The title of Christian Marazzi’s The Violence of Financial Capitalism begs questions that its contents begin to answer. What is financial capitalism, and how is it different from capitalism’s previous forms? What makes it so violent? In just over 100 pages, the Italian Marxist explains how the allegedly fictitious world of finance, where people make immense profits out of thin air, evolved out of crises inherent to capitalism itself.
Under pressure from perennially falling rates of profit, which are intrinsic to the logic of capitalism, all sectors of the economy needed to externalize profits from the production cycle by seeking profit in finance. On the consumption side, with increasingly cheap credit and falling wages, Americans found themselves reliant on complex financial packages in order to fund their ordinary lives. For most of us, obtaining a higher education, receiving healthcare, or owning a home forces us into debt.
The banality of finance in our everyday lives, along with deregulating banks, repealing the Glass-Steagall Act, and China buying US Treasury bonds that decrease our long-term interest rates, all fueled speculative bubbles that were destined to pop. Therefore, our financial crises do not result from moral deviances. Our policies encourage them. Until we reorient our relationship to China and heavily invest in our service economies, especially in education and healthcare, we have not fully learned from the 2008 financial crisis.
REAL AND FICTITIOUS ECONOMIES
Within the typical production cycle, which involves the manufacturing and selling of goods, rates of profit fall over time (Marx). If you sell bikes for 100 bucks, then the next guy is incentivized to sell bikes for 90 bucks, and then the next person for 85 bucks— and you’re all competing against each other to lower prices as much as possible, which eats away at all your profits. Each participating capitalist will also try to cut their employees’ wages to limit the cost of production as much as possible. The diminution of labor unions and workers’ rights are both a byproduct and contributing factor to this capitalist logic; automation and outsourcing are also intrinsic to the logic of capitalism, as businesses try to maximize profits by cutting costs. Nonetheless, within this logic, companies typically reinvest their profits back into their business in order to make them more profitable.
The financialization begins when companies no longer reinvest their profits back into the productive process. Between the years 1960 and 1970, companies saw a 50% drop in profits (Marazzi, 30). Reinvesting profits back into businesses did not seem wise, since markets were already clotted by, “market saturation of mass consumption goods, the rigidity of the productive process, constant capital and the politically ‘downwardly rigid’ working wage” (Marazzi, 30). But automation, outsourcing, attacks on workers, etc. — all adjustments within the production process — could achieve very little, so companies looked to maximize profits by pursuing financial investments (i.e. stocks). At this point, there can be no distinction drawn between the ‘real’ economy and the ‘false’ economy of finance, since they are intertwined on the business end. As we will see, the blend occurs on the consumption side as well.
PACKAGING AND SELLING THE ECONOMY
Whether it is buying a house, affording health procedures, obtaining an education, or living through an emergency, we basically all must take-on debt during our lives. In fact, all personal finance gurus say it is critical to build a good credit score because it ensures that a person receives good quotes on their loans. With so much of the population, therefore, involved in the assumption of debt — and with so much of the economy depending on financial profits — it is obvious that entire industries emerge in order to make this debt as profitable as possible for as many actors as possible.
The result mirrors the old manufacturing economy in its resemblance to an assembly line. Initial loans become securitized and sold to investment banks, which then pool various loans in various bundles to create various risk profiles and then sell these. Then, based on projected returns, create bonds that, in turn, become retirement funds, hedge funds, investment funds, etc. The actors involved range from investment bankers to real estate agents selling properties, to workers in banks selling credit cards, and so on. The whole process is lubricated by banking deregulations and the necessity of higher returns on investment. Importantly, the packing and selling of loans in complex packages creates an artificial increase in the total amount of credit in the market, since each purchase creates another layer of risk.
As the layers increase, and players seek higher levels of profits — which, again, is the raison d’etre for capitalism— investors begin to consider even riskier investments. For this, middle and lower class folks are brought into the system. Players must, “invest in the bare life of people who cannot provide any guarantee, who offer nothing apart from themselves. It is a capitalism that turns bare life into a direct source of profit” (Marazzi, 39). Because they are poor, they must take on debt. And, according to the financial calculations of bankers, who use complex combinations of loans, their risk is negligible in the scheme of things. The system can afford to rip them off as a class because they are, to bankers, a negligible class: people who can afford to pay back their loans will outweigh the folks who got shitty, expensive loans that they cannot pay back.
Of course, this is morally reprehensible. The social right to housing became less important than investors’ right to secure a profit. The author prays, “May the academic economists who all these years have been putting their scientific competence and their dignity at the disposal of the financial industry find peace in their consciousness” (Marazzi, 40).
THE CRISIS OF FINANCIAL CAPITALISM
Anyone with a vague sense of 2008 or with common sense realizes that such a system is bound to implode. Unfettered pursuit of profits, which is both the goal of capitalism and the only way for companies to remain afloat, inevitably leads actors to take on risk that blows up in their face. But the issue is not a moral battle over greed. The crisis was structural and stretched back over three decades.
The repealing of the Glass-Steagall Act (1999) and deregulating stock commissions (1970’s) incentives this behavior. It increased competition, which meant thinner margins and riskier investments. In the early 2000s, the Fed cut interest rates, which made money markets even cheaper for banks, which made it easier to provide cheap credit to US consumers. This resulted in “increased US consumer spending and the decline of measured savings into negative territory” (Eichengreen).
Our structural relationship to China also exacerbated issues. China lifted 1 billion people out of poverty, but the country saved nearly 50% of its GNP— and they used those savings to buy US Treasuries and the obligations of Fannie Mae and Freddie Mac (Eichengreen). In turn, this propped up the value of the dollar and made it easier for Americans to buy cheap goods from abroad; this inflated their sense of what they could actually afford. In addition, China adopted predatory policies like, “strong devaluations, competitive deflation, and the limitation of internal consumption” (Marazzi, 66). China uses its profits to buy US dollars, which increases the value of the dollar and thereby enables more cheap consumption, which China needs because its economic model relies on exports. The combination of sinking US wages and artificially valuable currency encouraged more US consumption, which contributed to the debt crisis.
More importantly, however, the influx of Chinese money meant that US authorities had very little control over their interest rates once they realized the need to increase them in order to curb spending. High demand from China increased the value of US bonds, which decreased the long-term interest rates— despite the Fed trying to raise interest rates. This meant that monetary policy could not impact the availability or cost of credit in America. The structure of the global economy created cycles that US authorities could not escape from: they could not make the bubble smaller, nor could they stop it from popping.
POLITICAL & ECONOMIC SOLUTIONS
Because the issue is not simply moral (i.e. greed, corruption) or simply of policy (i.e. reinstating Glass-Steagall), truly resolving the last economic crash requires reorienting global political economy. Marazzi lays out 3 plausible outcomes:
- A pact between the US and China that unites the currencies such that China can no longer devalue its currency and buy US Bonds with dollars acquired through its trade surplus.
- A pact between China, the US, Europe, and Russia in a redux of the Bretton Woods Conference.
- Nothing changes, which eventually causes the system to collapse and create “war on a global and nuclear scale.”
Each one of these cases leads to the end of US hegemony. There can be no empire that isn’t also a creditor. We already see that China is stepping up to this role in Africa and in how it currently offers help to EU countries during this current coronavirus pandemic. At the same time, America and Europe still have financial leverage over developing countries in the form of the IMF and World Bank, which generate loans that force certain policy positions onto the debtor countries. Nevertheless, financial imperialism was never a good thing— and we should not desire to lock countries into sadistic domestic policies in order to fatten the pockets of the World’s One Percent.
Marazzi concludes by reminding us what we already knew: we must devise a social system that frees us from the anxiety of making an immediate profit, which means heavy investments into the service economies— with a special emphasis on healthcare and education. We must also extend this to the level of global cooperation, which means overcoming the logic of nation-states pursuing their unique, local interests.
WORKS CITED / FURTHER READING
China buys US bonds (video). (n.d.). Retrieved from
Eichengreen, B. (2008, September 23). Anatomy of the financial crisis. Retrieved from https://voxeu.org/article/anatomy-financial-crisis
Marazzi, C. (2011). The violence of financial capitalism. Los Ángeles: Semiotext(e).
Marx, K. (n.d.). Chapter 13. The Law As Such. Retrieved from https://www.marxists.org/archive/marx/works/1894-c3/ch13.htm