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Too big to save: the end of financial capitalism
Saskia Sassen is professor of sociology at Columbia University, New York, and at the London School of Economics. Her books include Losing Control? Sovereignty in the Age of Globalization (Columbia University Press, 1996) and The Global City: New York, London, Tokyo (Princeton University Press, 2001). Her latest book is Territory, Authority, and Rights: From Medieval to Global Assemblages (Princeton University Press, 2006), based on a five-year project on governance and accountability in a global economy.
Saskia Sassen is professor of sociology at Columbia University, New York, and at the London School of Economics. Her books include Losing Control? Sovereignty in the Age of Globalization (Columbia University Press, 1996) and The Global City: New York, London, Tokyo (Princeton University Press, 2001). Her latest book is Territory, Authority, and Rights: From Medieval to Global Assemblages (Princeton University Press, 2006), based on a five-year project on governance and accountability in a global economy.
The misnamed "Group of Twenty" (G20) meets in London on 2 April 2009 to discuss how to save the global financial system. It is too late. The evidence is in: we don't have the resources to save this system - even if we wanted to. It has become too big to save: the value of global financial assets is several times the size of global gross national product (GDP). The real challenge is not to save this system but to definancialise our economies, as a prelude to move beyond the current model of capitalism. Why should the value of financial assets stay at almost four times the overall GDP of the European Union, and even more of the United States. What do everyday citizens - or the planet - gain from such excess?
The question answers itself. To explore further the inner workings of the financial system that has brought the world to this predicament is also to glimpse a future beyond financialisation. The task the G20 should actually address is not to save this financial system but to begin to definancialise the major economies to a significant degree, so that the world can begin to move towards the creation of a "real" economy that delivers security, stability, and sustainability. There is much work to do.
The logic
A defining feature of the period that begins in the 1980s is the use of extremely complex instruments to engage in new forms of primitive accumulation, with taxpayers' money the last frontier for extraction.
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The financialising of more and more economic sectors since the 1980s has become both a sign of the power of this financial logic and the sign of its auto-exhaustion. When everything has become financialised, finance can no longer extract value. It needs non-financialised sectors to build on. The last frontier is taxpayers' money - which is real, old-fashioned, not (yet) financialised money. Krzysztof Rybinski's "zombies" are also parasites.
The limit
The difference of the current crisis is precisely that financialised capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialising. It has penetrated such a large part of each national economy (in the highly developed world especially) that the parts of the economy where it can go to extract non-financial capital for its own rescue have become too small to provide the amount of capital needed to rescue the financial system as a whole.
By way of illustration: the global value of financial assets (which means: debt) in the whole world by September 2008 - as the crisis was exploding with the collapse of Lehman Brothers - was $160 trillion: three-and-a-half times larger than the value of global GDP. The financial system cannot be rescued by pumping in the money available.
This in turn explains the abuses of entire economies made possible through extreme forms of financialising. Before the current "crisis" erupted, the value of financial assets in the United States had reached 450% of GDP that is to say 4.5 times total GDP (see "Mapping global capital markets", McKinsey Report, October 2008). In the European Union, it stood at 356% of GDP. More generally, the number of countries where financial assets exceed the value of their gross national product more than doubled from thirty-three in 1990 to seventy-two in 2006.
Moreover, the financial sector in Europe has grown faster than in the United States over the last decade, mostly because it started from a lower level: its compound annual growth rate in 1996-2006 was 4.4%, compared with the US rate of 2.8%.
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The scale
Another way to portray the current situation is via the different orders of magnitude involved in (respectively) banking and finance. In September 2008, the value of bank assets amounted to several trillion dollars; but the total value of credit-default swaps (CDS) - the straw that broke the system - stood at almost $60 trillion. That is a sum larger than global GDP. The debts fell due, and the money was not there.
More generally - and again, to give a sense of the orders of magnitude that the financial system has created since the 1980s - the total value of derivatives (a form of debt, and the most common financial instrument) was over $600 trillion. Such financial assets have grown far more rapidly than has any other economic sector (see Gillian Tett, "Lost through destructive creation", Financial Times, 9 March 2009).
The level of debt in the United States today is higher than in the depression of the early 1930s. In 1929, the debt-to-GDP ratio was about 150%; by 1932, it had grown to 215%. In September 2008, the outstanding debt due on credit-default swaps - a Made-in-America product (and, it should be recalled, only one type of debt - was over 400% of GDP. In global terms, the value of debt in September 2008 was $160 trillion (three times global GDP), while the value of outstanding derivatives is an almost inconceivable $640 trillion (fourteen times the GDP of all countries in the world).
These numbers illustrate that this is indeed an "extreme" moment - but, again, it is not anomalous nor is it created by exogenous factors (as the notion of "crisis" suggests). Rather, it is the normal mode of operation of this particular type of financial system. Moreover, every time governments (that is, citizens and taxpayers) have bailed out the financial system since the first crisis of this phase - the New York stock-market crash of 1987 - they have given finance the instruments to continue its leveraging stampede. There have been five bailouts since the 1980s; on each occasion, taxpayers' money was used to pump liquidity into the financial system, and each time, finance used it to leverage. This time, the end of the cornucopia is near - we have run out of money to meet the enormous needs of the financial system.
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.
.
.
The bridge
The implication of the foregoing is that two major challenges need to be faced:
▪ the need to definancialise the major economies
▪ the need to move out of the current model of capitalism.
Both will be difficult, but it will help to focus on some very basic facts.
.
.
.
.
.
.
.
The question answers itself. To explore further the inner workings of the financial system that has brought the world to this predicament is also to glimpse a future beyond financialisation. The task the G20 should actually address is not to save this financial system but to begin to definancialise the major economies to a significant degree, so that the world can begin to move towards the creation of a "real" economy that delivers security, stability, and sustainability. There is much work to do.
The logic
A defining feature of the period that begins in the 1980s is the use of extremely complex instruments to engage in new forms of primitive accumulation, with taxpayers' money the last frontier for extraction.
.
.
.
.
.
.
.
The financialising of more and more economic sectors since the 1980s has become both a sign of the power of this financial logic and the sign of its auto-exhaustion. When everything has become financialised, finance can no longer extract value. It needs non-financialised sectors to build on. The last frontier is taxpayers' money - which is real, old-fashioned, not (yet) financialised money. Krzysztof Rybinski's "zombies" are also parasites.
The limit
The difference of the current crisis is precisely that financialised capitalism has reached the limits of its own logic. It has been extremely successful at extracting value from all economic sectors through their financialising. It has penetrated such a large part of each national economy (in the highly developed world especially) that the parts of the economy where it can go to extract non-financial capital for its own rescue have become too small to provide the amount of capital needed to rescue the financial system as a whole.
By way of illustration: the global value of financial assets (which means: debt) in the whole world by September 2008 - as the crisis was exploding with the collapse of Lehman Brothers - was $160 trillion: three-and-a-half times larger than the value of global GDP. The financial system cannot be rescued by pumping in the money available.
This in turn explains the abuses of entire economies made possible through extreme forms of financialising. Before the current "crisis" erupted, the value of financial assets in the United States had reached 450% of GDP that is to say 4.5 times total GDP (see "Mapping global capital markets", McKinsey Report, October 2008). In the European Union, it stood at 356% of GDP. More generally, the number of countries where financial assets exceed the value of their gross national product more than doubled from thirty-three in 1990 to seventy-two in 2006.
Moreover, the financial sector in Europe has grown faster than in the United States over the last decade, mostly because it started from a lower level: its compound annual growth rate in 1996-2006 was 4.4%, compared with the US rate of 2.8%.
.
.
.
.
.
.
The scale
Another way to portray the current situation is via the different orders of magnitude involved in (respectively) banking and finance. In September 2008, the value of bank assets amounted to several trillion dollars; but the total value of credit-default swaps (CDS) - the straw that broke the system - stood at almost $60 trillion. That is a sum larger than global GDP. The debts fell due, and the money was not there.
More generally - and again, to give a sense of the orders of magnitude that the financial system has created since the 1980s - the total value of derivatives (a form of debt, and the most common financial instrument) was over $600 trillion. Such financial assets have grown far more rapidly than has any other economic sector (see Gillian Tett, "Lost through destructive creation", Financial Times, 9 March 2009).
The level of debt in the United States today is higher than in the depression of the early 1930s. In 1929, the debt-to-GDP ratio was about 150%; by 1932, it had grown to 215%. In September 2008, the outstanding debt due on credit-default swaps - a Made-in-America product (and, it should be recalled, only one type of debt - was over 400% of GDP. In global terms, the value of debt in September 2008 was $160 trillion (three times global GDP), while the value of outstanding derivatives is an almost inconceivable $640 trillion (fourteen times the GDP of all countries in the world).
These numbers illustrate that this is indeed an "extreme" moment - but, again, it is not anomalous nor is it created by exogenous factors (as the notion of "crisis" suggests). Rather, it is the normal mode of operation of this particular type of financial system. Moreover, every time governments (that is, citizens and taxpayers) have bailed out the financial system since the first crisis of this phase - the New York stock-market crash of 1987 - they have given finance the instruments to continue its leveraging stampede. There have been five bailouts since the 1980s; on each occasion, taxpayers' money was used to pump liquidity into the financial system, and each time, finance used it to leverage. This time, the end of the cornucopia is near - we have run out of money to meet the enormous needs of the financial system.
.
.
.
.
The bridge
The implication of the foregoing is that two major challenges need to be faced:
▪ the need to definancialise the major economies
▪ the need to move out of the current model of capitalism.
Both will be difficult, but it will help to focus on some very basic facts.
.
.
.
.
.
.
.
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