Capitalism, Marx said, is unceasingly prone to crisis. His observation applies as much to financial capital as to industrial capital, as the recent collapse of Silicon Valley Bank and Signature Bank of New York attest. In their pursuit of profits, banks make loans that borrowers cannot repay or back the loans with assets that lose value. Why has this scenario become so deeply rooted in American capitalism and what is the state’s role in restabilizing the financial system once the house of cards begins to tremble?
This banking crisis seems to have ebbed as federal regulators decided to guarantee all deposits, regardless of the usual FDIC limits, at these two banks. Meanwhile, the US Federal Reserve Board carefully punted on its recent interest rate hike, hoping to locate a sweet spot between a higher anti-inflationary rate and the need to stabilize a quaking banking system with a lower one. It settled for a modest 0.25% increase. These federal actions are band aids on a gushing wound. Before considering steps government should be taking to avert future banking crises, we need to understand why they happen. The foundation of finance capital is loan credit. This means not only that finance capital and all the economic activities that it supports depend on a faith that mounting loans and debts will be repaid, but that the intangible financial assets used to repay the loans will retain enough of their value to keep the system going. In Silicon Valley’s case, for example, the long-term low-interest government bonds it used to back up its capital lost their value as the Fed raised interest rates to battle inflation and triggered a run on the bank. Put simply, newer government bonds paid more interest so old ones lost value. Depositors followed the money.
Karl Marx brilliantly explained how contradictions of capitalist production fueled emergent crises. For example, as capital replaced labor with technology, both surplus value and the rate of demand for goods would fall, raising barriers to further accumulation. And when capitalists stop accumulating capital, the system grinds to a horrific halt. Think 1929. Frederick Engels drew on Marx’s work to reveal much about the financial aspects of business as usual in Vols 2 & 3 of Capital that he edited, but Marx’s work on this score remained under-developed. Analysis of finance capitalism, a capitalism led by banks and financiers, not industrial corporations, awaited its fuller development in the early 20th century. Rudolf Hilferding’s path breaking work Finance Capital dissected the case of banker dominance in Imperial Germany. For the American variant, however, there was no more acute guide than Thorstein Veblen. His Theory of Business Enterprise (1904) and Absentee Ownership (1923) remain invaluable guides to our current situation. Together, these books clearly chart the transformation from corporate to financial governance of the capitalist class and its changing system of industrial-pecuniary relations. With the advent of the increasingly monopolistic, cartel-like structure of “key industries” such as steel, oil, communications, and automobiles plus establishment of the Federal Reserve Board in 1913, in the two decades that span his analysis, we can see how and why Veblen was impressed by the enhanced governing capacity to manage money values achieved by an informal alliance of extraordinarily concentrated public and private powers, “the general staff of financial strategy.”
But – and this qualification is critical as we stumble in the dark of financial uncertainty in days and months ahead – the impressive growth in finance capital’s governing capacity is and never can be equal to the ephemeral, intangible, and unstable make-believe of asset values. All the computers of all the financial kings’ math whizzes cannot put finite, predictable quantities to values that elude tangible measurement. As Veblen explained:
…The fabric of credit and capitalization is essentially a fabric of concerted make-believe resting on the routine credulity of the business community. It is…conditioned on the continued preservation of this…credulity in a state of unimpaired tensile strength, which calls for eternal vigilance on the part of its keepers. The fabric, therefore, is always in a state of unstable equilibrium, liable to derangement and extensive disintegration…at any point.
In plain language, Veblen summed up his point this way: modern finance is, at its core, “a confidence game…to be played according to the rules governing games of that psychological nature,” like Three-Card Monte on financial steroids played by guys in expensive suits. The only certainty in finance capital is the absence of certainty. Its illusory quality both allows for the grossest forms of sheer inequality and disallows effective governance of the system that fuels such inequality. The only way to manage that contradiction, at least within the terms of capital itself, is to require banks to serve production, not their own financial interests. We need regulations to make banks serve the public, not themselves. That includes a stronger version of the Glass-Steagall rules that Congress adopted in 1935 and then abandoned in 1999, a decision whose effects were soon felt in the tech stock collapse of 2000, in the far greater housing value collapse of 2007-2008, and now again in our more recent financial rumblings and quakes. If we continue to let the financiers play with financial fire, we will all be burned again. This is finance capital’s other great certainty.