

I don't know that either. I never read Harvey. Maybe it's a point of arrogance on my part.... or insecurity. I read Marx... then look at the data and develop my own analysis. For better or/and worse.

[Widerstand]

I've no idea, I was hoping you would know!

Am I right in saying David Harvey seems to think the issue is underconsumption?

Undercomsumption is implied with overproduction. If everything produced was consumed it wouldn't be overproduction.

[S.Artesian]

Undercomsumption is implied with overproduction. If everything produced was consumed it wouldn't be overproduction.

No, it is not. Capitalism does not produce for consumption. Capitalist production determines the consumption on the basis of accumulation of value. Overproduction is not "underconsumption" but rather the inability of capital to maintain the necessary rate of valorisation for expanded reproduction.

This is made clear, for example, that a recovery is always initiated in, by, and through, a decline in the workers ability to consume; in a measurable declines in consumption.

[Die Neue Zeit]

I don't know that either. I never read Harvey. Maybe it's a point of arrogance on my part.... or insecurity. I read Marx... then look at the data and develop my own analysis. For better or/and worse.

For worse sounds like a more accurate description. You're on the same playing field as Harvey, not much on the concrete comprehensive solutions side of things. :)

[S.Artesian]

For worse sounds like a more accurate description. You're on the same playing field as Harvey, not much on the concrete comprehensive solutions side of things. :)

And you are a self-aggrandizing idiot who doesn't understand a thing about how capital reproduces itself-- ergo your ridiculous comments that profits can't possibly recover because that would violate the fall in the rate of profit, or fictitious capital, or the rate of GDP growth.

Yeah, you got some real comprehensive solutions-- hooking up with state capitalists, so-called radicals, and dreams of Julius Caesar. genius at comprehensive solutions you are. Back on your chariot, Julius and roll the fuck out of here.

The topic is the Marxist analysis of the current condition of capital. If you have something to offer on that, go right ahead. If all you want to do is self-advertise then beat feet and go hang out with the Maoists.

[Die Neue Zeit]

And you are a self-aggrandizing idiot

So says Mr. De-Rail Driver-By Extraordinaire! :lol:


who doesn't understand a thing about how capital reproduces itself-- ergo your ridiculous comments that profits can't possibly recover because that would violate the fall in the rate of profit, or fictitious capital, or the rate of GDP growth.

Strike four, or is that strike forty? :laugh:

I clearly said "tendency" of the rate of profit to fall in the Wisconsin thread. :rolleyes:

The fall in profit rates and GDP growth can be solved under capitalism, but only through war.

[S.Artesian]

Nobody said it can be resolved, only that it gets resolved by being reproduced. You said that it could not be reversed, that it can't be offset.

You said:
The notion of neoliberal high profit rates is an illusion. It goes against the concepts of surplus value, fictitious capital, tendencies of the rate of profit to fall, and even empirical observation of lower GDP growth rates than the post-war boom. That was in response to a post by Syndicat where he talked about the measures the bourgeoisie had taken in the attempt to restore and maintain high rates of profit.

You might take the time to actually do a little investigation into the rates of return in US industry, mining, manufacturing since 1970 and see the cycle within the secular trend before you talk about things that go against "concepts of surplus value, the tendencies of the trate of profits, and even empirical observation of GDP rates," since 1)anyone who has bothered to read Marx knows that the neoliberal offsets in the rate of profit do not "go against" the concept of surplus, do not go against fictitious capital, do not go against the tendency of the ROP to fall."

Like I said, is there something you want to add to the origin, and development, of the current condition of capital?

[Die Neue Zeit]

Yeah, I said "neoliberal" and "tendencies." Two key words there. :rolleyes:

[S.Artesian]

How about answering the questions:

How about taking 5 year periods, or annual periods, and showing the changes in the ROI for US industry, manufacturing, mining?

How about graphing that ROI with year-on-year changes of GDP?

How about time-lining those changes with critical events--- like price of oil, dollar devaluation, war in Iraq 2, collapse of the fSU, NAFTA, S&L deregulation; repeal of the Glass-Steagull Act?

[Watermelon Man]

I find this to be a helpful and accessible start for anyone looking for a Marxist/Marxian analysis of the financial crisis. It is not written for economists, so the jargon is absent, but as far as I know it is pretty spot on.

What Caused The Global Financial Crisis? A Marxian View
by Geraldine Brooks - Greens Victoria News, 2011.1, Summer.

While it is generally agreed that the main source of the 2008 financial crisis was mortgage-related securities that spread through the US and global financial system and suddenly collapsed in value, there is little agreement as to the factors that precipitated the crisis. Neoliberal economists blame the “irrational behaviour of the agents” (both lenders and borrowers), whereas Keynesian economists blame financial deregulation and insufficient public policy.

A Marxian view of capitalist crises focuses on the inherent features of the capitalist system. Accordingly, it views the 2008 meltdown as the logical outcome of capitalism’s tendency to overproduction, rather than as an aberration of an unruly bunch of financiers, or as “super capitalism”, which needs greater regulation. In a capitalist society, private enterprise makes profit by employing workers to transform raw materials into goods with added value. The process of production is, however, periodically disrupted, at the end of periods of rapid economic expansion. The 1990s crisis in the US provides an example:

“Farm prices are depressed because four years of record crop production have swelled the supply of commodities, while the Asian financial crisis and financial shocks in Russia and Latin America have sharply reduced demand. The result is an enormous glut of agricultural commodities on the market. Wheat stocks worldwide have doubled since 1996, soybean stocks have tripled and corn stocks have quadrupled. Midwest grain elevators are filled to bursting with the unsold portions of the wheat harvests of 1996, 1997 and 1998.” (Martin McLaughlin, 1999.)

In this respect, the GFC is nothing special; the workers again cannot buy the commodities produced by their own labour. The only differences are the scale of the collapse, and the crash of investment banks. The crisis began when companies such as Toyota, General Motors and Honda were unable to sell the huge numbers of cars they had produced, and started laying off hundreds of workers. Row upon row of thousands of cars, worth millions, sat there unwanted.

“It’s not just cars piling up. According to analysts, growing inventories of supersized flat screen TVs are forcing retailers to slash prices. Meanwhile, in China there is more than a year’s supply of appliances sitting in warehouses, destined for nowhere. That few people are buying new products for their houses is not surprising – after all, in the US the inventory of unwanted houses is building up too.” (Colin Campbell, December 4, 2008).

One of the key features of a capitalist crisis is unemployment. Worldwide unemployment across capitalist countries during this financial crisis has again been devastating. China, the world’s fastest growing economy, is experiencing massive unemployment. According to recent data, over six million migrant workers who came to cities from the provinces have lost their jobs.

“Rich countries in Europe are also sinking into recession, with looming unemployment. For example, Spain’s unemployment rate increased by nearly 14 per cent this year. In the US, recent data reveals that 2.6 million Americans lost their jobs in 2010, the highest incidence of unemployment since the Great Depression.” (Unemployment Rate Rises Amidst Global Financial Crisis 1/26/2009, N. Despuez).

In Australia the unemployment figures so far are not as high as might have been expected during such a serious economic crisis. There are several reasons for this, including the government stimulus packages, and underemployment. Figures show the underemployment rate has been growing since 2008, as employers reduce work hours instead of laying people off, a tactic credited with maintaining Australia’s low unemployment rate compared with other Western nations (29 March 2010, The Australian).

When workers lost their jobs they could no longer afford to pay their mortgages, sparking the US housing crisis. It was made much worse because loans had been provided with such abandon by a deregulated financial sector, keen to sell its financial products to as many customers as possible. In the interests of multinational profits, governments privatise public enterprises, deregulate banking, and allow highly speculative activity. This is not “aberrant” capitalism, but rather the logical progression of capitalism as an economic system. It is “imperialism”, the highest stage of capitalism, in which finance capital merges with industrial capital, and monopolies form. A recent example of this was documented in WikiLeaks files describing the role of the US government in protecting the interests of US seed and fertiliser giant Monsanto. A WikiLeaks release of US diplomatic cables revealed that the Bush administration planned ways to retaliate against Europe for its refusal to use genetically modified seeds (http://uncensored.co.nz/2011/01/13/wikileaksreveals-us-sought-to-retaliate-against-europeover-monsanto-gm-crops/).

Pushing to reverse many of these ugly features of capitalism will ease the problem for awhile, but does nothing to change fundamental contradictions that, over time, will arise again and again. The buckets of public money used to bail out financial institutions diverted money from the real economy, and left those who contributed to the crisis free to carry on as before. While this enables the capitalists to temporarily avoid bankruptcy, and allows them to get back to producing goods again, the effect can only ever last until the next glut.

[HEAD ICE]

Article by the ICT on the economic crisis, its origins and what is driving it:
http://www.leftcom.org/en/articles/2009-11-24/the-fall-in-the-average-rate-of-profit-the-crisis-and-its-consequences

[Delenda Carthago]

What particular functions described in Capital do you think were at work in in the 2008-9 crisis?
Debt crisis.The production has been increased due to technology advantage, but the wages has been decreased. This led to investment to debt.Loans, credit cards etc became the way to consume.And as you can easy figure out, this couldnt go on forever.The capitalists knew that for the last 15 years,and they were prepared for it.The Left on the other side, was wasting time on postmodernity, ecology, veganism and other stupid shit like that.And that dear children is the story of the economic crisis we live in.

[S.Artesian]

Debt crisis.The production has been increased due to technology advantage, but the wages has been decreased. This led to investment to debt.Loans, credit cards etc became the way to consume.And as you can easy figure out, this couldnt go on forever.The capitalists knew that for the last 15 years,and they were prepared for it.The Left on the other side, was wasting time on postmodernity, ecology, veganism and other stupid shit like that.And that dear children is the story of the economic crisis we live in.

Prepared for it? The bourgeoisie are sitting on approximately $3 trillion in losses on non-performing loans still on their books.

Prepared for it? The entire system froze and if the US Fed hadn't opened up unlimited currency swap lines to foreign central banks, hadn't accepted junk grade collateral for loans, and if the US Tsy hadn't taken over FNMA, FMAC [which they were in no way prepared to do], we'd be looking at a pile of rubble called Wall Street, "the City," le Bourse, etc. etc etc.

The only thing the bourgeoisie are ever prepared for is to make somebody else pay, at gunpoint if necessary.

[Thirsty Crow]

Prepared for it? The bourgeoisie are sitting on approximately $3 trillion in losses on non-performing loans still on their books.
Can you explain in "ordinary terms" (meaning: explain it to someone who isn't well versed in economics) what does it exactly mean?

[S.Artesian]

These are positions, taken as issuers or counterparties to various debt instruments-- included in this figure, [for the US, the EU, Japan, etc] are, of course, bank loans to consumers -- i.e. mortgages, credit card loans, auto, home equity; bank loans tor corporations [for US regional banks most of these commercial loans are to real estate and construction businesses]; and the securitization of these loans through mortgage-backed securities, commercial real estate mortgage backed securities, other asset backed securities, collateralized debt obligations[like securitized credit card debt], and even synthetic CDOs which are based on event yet another abstraction, essentially being CDOs backed by other CDOs

For example, FNMA and FMAC hold insure/own about $5 trillion in US mortgages, and have outstanding more than $1.5 trillion in mortgage backed securities-- an 8% loss/non-performing rate of the underlying mortgages threatens more than $400 billion, it threatens the entire $1.5 trillion [I]and all the credit default swaps that have been initiated around these MBS.

That's the basic kernel of the issue. Nothing is "bought and paid for." Everything is leveraged at ratios much greater than 5 or 10 to 1. Consequently failure rates of underlying assets above 3% threaten the entire structure.

[Thirsty Crow]

Oh well, I guess I have a big problem with understanding phenomena you're talking about. It seems that I should've taken up economics as a field of study years ago.

For instance, from my very poor understanding, the "various debt instruments" have two sides to them - the issuer and the counterparty. Loans are necessarily "securitized", meaning that the issuer has to be secured with respect to paying off the debt (e.g. real estate mortgage - if a small business is unable to pay off the loan, and the deal was made that the bank willl seize a real estate if that happens - the bank will in fact seize the real estate).

Does "mortgage backed securities" as a term refer to the phenomena I described above (poorly)?
I have no idea what would CDOs be.

This is frustrating. Sometimes I wish I am able to force you and some other users of this site to act like my own personal economics instructor, 0-24 :D:D

[S.Artesian]

No, mortgage backed securities are a debt instrument backed or secured NOT by a real asset, i.e. the house, but by payment of the mortgages on large numbers of houses.

A thousand or several thousand mortgages are "pooled" and "sold" essentially by the issuer, [often a bank, sometimes a savings and loan in the US, sometimes a business that only deals in mortgages] to a "separate" entity [which is usually a shell company set up by an issuer for the express purpose of turning these mortgages into asset-backed securities].

The shell company, called a special purpose investment vehicle or a structured investment vehicle, pools the mortgages, which means pooling their principle amounts, and their coupons or payment amounts and issues NOTEs or BONDS backed by the cash-flow expected from the underlying mortgages. The investments are also known as stuctured investment vehicles in that they are usually tranched, or tiered, according to anticipated risk, so that a senior tier, which is based perhaps on the principle amount of the loan secured by the home's assessed value is considered more secure than a junior tier which is based on the monthly payments.

Of course, since home values exhibited a long term trend of climbing, nobody thought that in the short-term such values would ever decline. So everybody started to issue these MBS, and to generate the money that such MBSs bring, everybody started reducing the standards for mortgages, but because everyone thought that everybody else knew what risk they were exposed to, nobody that that she or she was exposed to any risk what so ever.

Home sales peaked in 2006 I believe; new homes could not be sold, or "flipped" from buyer to buyer. In addition, the new mortgages that were being issued were basically refinancings with people using their homes as piggy banks-- taking the appreciated value out in cash. Once all that and more started to happen, this house of cards market started to wobble and collapse.

It was musical chairs, without the chairs and the music.

Collateralized Debt Obligations are another derivative security instrument. What was done with mortgages to create MBS is done by banks with consumer loans, credit card debt, auto loans etc.

I have no problem going over this... but there's a tremendous amount of information available on the web about all these instruments and how they worked, and didn't.

[ckaihatsu]

These are positions, taken as issuers or counterparties to various debt instruments-- included in this figure, [for the US, the EU, Japan, etc] are, of course, bank loans to consumers -- i.e. mortgages, credit card loans, auto, home equity; bank loans tor corporations [for US regional banks most of these commercial loans are to real estate and construction businesses]; and the securitization of these loans through mortgage-backed securities, commercial real estate mortgage backed securities, other asset backed securities, collateralized debt obligations[like securitized credit card debt], and even synthetic CDOs which are based on event yet another abstraction, essentially being CDOs backed by other CDOs

For example, FNMA and FMAC hold insure/own about $5 trillion in US mortgages, and have outstanding more than $1.5 trillion in mortgage backed securities-- an 8% loss/non-performing rate of the underlying mortgages threatens more than $400 billion, it threatens the entire $1.5 trillion [I]and all the credit default swaps that have been initiated around these MBS.

That's the basic kernel of the issue. Nothing is "bought and paid for." Everything is leveraged at ratios much greater than 5 or 10 to 1. Consequently failure rates of underlying assets above 3% threaten the entire structure.


(Whew! If only our contemporary human society had the sufficient technical means by which to keep track of each person's work input and their corresponding personal material needs -- like maybe some kind of advanced information storing and transmitting device that could be accessed from anywhere in the world.... Then we could dispense with all of this intermediary hyper-sub-divided capital property amount-chasing.... Oh, well...!)

[Delenda Carthago]

Prepared for it? The bourgeoisie are sitting on approximately $3 trillion in losses on non-performing loans still on their books.

Prepared for it? The entire system froze and if the US Fed hadn't opened up unlimited currency swap lines to foreign central banks, hadn't accepted junk grade collateral for loans, and if the US Tsy hadn't taken over FNMA, FMAC [which they were in no way prepared to do], we'd be looking at a pile of rubble called Wall Street, "the City," le Bourse, etc. etc etc.

The only thing the bourgeoisie are ever prepared for is to make somebody else pay, at gunpoint if necessary.
Yes,prepared for it.Firstly, because this crisis would have happened more than ten years ago if it wasnt for the banking system-so they knew that it was gonna come.
And secondly, because they prepared the situation so excactly its not gonna be them who will pay,its not their reproduction that its gonna be in line.And they prepared for it in a financial,ideological,social and political way. On the contrary, the working class fell more and more into the blind abyss of ignorance.Thats why right now there is not an answer given to the crisis,4 years after it officially started.On the contrary we are being stiped naked more and more each every day.


edit: see how pathetic we are as a class,that they are mocking us in our faces and we still cant respond.
http://www.revleft.com/vb/anger-banks-justified-t150916/index.html?t=150916&highlight=crisis

[S.Artesian]

Yes,prepared for it.Firstly, because this crisis would have happened more than ten years ago if it wasnt for the banking system-so they knew that it was gonna come.
And secondly, because they prepared the situation so excactly its not gonna be them who will pay,its not their reproduction that its gonna be in line.And they prepared for it in a financial,ideological,social and political way. On the contrary, the working class fell more and more into the blind abyss of ignorance.Thats why right now there is not an answer given to the crisis,4 years after it officially started.On the contrary we are being stiped naked more and more each every day.


edit: see how pathetic we are as a class,that they are mocking us in our faces and we still cant respond.
http://www.revleft.com/vb/anger-banks-justified-t150916/index.html?t=150916&highlight=crisis

The bourgeoisie were hardly prepared for it. A crisis did occur in 2001; the banking system didn't prevent that crisis, not did it alleviate that crisis. Draconian reductions in capital investment, and against wage increases, dollar devaluation, and the war in Iraq reversed that contraction.

You can't say the bourgeoisie were prepared for this when they accumulated such incredibly leveraged positions. Their financial markets basically seized up. Do you recall that? Commercial paper markets across the world, where corporations go to finance day to day operations basically shut down. You call that being prepared?

That they are making "the best out of it," and using it as a weapon against the workers and the poor just means that they are still in power. That's what power means.

Working class in blind abyss? General strikes in Spain, France-- governments tossed out in Ireland, Iceland; occupation of a state capital building in Wisconsin with actions spreading to other states... that's OK for starters.

Right there's no answer for this crisis; there is no answer until the moment there is one, which is the overthrowing of capital.

[Dean]

The investments are also known as stuctured investment vehicles in that they are usually tranched, or tiered, according to anticipated risk, so that a senior tier, which is based perhaps on the principle amount of the loan secured by the home's assessed value is considered more secure than a junior tier which is based on the monthly payments.
My understanding is that the tiers are arranged along lines of credit ratings of mortgages (hence subprime):

http://en.wikipedia.org/wiki/Bond_credit_rating


Home sales peaked in 2006 I believe; new homes could not be sold, or "flipped" from buyer to buyer. In addition, the new mortgages that were being issued were basically refinancings with people using their homes as piggy banks-- taking the appreciated value out in cash. Once all that and more started to happen, this house of cards market started to wobble and collapse.

It's important to appreciate how this ties into liquidity. The velocity and volume of home sales in any given market have a powerful effect to induce or reduce home sales (speculative and consumption-based) - notably, as the volume and velocity go up, there is high liquidity. This refers to the expected ability to re-sell a product (house) - if no one is buying houses, there is no liquidity, and so the value goes down. Its similar to a demand function.


Collateralized Debt Obligations are another derivative security instrument. What was done with mortgages to create MBS is done by banks with consumer loans, credit card debt, auto loans etc.
My understanding is that CDOs were directly tied to mortgage securitizations, but the inability of a lot of articles to clearly define how the two relate (or contrast) from each other is a testament to how confused the general public is about these tools.


In terms of Marx's contribution - I haven't read enough of Marx yet to have a concrete response, but the more I read of his stuff, the more it seems to be common sense (or what ought to be common sense). The unsustainability of rampant extraction of value from the working class seems obvious enough to me, not sure if Marx directly confronts this issue in a systematic way though.

[S.Artesian]

The subprime aspect to mortgage securitization came relatively recently. I say relatively since FNMA had been authorized to issue mortgage-backed securities around 1968, but the market was limited to FNMA, and FNMA was limited to issuing such MBSs on "conforming" mortgages, where the credit rating and down payment by the original purchases conformed to the standards FNMA had set for purchasing and guaranteeing the mortgage in the first place.

Subprime mortgages, or "hard money" mortgages have been around a long time, issued by [now departed] companies like Household Finance, and Beneficial Finance for years-- but not securitized.

In 1986, the Congress passed the Real Estate Mortgage Investment Conduit law, allowing originators and secondary purchases of mortgages to "bundle" and "cleave" mortgages into sections, "tranches," for securitization, bypassing the risks of double taxation on the securities, and the necessity to register each offering in each state.

Later laws also sped up the process, and another boost was given by the actions of the Resolution Trust Company [RTC] in cleaning up the mess from the Savings and Loan collapse of the 80s, when it securitized the assets it had taken over from the S&Ls and sold the securities to investors.

To get the big money to invest in subprime REMICs, the big money in corporate pension funds, mutual funds, etc. the issuers of subprime needed to get hig credit ratings from one of the three recognized debt raters in the US-- Moody's, Fitch, S&P. Looking at what the RTC did, Wall Street figure it could get insurance on the bond, it could stucture the bond into senior/subordinate tranches so that the cash payments went first to the senior portions, or they could stuff so much collateral behind the face value of the security-- so many homes with such and such a value, that the bond was "overcollateralized" and theoretically less inclined to default.

Well, that worked; they got their high ratings and the brave new world of collateralized subprime mortgage backed securities met the old world of fear and greed.

In the meantime FNMA and FMAC decided to get in on the action by buying and trading an investment portfolio of mortgages and MBS issued by others. Of course, FNMA and FMAC would use this portfolio as collateral when issuing its own debt to finance its operations of guaranteeing and purchasing mortgages from banks and issuers, thus cycling the money back into the mortgage issuing industry.

In the 1998-2000 period FNMA eased its mortgage guarantee and acceptance standards and the circle jerk, which this certainly was, was complete.


If this all sounds like a Ponzi scheme.... well it isn't. Not really. Not until the economy as a whole goes in the tank, when the music stops in this game of musical chairs where the chairs have already been collateralized as kindling.

When that happens we find that fictitious capital isn't the problem, but rather all capital becomes fictitious when it can't reproduce itself quickly, profitably enough.

[Dean]

If this all sounds like a Ponzi scheme.... well it isn't. Not really. Not until the economy as a whole goes in the tank, when the music stops in this game of musical chairs where the chairs have already been collateralized as kindling.
It's just the standard operation of capital.


When that happens we find that fictitious capital isn't the problem, but rather all capital becomes fictitious when it can't reproduce itself quickly, profitably enough.
This is the crux of the issue, and a lot of us have been saying this for years.