Speculative Capital, Financial Crisis and Emerging Epic Recession

SMC Author

Jack Rasmus

SMC Affiliated Work

1

Status

Faculty

School

School of Economics and Business Administration

Department

Economics

Document Type

Article

Publication Date

2009

Publication / Conference / Sponsorship

Critique

Description/Abstract

This article re-examines the current financial crisis in the wake of the banking panic of 2008 that erupted in September 2008 and the implosion of financial institutions involving Fannie Mae/Freddie Mac, Lehman Brothers, AIG and others associated with the panic. It is argued that the financial crisis entered a second phase or stage with the above implosions, deepening the general credit contraction and propelling in turn the US and global economy toward a new kind of global economic downturn called an ‘epic recession’. Epic recession, it is argued, is a hybrid, unstable condition that shares characteristics of both traditional recessions and classic global depression. In addition to being more resistant to traditional fiscal-monetary control measures, it is characterized by spreading deflation (from asset values to product, commodity and wages), by growing global currency instability, and by the growing synchronization of real economic decline across global economic sectors. The article notes that the current state of the crisis, and the banking panic of 2008, is similar in a number of ways to the period of 1930–1931 in the US rather than to lesser financial instability events since the 1980s.

The article critically examines the dominant strategy employed to date by the US Treasury and US Federal Reserve—a liquidity strategy—and argues that such strategy has been, and will continue to be, a total failure despite a commitment by both agencies to now provide $4 trillion to the banking system. The strategy has failed, it is maintained, because the financial crisis is a solvency crisis and not a liquidity crisis. The article traces the failures of the Treasury and Federal Reserve in detail since the onset of the crisis in late summer 2007. It then explains that the root causes of the crisis originate neither in financial deregulation nor in loose central bank monetary policy, both of which are but enablers of the crisis. Rather the true causes reside in the changing institutional nature of finance capital itself in the late 20th century and in the increasing relative shift of capital to speculative forms of investment at the expense of non-speculative capital accumulation. This growing speculative investment shift is reflected in the massive $38 trillion debt run-up in the US in recent decades, in the current accelerating deflationary unwinding of that debt, and in the credit contraction and epic recession of historic dimensions that the speculative debt-unwinding is now provoking. The nature of speculative finance in the early 21st century is then considered, as well as the relationship between speculative finance and epic recession.

These investigations are a prelude to subsequent theoretical work, aimed at integrating a deeper understanding of speculative investment and the new finance capital with Marxist crisis theory based on disproportionality analyses.

Keywords

Speculative Finance, Epic Recession, Liquidity Crisis, Solvency Crisis, Debt-Deflation Dynamic, Derivatives, Deflation

Scholarly

yes

Peer Reviewed

1

DOI

10.1080/03017600802598179

Volume

37

Issue

1

First Page

31

Last Page

49

Disciplines

Business | Economics

Original Citation

Rasmus, J. (2009). Speculative capital, financial crisis and emerging epic recession. Critique, 37(1), 31-49

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