Tectonic Shifts and Systemic Faultlines: The Global Economic Crisis*

At the conclusion of his widely popular study of the global political economy, The Rise and Fall of the Great Powers, English-born and Oxford-trained Yale historian Paul Kennedy observed, “The task facing American statesmen over the next decades… is to recognize that broad trends are under way, and that there is a need to ‘manage’ affairs so that the relative erosion of the United States’ position takes place slowly and smoothly.”1 In chronicling the decline of the US as a global power, Kennedy compared measures of US economic health, such as its levels of industrialization and growth of real gross domestic product (GDP), with those of Europe, Russia, and Japan. What he found was a shift in the global political economy over the last fifty years generated by underlying structural changes in the organization of its financial and trading systems.

Kennedy’s arguments about a structural decline in US power are shared by other critical thinkers who similarly see global political economy through a historical lens. Andre Gunder Frank (ReOrient, 1998), Emmanuel Todd (The Breakdown of the American Order, 2002), Giovanni Arrighi (Adam Smith in Beijing: Lineages of the Twenty-First Century, 2007), Niall Ferguson (The Ascent of Money, 2008), Peter Gowan (Crisis in the Heartland, 2009), and Fareed Zakaria (The Post-American World, 2008) all argue that US power is declining in conjunction with a rise of regional powers, particularly China. In their view, this decline reflects structural changes that have occurred as the global economy attempts to adapt to new historical circumstances.

The present crisis is systemic and not merely a management/regulatory problem. The changes it has provoked have pushed the global political economy beyond its original Bretton Woods design, reflecting new political and ecological realities. This restructuring is only the first phase of a larger transformation which is undermining the assumptions of global capital.

Causes of the present crisis

Mainstream economic opinion has identified the immediate cause of the crisis with sub-prime mortgage lending in the United States, whose effects were exported to other countries through an interconnected web of global financial management.2 We argue, however, that this sub-prime lending was itself rooted in capital’s historic process of concentration and its need to maximise profit.

Further, as a political matter, sub-prime lending was encouraged by governments both because it served the interests of capital in maximising profit, and because it generated an illusion of value in private property that reinforced capitalist ideology among the middle and working classes. In reality, however, sub-prime lending was designed not for the middle and working classes, but for the purpose of delivering huge profits to capitalists. The transitory benefits of higher home values that it allowed proved illusory in the end, as it was the middle and working classes that have ultimately borne the cost of speculative risks in the form of lost jobs, depleted retirement funds, depressed wages, and massive government subsidies proffered to the speculators and bankers who drove the system into bankruptcy.

The institutions created at the Bretton Woods Conference (1944) originated from the liberal prescriptions of Keynesianism and its attempts to resolve the circumstances which caused the Great Depression. The system’s trajectory has been punctuated by internal shifts and riddled with fault lines that are now clearly visible. Exploring the present crisis historically, what becomes apparent is that Bretton Woods was never as effective as was hoped. Rather, deep currents within the global political economy, such as the material transformation of national economies, imbalances and stresses generated by concentrations of capital, and resource depletion, all forced the US from time to time to defend its position as guardian of the system by reconfiguring its terms.

The resulting changes define three distinct periods. The first of these is the period of the system’s greatest legitimacy; it ended in 1971 when the US unilaterally abandoned the gold standard. The second phase, that of the “petro-dollar” system, began shortly thereafter, when the US once again unilaterally modified the system by linking the US dollar with the price of oil, thus ensuring both a demand for dollars and a privileged position for US currency. This was also the period in which Keynesianism gave way to neoliberalism as the dominant economic paradigm for global capital. The third period emerged during the early 1990s following the collapse of the Soviet Union. This truly globalized the world’s economy, giving capital unprecedented access to the resources of central Eurasia. The present crisis marks an end to this period and the opening up of an uncertain future.

Bretton Woods: a liberal response to the great depression

The main institutions that emerged from Bretton Woods, and which remain as critical parts of the global economy, were the International Monetary Fund (IMF), which oversees national currencies to maintain financial stability, and the International Bank for Reconstruction and Development (IBRD, now World Bank), which is the primary conduit for channelling capital into development projects, with an initial emphasis on post-war reconstruction. While these institutions were designed as broadly collaborative entities, in practice they have been controlled by the advanced capitalist governments, and particularly the US, which holds the top posts within them and dominates the voting blocs that govern them. In spite of periodic tinkering, the fundamental character of these institutions and their allocations of power have not changed for more than sixty years.

The US, as the only great power to survive the war with its economy intact, assumed control over devising the new world economic order. It drew heavily on its own commitment to Keynesian ideology,3 which required that global economic institutions be capitalist but also be regulated by a central authority, which by default meant the US. The period from the Conference to 1971, although often called the “golden age of capitalism”, was riven with fractured alliances and conflicted relations. While it is true that the global economy expanded rapidly, this cannot be attributed solely to the Bretton Woods system. It reflected a general post-war rebuilding that occurred not only among Bretton Woods members but also in economies outside the Bretton Woods system, including those in the socialist world. It can also be said that the gold in this age flowed primarily toward the US, which at the end of the war held 80% of the world’s gold in its national reserves.4

The delegates at Bretton Woods were deeply divided over the system’s design and the control that this would place in the US and its capitalist allies. The objections of the Soviet Union and its socialist allies have been generally recognized, but the fault lines in the conference extended into the capitalist bloc itself, with delegations representing several European countries, and particularly the French, objecting to its clear Anglo-American bias.5 Eventually, the Soviet Union left the Bretton Woods system to form an alternative socialist system, known as the Council for Mutual Economic Assistance (COMECON), which created a competing economic bloc that complemented emerging Cold War political alliances.6 While each system had a hegemon to guarantee its stability, COMECON governments operated within state-socialist structures, whereas Bretton Woods governments sought to advance capitalist accumulation.

The instability arising from the system’s capitalist orientation can be seen in the functioning of the IBRD and IMF. In both cases, institutional governance was retained by the US through the dominant position it occupied in their corporate-style Boards of Governors. This, in turn, served the interests of US bankers and industrial capitalists, who by default dominated trade and finance after the war. Not surprisingly, the pattern of development that flowed through the IBRD during the late 1940s into the mid-1950s favoured US capital investments and industrial exports, leading to a rapid expansion of US industrial production and exports. For its part, the IMF provided the desired currency stability while also securing the role of the US dollar as the reserve currency required for international trade. The Bretton Woods system thus extended the economic power gained by the US during the war into the post-war period.

Yet, the development of the post-war economy through the Bretton Woods system also produced a steady erosion of US influence, demonstrating, perhaps, the triumph of short-term profits over a professed interest in long-term stability. The friction between capitalist governments evident at the 1944 Conference was not merely a matter of ideological differences, but represented competing national interests. These conflicts increased steadily during the 1950s as the reconstruction of Western Europe and Japan transformed these economies from outlets for US investments and trade into international competitors. The first casualty of this competition was the currency exchange rate, which had been predicated on stability of the US dollar.

In practice, the dollar’s reserve currency role depended on maintaining a fixed rate of its exchange for gold, with foreign governments allowed to exchange dollars for gold held by the US Treasury. This arrangement meant that other governments would need to accumulate dollars to protect the value of their domestic currencies and to facilitate trade with other Bretton Woods members, which created a demand for the dollar that supported its value. This let the US enjoy a competitive trading advantage over other Bretton Woods members, to the extent that the US also held a competitive advantage in industrial production. Similarly, the dollar’s role as a reserve currency provided an additional advantage to US trade and fiscal management, but only so long as the US maintained gold reserves sufficient to cover its outstanding international debt. The fatal .aw in this arrangement was a misreading of history as static, and when the US lost its competitive industrial advantage to Europe and Japan as they rebuilt their industry with newer and more efficient systems of production, the stability of the system was lost and the dollar became subject to the vicissitudes of competitive markets.

Historically, the unravelling of this basic Bretton Woods arrangement began as more and more dollars circulated outside the US, or were invested by foreign owners in the US during the late 1940s and early 1950s. Because trade debt also was denominated and payable in dollars, it had to be paid down on terms favourable to US creditors and banks, which then recovered huge profits from originating and managing credit and debt accounts. These structural advantages then were multiplied by the role of the dollar as a reserve, because as international trade and finance, governments, banks, and individuals were encouraged to transact in dollars, the logic and practice of a dollar-based global system was reinforced.

This initially worked to insulate the US from accountability for its internal financial management. But the accumulation of profits in US banks eventually led to a dependence of the US on profit accumulation to the detriment of the internal investments that were needed to maintain its competitive edge. This condition was unsustainable because the wealth that was created became captive of speculative capitalist interests that increasingly demanded payouts rather than the reinvestment of profits. As a consequence, the US began to manage its economic affairs as if they were accountable only to domestic politics and not to the international marketplace, which in turn encouraged a false assumption within the US that its debt and the policies surrounding that debt were of no consequence in the global political economy. Beginning in the 1950s and extending into the 1960s, these practices undermined confidence that the US could act responsibly as manager of the Bretton Woods system.

The erosion of US control over the Bretton Woods system reached a decisive turning point during the mid-1960s as an inequitable distribution of power and wealth within the system led the US to overreach the advantages offered by the dollar’s reserve currency role. Concerns about US national debt and its international trade and financial deficits had been growing since the mid-1950s as more and more dollars accumulated in the central banks of other countries. For a time, these central banks foreswore their right to demand gold in exchange for dollar debt, based on their confidence that the US would act to protect their interests as fellow members of the Bretton Woods system.7 But as more dollars accumulated, central bankers began to see that US policies and financial practices, particularly its increasing military interventions in former US and European colonies, reflected a continuing decline in relative US political and economic power and in its commitment to a cooperative Bretton Woods system. These suspicions were finally confirmed when in 1965 President Lyndon Johnson declared that the US could maintain simultaneously its increasingly expensive intervention in Vietnam and its “Great Society” economic expansion at home through a “guns and butter” economic strategy. The folly of this declaration became apparent as the US quickly expanded both its national debt and the amount of dollars accumulating abroad.8

The precipitating conditions that ended the dollar-gold link developed as US gold reserves fell from $30 billion in 1960, which was adequate to its obligations, to alarmingly low levels in 1965 that barely covered US liabilities to foreign central banks. This drop led French President Charles de Gaulle in 1965 to break with the practice of deferring gold for dollar demands; he asked the US to pay off its $300 million debt to France with gold from the US Treasury.9 Although the US complied, it became apparent that it would not be able to meet all such demands, as its gold reserves fell in 1970 to only 55% and in 1971 to a mere 22% of its liabilities.10 This rapid decline created a stampede by foreign central banks to convert the US debt to gold, forcing President Richard Nixon to publicly declare an end to the Bretton Woods’ fixed dollar-gold link on 15 August 1971.

This declaration effectively signified a default by the US on both its international payments and its guarantee to represent the interests of all in maintaining the dollar as a reserve currency. But as dramatic as it was, this step was taken as much to “save” the overall system (by preventing an outright collapse of all other Bretton Woods institutions) as it was to save the dollar and help the US maintain control over the IMF and the IBRD.11 In exchange, however, the US lost some of its power over global trade and finance, which weakened the dollar further and opened the door for other central banks to diversify and develop alternative currencies as a hedge against any precipitous decline in the dollar’s value. Thus, after 15 August 1971, the US was exposed to imported inflation and had to convince the rest of the world to continue accepting devalued dollars in exchange for economic goods and services.

1971 to 1993: an unstable “petro-dollar” system

After the collapse of the dollar’s powerful role in international finance, the US entered into a long period of economic instability, including a recession in 1971, an even deeper and longer recession from 1973 to 1975, a period of hyper-inflation from 1979 to 1980, followed by a severe recession in 1981–82, a real estate bubble and stock market panic in 1987, and finally another deep recession in 1992–93. Altogether, nine of the twenty-two years from 1971 to 1993 could be characterized as “economically troubled”, with the years in between reflecting uneasy transitions from one crisis to another. The one constant that marks this period was an unsteady attempt by the US to restore the role of the dollar and its own economic power by linking the dollar to yet another commodity – petroleum. The contradictions produced by this “petro-dollar” system were economic, in that the Bretton Woods system never found a way to successfully recycle the huge profits and widespread speculation that it generated, and political, in that the petro-dollar system shifted the focus of global politics to the Middle East and other areas of petroleum production.12 Understanding how that system developed with those contradictions offers important insights into the present crisis.

The US effort to recreate the dollar’s dominant position in global finance began almost immediately after 15 August 1971, based on the emerging role that oil was already playing in the early 1970s as a strategic commodity for industrial production. This made oil a logical choice because, unlike gold, it had a central role in modern economies that could further underpin its value. This advantage was put on dramatic display during the oil embargo that followed the 1973 Arab-Israeli war, when a denial of significant amounts of oil drove the advanced economies of the Bretton Woods system into a panic. Linking the dollar to oil, however, was a work of diplomatic art conducted between the US and Saudi Arabia, which was then the leader of the oil embargo and the principal source of oil for Bretton Woods countries; it was not an effort on behalf of the Bretton Woods system itself.

The term “petro-dollar system” derives from the way this diplomacy linked the sale of oil to the dollar through a series of agreements between the US and Saudi Arabia concluded during 1972–74, which were later formalized as the US-Saudi Arabian Joint Economic Commission. Economically, the agreements required that oil sales conducted by the Organization of Petroleum Exporting Countries (OPEC) be made exclusively in US dollars,13 which ensured that OPEC oil markets would be dominated by the US through the demand they created for US dollars.14 Since the agreements, Saudi Arabia, which was and remains one of the world’s largest oil producers, has become one of the most reliable of US allies, enjoying a privileged status within OPEC that exempts it from allotted production quotas as the proxy representative of the US.15 After the mid-1970s it used its position as OPEC’s “swing producer” to “manage” oil prices in order to increase or decrease oil production and bring about oil scarcity or glut in the world market according to US interests.

As structured, the US-Saudi agreements implicitly created a global petro-dollar economic system that not only put a floor under the value of the US dollar, but also allowed the US to once again manage international trade on terms that disadvantaged its European and Japanese competitors. This worked by making petro-dollars a de facto replacement for the pre-1971 gold-dollar standard, thereby guaranteeing a demand for dollars, whose value was then linked to oil through the OPEC trading standards and practices. In this scheme, all industrially advanced nations in the Bretton Woods system had to purchase oil, either from OPEC or from one of the smaller oil producers, but they could conduct these purchases only by pricing and buying the oil in dollars, thus restoring the old hegemonic role for the dollar as a required reserve currency.16 This kept demand for dollars artificially high, and as the price of oil went up following the 1973 Arab-Israeli war, the demand for dollars increased, raising the value of the dollar even further and once again subsidizing US domestic and military spending. However, this also allowed the US to further increase its current-account deficits, eventually again destabilizing the Bretton Woods system.17

The creation of the petrodollar system also once again provided a double loan to the US, first by allowing it to set the terms for the international oil trade, and second by subsidizing the value of the dollar and exempting it from the burden of internal US monetary and economic policies. This allowed the US to print dollars to pay for its oil imports without giving up goods and services in exchange, as the value of those dollars was supported by the demand created for them by the petro-dollar system.18 The yin and yang of this petrodollar economy, however, also meant that US benefits were offset by costs imposed on other capitalist economies – particularly those emerging from post-colonialism – as the US exported its economic problems. Thus, when the 1973–75 recession began, the US could shift its effects onto its capitalist partners, which then bore the greater burden as oil prices rose after 1974. Similarly, the hyperinflation of the late 1970s and the sharp global recession of 1981–82 (which were also were linked to the petro-dollar economy and caused dollars to once again pile up in an international banking system) became global crises as the Bretton Woods system struggled to recycle the dollars into for-profit investments. This led depositor banks in the advanced capitalist economies to look to less developed countries for profits, because oil-exporting economies were unable to absorb the huge oil revenues that were generated in US dollars.19

The tragic results of the crises of the 1970s and early 1980s were, once again, exacerbated by a failure of the US to exercise leadership within the hegemonic power of the Bretton Woods system. Rather than promoting sensible social investments (whether in its own economy or in those of the developing world), the US chose in the mid-1970s to use the petro-dollar overhang as an opportunity to promote the purchase of US Treasury bonds, which would act as yet another subsidy for the US economy by keeping domestic interest rates low. The short-term benefits this solution provided, however, were more than offset by its long-term costs as the US increasingly came to rely on foreign investors as the primary source of finance for US investments.20 This had the effect of artificially increasing prices through speculation, leading to an inflationary outburst that undermined the perceived value of the dollar, causing a decline in demand for dollars and a corresponding upward spike in US interest rates. This in turn forced depositor banks to scramble to find new ways to invest the growing horde of petro-dollars, leading to further attempts to dump excess petro-dollars in developing economies, which merely fed the inflationary spiral by adding a rapid increase in the price of basic commodities to the mix. But in this case, as the present one, the vast amount of capital that flowed into the banking system was accompanied by a disregard for the underlying financial problems that it masked. The banks, which were making huge profits on loans, had little incentive to blow the whistle, and the government, which was using the situation to create an illusion of prosperity, had little incentive to self-critically examine a system for which it was ultimately responsible. But, by early 1980 the game was up, and, as the US Federal Reserve stepped in to radically raise interest rates to cool inflation and protect the dollar, a growing number of the economies of developing countries sank into a deep depression.

These petro-dollar crises might have brought down the entire Bretton Woods system, except for massive new spending by the US as part of a new Cold War initiative. Generally identified as “Star Wars”, this initiative by President Ronald Reagan poured money into military spending in an effort to drive the Soviet Union into bankruptcy. This helped to temporarily dry up the petro-dollar surplus by channeling it into military development, but it also touched off another burst of speculation within the US that centered on commercial and residential real estate. While much smaller than the present speculative bubble, the collapse of this real estate speculation was at the time the most serious financial crisis to hit the US since the Great Depression, sparking the largest single-day decline in US stock prices and shaking confidence in the economy that continued through the 1992–93 economic recession.21

But in spite of the recurring crises of the 1970s and 1980s, the Bretton Woods system continued to operate as if the structure of the international economy had little changed. Rather, the periodic reforms sought merely to fix immediate circumstances with little regard to the underlying systemic problems in Bretton Woods, including the shifting balance of global economic power away from the US.

The collapse of the Soviet Union and COMECON in 1991, however, allowed the system to sidestep any fundamental change by globalizing itself and privatizing many of its essential functions.

1993 to present: globalizing neoliberal capitalism

The globalizing and privatizing of the Bretton Woods system after 1993 occurred in the context of the collapse of the Soviet Union and the emergence of neoliberalism as the preferred form of capitalism in the US and Britain. With no alternative socialist system available, the former members of COMECON and states emerging from the Soviet collapse had few alternatives to joining and thus expanding Bretton Woods into a truly global system. These new opportunities for profit coincided with the descent of the US and Britain into a neoliberal form of capitalist economics. Neoliberalism, which had formed around the writings of Milton Friedman and other conservative US economic theorists, emerged as the major organizing theory within US and British political economy during the 1970s and 1980s, largely based on its claims that capitalism was failing to thrive under Keynesian economic practices.22 These arguments particularly targeted the Bretton Woods assumptions about liberal institutionalism and government regulation, favouring instead a free-market system left to the management of private enterprise. Neoliberalism, however, also came with a political price in undermining the basic liberal concept of a social contract between citizens and their government for the provision of essential social services, and concentrating economic power in the hands of private capitalists.

While the collapse of socialist systems in the early 1990s opened the door to an extension of Bretton Woods and its reconstruction around neoliberalism, it also removed an important safety valve that had acted to protect Bretton Woods during its many crises, as the state-socialist economies of COMECON had offered a relatively stable, long-term market for the excess production of Bretton Woods member-states from 1949 to 1991, thereby partially buffering them against capitalist crises. At the same time, this socialist alternative market also provided a counterweight to Cold War practices of the US and its Bretton Woods allies which restricted the free exchange of ideas and justified militarism and intervention in the post-colonial world. Once this safety net and counterweight were gone, the comfortable balance of a bipolar world disappeared with it. Its absence after 1991 increasingly exposed the Bretton Woods system to capitalism’s own contradictions, such as its tendencies toward speculation and overproduction, its reliance on US leadership, and its disregard for the connection between bad economic policies and their political consequences.

With the Bretton Woods system evolving into a fully integrated global financial system by the late 1990s, the US role in neoliberal reconstruction became more visible. The institutional power that the US enjoyed in governing the IMF and World Bank before 1991 was thereafter joined by an even greater power of persuasion that drew public as well as private institutions to neoliberalism around the world.23 Thus, when the US dismantled its own Depression-era restraint on speculative investments by banks – the Glass-Steagall Act – and replaced it with the Gramm-Leach-Bliley Act, labeled the Financial Services Modernization Act of 1999, it effectively introduced casino capitalism on a world scale.24 Once introduced, casino capitalism rippled through the global economy promoting massive concentrations and exchanges of capital among global speculators, the transfer of speculative funds to international banks and other financial institutions, and the development of an array of new speculative investment tools to generate quick and easy profits.

It should come as no surprise that the neoliberal transformation of the global economy would come to a bad end. Warning signs of its destructive capacity had been in evidence during the US Savings & Loan fiasco of 1987. Then, with the added power of the internet and its global communications revolution, the neoliberal promotion of unregulated currency trading ricocheted like a shot inside the global banking system, first creating the Asian financial crisis, which led the US government to make a frantic multi-billion dollar midnight rescue of Long-Term Capital Management, and later generating the US “dot.com bubble”, which when it collapsed in late 1999 added further evidence of the dangers that came from the unregulated speculation. What is remarkable is not the many failures of neoliberalism over the past fifteen years that pyramided investments on speculative debt to balloon overall global paper capital from a relatively modest sum of $70 trillion in the late 1990s to more than $700 trillion by 2007, but the inability of capitalist governments to extract themselves from its grip. Thus, rather than acting to restrain capitalist excess, these governments stood aside to encourage the even greater speculation that eventually produced the 2008 crash.25

Understanding the dynamics of the present crisis

Like its history, the dynamics of the present crisis lie below the surface of events. Certainly, sub-prime lending was a precipitating factor, but it also represents a series of policy choices that were driven by changing circumstances within the global political economy. Some of these were within the control of capitalist governments, such as the dismantling of Depression-era regulations of financial markets. But others, including the rapid evolution of global systems of trade and communications and the regeneration of China and India as major global economic centres, were historically beyond national policy control. Clearly separating the inside from the outside is critical to understanding why and how this crisis unfolded and where it might take the global political economy.

The two elements that we feel are most important in understanding the present crisis are its ideological origins in neoliberalism, which has produced distinctive tools for crisis management, and the rapid evolution of extra-governmental dynamics within the global system, which has substantially undermined the ability of individual governments to contain the crisis. As neoliberalism comes under scrutiny, its management tools should also be examined to ensure that they do not survive its demise, and as the global system continues to evolve new relationships and dynamics, these must be taken into account when considering how the global political economy can and might also evolve toward more democratic and socialist forms.

Neoliberalism and capitalist crisis displacement strategies

26Current examinations of sub-prime lending generally argue that its wide-spread adoption was possible because of the repeal of the Glass-Steagall Act. This Act had been adopted in 1933 in an effort to restrain the unregulated speculation that contributed so much to the length and severity of the Great Depression,27 and, as the argument goes, its repeal in 1999 added instability to the financial system by allowing investment banks access to a wide range of previously denied speculative investments. Yet the repeal of Glass-Steagall itself reflected the arrival of neoliberalism at the heart of the US financial system as a means of finding new ways to “modernize” the financial services industry to profitably recycle huge amounts of capital that had become concentrated in money-centre banks.28 Seeing the repeal of Glass-Steagall as a response to contradictions within liberal Keynesianism raises more substantive issues about the how capitalist reforms are generated out of crises as efforts to secure the interests of finance capital, rather than to serve greater interests in the capitalist economy as a whole.

Using this wider, structural lens, explains how both the repeal of Glass-Steagall and the subsequent expansion of sub-prime lending arguably were crisis displacement strategies adopted by capitalist governments to avoid the consequences of earlier policy accommodations. A similar crisis displacement strategy was followed in 1971 when the US abandoned fixed currency exchange rates and gold as the base value for the dollar. This crisis appeared after the accumulation of US international debt during the Vietnam War, which exposed tensions with other capitalist governments that no longer would subsidize US economic and political profligacy. In its place, the US adopted a petro-dollar system that promoted the interests of US international banking and protected US control over global finance. But as with the present crisis and its links to neoliberal reforms, the petro-dollar system quickly became the source of a new and more severe international economic crisis as huge amounts of new capital flooded into the capitalist banking system demanding opportunities for profitable investment. Thus, both crisis displacement strategies achieved short-term reprieves that only introduced new contradictions and tensions within the global political economy that demanded other crisis displacement strategies.29

Understanding neoliberalism and its reforms of the political economy as crisis displacement strategies also better illuminates the role of the US as the global economic policeman created by the Bretton Woods system. US power over the system has been one of its central contradictions because it envisioned that the US would remain the central global economic and political power in perpetuity. But at the same time, by structuring the global political economy around competitive capitalism, the system also ensured that conflict would be endemic and grow as individual nations evolved economically and politically. The form of neoliberalism that took root in the US during the 1970s and in the UK during the 1980s emerged primarily as a discourse about the desirability, if not necessity, of shifting power over policymaking away from governments.30 It quickly spread internationally through the central role that the US played in Bretton Woods’ economic institutions, changing not only the ideology of these institutions, but also the way that they functioned structurally. Thus, as the US role in the Bretton Woods system became more problematic, efforts at reform of the system focused increasingly around crisis displacement strategies, and particularly “marketbased” schemes, rather than true structural reform.

The money merry-go-round and sub-prime lending

Sub-prime lending offers important lessons as to why this present crisis is a fundamental crisis of capitalist institutions, and not just a garden-variety recession caused by the bad behaviour of a handful of speculators. What capitalism as an economic system does most efficiently, when left to itself, is to create and increase economic and political inequalities. And what it does most inefficiently is account for social needs and systemic change. The money merry-go-round that accompanied sub-prime lending before the present crisis offers insights into how the contradictory tensions within modern capitalism fated it to crisis.

At present, there are two poles within capitalist theory and politics. One pole, Keynesianism, created the Bretton Woods system, in the belief that capitalism could be tamed by surrounding its practices with institutions that regulate basic economic functions, particularly currency and access to markets. The other, neoliberalism, developed out of the failure of Keynesianism to accommodate capitalism’s drive for ever-increasing profits. And while the oscillation between these two poles can be seen in the capitalist portion of the global political economy over the last half-century, neither has been able to prevail because both contain fundamental contradictions. These contradictions were anticipated by critical political economists, such as Susan Strange, whose 1986 critique of global capitalism, Casino Capitalism, observed how a money merry-go-round of speculative investment had even then begun to spin the web of speculation that produced the current crisis.31

The origins of sub-prime lending have commonly been attributed to the dismantling of Depression-era government regulation of the banking industry, which opened the door to investment banks to enter and eventually dominate the real estate markets. Yet, the repeal of Glass-Steagall was itself prompted by a two-decades-long movement toward deregulation designed to increase opportunities for profit by financial capitalists proposed by neoliberal economists.32

This clearly indicates that the origins of the crisis lay not in the speculation that acted as its trigger, but in the way the financial system was designed to encourage that speculation. The money merry-go-round that became visible after the collapse of the speculative frenzy that was then produced must be seen as fundamental and systemic rather than as merely the bad behaviour of those within it.

If the origins of sub-prime lending are in the 1980s (as appears to be the view of economic historians of the period),33 then the mechanisms that charged up the money merry-go-round in the 2000s can also be traced to that same period and linked to the problem of recycling vast amounts of capital produced as profits within the system. The primary difference between the 1980s and the 2000s is the source of this profit, which in the first case were the petro-dollars that gathered primarily in US money centre banks, and in the second case were the vast profits from the speculative frenzy that followed the collapse of the Soviet Union. Unlike the first case, the second was far more global in origin and effect, and was greatly enhanced by the transformation of the global economy through emerging communications technologies.

What is remarkable is how closely these two crises – separated by almost two decades – match up in the way that they formed, threatened the system, and then planted the seeds of further crises. For example, in both cases borrowers who could not have qualified for a home purchase under standard mortgage processes were qualified under “special” provisions for the purpose of enhancing lender profits, which in the case of sub-prime loans were mostly investors.34

Additionally, in both cases the borrower rather than the lender was saddled with the risks of default, with capitalist banks on both occasions enjoying government support and protection from any failure.

The greatest differences between the two crises were the scale of the lending and the potential for disaster. For example, the amount of global capital devoted during the latest period to sub-prime lending was staggering, amounting at one point to some $12 trillion in the US alone,35 whereas the excess petro-dollars that required recycling during the earlier crisis amounted only to some $111 billion in the peak year of 1980.36 Additionally, with the Cold War in full bloom during the first crisis, US power remained largely what it had been during the postwar period, which made it much easier for the US to coerce cooperation from other Bretton Woods members, while the current crisis has been exacerbated by a measurable decline in US power, which has limited its ability to act unilaterally in setting the global policy agenda.37 Finally, the first crisis occurred at a time when governments generally had a much larger measure of control over their national economies and the US had a stronger hand in managing global economic institutions. The present crisis has clearly demonstrated the limits of economic control enjoyed by governments generally.

Seen in this historical light, the repeal of Glass-Steagall assumes its collateral role in facilitating access by investment banks to residential property precisely because this sector offered the best opportunity for huge and largely unregulated profits.38 The privatization of this process merely reflects a crisis displacement strategy, allowing governments to avoid accountability for the crisis that followed, while maintaining their role as lender of last resort to the banks and speculators.

How banks failed

The details of the money merry-go-round and its aftermath are also a guide to how banks have been failing during the crisis. Unlike the central banks of other, more democratic countries, the US Federal Reserve is entirely controlled by the private sector, with representatives from business, banking, and finance acting as its governors. This arrangement meant that this crisis was managed by capitalists that were largely beyond the control of the putative “democratic” US Congress, leaving the worst effects of the crisis to be born by the middle and working classes.39 Thus, the crisis has not affected all banks equally, and individual bank failures mark points in the fault lines within US capitalism. In the broad sense, these fault lines represent conflicts of interest within national capital, with the neoliberal reconstruction that began in the 1970s favouring finance capital over industrial capital. The multi-layered pyramid of economic power that has followed in its wake is driving the US further toward a dependence on international banking and finance to secure its own economy and its global economic influence. However, this pyramid also continues to widen conflicts within US capitalism, undermining its long-term viability as leader of the Bretton Woods system.

The link between sub-prime lending and US money-centre banks and financial organizations was clearly visible during the crisis in the way that speculative investment instruments, such as credit default swaps (CDS) were developed and deployed nationally and internationally. While these instruments have been widely explained and criticized, little attention has been paid to the increasingly speculative nature of the US finance and banking system.40 Rather, most analysts have been content with criticizing lax government regulation and pointing to greedy speculators, overlooking that speculation has now become the “mother’s milk” of capitalism.41 The multi-layering of finance has meant that high-risk sub-prime mortgages were palmed off on second, third, fourth, and fifth tier investors, masking the true nature of the risk, which was ultimately devolved onto the public, who paid for it in discounted retirement funds, lost public finance, and a siphoning off of taxes to bail out the investment banks. To date, there has been no accounting for the trillions of dollars spent to “rescue” these banks and speculators, even while the middle and working class has been asked to pay for the profligacy.

It also should be understood that only small and middle-sized banks were actually allowed to fail, and in those case their assets were absorbed by larger banks at fire-sale prices. Thus far during the third quarter of 2009 alone, more than 140 banks failed, were closed, or merged, and all but a handful of these were small and/or regional banks whose primary customers were local businesses, homeowners, and other members of the middle and working classes.42 Among the money centre and investment banks, only Bear Stearns, which was forcibly merged by the Federal Reserve into the Bank of America in March 2008, and Lehman Brothers, a 158-year-old international investment bank and one of the largest financial institutions in the US, which was forced into bankruptcy in September 2008, suffered a similar fate. The disparate treatment of big and small banks illustrates not so much that the US government plays a key role in managing finance, but that it allows this management to be done by financial capitalists who are largely immune from government in.uence.43 Thus, when big investment banks began to generate new speculative instruments, on top of the ones that they had previously invented, they were already “too big to fail” because they constituted the political as well as the economic core of US society.

The remaining events in the banking crisis of 2008 add some finer points on how this marriage of financial capital and government functions. For example, the crisis arose first as the underlying value of bank assets, including sub-prime mortgages, came into question. The doubt about value then limited the ability of banks to provide credit, based on restrictions imposed by the Federal Reserve.44 This eventually caused new credit to dry up, as lenders could not assess the risk that new lending might entail. This “credit crunch” quickly spread throughout the US, and then the world, through the interconnections that had developed in the global banking system and the web of borrowing and lending that followed. Thus, the “Toxic Asset Relief Program (TARP) that was designed in a midnight bargaining session could not provide any material relief to creditors, be they private homeowners, small businesses, or state or local governments, because its focus was on relieving the speculative pressures that had enveloped US banks. Thereafter, the economic stimulus package that was developed by the incoming Obama administration continued to focus its efforts on stabilizing banks, even as the broader economy continued to decline. This focus had a particularly pernicious effect on the working class, whose job losses and home foreclosures were compounded by an evaporating social safety net and the loss of essential state and local government services.

The way ahead: prospects for socialism after Bretton Woods

The present crisis is both institutional and ideological, and as it progresses it continues to undermine the credibility of Bretton Woods and US economic and political leadership. The first casualty has been neoliberalism as an ideological force in shaping institutions;45 the second, which is sure to follow, is a US-dominated global political economy. This, by itself, does not mean that a socialist alternative will follow, either in the US or globally. But there are at least two factors that appear to be working in that direction: 1) the obvious inefficiency of capitalism as an economic organizing principle and the relative success of forms of socialism in the developing world; and 2) the gathering global ecological crisis which can only be solved through collective, democratic participation.

The widespread attacks within and outside the US on neoliberal ideology must lead beyond liberal Keynesian reform, if the US is to escape its pattern of spiralling economic crises. What US capitalism has done most efficiently over the last half-century is to increase inequalities by disinvesting in it own people and economy. The Bretton Woods system partially offset the domestic impact of this process by extracting wealth from the hapless members of the developing world. But this tactic is rapidly becoming obsolete as new economic power blocs emerge in China, India, and Brazil. What has become apparent, even to the otherwise poorly informed American public, is that the US fails to provide the basic services, such as healthcare and effective education, that have become commonplace in other advanced economies. Without these services, it is unlikely the US can be economically or politically competitive in a post-Bretton Woods world.

Keynesian-style liberalism, which is now being offered as an alternative to neoliberalism, will not work better today than it did in the 1930s, when it was successful only in blunting the hard edges of capitalism in the US and Britain, and was eventually replaced in post-War Europe with something closer to democratic socialism. When adopted in the 1930s, Keynesian liberalism was embraced as the alternative because history was threatening to depose capitalism altogether. During that period, socialists, and in some cases even communists, were invited into the governments to adapt socialist concepts and structures and make them useful within capitalism and subject to capitalist control. This was never a wholly satisfactory arrangement, but that compromise legitimated much of the socialist agenda, and this legitimacy remains today in the shreds of the social safety net that are extended to victims of the current crisis. Thus, the foundation for a socialist reconstruction lies at our feet and in the public mind, waiting for a call for its rebuilding.

The challenge for democratic socialists is how to navigate through the liberal minefield to secure a genuine socialist reconstruction. At the ideological level, this means successfully countering Keynesian liberalism’s claim that it is the best way to govern efficiently and democratically. History, however, offers little support to this claim because the Keynesian commitment to capitalism makes it unable to effectively regulate markets to block the concentration of capital. Further, as the history of the US Federal Reserve demonstrates, Keynesian economic policy is always tentative and subject to the authority of capitalists and their interest in protecting their wealth. Thus, even the more benign benefits proffered by Keynesian liberalism, such as free public education, subsidized housing, and minimal protections for labor, are never secure and always subject to change by the capitalists who control the system. In effect, capitalists will always be the “winners” and the middle and working classes the “losers” where capitalism comes into conflict with the public interest.

The second factor – the growing global ecological crisis – is perhaps an even stronger force pushing toward democratic socialism because it challenges the dark heart of capitalism as a system that by necessity exploits people and the earth. The trend in this case is heartening, in that the collaborative and democratic nature of sustainable human-nature relationships is gaining currency within the global community. Those outside of Europe and the US will recognize that this trend has been underway for some time now among critical political ecologists, with some of its strongest spokespersons emerging from the developing world.46 And in awarding the 2008 Nobel Memorial Prize in economics to Elinor Ostrom, the award committee has put the collaborative and democratic prerequisites for sustainable development at the center of environmental politics.47

The central point in environmental sustainability is preserving a balance between human wants and nature’s needs. As Karl Marx pointed out long ago in fashioning the term “reification”, the natural tendency of capitalism is to reduce all human relationships to objectified and quantified values for the marketplace. This universal quality of capitalism similarly attempts to reduce nature to a set of economic values that can be bartered in capitalist markets. Thus, it is no accident that the present drive to craft an international agreement concerning climate change, which has occurred at the height of neoliberalism and within a global capitalist economy, has focused on market mechanisms such as emissions trading. As informed critics have pointed out, none of these capitalist proposals hold any real promise of slowing, let alone stopping, global warming.48 In reality, since capitalist governments depend on economic growth for their political legitimacy, they also depend on ready access to and the use of natural resources, which clashes with any effort to rein in resource consumption for the sake of ecological sustainability.

Unfortunately, capitalist ideology pervades liberal environmental organizations, making it sometimes difficult to separate out what are ecologically sustainable choices. This infection is expressed in many of the central ecological debates of our time, such as the challenges of a changing climate. Fortunately, a socialist response to the ecological crisis is beginning to form, asking, “Will climate change enforce global justice?49 Will capitalism survive the climate crisis?”50 The work of articulating how democratic socialism can offer a meaningful alternative to the capitalist marketplace should begin by emphasizing the points made by Ostrom, those in the ecosocialist movement and critical political ecologists, that humans have the capacity – outside of the competitive relationships fostered by capitalism – to collaborate for long-term ecological sustainability. In fact, sustainability itself requires something more than mere environmental management: it requires a rethinking of the nature as property as well as the possibilities for collective action.51

Of course, the ultimate argument in favour of socialism is that it begins with efforts to ameliorate conflict and achieve a working, nonexploitive consensus. Keynesian liberals claim to want the same ends, yet they don’t want to abandon competitive and exploitative capitalism. The contradiction is obvious but the journey from liberalism to socialism must address the basic question: how then do you continue economics? Some radical political economists have attempted an answer through what they term ecologically sustainable “steady-state” economics, which blends democratic socialism with a reduction in the material base of society.52 The biggest challenge to this approach has been a residual attachment to the idea, held by both capitalists and state socialists, that growth is essential to the legitimacy of any economic system. However, this resistance also represents something of a Eurocentric “modernist” view, which is losing currency among ordinary people and has always been questioned by traditional societies.

In conclusion: listening to the language of change

Above all else, the present crisis reminds us that we live in a dynamic world where empires and systems come and go. If the Bretton Woods system is in eclipse and the world is moving toward a multi-polar political economy, whose voices will be important in these times of change?

One voice is that of Zhou Xiaochuan, Chair of the Monetary Policy Committee of the People’s Bank of China, who has called for structural reforms in the international monetary system that redistribute power more equitably according to emerging social and political change. His call has been welcomed by Russia, India, and Brazil, based on their view that there are “inherent weaknesses” in the current international monetary system that was built around US power. Another is that of Brazil’s President, Luiz Ina´cio Lula da Silva, who in defending the right of national self-determination, noted that… each country establishes the democratic regime that suits its people… The great lesson for everybody is that the state has an important role to play, and has great responsibility. We don’t want the state to manage business. But it can be an inducer of growth and can work in harmony with society. In Brazil, thank God, we had a solid financial system and public banks [emphasis added] with an important role in offering credit. And these were the banks that made sure the crisis here was not as bad as it was in other countries.53

While Zhou’s call is narrowly structural, and da Silva’s broadly ideological, both clearly envision a world that is beyond the Bretton Woods system. Similar post-Bretton Woods views are also now appearing within the US, with Paul Kennedy noting in a recent New York Times op-ed column,

If one believes in the economists’ theory of “convergence” – that is, the coming closer together of the product and income of companies, regions and countries – then the conclusion is clear: As China, India, South Korea, Brazil, Mexico and Indonesia all “catch up,” the American share of things will relatively shrink. Sooner or later – and this debate really is about “sooner” or “later,” not about “if” – we are going to witness another major shift in the global balances of power.54

The words of Zhou, Lula, and Kennedy should not come as a surprise or be interpreted as a threat, because they merely acknowledge what should be obvious in considering the direction of the world’s evolution over the last sixty years. Global political economy has shown at each turn how changes in human society and in the world that surrounds it demand changes in institutional arrangements. These changes, as Marx and other critical political economists have observed, are not optional, any more than history itself is optional. Rather, what remains within our human capabilities is to make reasoned choices that acknowledge our common heritage and shape our future.


*An earlier version of this article appeared in the on-line journal Cultural Logic (2009).

1. Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, New York: Vintage Books, 1989, 534.

2. Sub-prime mortgages carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes.

3. It is useful to remember that Lord Keynes was one of the two principal organizers of the Bretton Woods conference, along with US Secretary of the Treasury, Hans Morgenthau. Arman van Dormael, The Bretton Woods Conference: Birth of a Monetary System, New York: Palgrave-MacMillan, 1978.

4. The US acquired 80% of the world’s gold by requiring payments in gold for the wartime materials it supplied to its allies, particularly Britain and the Soviet Union, under the Lend-Lease program. “Money Matters: An IMF Exhibit – The Importance of Global Cooperation’, International Monetary Fund,”
http://www. imf.org/external/np/exr/center/mm/eng/mm_dr_01.htm.

5. See van Dormael, The Bretton Woods Conference.

6. Although it never formally joined COMECON, the Chinese government maintained a loose trading relationship with it throughout its existence. At the same time, China’s government slowly opened up to Bretton Woods members through a series of bilateral agreements that led it to eventually become a member of both the IMF and the World Bank in the 1980s when it assumed the membership of the Nationalist government of Taiwan. Harold Jacobson and Michael Oksenberg, China’s Participation in the IMF, the World Bank, and GATT, Ann Arbor: University of Michigan Press, 1991.

7. “Money Matters: An IMF Exhibit – The Importance of Global Cooperation, System in Crisis (1959-71)”, Part 2,

8. The US eventually spent more than $500 billion on the Vietnam War alone, which was an enormous sum for that time, equivalent to more than $2 trillion today.

9.“De Gaulle v. the Dollar”, Time, February 12, 1965.

10. F. William Engdahl, “The Dollar System and US Economic Reality Post-Iraq War”, http://www.instantcube.com/discernement/engdahl1.htm. See also John White-clay Chambers II (ed.), The Oxford Companion to American Military History, New York: Oxford University Press, 1999.

11. “Money Matters: An IMF Exhibit – The Importance of Global Cooperation, System in Crisis (1959-71)”, Part 4,

12. Bulent Gokay,“The Beginning of the End of the Petrodollar: What Connects Iraq to Iran”, Alternatives: Turkish Journal of International Relations, Vol. 4, No. 4, Winter 2005, 40–56.

13. “Petrodollar Problem”, “Money Matters: An IMF Exhibit – The Importance of Global Cooperation, System in Crisis (1959–71)”, Part 3
http://www.imf.org/external/np/exr/center/mm/eng/mm_rs_03.htm. See also David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Ithaca: Cornell University Press, 1999.

14. Department of Treasury, “Jeddah, Saudi Arabia, Joint Statement: US-Saudi Arabian Economic Dialogue”, press release, March 6, 2002,

15. In 1982, OPEC adopted the “quota system” to limit its oil supplies and thereby keep oil prices from falling below certain levels. Under this system, each OPEC country is allocated a specific quota for oil production. This did not prevent the 1986 oil price collapse, however, because most OPEC countries did not respect their quotas. See Bulent Gokay, The Politics of Oil, London: Routledge, 2006.

16. The dominance of the dollar is not simply the result of the size of the US economy; it is also the result of two other things: politics and finance. See Billent Gokay and Darrell Whitman, “Ghost Dance: the US and Illusions of Power in the 21st Century”, Alternatives: Turkish Journal of International Relations, 2004, 3(4), 65.

17. “Petrodollar Problem”, “Money Matters”, part 3 (note 13). See also Spiro, The Hidden Hand of American Hegemony.

18. Spiro, The Hidden Hand of American Hegemony, 121.

19. See, e.g., William Greider’s detailed account of the 1979–83 crisis, which he identifies as beginning with a rapid accumulation of petro-dollars in money-centre banks in the US. Secrets of the Temple: How the Federal Reserve Runs the Country, New York: Simon & Schuster, 1987.

20. Robert G. Kaiser and David Ottaway, “Oil for Security Fueled Close Ties. But Major Differences Led to Tensions”, Washington Post, February 11, 2002.

21. For a detailed discussion of this “S&L crisis”, see, William K. Black, How to Rob a Bank: How Corporate Executives and Politicians Looted the S&L Industry, Austin: University of Texas Press, 2005.

22. See, e.g., Milton Friedman, Capitalism and Freedom, Chicago: University of Chicago Press, 1962; Noam Chomsky and Robert W. McChesney, Profit Over People: Neoliberalism and Global Order, New York: Seven Stories Press, 2003; and David Harvey, A Brief History of Neoliberalism, New York: Oxford University Press, 2007.

23. See, e.g., Louis W. Pauly, “Promoting a Global Economy: The Normative Role of the International Monetary Fund”, in Richard Stubbs and Geoffrey R.D. Underhill, eds, Political Economy and the Changing Global Order, London: Macmillan, 1994.

24. “Casino capitalism” was a term developed by Susan Strange in the mid-1980s to describe the unbridled speculation that was developing in the wake of neoliberal economics. Casino Capitalism, Oxford: Blackwell, 1986.

25. Jim Jubak’s Journal, 1/18/08, “The Next Banking Crisis On The Way” MSN Money, http://articles.moneycentral.msn.com/Investing/JubaksJournal/The NextBankingCrisisOnTheWay.aspx. A seasoned investment advisor, Jubak observed that, “The more investors who bought in [to speculative investments such as credit default swaps], the more of these new products Wall Street could sell and the more money it was willing to lend to home builders, home mortgage lenders and credit card companies to the savings and loans and banks that created the raw materials (mortgages, credit card debt, autoloans) that Wall Street needed to manufacture its products; and to the hedge funds and structured investment vehicles that bought what Wall Street produced… It worked out just fine until reality stuck a pin in the bubble.”

26. The concept of “crisis displacement strategies” is more fully developed by Colin Hay, who argues that “during such moments of crisis a new trajectory is imposed upon the state. The intense and condensed temporality of crisis thus emerges as a strategic moment in the structural transformation of the state. Within this theoretical account crises are thus revealed as ‘epoch-making’ moments marking the transition between phases of historical-political time.” Colin Hay, “Crisis and the Structural Transformation of the State: Interrogating the Process of Change”, British Journal of Politics and International Relations, Vol. 1, No. 3 (2002): 317–344.

27. Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance, New York: Grove Press, 2001.

28. James Barth, R.D. Brumbaugh, Jr., and James Wilcox. “The Repeal of Glass-Steagall and the Advent of Broad Banking”, Journal of Economic Perspectives, Vol. 14, No. 2 (Spring 2000): 191–204.

29. The yin and yang of these crisis displacement strategies can be clearly seen in William Greider’s account of the struggle between neoliberal monetarism and liberal regulation during the extended inflation-deflation crisis of 1979–83. Greider, Secrets of the Temple.

30. Neoliberalism first emerged in the US system as an attempt to “displace” environmental crises that could not be resolved by the US government because they required regulation that threatened corporate profitability. Once neoliberal crisis displacement techniques had proven their value by successfully supplanting public regulation with private negotiations, they spread throughout the US political and economic system. Of course, neoliberalism was finding its way ideologically into many areas of US life during the 1950s and 1960s even before it emerged as a crisis displacement strategy in environmental policymaking during the 1970s. But it was environmental policymaking that legitimized these strategies and greatly enhanced their political stature with corporate elites and government officials, leading eventually to their institutionalization within corporate social responsibility discourse during the 1980s. Darrell Whitman, “Stakeholders and the Politics of Environmental Policymaking”, in Ken Conca, Matthias Fingers and Jacob Park, eds, The Crisis of Environmental Governance: Towards a New Political Economy of Sustainability, London: Routledge, 2008.

31. Susan Strange’s subsequent book, Mad Money: When Markets Outgrow Governments, Ann Arbor: University of Michigan Press, 1998, similarly anticipated the role that emerging technologies would play in disempowering government management of the global economy.

32. See, e.g., James Crotty and Gerald Epstein, “The Costs and Contradictions of the Lender-of-Last Resort Function” in Contemporary Capitalism: The Sub-Prime Crisis of 2007-2008, unpublished, 2008. The authors in this case argue that the elimination in 1999 of the 1930s Glass-Steagall legislation, which segregated commercial and investment banking, was the culmination of two decades of radical deregulation that created what is often called the “New Financial Architecture” (NFA),
http:// dec84.univ-paris13.fr/ccepn/Texte_Epstein_101008.pdf

33. See, e.g., Greider, Secrets of the Temple. In his account of home loan practices in the high interest era of the early 1980s, Greider notes that adjustable rate mortgages (ARMs) were developed to accommodate low-income borrowers and increase home sales, with these ARMs shifting risk from the lenders to the borrowers, much as did the sub-prime loans of the 2000s (p. 589).

34. In the case of petro-dollar lending, developing countries were treated in much the same way, with loans offered at very high interest rates that were made not to support development, but to profitably recycle petro-dollars (see, e.g., William Greider, Secrets of the Temple, p. 435). In the second case, as the term “sub-prime” suggests, loans were offered at below market rates of interest to home buyers who could not otherwise qualify for a loan, with the loans to reset to market rates after an initial loan period, usually 3–5 years depending on the loan terms. Also, many if not most of these loans were made with little or no down payment, instead of the 5% or 10% usually required in standard home mortgages, with down payments effectively folded back into the original loan together with closing costs and fees, leading to loans that exceeded the stated price of the house.

35. John Gittelsohn, “Ex-Subprime Exec Works Flip Side Of The Market”, Orange County Register, March 16, 2009,

36. Wendy Cooper, “Bankers Claim the Danger of Global Collapse Is Receding” in Multinational Monitor, Vol. 2, No. 11 (1981).

37. The shift of power away from the US is clearly visible in many spheres, from the growing call to replace the US dollar with a “more stable currency” (see, e.g., Joseph Stiglitz,” We’re In A Whole New Territory”, Newsweek, April 6, 2009), to a renewed political independence among its one-time allies, such as Japan (see, e.g., Mure Dickie, “Shift in dealings with US on cards”, Financial Times, August 30, 2009).

38. This process is described as “bubblenomics” by Robert Brenner, “What is Good for Goldman Sachs is Good for America. The Origins of the Current Crisis”, http://www.sscnet.ucla.edu/issr/cstch/papers/BrennerCrisisTodayOctober2009.pdf, p. 34.

39. As William Greider observed, “In this pivotal instance [when the Federal Reserve raised interest rates in 1984 to choke off a nascent economic recovery], as it had done so often in its history, the central bank was deciding to defend wealth and let workers take the loss. The financial side of capitalism would be protected from risk, even excessively enhanced. Enterprise in the productive economy would be restrained, even injured” (Secrets of the Temple, p. 620).

40. One of the exceptions was Robert Brenner, who carefully traced the increase in speculation back to at least the early 1970s and attributed it to a steady decline in the ability of the general economy to produce increasing profits. Brenner, “What is Good for Goldman Sachs is Good for America” (note 38); see also his Economics of Global Turbulence, London: Verso, 2006.

41. See, e.g., “The Rise and Potential Fall of America’s Banks”, Associated Press, February 8, 2009, http://www.msnbc.msn.com/id/29084713/. While the account notes that, “Using vast sums of borrowed money, Goldman Sachs, Morgan Stanley and other investment banks bought and sold mortgage-backed securities and other complex financial products, reaping astronomical profits that helped pay for outsized bonuses for executives”, it doesn’t go beyond demonizing bankers and speculators and offering an apologia for government.

42. US Federal Deposit Insurance Corporation, October 8, 2009,

43. The US Federal Reserve is only marginally a public institution in that appointments to its Board are made by the President and confirmed by Congress. However, in practice the Board works closely with the 12 regional Federal Reserve Banks, all of which are managed by private bankers for the purpose of serving banking interests. See, US Federal Reserve, http://www.federalreserve.gov/aboutthefed/default.htm, and Greider, Secrets of the Temple.

44. The Federal Reserve influences economic activity not only by adjusting interest rates, but also by making money available to member banks through its Discount Window. However, to maintain membership in the Federal Reserve system, banks have to maintain ready access to a specified amount of capital, which is intended to act as a cushion against withdrawals. The Federal Reserve varies the amount required, known as “reserves”, according to what the Fed believes prudent, which it often increases in times of financial crisis to allay fears about bank solvency.

45. The race to reject neoliberalism is being run most vigorously among national leaders who were most wary of it in the first place, with the Chinese government advancing an agenda to write the US dollar out of the global political economy (see Zhou Xiaochuan, “Reform the International Monetary System”, 2009,
http://www.pbc.gov.cn/english/detail.asp?col=6500&ID=178), and then quickly moving to create facts on the ground to emphasize its newly emerging economic power (see, e.g., Luis Arce, “China Takes Steps Towards Full Convertibility of the Yuan”, World Socialist Website, http://www.wsws.org/articles/2009/may2009/yuan-m07.shtml; “Chinese Make Largest Overseas Acquisition Ever”, by the Associated Press, 24 June 2009, http://www.msnbc.msn.com/id/31528749/ns/business-world_business/; Michael_J_Kosares, “China Decision to Buy $80 Billion of Gold, the Dragon’s Hoard”, in The Market Oracle, 25 June 2009, http://www.marketoracle.co.uk/Article11580.html; and, “Chinese Solar Plant Expected To Be the Biggest”, by the Associated Press, September 8, 2009,

46. See, e.g., Ashish Nandy. The Intimate Enemy, Bombay: Oxford University Press, 1987; Arun Agarwal and S. Narain, Global Warming in an Unequal World – A Case of Environmental Colonialism, New Dehli: Centre for Science and the Environment, 1990, and Arturo Escobar, ‘The Making and Unmaking of the Third World through Development’, in M. Rahnema and V. Bawtree, eds, The Post-Development Reader, London: Zed Books, 1997: 85–93.

47. As the Nobel Committee noted, Ostrom received the award in recognition of her work in political economics of the environment, where she has long argued that sustainable governance cannot be achieved through regulation alone, but requires democratic participation. See Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge: Cambridge University Press, 1990.

48. See, e.g., John Bellamy Foster, Ecology Against Capitalism, New York: Monthly Review Press, 2002.

49. See, e.g., J.T. Roberts and Bradley C. Clark, A Climate of Injustice: Global Inequality, North-South Politics, and Climate Policy, Cambridge: Cambridge University Press, 2007.

50. See. e.g., Petter Naess and Karl Georg Heyer, “The Emperor’s Green Clothes: Growth, Decoupling, and Capitalism”, Capitalism Nature Socialism, Vol. 20, No. 4 (December 2009); and Joel Kovel, The Enemy of Nature: The End of Capitalism or the End of the World? London: Zed Books, 2007.

51. See. e.g., Nives Dolsak, Elinor Ostrom, and Bonnie J. MaCay, eds, The Commons in the New Millennium: Challenges and Adaptation, Cambridge, MA: MIT Press, 2003.

52. See, e.g., Herman Daly and J. Farley, Ecological Economics: Principles and Applications, Washington, DC: Island Press, 2003.

53. Mac Margolis, “Reason with Him: An Interview with Luiz Ina´cio Lula da Silva,” Newsweek, September 22, 2009.

54. Paul Kennedy, “The Dollar’s Fate”, New York Times, August 29, 2009.

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