On Madoff, the Maestro, and Marx: Who Lost American Capitalism?

Was Karl Marx basically right? Are we about to witness the final death knell of global capitalism, as the few remaining big players begin to devour each other in a financial feeding frenzy? I myself am not usually one for that old line of socialist hyperbole, in the tradition of those outdated 20th century critiques of capitalism: the “final crisis,” the “final contradiction,” the “final collapse,” etc. These biblical-sounding, millenarian predictions have typically proved to be somewhat off the mark. Because this was so, there would then have to be some form of “revisionism,” wherein the arrival date that the socialist avatar that would come down to Earth from “egalitarian heaven” would have to be postponed—until the next “final whatever.” And so it went.

Capitalism has repeatedly proven itself to be incredibly adaptive, over time. Subsequent “final” events over the course of much of the last century—initially viewed as “crises”—would typically turn out to be “opportunities” for capitalism to reinvent itself, yet again.

Notions of arcane theoretical modeling aside, the system of accumulation known today as global capitalism does not appear well—not at all now, not anywhere. Since the beginning of the 21st century, the United States of America (still, as of this writing, the largest economic engine in the world system) has experienced what can only be called an epidemic of deep-seated financial corruption, in a broader context of systemic financialization (in a still broader context of gradual class closure, or economic collapse). Pardon me, as I engage in my own type of hyperbole. But this time, I fear, the hype is truly warranted.

This deep-seated corruption was typified, for example, in the Enron scandal (and the subsequent, anthropogenic California energy crisis) that broke at the turn of the century. Not only were Ken Lay, Jeff Skilling and Company engaged in politically authorized, financially deregulated, Ponzi-like malfeasance; they were also supposedly being “audited” by third party, professional accounting firms that were charged with overseeing their activities (remember the now-defunct Arthur Andersen consulting firm?).

In late 2008, we had the Bernard Madoff scandal. To be sure, financial malfeasance is happening all the time—somewhere. Moreover, two prominent financial scandals involving billions of dollars maketh a “final crisis” not. However, it is both the depth and breadth of this particular scandal which is so revealing to us now. In what is being described in the mainstream US media as an elaborate “Ponzi Scheme,” Madoff actually “made off” with approximately $50 billion in “funny money.” Few people are laughing, now, as it appears that Bernard Madoff has defrauded some of the wealthiest or most prominent members of our society.

But what I would like to highlight here is the very nature of the exposure of the crime: it was only as a result of the downturn in the economy that Madoff’s fraudulent activities were brought to the light of day. Had the economy still somehow been in a growth phase, akin to what we witnessed in the US pre-2000, he would have continued perpetrating himself as some kind of financial guru, we would have believed him, and he would have continued perpetrating his Big Lie, defrauding yet more people of yet more billions. Growth in the system, at least in part, appears to have been a part of the problem here. I will make more of this “economic growth problem,” later on.

According to Yahoo! News, of 12 December 2008:

It appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull out some $7 billion from the fund — money Madoff apparently did not have. In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand.

But the financial crisis appears to be hastening that unwinding process, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash. In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies.

“Based on a series of lies,” indeed. It seems that Mr. Petters was borrowing ideas from the Madoff book. Again, I want to highlight the fact that as long as the system was able to induce economic growth, the “lies” continued. Only after the system began to collapse, did we begin to see what has really been going on. Now, it appears that The Truth is beginning to set us free.

However, reality can be complex. Just as revelations can come from lies, so deceptions can come from truth. I would here like to switch to the interesting-but-sad case of another fallen hero: Dr. Allan Greenspan (a.k.a., The Maestro, for his apparent ability to easily manipulate or control events in the global economy). On 23 October 2008, from the Wall Street Journal, Greenspan stated the following, before the US Congress:

In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. This crisis, however, has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount. Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment.
(Source: http://blogs.wsj.com/economics/2008/10/23/greenspan-testimony-on-sources-of-financial-crisis/)

It was broader than anything he could have imagined. What was it that had seemingly constrained his imagination so? A part of the answer can be found in the Washington Post, of 24 October 2008:

Alan Greenspan, once viewed as the infallible architect of U.S. prosperity, was called on the carpet yesterday, pilloried by a congressional committee for decisions that contributed to the financial crisis devastating world markets.

The former chairman of the Federal Reserve said the crisis had shaken his very understanding of how markets work, and agreed that certain financial derivatives should be regulated -- an idea he had long resisted.

When he stepped down as Fed chairman less than three years ago, Congress treated Greenspan as an oracle, one of the great economic statesmen of all time. Yesterday, many members of the House Oversight and Government Reform Committee treated him as a hostile witness.

"You found that your view of the world, your ideology was not right, it was not working?" said Rep. Henry A. Waxman (D-Calif.), the committee chairman.

"Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Again, as long as the economy was in a long-term growth phase, these concepts would be (superficially) somewhat easier to maintain. The economy was growing, it was true. And with that truth, the deception could be maintained. Once such growth severely slows or stops, however, the curtain is raised, revealing that which exists behind. What has existed behind the mysterious curtain of economic growth has merely been a pre-supposition of more economic growth. In a sense, the entire US economy was based on a more elaborate, highly intricate Ponzi Scheme: as long as there were ever more folks willing to buy in to the ever bigger scheme, everything appeared to be okay.

The Washington Post went on to write:

With the global financial system unraveling, economists and political leaders are coming to doubt some of Greenspan's most closely held views: that markets can exact self-discipline, that central bankers should generally not try to prick bubbles in the price of houses or tech stocks, that a policymaker's most powerful tool to encourage growth is to stay out of the way.

Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
It is indeed a shock, to both individuals and systems, when prevailing ideologies no longer seem to be relevant or true. The Washington Post, in conclusion, went on to say:

The tough talk reflected a widening sense that some of Greenspan's apparent successes in managing the economy from 1987 to 2006 were in fact illusory, that they came at the cost of building the biggest credit bubble in world history.

Okay, so now it’s clear we’ve been bamboozled by neo-liberal economic philosophy for the past 25 years or more. What do we do now? First, we have to adjust our vision. We have to recast and readjust the type of models we deploy, and the time frames in which we deploy them. The time frame used by Greenspan et al. was far to short, in the final analysis. According to an editorial in Monthly Review magazine:

The extreme short-sightedness of building models on “a period of euphoria” and ignoring “historic periods of stress” meant that the historical reality of capital accumulation was simply written out of the analysis. As Marx explained, overproduction of capital inevitably leads to periods of massive devaluation, by which the system prepares the ground for a further expansion. “Business is always thoroughly sound, and the campaign in fullest swing, until the sudden intervention of the collapse” (Capital, vol. 3, chapter 30).

This analysis is okay, as far as it goes; however, I maintain that it does not go quite far enough. Not only must we concern ourselves with medium-term business cycles (typified in the 60-year boom and bust waveform pattern seen in the Kondratieff Wave, or K-wave); additionally, we must also look at the centuries-long patterns of regional and global ecological systems. Such ecological systems provide all of the foundational raw materials which are needed for the process of “material accumulation." Nowhere is this more apparent than in the current global (mis)management of the material and energy resources needed to fuel our old heavy industries. These natural resources—typified by petroleum’s impact on 20th century economic growth—are subject to physical shortage and depletion, which no amount of financial trickery (read, “wishful thinking”) can reinstate.

When viewed in this light, the final contradiction of global capitalism may not lay so much in financial bubbles as it may lie in something far more pernicious. The final contradiction may lie in the increasingly fragile “ecological bubble” in which we all now live. Only a framework that allows for both growth and contraction can be relevant and useful to us, over the long-term.

Dr. Blaine © 2008