Some perspective please: Gowan’s piece in NLR

(noon. – promoted by ek hornbeck)

This is a review piece on Peter Gowan’s article “Crisis in the Heartland” in the Jan./Feb. 2009 issue of the New Left Review, in light of the significant number of diaries upon the most recent “toxic assets” plan of Treasury Secretary Geithner and in light of the foregrounding of Gowan’s article in the weblog Feral Scholar.  Perhaps the most meaningful way to resolve economic debates is to go back through history to examine what happened.  This is a diary about why the current economic crisis has happened.  Mainstream economics is typically obsessed with the present-day, at the expense of a longer view, and this is precisely what Gowan hoped to circumvent.

(crossposted at Big Orange)

OK, there have been a lot of diaries of recent on the “Geithner plan.”  New Deal democrat offers a “balanced view,” rjones2818 offers the Socialist Review perspective, Crabby Abbey offers “general discomfort,” The Field says “Geithner isn’t going anywhere,” Jerome says it’s not toxic assets, Rogue Robot says Krugman is wrong, pfiore8 asks “who ya gonna trust?”, Tom P makes fun of another Geithner diary, bonddad offers his view, and so on.  

The thing to be careful of, here, is a sort of presentism; instead of looking for the cause, we react to the symptoms, or to the proposed “cure.”  Gowan’s piece goes deeper.  (Oh, sure: this piece is a bit old; but it isn’t that old.  It’s still relevant.)

To preface all this, we need to observe a couple of things about Peter Gowan.  Peter Gowan is a professor of international relations at London Metropolitan University; he’s written an important volume on US economic imperialism in the neoliberal era; in it, Gowan describes the “Dollar-Wall Street Regime,” an unliterary term for dollar hegemony.  So, yes, he knows.



A piece-by-piece examination of Gowan’s argument will show his attempt to expose the fatal dynamic at work in the economy.  First he rebuts the assumption that this is all a product of the decline in housing prices: “after all, the bursting of an equally large bubble in the Spanish housing market led to no such blow-out in the domestic banking system.”  In fact, Gowan argues, this has nothing to do with the “so-called real economy,” the implication being, then, that speculators are the cause of all this.  Well, maybe.  Let’s move on.

Gowan’s notion, here, is that the speculative economy operates by creating, and then bursting, asset bubbles, all the while presumably gaming both bubble expansion and burst:

Time and time again, Wall Street could enter a particular market, generate a price bubble within it, make big speculative profits, then withdraw, bursting the bubble. Such activity was very easy in so-called emerging market economies with small stock or bond markets. The Wall Street banks gained a wealth of experience in blowing such bubbles in the Polish, Czech or Russian stock markets in the 1990s and then bursting them to great profit. The bubble in the us then showed how the same operation could be carried through in the heartland without any significant loss to the Wall Street banks (as opposed to some European operators, notably insurance companies, eager to profit from the bubble but hit by the burst).

Both the Washington regulators and Wall Street evidently believed that together they could manage bursts.

So, presumably, THIS bubble is the “one that got away.”  They were playing this game with everyone’s money, and, woops!


Then Gowan explains that the sort of “bubble management” model used by capital to expand its profit-taking required huge quantities of leverage, in order to take advantage of the “bubble management” game:

A striking feature of the New Wall Street System business model was its relentless drive to expand balance sheets, maximizing the asset and liabilities sides. The investment banks used their leverage ratio as the target to be achieved at all times rather than as an outer limit of risk to be reduced where possible by holding surplus capital.

Risk was maximized, then, in the interests of controlling the market, which you could only do if you were big enough:

If you are a speculative arbitrageur or an asset-bubble blower, financial operational scale is essential to moving markets, by shifting prices in the direction you want them to go.


This argument leads Gowan’s readers to the second portion of his essay: shadow banking.  The need to be big, he argues, obliged the pursuers of this “bubble management” game to create a shadow banking system in order to increase their individual leverages to the point of being able to control whole markets.  Thus, from this point in the essay, Gowan leads us into a discussion of “collateralized debt obligations (cdos) and credit default swaps (cdss).”  CDOs are big packages of loans, bundled together and traded on the open market; CDSs, then, are a cheap form of insurance for CDOs in case they lose their status as good bundles of loans.

From those bundled loans, we are told, the borrowing needs of big players on Wall Street (which, for purposes of the essay, includes London) escalated out of control, involving 401K plans.

So what just happened?

When trying to explain the crisis, Gowan points first to the housing bubble, and then suggests that this was the bursting of the Bubble of All Bubbles:

But the bubble that generated the credit crunch of 2007 lay not only-or even mainly-in the housing market, but in the financial system itself. The crisis was triggered not only by the scale of the debt bubble, but by its forms.

So here we get to the crux of it.  As the bubble expanded, the CDOs were revealed to be junk (which means, tho’ Gowan does not say so, that ordinary, working people were defaulting on their bank loans, and gee, why do you think that might have happened?), and thus the lenders who supported their purchase fled, thus leading to an overall freeze-up of credit.

The suppliers of credit funding, such as money-market and pension funds, grasped that they had no way of knowing how much of the rest of the cdo mountain was also worthless. So they fled. Their refusal to keep supplying the handful of opaque Wall Street investment banks and their spin-offs with the necessary funds to keep the cdo market afloat was what produced the credit crunch.

So what’s to be done?

Essentially, and if you read Gowan’s paragraph on “phases of the crisis,” the last of which is being begun by Geithner as I write, the standard rescue attempts to recreate the status quo in some sense or other.

The real questions for Gowan are those of whether or not the banks are to be speculative vehicles, and of whether the world economy is to be a multilateral entity vs. an imperial vehicle for US economic domination.  So far, in both cases, global elites have tried option (b), speculation and US economic imperialism (aka dollar hegemony), and these options have led us to the point we are at now.

Gowan predicts increasing Chinese economic hegemony based upon the trajectory he sees.  Of course, as readers of my diaries have seen previously, Minqi Li has pointed out that any Chinese rise to the status of hegemonic power is likely to bump up against ecological limits.  Any US attempt to “get back into manufacturing” is going to see the same thing.

A few words of analysis

Gowan is probably right to assume that the extent of the crisis is due to speculation, and not (merely) to the collapse in housing; however, some good reason has to be found for why the investment bankers could not just continue playing their CDO and CDS games indefinitely.  Gowan doesn’t answer this one; instead, remember, he prefaced his whole argument by saying that he’s not getting into ultimate causes here.

I rather suspect that the reason for this is the usual one: capital is parasitic upon labor, feeding off of its ability to produce a surplus.  When the working class is milked dry, either through its impoverishment or through its induction into debt peonage, capital is not going to find more to exploit; thus economic downturn.  Want a robust economy?  You’ll need a robust working class.  Charting “economic strength” upon the profits of the owners (and esp. upon its simplified form, the Dow Jones Industrial Average), is what got us into the current situation.

Is Geithner’s plan bad or good?  Well, compared to what?  Are there other options?  Since Wall Street holds all the cards at this point, we don’t get a choice.  Want to have a choice?  That has to be organized.  Power concedes nothing without a demand, sure, but a demand is not a sufficient condition for the wresting of concessions from power.

Finally, this “let a depression happen” trope needs to be exposed.  Its implicit presumption is that the US government can do something other than “let a depression happen.”  Oh really?  How do we know this?

I’m going to conclude this diary by letting you, the readers, tell me what’s what.  Is Gowan right or wrong?  Am I right or wrong?


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  1. My God, what have I done?

  2. if you or Gowan are right or wrong. All I know is that I’m trying to soak up every bit of information I can digest to try my best to understand what’s happening. And this was very helpful information in that process. Thank you!

    The one thing you said that I heartily endorse is this:

    Want to have a choice?  That has to be organized.  Power concedes nothing without a demand, sure, but a demand is not a sufficient condition for the wresting of concessions from power.

  3. even if we could state absolutely who is more accurate…..

    would it actually matter……

    knowing a cause is not the same as having access to a cure…..

    perhaps at true cause here is the nature of the individual in our race…..

    perhaps the aggregate human system is beyond the comprehension of most of the individuals alive today……

    they are by nature sheep to be harvested by the wolves……

    perhaps the cause is the inability and unwillingness of humanity to answer a very simple question……

    what constitutes enough……………

  4. But although resets in mortgage rates may have begun this crisis, we are now in a place where the biggest banks themselves are, essentially, bankrupt.

    In looking for the direct cause of this crash, one need look no further than the First Great Depression:

    – too much easy credit

    – speculative banks & normal banks under one corporate entity

    The parallels are just too striking.  Destroying Glass-Steagall basically guaranteed that we would eventually be exactly where we are now.

    Regulations are enacted for a reason…rescind them at your peril.  And when you have 8-10 years of gutting all kinds of regulations (& ignoring thousands more), well…

    You not only get an economy that’s in the shitcan, you also get salmonella in peanut butter, for example.  Deadly pet food.  The biggest beef recall in history.

    What I’m trying to say is, I think these issues are all related: and they are directly related to the unwllingness of the last administration to regulate any industry, anywhere: and to let all industry lobbyists write the rules.

    Thereby guaranteeing a meltdown of our society on many seemingly different levels.

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