Charles Kindleberger and Robert Aliber (2011): Manias, Panics, and Crashes, NY: Palgrave Macmillan
tl;dr: The flows of capital connecting the latest four financial/economic crises are the 21st-Century version of Egyptian pyramids – except more destructive.
History or Economics of Crises?
It seems evident that the difference between an economic science based on models – miraculously situated outside of time and space, perhaps? – and a nominalist version of economic history (26) is largely irrelevant to the points this book and, if I am not mistaken, the question of governance in general tries to make. It seems safe, therefore, to proceed as if economic crises, for all their idiosyncrasies, bubbles, manias, panics, and crashes, have similarities (8).
A so-called ‘economy’, that is, the sum total of economic transactions in a given area in a given time frame, is composed of a list of institutional features, among which are actors (individuals, groups, firms, corporations, governments, intermediary institutions), structures (exchange mechanisms, goods/services/information-distinctions, ethical codes, laws) and the actual process that turns steady state T into steady state T1, at least in the neat models of neoclassical microeconomics. That is, any economic history or history of economics will give accounts of actor’s behavior, as well as the structural environments in which said behavior takes place and is played out, to create the process.
The history of economic crises, consequently, will give accounts of the psychology of a crisis (individual psychology on the level of the so-called ‘market’ as well as within the so-called ‘government’), as well as the structures enabling certain elements of that psychology to be played out in certain ways, and finally, the actual process of a crisis. The former two will inevitably allow the question: which is more important – the structure or the psychology; or, in the description of a crisis that Kindleberger and Aliber (62), is it the credit expansion or the transition from rational to irrational exuberance on the part of traders (that is, the mania) the heart of the matter?
Psychology and Credit
As Kindleberger puts it, this question – though upon first glance obvious – is somewhat ambiguous, as “nearly every mania has been associated with rapid growth in the supply of credit” (62), but it does not seem to be possible to establish a definite order in which they appear. Rather, as lenders increase their credit to borrowers, it is not entirely sure whether they do so “because their [the borrower’s, S.E.] incomes or anticipated incomes increased, or because the regulatory environment had become less restrictive.” (187) Other than Kindleberger himself, Robert Aliber1 gives gives firm priority to structural causes of financial crises, when he maintains that “[r]eckless lending and greed had only a minor impact on the supply of credit … The supply of credit would have been satisfied in some other way if the banks had been more cautious in buying mortgages and mortgage-related securities.” (301)
Be that as it may – and indeed, who is to say that the establishment of credit is to be counted as a structural part, when it could, with equal force, be said to fall into the realm of behavior – Kindleberger and Aliber firmly establish that both factors are important contributors to the history of crises. Distress, as Kindleberger and Aliber call the initial absence of faith in market conditions, does not have to lead to a panic if there is a reassuring factor (94) – even though it may remain untested or, as one might add only seemingly paradoxically, only when it is actually untested (243).
On the other hand, two of the earliest bubbles, the 1720 South Sea and Mississippi bubbles, can clearly be traced back to “rapid increases in the supplies of credit from newly established banks” (273). As Minsky’s model maintains, “the events that lead to a crisis start with a ‘displacement’ or an innovation” (27) – which can be a financial innovation (55) – and the so-called ‘boom’ most is fueled most definitely with an enlargement of credit (28). Like Aliber, Kindleberger and Minsky maintain that banks and non-banks alike can spread credit and thus reinforce the circle that leads to a bubble: “the history of money,” Kindleberger and Aliber note, “is a story of continuing innovations so that the existing supply of money can be used more efficiently and the development of close substitutes for money that circumvent the regulatory environments applied to the creation of money.” (65) In other words, credit expansion is where a politics of lenders meets a psychology of borrowers, and whichever demand for credit exists, is supplied; or rather, demand is created as supply increases (this old theory by Say seems to be particularly applicable to financial crises).
Such innovations, of course, can be called a ‘politics’ of lenders – in the case of subprime mortgages, a rather foolish ‘politics’ not guided, on the surface, by any sort of economic rationality at all (93) – but they can also, and perhaps more justifiably, become part of a realm of illegal activity. In this case, policies such as subprime mortgages can at least be imagined to be not a foolish activity, but one motivated by a different kind of rationality than a purely legal-economic one (46): nothing is out of the equation when one realizes that movements on global financial markets do occasionally depend on “help in getting … twin daughters admitted to the kindergarten class” (138). And yet, even such practices rely on a mass of gullible consumers buying in a mania (141) – consumers whose success, if there is any, only drags still others into the mania (13).
In short, as far as individual crises go, connections between structures and actors are usually played out such that they reinforce each other: both in the upward movement, the mania leading to a bubble and the downward movement, the panic leading to a crash, pro-cyclical reinforcing of buying and selling are crucial (13).
So far, so good. I would maintain, however, that Kindleberger and Aliber tell another story, which is most obvious when the latest four crises are concerned. This story is somewhat hidden in their account of financial crises, though it surfaces in at least two places of it. Thus, the authors note that, in every crisis, “[m]oney seems ‘free’ as if the fundamental laws of economics no longer apply.” (20) Well, what if that were actually true? What if bubbles, and especially the last four ones, indeed represent something to which the rules of textbook economics no longer apply – not because of morally or legally questionable behavior of borrowers, and not because of behavior circumventing regulation on the part of lenders, but because the nature of the phenomenon in question exceeds economics properly defined? “The surge in wealth in a bubble leads to economic behavior that would appear as exceptional – the squandering of wealth,” note the authors (108). What if bubbles and crashes, rather than being a transition from a rational to an irrational part of the so-called ‘economy’ – that is, of the limited economy – are, rather, a transition to an altogether different, a general economy?
According to Georges Bataille, luxury, and not scarcity, is the central problem of living matter, and mankind as a part of it, in general (BAS 1: 12). Each organism must necessarily the excess of energy it receives from its surroundings: it must grow, or it must squander (ibid.: 21). Likewise, an economic system such as a ‘market economy’ (which is, in this case, distinct from a capitalist economy, and simply denotes a set of economic exchanges in, say, a given geographical area) will always have, according to Bataille a certain surplus of wealth which it will use, initially, to create more wealth – this would be the historical moment where the capitalist mechanism is introduced. Eventually, however, “[t]his surplus … contributes to making growth more difficult, for growth no longer suffices to use it up.” (ibid.: 37) Solutions, through the ages, have included war, sacrifice, and death (ibid.: 25).
Bataille insists, however, that with capitalism – and when he wrote The Accursed Share, the Soviet, so-called ‘communist’ economy was even more efficient about this (BAS 2: 266) – the problem of economic surplus has become more pressing than ever. This is because capitalism and communism both tried to use the entire surplus energy produced by their mechanisms for reinvestment – thus creating every more energy which must eventually be squandered on a worldwide scale in a gigantic convulsion (ibid.: 428). In short, capitalism, on a world-wide scale, by ever better means and with every more precision, has created gigantic amounts of surplus wealth and energy which, though most decidedly not solving the problem of poverty (BAS 1: 39), nevertheless poses a problem of excess which must be solved.
Clearly, then, one can stand in marvel before the monuments Kindleberger and Aliber attribute to the squandering of wealth which accompanies a bubble. Consider only the list of tallest buildings of the world, corresponding in time to bubbles, which, as the authors note, “are as economic as the Pyramids of Egypt” (107) – exactly, for that is their point (BAS 2: 223). And yet, these are not what I think is the actual monument of squandering wealth that this stage of capitalist development.
Nether do I refer to another phenomenon one could mention as a squander of wealth surrounding crises – this time, not the bubble, but the crash. That is, one could possibly interpret the “extremely powerful real effects on the domestic economies” (232) that over- and undervaluation of a country’s currency have as a form of destruction of excess wealth (leaving out the question of whose wealth is being destroyed – to society as a whole, an irrelevant question). Likewise, the havoc wreaked by the immediate aftermath of the Lehman collapse (261) could be interpreted that way.
The latest four crises
Rather, my proposition is that the monument to squander that best captures our times and the particular stage of capitalism we inhabit is the movement of vast sums of capital underlying the four latest crises (the bubble in developing countries in the early 1980s, the Japanese real estate and stock bubble in the late 1980s, the Asian crisis of 1997, and the dotcom and housing bubbles 2000-2008), and currently, without a doubt, situated to prepare the coming bubble. As Aliber notes, despite “differences in the identities of the borrowers and the lenders in these several waves, there was remarkable similarity in the pattern of cash flows.” (288) Moreover, “[t]he likelihood is high that these several waves of bubbles were not independent events; instead there was a systematic relationship between the implosion of one wave and the beginning of the next wave.” (289)
It will be said that this relationship worked over a wide range of mediations. That is certainly true, and indeed, some of these were idiosyncratic. Kindleberger and Aliber note that, for example, the subprime mortgage market seemed to have been “uniquely American” (8). On the opposite end of the spectrum, however, there are common developments that the authors characterize as almost automatic: when the Japanese bubble burst, money had to go somewhere – it went to a set of emerging markets in South East Asia which “were on the receiving end of outsourcing by American, Japanese, and European firms” (179) and thus promised good returns on investment. Consequently, stock bubbles emerged (ibid.), which were, as seems frequently to be the case (59), linked to real estate bubbles. In the Asian and Tequila crises in the late 1990s, these bubbles burst, and money flowed somewhere else – in this case, to “residential and commercial real estate” in several countries (286). Without a doubt, central banks contributed to this development in unique ways – the Federal Reserve’s Y2K injection might be the most remarkable one (185) – but even this cannot be said to create an amount of liquidity which is invested into something other than sustaining, and expanding the already existing capital flows coming in from Asia and Mexico (186).
What seems to be common in the latest four crises is that a boom-and-bust-cycle seems to have developed, in which the same, ever-expanding total flow of capital – investments, currency cycles of appreciation and depreciation with their automatic (!) consequences (281), and the financial edifice erected upon securitizations, derivatives, and interbank loans – moves into a region, creates a bubble which bursts eventually and, when moving somewhere else, leaves depreciated currencies, ruined businesses, and recessions (282). The only consequence this flow seems to have is negative. Kindleberger and Aliber note that, despite positive effects, floating currencies are frequently subject to both over- and undervaluation (231) which have the aforementioned “extremely powerful real effects on the domestic currencies” (232). And this is not to mention the scores of individually ruined investors, most of which have fallen, as noted above, for promises by more or less savvy insiders (46) and have to look on helplessly as white-collar-crime is either acquitted or faces what little punishment there is (153).
What characterizes this flow of capital, then, is that it, too, is “as economic as the Pyramids in the Egypt” (107), for its only effect is destructive: the creation and subsequent contraction of bubbles, erasing countless firms and, probably more important, ruining countless existences. It cannot even be said that sustaining this flow has any beneficial effect on those which do: when Kindleberger and Aliber recount the 1999 surge of American wealth, they note how Americans who just sold “securities they owned to foreign investors … had to decide what to do with the money,” and who then “used most of the money to buy more securities” (184).
It seems to me that this purchase of more-of-the-same is the best characterization of why the current series of bubbles may be identical to the pyramids of our times. If the capitalist system of economy can be characterized as a limited economy which, as the first one of its kind, was able to absorb all excess energy (capital, surplus-value, wealth) into its reinvestment and into the creation of more excess – that is, if the capitalist economy is the first and only one which necessarily has to include its general economy: what better way of doing so than to construct a limitless flow of wealth, not confined but corrosive to all its boundaries, with no effects but the inevitability of its own further existence and the destruction it leaves along its way?
Kindleberger and Aliber, page numbers in brackets.
Bataille, Georges (1967, 2007): The Accursed Share. Vol. I: Consumption. NY: Zone Books. (BAS 1)
Bataille, Georges (1976, 2007): The Accursed Share. Vols. II: The History of Eroticism & III: Sovereignty. NY: Zone Books. (BAS 2)