INTRODUCTION

 

1.       Why Radicals Need to Understand the Financial Crisis: Not everyone takes an interest in economics, obviously. Nor do they need to, in general. But anti-capitalist activists do have a special responsibility to be well-informed about what is happening in the capitalist system, especially in times of extraordinary turbulence and instability. In recent months, the capitalist financial system has plunged into a state of profound crisis. Millions of people the world over are beginning to question the claim that markets offer an efficient way of allocating resources. The very idea that capitalism is a system that actually "works," in contrast to proposals for more just and democratic alternatives which supposedly do not "work," has been dealt a serious blow. In such a situation, radicals really do need to develop some rudimentary understanding of what is going on, for at least two reasons. First, radicals need to develop an informed activist perspective on how to fight back against attempts by corporations and governments to pay for the crisis on the backs of students, workers, the poor and the unemployed. And second, radicals need to find ways to use this occasion to promote participatory-democratic alternatives to capitalism.

2.       The Approach Taken Below: In the following comments, four things are attempted. First, several of the factors that set the stage for the crisis are reviewed, in a simple but hopefully not simplistic way. Second, the actual crisis is concisely described, from its early stages in the sub-prime mortgage market, through to its spread throughout the U.S. (and ultimately the global) financial system, culminating in several high profile bank failures. Third, some more difficult questions are briefly addressed, including the relation between financial crises and macroeconomic crises, and the distinction between a ‘structural’ crisis and a ‘systemic’ one. These three parts are intended to offer readers a rudimentary analysis of what is going on in the financial system today, with an emphasis on developments in the U.S. (For other perspectives, see the Suggested Readings, at the end.) Finally, a perspective is offered on how radicals should approach the question of short-term ‘policy responses,’ as well as the more fundamental question of how to forge an egalitarian and democratic "participatory" alternative to the capitalist system itself.

 

 

I: SETTING THE STAGE FOR DISASTER

 

3.       Low Interest Rates: In response to the 2001 recession, especially after 11 September 2001, the U.S. Federal Reserve kept interest rates at unprecedentedly low levels, encouraging borrowers (businesses and consumers, including home buyers) to take on more debt. The strategy – sometimes called "privatized Keynesianism" – was to use household debt to play the demand-fueling role that had once been played by public sector deficit-spending in the Keynesian era (from the 1930s to the 1970s). From the late 1990s to 2007, the ratio of household debt to GDP in the U.S.A. went from just over 60% to almost 100%, with households taking on an additional $3 trillion of debt.

4.       Rising Housing Prices: In the 10-year period preceding the crisis, from 1996 to 2006, the average resale price of U.S. homes almost tripled. This "bubble" (or speculation-driven price rise) in the housing market turned residential real estate into a magnet for speculative financial investment, which continually drove prices up, further inflating the bubble.

5.       Lax Lending (and Refinancing) Standards: In the context of steadily and rapidly rising home values, mortgage lending began to seem like an increasingly safe bet for lenders, since the money loaned to home buyers was being used to purchase assets (namely, houses and con

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