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R E S E A R C H O N M O N E Y A N D F I N A N C E
Discussion Paper no 11
At the Heart of the Matter:Household Debt in Contemporary Banking and the
International Crisis
Paulo L dos SantosDepartment of Economics, School of Oriental and African Studies
11 May 2009
Research on Money and Finance Discussion Papers
RMF invites discussion papers that may be in political economy, heterodox economics, and economic sociology. We welcome theoretical and empirical analysis without preference for particular topics. Our aim is to accumulate a body of work that provides insight into the development of contemporary capitalism. We also welcome literature reviews and critical analyses of mainstream economics provided they have a bearing on economic and social development.
Submissions are refereed by a panel of three. Publication in the RMF series does not preclude submission to journals. However, authors are encouraged independently to check journal policy.
Paulo L dos Santos, Address: Department of Economics, Soas, Thornhaugh Street, Russell Square, London, WC1H 0XG, Britain. Email: [email protected].
Research on Money and Finance is a network of political economists that have a track record in researching money and finance. It aims to generate analytical work on the development of the monetary and the financial system in recent years. A further aim is to produce synthetic work on the transformation of the capitalist economy, the rise of financialisation and the resulting intensification of crises. RMF carries research on both developed and developing countries and welcomes contributions that draw on all currents of political economy.
Research on Money and FinanceDepartment of Economics, SOAS
Thornhaugh Street, Russell SquareLondon, WC1H 0XG
Britain
www.soas.ac.uk/rmf
2
Abstract
Thispaperconsiders the nature androle ofhousehold indebtedness incontemporarybankingandthecurrentfinancialandeconomiccrises.Itoffers a concise empirical exposition of the centrality of householdlending and related financial services to leading banking institutionsandto thecreditsystemsofanumberofadvancedandmiddle‐incomeeconomies. It also offers socioeconomic characterizations of thisdebtand its macroeconomic significance from the standpoint of Marxistpoliticaleconomy,affordingtwodistinctiveinsights.First,theconcretesocial content ofhouseholddebtover the past twodecadeshashelpedensure this lending remained highlyprofitable to lenders, making it anaturalvehiclefordestabilizingcapital‐marketcompetition.Second, acrisis characterized by record levels of over‐indebted wage‐earninghouseholds is likely to pose distinctive difficulties to a process ofmarket‐basedrecovery.Whilethedestructionofcapitalvaluesduringacrisis lays the basis for the eventual restoration of profitability andsolvencyforsome enterprises,over‐indebted wage‐earning householdsface no analogous opportunity. Without new speculative asset‐pricebubbles,the restorationoftheirfinancialstabilityhingesonreductionsinconsumptionorincreases inwages,bothofwhichpresentobstaclestoamarket‐basedprocessofeconomicrecovery.
3
1.IntroductionTheworldeconomyiscurrentlyundergoingoneofthemostsevereanddistinctivecrisesin
thehistoryofindustrialcapitalism.Theveryideathatdefaultsonhomemortgagesbysome
ofthepoorestelementsoftheUSworkingclasswouldhavewipedoutleadinginternationalfinancial institutions,andtriggeredaworldwiderecession,wouldhavebeenunthinkableas
recentlyas25yearsago.Theextentanduniquenessofthecrisishavecastasharpfocusontheoperationsofleadinginternationalbanks,andtheeconomicandpolicydeterminantsof
theUSsubprimemortgageimplosionanditsinternationalspread.
Anumberofcontributionshavesoughttoconceptualize,onthebasisofapluralistrangeof
analyticalframeworks,bothrecentchangesto theactivitiesofbanksandthedeterminantsofthecurrentcrisis.Thechangesinbankinghavebeenlongdocumented.Bergeretal(1995)
providedearlysystematicevidenceofthesteadylossbyUScommercialbanksoftraditional
business of lending to corporations and of captive deposit bases, attributing bothdevelopmentstofinancialderegulationandincreasedcompetition, aswellastechnological
developments.AllenandSantomero(2001)havenotedtheshiftfromnetinterestmarginstovariousservicefeesinbankbusinessmodels, interpretingthechangesinbankingasashift
in the relative importance of risk management services and traditional information
gathering functions. Erturk and Solari (2007) have emphasized the importance of bankentrepreneurial alertness in the development of newbank business lines in a context of
shiftingfinanciallandscapesandgrowingcompetitionfromcapitalmarkets.
Thecrisishasseentherapiddevelopmentofanextensiveliteratureonitsdeterminants,too
numerous to examine in detail here. Broadly, mainstream contributions have located thesources of the crisis in combinations of ‘market failures’ or ‘regulatory failures’,
conceptualized in relation to ideal,perfectly functioningmarkets.1 Heterodoxandradicalpolitical economists havesought to identifydeeper tendencies and processes inherent to
capitalistmarketsandcontemporarycapitalism.Numerouscontributionshaveemphasized
anddevelopedHymanMinsky’sconceptualizationofendogenoustendenciesincompetitiontowardsincreasinglyfragilefinancial structuresbyenterprises.2 More recently,Fosterand
Magdoff (2008) have attributedthe crisisto thestructural shift in theUSeconomyaway
4
1 Incentiveproblemsposed inmortgageoriginationand securitizationhavebeenofferedascausesof ‘marketfailures’, ashastheabsenceofliquidmarketsforCDOswrittenoverresidential mortgagesand thecorrespondingstrongreliance onstatisticalmodels for the establishment of prices. A ‘regulatory failure’conceptualization clearly underlies the extensiverecentcontributionofferedinBrunnermeieretal(2009).
2TheseincludeWhalen(2007),Wray(2007,2008),Kregel(2008).
from productive and towards financial activities. The authors identify this shift as anultimately self‐defeating capitalist response to the tendencies the authors find in
contemporarycapitalismtowardschronicstagnation.3
Yetfewcontributionshavesoughtoutanintegratedunderstandingofthecurrentcrisisasa
distinctiveresult of specificcontemporarybanking practices.4 ThispapermakesamodestcontributiontowardsuchanunderstandingdrawingonMarxistpoliticaleconomy.5
It arguesthat themostsignificant aspect ofrecent changes inbanking activitieshasbeentheturntowardsindividualwageincomeasasourceofbankprofits.Banklendinghasbeen
reorientedawayfrom loans to enterprises and towards various formsofconsumptionandmortgageloanstohouseholds.Investmentbankingbusinesshasalso increasedforall types
ofbanks,significantlydrivenbytheriseofretailinvestmentfundservices.6
Thesedevelopments have been conditionedby arange of seculareconomic and financial
changes in capitalism over the past three decades. Financial liberalization, the rise ofinstitutional investors, and changing financial behavior by non‐financial corporations
erodedtraditionalbankingandforcedbanksto lookfornewbusinessandfundingsources.
Wagestagnation,growinginequalityandthesteadyexpansionofprivateprovisionofbasicnecessities in housing, education, health and retirement, have increasingly forced wage
earnerstoapproachbanksandotherfinancialintermediariesinordertogainaccesstobasicnecessitiesandobtainsomedegreeofprotectionagainst risks they now faceindividually.
AlthoughtheseprocessesaremostclearintheUS,theirsalientfeaturesareevidentacrossa
rangeofadvancedandmiddle‐incomeeconomies.
The current crisis may be understood as a crisis of the distinctive type of banking thatemerged through these changes. First, itwas triggeredbythe subprimemeltdown, which
developedasbankssoughtto extendhouseholdlendingtohistoricallyoppressedsegments
of the US population. The meltdown had irreducibly financial causes related tosecuritization, access to moneymarkets,high levelsofbank leverage, and thepotentially
destructivenatureoffinancialcompetition.Yetunderpinningtheresulting frenzyandbustlaylendingtowage‐earninghouseholdsandthedistinctivenewsocialrelationsitdefines.
5
3LaidoutinBaranandSweezy(1968).
4AnotableexceptionisKregel(2008).
5BasedonresearchmostrecentlyreportedindosSantos(2009a),Dymski(2009),andLapavitsas(2009).
6SeeWilhelmandMorris(2007).
And second, recent household lending has also given rise to record levels of household
indebtedness acrossmanyeconomies. The current crisis has seen largenumbers of over‐
indebted households in those countries face increasing difficulties in servicing debt.Widespreadfinancial distressby largenumbersoffinalconsumersrepresentsadistinctive
feature of the current international recession that is likely to condition significantly theprospectsforeconomicrecovery.
AMarxian approach to these developments affords two distinctive insights motivated indetail in this essay. First, by pitting households aiming to secureaccess to consumption
againstfinancialenterprisesseekingtomaximizeprofits,householddebthasinthepresentcontextcreatedsocialrelationsthataresystematicallydisadvantageous toborrowers.Such
disadvantages underpin the high effective interest rates realized by lenders and the
sustained high profitability until recently enjoyed by financial intermediaries lending toordinaryconsumers.Highratesofprofit,inturn,madethislendingparticularlywell‐suited
forthedevelopmentofexcessivelendingandinstability intheprocessoffinancialmarketcompetition.
Second andmost significantly, there are good theoretical reasons to expect that a crisistriggered and characterized by over‐indebtedness by wage earning households will pose
distinctive difficulties to the process of recovery. At the broadest level, Marx (1909)identified a number of mechanisms through which the devastation of capital values
(includingwages paid to variable capital) ushered by an industrial crisis creates the very
bases for an eventual recovery ofprofitability. Such a recovery improves the solvency ofindebted enterprises, facilitates financial stabilization, and fosters broader economic
recovery. In contrast, a crisis sets into motion a range of macroeconomic processes thatunambiguouslydeterioratethefinancialpositionofwage‐earninghouseholds.Theveryreal
reductionsin wagerates uponwhich an eventual recoveryis significantly predicatedmay
plunge over‐indebted householdsdeeper into financial distress, creating further financialdisruptions, and further limiting household demand. In such a setting, it is likely that
recessionswillproveunusuallylonglastingwithoutsignificantstateinterventionintolaborandfinancialmarkets.
The rest of the paper proceeds as follows. Section two documents the changes in theconduct of banks and the related reorientations of credit systems toward credit to
households. It also offers a discussion of the broad policy, labor‐ and financial‐marketfactors conditioning these developments. Section three offers a conceptualization of the
6
different social relations associated with lending to capitalist enterprises and lending toindividualwageearners,basedonMarxianschemasofreproduction.Onthesegrounds,the
section identifies possible grounds for systematically higher effective interest rates in
lendingtowage‐earninghouseholdsforpurposesofconsumption.
Sectionfouroffersinitialanalyticalconsiderationssuggestingthatrecoveryfromarecessioncharacterized by high levels of household indebtedness and financial distress may pose
distinctiveandstubborndifficulties.Sectionfiveconcludes.
2. TheReorientationofBanking
Banking in the advanced capitalist economies has undergone significant transformationsover the past 25years. Lending has been reoriented away from loans to enterprises and
towards various forms of consumption and mortgage loans to households. Investment
bankingbusinesshasalso increased forall typesofbanks,drivenmost significantlybytheriseofretail investmentfundservices.AsdocumentedindosSantos(2009a)andLapavitsas
(2009), these developments can bemeaningfully understood as embodying an importantshift in the sources of bank profits, away from the profits of productive enterprise and
towardsthewageincomeofordinarypeople.
Recordlevelsofhouseholddebthavefollowedthesedevelopments.Risingindebtednesshas
imposed higher debt servicing costs onto wage‐earning households even in economieswhereinterestrateshaveseenclearseculardeclinesinthepast25years.Thisgrowingdebt
burdenhastransformedgrowingsharesofwageincomeintobankrevenuesandprofits.
WhiletheseprocesseshavebeenclearestintheUS,manyoftheircentralaspectsareevident
in Britain, and other OECD economies. They are also evident in many middle‐incomeeconomies,whereleadingUSandEuropeanbankshaveledthesetransformationsoverthe
past 15years.7 Thissectionbrieflydocumentsthesechangesinbankbehavior,theirimpact
on the overall allocation of credit and the burden of debt on households, and offers a
discussiononthedeterminantsofthesedevelopments.
2.1TheNewBankActivities
Basedonastudyofcorporatedisclosuresfornineleading international banks, dosSantos(2009a)offersasnapshotofabankingsystemgearedtowardstheextractionofprofitsfrom
individual wage revenue. Activities and revenues centre significantly on lending toindividuals,money‐dealingfeesonretailaccounts,andtheprovisionofretailinsuranceand
77SeedosSantos(2009b).
investment fund services. Lending to individuals is clearly a major lending activity forleadinginternationalbanks,especiallythosefromtheUS.
Table1‐LoanstoIndividualsasPercentageofTotalLoanPortfolio,December2006
HSBC Citigroup BofA RBS Barclays Paribas Dresdner SMFG
40.5 77.7 76.3 24.0 44.0 33.0 20.1 26.8
Source:dosSantos(2009a)
Yet even these figures understate the importance of this type of lending. The very
organisationofCitibank,HSBCandBankofAmericarevealstheirorientationtoindividualcredit.Citibank’s“GlobalConsumer” businesssegmentgeneratedprofitsofUS$12.1billion,
or56percentofallprofits,in2006.Revenuesfromcreditcardsandconsumerlendingstood
atUS$13.5billion,or31.6percentofallrevenues.Citigroupalso reportedatotal ofUS$220millioninprofitsfromitsUSstudentloansdivisionalone.8
That same year HSBC’s “Personal Financial Services” segment, which focuses on
consumptionandmortgagecredit,generatedUS$9.5billion inprofits, 42.9percent ofthe
total,aheadofcommercialandinvestmentbankingdivisions,whichaccountedfor27.3and26.3 percent of profits respectively. Central to this performance is HSBC’s credit card
network of over 120 million cards worldwide. Bank of America’s “Global Consumer andSmallBusiness” segment,whichfocusescentrallyonconsumptionandmortgagecreditand
retailaccounts,accountedfor65.6%ofnetinterestincomethatyear.
Money‐dealingfeesinretailaccountshavealsodevelopedasamajorsourceofbankrevenue
drawing onwageincome. In 2007, Bank ofAmerica andCitigroupreceived almostUS$30billion in such fees, with HSBC and Barclays US$23.6 billion. Overdraft charges, late
payment fees,creditcardcharges, etcareleviedasfeesbutarecostsofconsumerlending.
BankofAmericaattributedthesignificantriseinitsnon‐interestincomebetween2005and2006toitspurchaseofBritish‐basedcreditcardissuerMBNA,whichresultedinincreasesin
excessservicing,cashadvance,andlatefees.Similarly,Furnace(2004)reportsthattotalUSlatecreditcardfeesrosefrominsignificantlevelsin1990tooverUS$1billionin1996,andto
almost US$9billion in 2003.Other fees relate to access to new services, such as ATMs,
phoneandinternetbanking facilities,whosehighinstallationcostshavesuccessfullybeenpassedtoclientsbybanks.9
8
8AllinformationonindividualbankswasobtainedfromcorporateAnnualReports.
9SeeLapavitsasanddosSantos(2008).
Finally, banks have benefited significantly from the growing reliance on private pension
provisionbydevelopingnewmassretailservicesininvestmentfunds.Worldwide,managed
fundsheldatotalofUS$63.8 trillioninassetsattheendof2006.10 Evensmallmanagementfeesonsuchvolumescanleadtolargerevenues.IntheUSalone,mutualfundmanagement
feeshavegrownconsiderablysince1980.
Table2‐TotalMutualFundFeesPaidbyHoldersinUS,US$billion
1980 1985 1990 2000 2001 2002 2003 2004 2005 2006
0.0 0.2 1.1 3.4 11.0 8.9 9.1 10.3 10.6 11.8
Source:InvestmentCompanyInstitute
Inaddition to these fees, fundmanagersstandinahighlyadvantageousposition toprofit
fromdocumented ‘behavioural’ tendenciesbyretail investors to buywhileprices arehigh
andsellwhen theyarelow.11 Asaresult,fundmanagement isremarkablyprofitable.Inaninternationalsurveyofmoneyfundmanagers’performanceintheleanyearof2002,Boston
ConsultingGroup(2003)foundthat64percentofthefundsreportedpre‐taxprofitmarginsabove 20 percent. A full 42 percent of the funds reported profit margins higher than 30
percent.Fundstargetingretailinvestorswerereportedlythemostprofitable.
2.2TheGrowingBurdenandProfitsofDebt
These activities have turned the debt of households into a major component of overallprivatedebtacrossanumberofeconomies.InMexico,Estonia,RomaniaandPoland,where
leading international banks have come to dominate banking markets, bank loans to
householdsstoodrespectivelyat40.0,46.6,49.8and54.1percentoftotalbankcreditbythestart of this year.12 In Britain household debt reached 78.9 percent of all private non‐
financial debt and160 percent ofgrossdisposableincomeby theendof2007.13 IntheUShouseholddebtreached58.3percentofallprivatenon‐financialdebtliabilitiesinmid2006.
Italsopeakedatarecord133percentofdisposableincomeinearly2008,remainingaround
130percentinthesecondhalfof2008despiteaggressivecutsinbaseinterestrates.14
9
10dosSantos(2009a).
11Ibid.
12Calculatedfromrespectivecentralbanks,exceptforMexicowheredatafromtheCNBVwasused.
13CalculatedfromUnitedKingdomNationalAccounts:BlueBook.
14CalculatedfromFlowofFundsoftheUnitedStates.
All layersoftheUSpopulationhavebeenaffected,withtheheaviestproportionalvolumes
ofdebthittinghouseholdsinthebottom20percentoftheUSincomedistribution,andthe
lightestonthosehouseholdsatthetop10percent.
Table3–USMeanHouseholdDebttoMeanIncome1989‐2007,byincomepercentile
0‐20 20‐39.9 40‐59.9 60‐79.9 80‐89.9 90–100
1989 87.5 86.0 84.7 95.9 83.7 60.2
2007 258.5 154.8 170.2 182.5 178.0 86.7
CalculatedfromFederalReserveSurveyofConsumerFinances,2007Chartbook
Despiterecent seculartrendsto lowerratesofinterest,thecosttohouseholdsofservicing
thisdebthasincreasedconsiderably.TheFederalReserve’sFinancialObligationsRatio,anestimateoftheshareofdisposableincomepaidoutasinterest andforaseriesofhousing‐
related services, reached a record 19.39 percent in the fourth quarter of 2007. Despite
significantinterestratecutssincethen,itstillstoodat19percentoneyearlater,alevelonlyreachedduringtheheightoftherealestateboominmid‐2005.
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10
The distribution of this debt burden can be quantifiedmore exactlywith data from the
recentlyreleasedUSSurveyofConsumerFinances. It showsthisburden fallingheavilyon
all households acrossthe incomedistribution, saveforthosein thetop10 percent,withaslightlyheavierrelativeburdenonthetwomiddlequintiles.
Table4‐AverageDebtPaymentstoFamilyIncome2007,byincomepercentile
0‐20 20‐39.9 40‐59.9 60‐79.9 80‐89.9 90‐100
17.6 17.2 20.3 21.7 19.7 8.4
FederalReserveSurveyofConsumerFinances,2007Report
Asthefiguresprovidedaboveonleadinginternationalbankssuggest, theyhavedeveloped
veryprofitablebusinesslinesrelyingonappropriationsofthesegrowinghouseholdoutlays.Ausubel(1997)providesrobustevidenceoftheexceptionallyhighlevelsofreturnsonassets
USbanksreceivedoncredit‐cardlendingcomparedwithotherlendingactivities.InBritain,
Bank of England figures on realized effective interest rates show a consistent threepercentage point premium on returns on unsecured overdraft loans to households over
equivalentloanstonon‐financialcorporationsbetween2004and2008.15
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1115Thegaphaswidenedtofivepercentinthefirstthreemonthsof2009.
The profitabilityof this lendingmayalso be inferred from the aggressivenesswithwhichbanks in theUShave pursued acquisitionsof independentfirmsengaged in this lending
sincetheearly1990s.In1995theyheldnomorethan25percentofcreditcardreceivablesin
theUS.16Aslateas1999,thetoptenUSissuerscontrolled55percentofthemarket;manyofthemwereindependent creditcardcompanies.17 Sincethenlargebanksbought theirway
into dominant market share, acquiring Associates, Bank One, British‐basedMBNA, andProvidian.After2004,thetoptenUSissuerscontrolledover90percentofthemarket,and
countedonlyone independent,non‐bank enterprise.18 During thereal estateboom ofthe
mid‐2000s, US banks pursued similarly aggressive acquisitions of independent mortgagecompanies,pavingthewayforseverelossesoncethesubprimecrisisexploded.
2.3TheBroadDeterminantsPavingWaytoCrisis
A series of secularand policy developments over thepast 25 yearshave conditioned the
developmentofhouseholddebtoverthepast25yearsandthebuilduptothecurrentcrisis.As above, these are clearest in the US, even though their central elements have been
observedacrossmostoftheadvancedandmanymiddle‐incomeeconomies.
Onthedemandside,anumberoflabor‐marketandsocialpolicydevelopmentshavehelped
pushwageearnerstoaccesscreditandotherfinancialservicesinordertomeetbasicneeds.Fromdifferentanalytical perspectives,Iacoviello (2008) aswell asBarbaandPivetti (2008)
have established empirical and conceptual linkages between rising levels of incomeinequalityandrisinghouseholddebtintheUSeconomy.Lapavitsas(2009)anddosSantos
(2009)emphasizeacloselyrelatedaspect:thathouseholdindebtednesshasrisenagainsta
backgroundofstagnantincomesandthegrowingroleofprivateprovisionin thesupplyofnecessities in housing, health, education andpension services. These developments have
forcedwageearnersincreasinglytoborrowandtoaccessvariousinsurance,investmentandrisk‐managementservicesprovidedbybanksandotherfinancialfirms.
Onthesupplyside,scopeforthetraditionalbankingbusinessoflendingtoenterpriseshasbeen greatly reduced. Financial liberalization intensified capital‐market competition for
banks,whiletheriseofprivatepensionsavingscontributedtoanexplosionintheissuanceofcorporatebondsstartingintheUSsinetheearly1980s.Non‐financialcorporationshave
increasingly been able to rely on bond markets and retained earnings to meet their
12
16AllenandSantomero(2001).
17Land,Mester,andVermilyea(2007).
18JPMorgan,Citigroup,BankofAmerica,theindependentCapitalOne,HSBCandWashingtonMutualheldthetopsevenspotsatthetime.SeeAkersetal(2005).
investmentneeds.Further,theirrealfixedinvestmenthastendedtofallinrelationtoGDP,whilevariousmeasuresinvolvingtherepurchaseofoutstandingequitythroughbuybacks,mergers,and
leveragedbuyouts,oftenfinancedthroughbondissuance,haveincreasedinsignificance.19
Bankswerethusforcedtodevelopnewlinesofbusiness,whichtheyfoundintheprovision
of investmentbanking services andbyturning to theindividual. Inthistechnological andtechnical developments such as credit scoringmethods and programswereinstrumental.
Theypermittedtheextensionofretailcredittolargenumbersofborrowers,includingthose
at considerable geographical removes from banks’ head offices, on the basis of ‘hard’quantitativeestimatesofcreditworthiness.20
Asdiscussed above, thehigh relativeprofitabilityofthis typeof lendingcompelledbanks
increase market share and market size, often by aggressively offering consumption and
mortgagecredit.21Inthesettingoflowinterestratesandanincipientreal‐estatebubbleofthemid‐2000s, this evolvedintopredatorylending to historicallyoppressedandexcluded
sectionsoftheUSpopulation,22fuelledbytheadoptionofinvestment‐bankingfundingandinvestmenttechniques.23Thelureofhighreturns,theverynatureoffinancialcompetition,
andhubrisconcerning thedescriptivepowerof variousnewriskmanagement techniques
andinstruments,pavedthewayfortheextensionofsuchpracticesintopreviouslyexcluded‘sub‐prime’marketsegments—withdisastrouseffects.
Finally,governmentsactivelysupportedhouseholdindebtednessasanincreasinglycentral
tenetofmacroeconomicpolicy.In theUS,fixedproductiveinvestment and theincomeof
thebottom90percentofhouseholdsstartedto experiencesignificantfallsrelativetoGDP
in the mid 1980s.24 Household debt offered an easy macroeconomic solution to theconsequentdemandproblems.AsadmittedbyAlanGreenspan(2007),ithasbeenpursued
assuchsinceatleasttheearly1990s.Borrowinghasrisensteadily sincethen,asshownin
figure1,whiletheshareinGDPofhouseholdconsumptiongrewfroma1952‐1982averageof62percenttoover70percentby2002.Whilethedot.combubbleofferedabriefrespite,the
13
19SeedosSantos(2009a).
20SeeLapavitsasanddosSantos(2008).
21 Pre‐approved credit cardshave longbeen aggressively awarded to students and youngadultssince the early 1990s.Throughsuchstrategiesissuersseektoprofit fromdocumented tendency for consumerstocontinueusingthefirst cardtheyeverobtained,regardlessofitscomparativeinterestrates.SeeGruberandMcComb(1997).
22SeeDymski(2009).
23SeeLapavitsas(2009b)inthisvolume. 24SeeNIPAandIRSdata,whichdocumentthesetendenciesrespectively.
falling trends in investment and income resumed quickly from 2001. From then on, asGreenspanhimselfcandidlynotes,
“Consumer spending carriedthe economythrough thepost9/11malaise, andwhat carried consumer spending was housing. In many parts of the United States,
residentialreal estate, energizedbythefall inmortgageinterest rates,beganto see values surge.... Since 1994, the proportion of American householderswho became
homeownershadaccelerated....ThegainswereespeciallydramaticamongHispanics
andblacks,asincreasingaffluenceaswellasgovernmentencouragementofsubprime mortgageprogramesenablesmanymembersofminoritygroupstobecomefirst‐time
homebuyers.Thisexpansion...gavemorepeopleastakeinthefutureofourcountry andbodedwellforthecohesionofthenation....
“Capital gains,especiallygains realizedin cash[throughhomeequitywithdrawals],
began burning holes in people’s pockets. Soon statisticians could see a bulge in consumerspendingthatmatchedthesurgeincapitalgains.Someanalystsestimated
that3percentto 5percentoftheincreaseinhousingwealthshowedupannuallyin thedemandforallmannerofgoodsandservices.”25
Meanwhile,US householdswerefinancing growing levels of consumptionand residentialinvestmentwithborrowings,whichreachedsustainedrecordlevelsbetween2003and2006.
1425Greenspan(2007),p229‐230.
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ConcernsaboutthemountingsignificanceandmagnitudeofhouseholdborrowinganddebtweredismissedbyFederal Reserveofficials,who thought theyhaddiscovered aperpetual
motionmachineinrisinghouseprices.Risinghousepricesappearedto improvehousehold
networthandwerearguedtorenderrisinglevelsofdebtsustainable.AscanbeseenintheFed’sMonetaryReporttoCongressof2004,noattentionwasgiven(atleastinpublic)tothe
factthatitwasrisingindebtednessthatwashelpinginflatehomeprices.
Againstthisbackdropthecurrentcrisisappearsasacrisisofcontemporarybanking,andof
thebroadereconomicandpolicyregimethatconditioneditsdevelopment.Attheheartoftheseprocesseslayanewsetofcreditrelationsthat havebecomecentral tocontemporary
capitalism: Lending to wage‐earning households. Its distinctive social content and likelyimpactoncrisisandrecoveryarepursuedinthenexttwosections.
3.OntheSocialContentofDebtClassicalMarxistanalysisofbanklendingisfoundedonthedistinctiveconceptofinterest‐bearing
(orloanable) capital.Loanablemoneycapital(LMC)isapeculiartypeofcapital thatisdistinctfromindustrialandcommercialcapital.Itoriginatesfromidlepoolsofmoneycapitalthatappear
inthefirstinstanceoverthecourseofthecircuitofindustrialandmerchantcapital.26Suchpools
aremobilisedandtransformedintoloanablemoneycapitalbythecreditsystem,whichchannelsitbackintocirculation,inthefirstinstanceasloanstocapitalistenterprises.
TradinginLMCinvolvescreditrelations,that is,theadvanceofvalueagainst apromiseof
repaymentwithinterest.Inthislight,banksandotherfinancialintermediariesarecapitalist
enterprises that specialize in all aspects of dealing in LMC, accruing revenues from thedifferenceinthepricepaidfordepositsandthatpaidonloans.LMCcommandsrepayment
with interest,andtheentire aimof itscirculation is itsreturn to its originaugmentedbyinterestpayments.Itssuccessfulreproductionmaybedescribedschematicallyas,
M‐F‐M’ (1)
WhereMdenotesthevalueoftheoriginalLMC,F isthefinancialclaimitbecomesonceit
isadvanced,andM’>MdenotesthevaluereturningtotheownerofLMC.Notably,process
(1) is characterized by the qualitative identity and quantitative difference between itsstartingandendingpoints.
AsintermediariesdealinginLMC,banksarespecialistsinoverseeingsuccessintheprocess
1526SeeItohandLapavitsas(1999).
describedin(1)onbothassetandliabilitysidesoftheirbalancesheets.Inthisspecializationtheymustaddressdifficultiesrelatedto thepeculiarcharacterofinterestratesasapriceof
LMC. To Marx (1909),27 the rate of interest contains an element of irrationality. It is a
peculiarprice:anexpressionofvalueinmoney,ofafutureflowofmoney.Italsorevealsnounderlyingsocio‐economicrelationshiporinherentmaterial aspectofsocialreproduction,
not least because it is not the price of aproduced commodity. Interest ismost generallydeterminedsimply throughtheinteractionofsupplyanddemand.Its relativedetachment
from the material realities of production makes relations defined over LMC highly
susceptibletotheinfluenceofbroaderpatternsofsocio‐politicalpower.28
As a result, the extension ofLMC to different classes of borrowers entails fundamentallydifferentsocialandeconomicrelations.Thisincludesdifferencesinthebasesforrepayment
with interest,differences intherelationshipbetweenthevalueadvancedthroughtheloan
and theborrower’s reproduction, andin thedifferent reproduction aimsand imperativesgoverning borrowers’ need for credit. This section illustrates these differences with a
comparison,atthehighest levelofabstraction,ofthesocialcontentoflendingtocapitalistenterprises and that of lending to wage‐earning households based on classical Marxist
analysisofLMCandtheprocessofreproductionofeachclassofborrower.
3.1LendingtoCapitalistEnterprises
The process of social reproduction of capitalist enterprises in Marxist political economyinvolves the self‐expansion of value through the appropriation of surplus value. This is
achievedascapital istransformedintocommoditieslaborpowerandmeansofproduction,
C(lp,mp).Thosearecombinedintheproductionofnewcommodities,whosesaleallowsthecapitalist to realize profits. Central to the process is the appropriation by the capitalist
enterpriseofvaluecreatedbylaborpoweroverandabovethevaluerepresentedbywages.Schematically,
M‐C(lp,mp)‐M’ (2)
SuccessinthisreproductionrequiresthatM’>Manddefinestherateofprofit,takenhere
withreferenceasingleturnovertime,
16
27Chapter22.
28Lapavitsas(2003).
ρ=(Μ’‐Μ)/Μ (3)
The rate ρ provides the central concern for all aspects of the reproduction of capital.
Expectationsabout its level governtheoperationsofeverystage inprocess (2). Theyalso
driveinvestmentplansanddemandforinputs,aswellasthebroaderprocessofallocationofcapital.Significantly,itdependsonthequantitativerelationshipbetweenΜandΜ’.Inorder
to succeedinitsreproduction,capitalmustofnecessitydealwithall aspectsofcombininginputstoproduceoutputsandallqualitativetransformationsitentails.Butnarrowtechnical
orengineeringissuesarenot thecentral imperativeoftheprocess.Thatisprovidedbythe
quantitativeexpansionofvalue.
Whenextendedtofinanceacapitalistenterprise,theinterestpaymentsonLMCrepresentadivisionofprofitsrealizedbytheenterprise.Whileshapedbytheunanchoredinteractionof
supplyanddemandforLMC, thisdivisionmustyieldcertaingeneral regularities ifoverall
reproduction istobesuccessful.Therateofinterest typicallyliesbelowthegeneralrateofprofit, ensuring repaymentwith interest canproceedwithout the lossofcapitalvaluesby
theborrowingenterprise.
Duringnormal business, thesystematicbasisfor thepayment of interest is the increased
turnoveroftotal capital achievedby themobilisationof idlemoneyand itsapplicationtofunctioning circuits of capital through lending.More concretely, individual firms will be
abletoincreasethereturnsontheirowncapitalbyleveragingitthroughborrowing,solongas thereturn on appliedcapital exceeds therateof interest. In eithercase, theadvanced
LMChelps generate the source of its own repaymentwith interest, by circulating in the
borrower’scircuitandexpandingthroughtheappropriationofsurplusvalue.
Intimesofcrisis the rateof interestmaygenerallyexceedtherateofprofit,posing averydifferentpotentialsetofrelationsbetweenlenderandborrower.Debtprovesdestructiveof
capital and disruptive of accumulation.29 Its repayment poses elements of borrower
expropriation, as repayments may require the liquidation of assets and the transfer tolendersofvaluesecuredbytheborrowingenterpriseindependentlyoftheloan.
Finally, in the social relation posed by LMC advanced to enterprises the borrower
approachestheloanonthesamebasisasbankingcapital:seekingtosecurethequantitative
augmentationofcapitalΜintoΜ’.Theresultingsocialrelationsaredefinedbetweensocial
1729ItohandLapavitsas(1999).
equalswho,atthislevelofabstraction,havecomparableexpertiseinseekingtheexpansionofvalue.
3.2LendingtoWage‐EarningHouseholdsMatters are fundamentally different in credit relations between banks and wage‐earning
households.Undercapitalistconditionswageearnershavenomeansotherthanthesaleoftheir own labor power as the means to secure access to necessary consumption.
Schematically,theirreproductionmayberepresentedas,
C‐M‐C’ (4)
HerewageearnersselllaborpowerC,inordertoobtainanequivalentquantityofvalueasmoneyM,whichallowsthepurchaseofequallyvaluedconsumptioncommoditiesC’.
This reproduction is fundamentally different from that of LMC and industrial capital. Its
purposedoesnot relateto changingquantitativemagnitudes,whichstayconstantateverystep. It lies in the qualitative difference between the original commodity and the
commodities accessed. The governing imperative in this process is the fulfillment ofconsumption needs. Significantly, the development of such needs, norms, habits and
expectationstakesplacethroughcomplexnon‐economic,socialprocesses.30
Debtplaysadistinctiverolehere.ItmayallowwageearnerstoaccesscommodityvaluesC’in
excessofthevalueoftheircurrentearningsandanypossiblesavings.Therationalesforthe
paymentofinterestarefarmorecomplexherethaninthedebtofindustrialenterprises,andrequireconsiderableseparateanalysis.MainstreamcontributionslikethoseinspiredbyMilton
Friedman’s(1957)Life‐CycleorPermanentIncomehypotheses,pointtothegainsinborrower
welfare arising from consumption smoothing by consumers facing uneven or stochasticincomepaths.Inadditiontonotinquiringintothedeterminantsofconsumptionpreferences,
suchviews implya long‐term individual calculus thatbearslittleresemblanceto theactualbehaviorofthemassofwageearnerstowardsdebtandanuncertaineconomicfuture.31
A perspective far more likely to yield fruitful research has been recently advanced byCynamon and Fazzari (2008), who argue that, as with consumption habits, ‘financial
preferencesevolveassocialnorms[and]interactwithbothculturaltrendsandinstitutional
18
30See,forinstance,Lapavitsas(2003),Saad‐Filho(2002),orCynamonandFazzari(2008).
31SeeMiles(2004),CampbellandCocco(2003),forillustrations.
changes in householdfinance’.32 Under this light, themotivations and social content ofhousehold debt and consequent flows of interest payments should be understood with
reference to the concrete evolution of consumption habits, norms and expectations and
theirrelationshiptowagelevels.
Twodistinguishinggeneralfeaturesofborrowingbywage‐earninghouseholdsconditionitssocial content.First,it inherentlyposesanelementofexpropriation.Moneyloanedoutto
individualsforconsumptionormortgagesdoesnotordinarilygeneratethevaluefromwhich
it is to berepaidwith interest.33 Interest paymentsare generallymade from subsequentwagereceiptsbyborrowers,representinganappropriationofvalueborrowershavesecured
independentlyoftheloan.
Second, in this borrowing wage‐earning households are primarily concerned with the
satisfactionofqualitativeconsumptionneeds,asrepresentedby(4).Andwhileinthispursuitthese households generally ensure themaintenance of quantitative equality across trades,
tradingoverLMCposesseriousdifficultiesdueto theindefinitenessofitsvalueinexchange.Insuchtradestheyfaceprofit‐maximizinglenders,specializedintheexpansionofvaluegiven
by(1),whowillapproachtherelationshipfromaclearlyadvantageousposition.
Intheconcretesettingofstagnantwages,risinginequality,andgrowingrelianceonprivate
provision of housing, health, and education, wage earners have been increasingly forcedonto debt relations in order to secure theirown reproduction. Thedistinguishinggeneral
features of consumption debt and this element of social compulsion suggest that the
transfersofwage income in the formofinterestpaymentsmay beusefully understoodasusuriousandcontaininganimportantexploitativeelement.
They also help identify the general class and concrete historical bases for the high
profitabilitygenerallyassociatedwiththistypeoflending.Highratesofprofit,inturn,made
this lending particularly well‐suited for the development of excesses in the process offinancialmarketcompetition,andhelpedpavethewaytothecurrentcrisis.Atthebroadest
level, the usurious and exploitative elements of this lending helped condition thevulnerabilitiesthatburstopeninAugust2007intheUS.
19
32CynamonandFazzari(2008),p1.
33Theobviousexceptionsrelatetoequityandresidentialrealestatebubbles.
4. Debt,CrisisandRecoveryTheevolutionofdebt, itsburdensonborrowersanditssustainabilityhavebeen longand
widely understood to be an important factor in the origin and propagation of capitalist
crises. Hyman Minsky’s Financial InstabilityHypothesis,34 most notably, identifies in thecompetitiveeconomicprocessendogenoustendenciesforincreasinglyfragilecorporatedebt
structures,advancingthemasthebasisofcapitalism’sinherentandrecurringcrises.Fisher’s(1933)debtdeflationadvancescorporateover‐indebtednessnotonlyasthetrigger,butalso
as thecentral transmissionmechanism ofeconomic depressions, leading to distressasset
selling, falling asset prices, and a contraction of credit, confidence, profits, and output.35Even neoclassical economists have sought to identify in debt and its associated
‘transactionalproblems’potentialsourcesforthepropagationintimeofone‐off exogenousshocks.36
These and related contributions have helped offer insights into a number of importantelementsofthecurrentcrisis.37Butinthemselves,theyprovidescantbasesforapproaching
the potentially distinctive role and origins of household over‐indebtedness in thedevelopmentandpotentialrecoveryfromacrisis.Thissectionoffersinitial elementsfora
conceptualisationofsuchpossibledifferencesdrawingonMarxistpoliticaleconomy.
Theanalytical emphasis inMarxist approaches to crises liesnotonthe evolutionofdebt,
interest rates or financial structure, but on various tendencies inherent to the processofaccumulation that periodically reduce rates of profit.38 Recurring systemic reductions in
profitabilitynot onlyinhibitinvestment and triggerindustrial crises,butalso compromise
theabilityofenterprisestoservicedebt,potentiallycreatingsignificantfinancialdisruptionsthataugmentthesize,durationandscopeofthecrisis.
Whenconsideredfromthestandpointofthecurrentcrisis,Marx’sunderstandingofprofits
andtheir rolein theoriginsandrecoveryfrom crisesafford two important insights. First,
thecurrentcrisisdidnotimmediatelyoriginateasaresultofdisruptionstotheprofitabilityof capitalist enterprises. Its spread followed from the severe international financial
20
34LaidoutsuccinctlyinMinsky(1992).
35Fisher(1933),p342.
36See,forinstance,KiyotakiandMoore(1997).
37SeeinparticularKregel(2008).
38SeeDay(1981)andSweezy(1970)forsummarydiscussions.
disruptionsthatfollowedunexpectedbanklossesinhighlyleveragedinvestmentsinclaimsonUSwage‐earninghouseholds.Itishistoricallynovelinthatregard.
Second and most significantly, recovery from a crisis triggered and characterised byunprecedented levels of household debt poses a range of distinctive difficulties. The
depressioninthevaluesofallformsofcapitalduringaclassicalindustrialcrisishelpscreatethe conditions for the eventual recovery of profit rates, financial stability, and aggregate
demand. Capitalist enterprises able to pursue operational and financial restructuring, or
simplycapableof securing accessto funds,mayfindattractivepickings amid thegeneralcarnage of a depression. Wage earners, in contrast, face no analogous vulturous
opportunities.Deflation in consumer goodsdoesnot in itself facilitate ‘restructuring’, thedevelopmentofnewincomesources,andeventualboostsindemand.Infact,improvements
in their financial situation generally rely on reductions in consumption and increases in
wages,bothofwhichstandopposedtotheneedsofamarket‐basedrecovery.
This sectionofferspreliminaryconsiderationson thesematters. First, it considersMarx’sownanalysisofpossiblesourcesofrestoredprofitabilityamidstthedevastationwreakedby
ageneralcrisis.Itthenconsidersthesituationofaacrisischaracterizedbyhouseholdover‐
indebtedness.
4.1TraditionalCrises,EnterprisesandRecoveryFor Marx, capitalism is incapable of sustained and stable accumulation and the
corresponding development of productive capacities and living standards. Competition,
individual appropriation and the corollary economic anarchy help render the systemvulnerabletodisruptionstoprofitability,itsveryorganizingprinciple.Marxandsubsequent
contributionstoMarxistpolitical economyhaveadvancedanumberof inherentprocessesthat tend to erode profitability in contemporary capitalism. Those include tendencies
present in competitive accumulation to over‐investment and over‐production, the
possibilityofsustainedandsignificantgainsinaveragewages,andpossibledifficultiesintherealizationofthevalueofproducedcommoditiesduetodemandproblems.39
Whateveritsimmediatecauses,adeclineinprofitabilitymayquicklyripplethroughoutthe
system ascuts ininvestmentandemploymentdisrupt themyriad interdependenciesupon
whichpreviousinvestment,production,consumptionplanshadbeenmade. Intheensuingeconomicdecline,capitalist societyfinds itselfwith anoverabundanceoftheentiresocial
process of capital: means of production and labour power organized according to the
2139SeeDay(1981)orSweezy(1970).
imperatives of profit extraction, the various claims on the resulting surplus, and allattendant social relationships. Thisoverabundance of capital generates losses to all those
with claims on it.ToMarx, crisesset inmotioncompetitive struggles betweencapitalists
overthedistributionoftheselosses,
‘thelossinnotequallydistributedoveralltheindividualcapitalists,butaccordingtothe fortunes of the competitive struggle, which assigns the loss in very different
proportions and in various shapes by grace of previously captured advantages or
positions,sothatonecapitalisrenderedunproductive,anotherdestroyed,athirdbutrelativelyinjuredbutmomentarilydepreciated,etc.’40
Thegoalofthiscompetitiveprocessistoensure‘equilibriumisrestoredbymakingmoreor
lesscapitalunproductiveordestroyingit.’Thechiefmechanismsforthisdestructioninvolve
not somuchthephysicaldestructionofcapital,but thedestructionofthevariousformsofcapitalvalue,includingthosecontainedinfinancialclaimsandcapitalgoods.
‘Thatportionofthevalueofcapitalwhichexistsonlyintheformofclaimsonfuture
shares of surplus‐value of profit, which consists in fact of creditor’s notes on
productionanditsvariousforms,wouldbeimmediatelydepreciatedbythereductionofthereceiptsonwhichitiscalculated.Oneportionofthegoldandsilvermoneyis
renderedunproductive,cannot serveascapital.Oneportionofthecommoditiesonthemarketcancompleteitsprocessofcirculationandreproductiononlybymeansof
an immense contraction of its prices, which means a depreciation of the capital
represented by it. In the same way the elements of fixed capital aremore or lessdepreciated.’
Variable capital also depreciates through reductions in wages, as ‘The stagnation of
productionwouldhavelaidoffapartoftheworking‐classandtherebyplacedtheemployed
partinacondition,inwhichtheywouldhavetosubmittoareductionofwages,evenbelowthe average.’ Finally, Marx understood quite well that these processes set into motion
monetaryandfinancialdisruptionsthatcompoundedandextendedtheoriginalcrisis.
WhileMarxincludedtherecurrenceofsuchdevastatingcrisesinhisgeneralindictmentof
capitalism, he identifiedthem not as terminal systemiccrisesbut aspart of acontinuousanddisruptiveprocessofcrisisandrecoveryincapitalism.Infact,muchasheidentifiedin
2240AllquotesfromMarxinthissectionarefoundinMarx(1909),p297‐299.
successfulaccumulationtheseedsofcrisis,Marxalsopointedtotheelementsofcrisesthathelpedpavethewayforaneventualrecovery.
‘thefallinpricesandthecompetitivestrugglewouldhavegiventoeverycapitalistanimpulseto raisethe individualvalueofhistotalproduct above itsaveragevalueby
means of newmachines, newand improved workingmethods, new combinations,whichmeans,toincreasetheproductivepowerofagivenquantityoflabour,tolower
the proportion of variable to the constant capital, and thereby to release some
labourers.... The depreciation of the elements of constant capital itself would beanotherfactortendingtoraisetherateofprofit.Themassoftheemployedconstant
capital,comparedto thevariable, wouldhave increased,but thevalueof thismassmight have fallen. The present stagnation of production would have prepared an
expansionofproductionlateron,withincapitalisticlimits.
‘Andinthiswaythecyclewouldberunoncemore.’
In contemporary terms, a setting of falling prices for capital goods, labor inputs, andcorporate securities, createopportunities forrestored rates of profit forsomeenterprises.
Firms that happen to be in better financial states, or simply to possess better access to
finance,willgenerallybeinapositiontoimplementoperationalandfinancialrestructuringmeasuresthatbuttresstheirprofitability,improvetheirsolvency,andboostdemand.
In addition to the operational measures noted by Marx, some enterprises may divest
themselvesofparticularlyproblematicareasofoperations.Suchmeasurespotentiallyyield
significantpresentlosses,butpavethewayforhigherexpectedprofitrates,onthebasisofwhichnew investment may beundertaken.41 Similarly, asettingofdepressed asset prices
offersparticularlyauspiciousopportunitiesforprofitabilityforthoseenterprisescapableofdeveloping and undertakingproduction of newproduct lines, particularly when theyare
capableofdefendingmonopolisticrents.42
Fallsinprices forcorporatesecuritiesopenfurtherpossibilitiesforfinancial andeconomic
stabilizationandeventualrecovery.Depreciateddebtclaimsoncorporationsmaybeboughtupbystrongerinvestorsorfinancialintermediaries.Suchpurchasesmayentailsignificantor
evenfatal lossesforincumbentholders,diminishingoreliminatingtheircapacitytoextend
additionalcreditandcompoundingthecrisis.Butcapitallossesalsoensurenewholdersface
23
41SeeDonaldson(1994).
42AsemphasizedbySchumpeter(1976).
considerablybetteryields,possiblyplacing them inbetterpositionsfromwhicheventuallytohelprestorecreditactivity.
Falling equity prices may facilitate corporate takeovers and other types of mergers andacquisitions. These may be undertaken in conjunction with the pursuit of the various
operational restructuringmeasures laid out above. Theymay also be associatedwith theconcentration andcentralizationof capital, through which the resulting corporationmay
enjoyenhancedeconomiesofscaleormarketpower.Ineitherevent,thepurchaseofequity
mayfacilitateaneventualrestorationofprofitability.
In sum, the destruction of capital values in their various forms facilitates processes ofoperationalandfinancial restructuringbysomeproductiveenterprises.Thesemeasureslay
the basis for the eventual recovery of profitability, solvency, and levels of activity across
productive capitalistenterprises.Theyalso contributeto the recoveryoffinancial stabilityandlevelsofactivity,pavingthewayforthenewupswinginaccumulation.
4.2HouseholdDebtandtheCurrentCrisis
Therearecompellingtheoreticalreasonsto expecttheprospectsformarket‐basedrecovery
to beconsiderablydimmerduring thecurrent recession. Theuniquesocial andeconomiccontent of household indebtedness throws up distinctive obstacles to the process of
economicrecoveryunlikelytobesurmountedwithoutsignificantstateintervention.
The crisis has placed millions of households under considerable financial distress.
Wholesalefundingandsecuritizationofloanstohouseholdshaveallbutdisappeared,whileon‐book bank lending has also contracted severely. This has cut credit flows that were
increasingly central to sustaining household consumption. As shown in figure 3, US nethouseholdborrowing as a shareof consumption and residential investment had reached
record levels in mid‐2005. As a result, the subsequent collapse of credit has triggered
staggering fallsin consumption,whichdroppedby arecord1.58percent on real, year‐on‐yeartermsinthefinalquarterof2008.
24
Such recordfallsin consumptionhave taken placedespitetheexhaustionofexpansionary
monetarypolicy,whichhastakentheFedFundsrateto anaverageof0.15percent inApril
2009.43 And while the reduction of base rates has doubtlessly improved the financialpositionofmanyindebtedhouseholds,overalldebtandservicingcostsmeasuredinrelation
to personal disposable incomeare yet to fall significantly,as suggestedbyfigures 1 and 2above.44 Similarly, default rates on carried commercial bank loans to households have
continuedtorise,asshowninfigure5below.
25
43 It isnotable thaninthetwopreviousepisodesofsignificantcontractionsinconsumption, in1973‐74and1980,USbaseinterestrateswererisingsignificantly.
44Despitethecutsandactualdeflation,USaverage creditcardratesstoodat13.5percentbytheendof2008,onlyslightlybelowthe recentpeakof15.2 in September 2007or the 14.7percentaverage of2006‐2007. InBritain realizedreturnsoncreditcardloansstoodat12.4percent,thehighestratesince2001.
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Whilethisevidenceisdoubtlesslypreliminaryandtheevolutionofthesevariablesrequires
ongoingmonitoring,it pointsunambiguouslyto severehouseholdfinancial distress.Based
on thediscussioninsection4.1above, itispossibleto identifyanumberofconsiderationsthatsuggestfinanciallydistressedhouseholdscreatedistinctivedifficultiestotheprocessof
market‐basedrecovery.
Aswithproductivecapitalist enterprises, a recessiondirectlyaffectsthe incomesofwage‐
earninghouseholds.Unemploymentandfallingrealwagestendstoreducethesector’slaborincome,whilefallingassetpricesfurtherlimitconsumptioncapacityandforcespotentially
dramaticfallsinhouseholdnetworth.Yetunlikeproductiveenterprises,theseprocessesdonot in themselves offer wage‐earning households new opportunities to increase their
incomesandimprovefinancialsolvency.45
At thebroadest level, thereis limitedscopeforoperational andfinancial restructuringof
households.46 Fundamental adjustments in consumption are likely to be much moredifficult and sociallydisruptive than corporate restructuring. Further, consumption is an
inalienableprocess, and individualconsumerscannotbe ‘takenover’and ‘restructured’ by
other consumers. Finally, even when entrepreneurial discovery takes place among final
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26
45Theobviouspossibleexceptioninvolvestheunlikelyinflationofanewhousingbubble.
46Currentdifficultieswithsellingsecuritizedclaimsonthedebtofhouseholdsalsopointtodifficultiesinrestructuringfinancialclaimsonhouseholds.
consumers, it is inherently limited in its scope to various economies in consumptionunlikelytoprovidebooststobroadereconomicactivity.
Asaresult,improvementstothesituationoffinanciallydistressedwage‐earninghouseholdswill rely exclusively on reductions in consumption and increases in wages, both ofwhich
standopposedto theneedsofamarket‐basedrecovery.Mostsignificantforthepurposesofthisessay,arecoveryledbyproductivecapitalistenterprisesispremised,mostsignificantly
amongseveral factors, ongeneral reductionsin therealwage. In fact,thepersistenceand
depth of the Great Depression have long been attributed in considerable part to thedownwardinflexibilityofwages.47
Herein lies a distinctive paradox posed by recovery from a recession characterized by
financial distress by wage‐earning households. A recovery led by capitalist enterprises is
predicated on reductions in the real value of wages. Even if such reductions succeed infosteringeventualeconomicrecovery,intheshortruntheywouldfurthererodethecapacity
ofhouseholdstoservicedebt,compoundingfinancialstresses.Yetfurtherfinancialstresseswouldalsoarisefromafailuretoreducetherealvalueofwages,which,withoutadditional
stateinterventions,wouldquicklytranslateintorisingratesofunemployment.
Aneventualreturnofinflation,oftenlookedtoasanaidtotheprocessofdeleveraging,also
posesdistinctivedifficulties.Risingpricelevelsmayreducerealdebtburdens,but thiswilldependon thecapacityof lenders to maintain thereal valueofdebt,and thecapacityof
borrowerstomaintaintherealvalueoftheirincomes.Particularlyinarecessionarysetting,
wageearnerswill generallynotbevery successful inmaintaining the real valueofmoneywagesinrelationtoconsumptioncommoditiessoldbyfunctioningcapitalistsandtoclaims
onhouseholdsbyfinancialenterprises.
At the broadest level, during typical industrial crises falling wages and inflation effect
transfers and shifts of value from financial enterprises and wage earners to productivecapitalistenterprises.Becausethoseenterprisesmonopolizetheappropriationofnewvalue,
and some of them may be able to found their economic plans on the yields this valuerepresentsonlevelsofinvestmentdepressedbyrecession,suchtransfersmayhelppavethe
wayforaneventualrecovery.
Thecurrentcrisispresents amorecomplexpicture.Thereturnoffinancial andeconomic
stability poses the need for transfers from financial and productive enterprises to wage
2747See,ofcourse,Keynes(1973),andBernanke(1995)orBordoetal(2000).
earners. Suchtransfersareunlikely to takeplace onmarket terms, eitherthrough higherwagesorthroughinflation.Withoutsignificantstateintervention,theprocessofhousehold
deleveragingis likelyto continueto involveweaklevelsofconsumption,ongoinglosseson
householdcredit,andconsequentdisruptionstobroaderprocessesofeconomicrecovery.
5. ConclusionsDrawing onMarxist political economy, this essay has sought to document the economic
significance and distinctiveness of rising levels of debt by wage‐earning households,
advancingthemasadefiningfeatureofcontemporarybanking,macroeconomicpolicy,andof the current crisis. Householddebt isat the centreofthe turn bybanks to individual
incomeasasourceofprofits.Itprovidedthestapleforthespeculativebingethat triggeredthecurrent crisis, and it liesat theheartofthebroadereconomicandpolicyregimes that
appeartobeunravelingasaresult.
Fromthisperspective, theessayadvancedpreliminary analytical discussions that afforded
two broad insightsoncontemporarybankingandthe international crisis that helpinformpolicyandresearcheffortsinrelationto theunfoldinginternational recession.First,itwas
the usurious and exploitative character of lending to wage‐earning households, as it
developed in the concrete setting of rising inequality andprivatization of thepast threedecades, that made it highly profitable. High profitability made it a natural locus for
destructiveprocessesoffinancialcompetitionandinstability.
Second,recordlevelsofhouseholdindebtednessposedistinctivedifficultiesfortheprocess
of recovery from the current recession. In the first instance, theycompromise consumerdemand.Butmoreimportantly,theycreateaconflictbetweentheneedforlowerrealwages
to support restored profitabilityof capitalistenterprisesand theneed forhigherwagestorestorefinancial stabilitytohouseholdsandbroadereconomy.Thereisno reasontoexpect
financialandlabormarketstoresolvethisconflictinatimelyandsociallydesirablefashion.
Analytically, the preliminary discussions offered here point to the need for robust
conceptualizations of credit relations in the process of accumulation, including thedistinctivesocial content ofcredit to wage‐earning households.At the level ofpolicy,this
essay points to theneed fora series of state interventions to facilitatetransfers towage‐
earning households—through gains in real wages, reductions in inequality, and growingscopes for social provision of basic necessities—as central to economic recovery. In the
currentcontext itisincreasinglyclearthataddressingbasicissuesofsocioeconomicequityisindispensabletotherestorationofeconomicgrowthandstability.
28
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