Paper Dragons: China and the Next Crisis

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Walden Bello has championed the interests of the Global South, particularly its poorest and most disadvantaged, since the late-1960s. The struggles of workers and working class communities do not appear in this book, but global capitalism remains firmly in his sights.

Paper Dragons revolves around the 2008 financial crash. Unlike many, Bello locates its roots in the crisis of profitability and overproduction of the 1970s. In response, he argues, capitalism restructured in three inter-connected ways — neoliberalisation, globalisation and financialisation. His focus here is firmly on the latter.

Financialisation underlines the failure of neoliberalism and globalisation to restore profitability. Indeed, both contribute to weak demand and slow growth in the rich countries — via attacks on workers’ organisation, downward pressure on wages, and cuts in the social wage. As a consequence, over recent decades capital has been reluctant to invest in productive activity and has instead sought profits from financial activities.

Bello shows how weak regulation of finance generated pressures that exploded in 2007-8. He tells the complex story of sub-prime lending, mortgage backed securities, collateralised debt obligations, over-the-counter derivative trading, etc. clearly and with a minimum of complexity.

If capitalism were built on an evidence-based problem-solving logic rather than class interests, then the response to the crash might have included an expansion of demand and some restoration of working class living standards. But the post-2008 austerity that has been heaped on workers has reinforced weak demand. Meanwhile, the financial system that precipitated the crash remains fundamentally unreformed.

Bello exposes the resistance to reform and highlights the persistence of many of the problems that precipitated the crash. For instance, financial reformers proposed that bank lending be more firmly backed by assets and/or equity — thereby limiting risky speculation and the possibility of Northern Rock-style bank runs.

A small minority argued for a 100 percent correspondence between lending and assets, while many suggested 20-30 percent. The Basel Committee — laughably charged with providing unofficial international banking regulation — initially proposed 7 percent but eventually settled on 4.5 percent. Banks remain largely free to speculate in derivatives and complex securities.

The consequences have been predictable. The major banks are now even more “too big to fail”. The six largest US banks now control 70 percent of the assets in the US system and hold considerably more derivatives than in 2008.

Executive pay remains a beacon of capitalism’s warped logic and values. For instance, even during the crisis 400 senior executives of US insurance giant AIG, the people whose speculative excesses threatened the firm’s very existence, shared $165 million in bonuses. Shortly afterwards AIG received a $182 billion bailout. These people, and their counterparts in other firms, were responsible, albeit via complex mediations, for the savage cuts in the average incomes of ordinary Greek people.

These financial operators have survived and prospered thanks to Quantitative Easing, which has become a life-support system for global capitalism. Even key figures in the IMF now suggest that we live in an era of “secular stagnation”, of low profits and weak investment.

The financial bailouts, far from trickling down to productive industry, have exacerbated problems. Global debt is now well over $300 trillion dollars, three times annual global income and many mainstream economists believe that a dangerous debt bubble could soon burst.

Despite its title, China is not the main focus of Bello’s book, but the sections on China show that it shares the problems with the rest of the global system. Its own post-2008 stimulus was not directed at welfare and workers’ incomes. Instead 70 percent has gone to infrastructure projects.

As elsewhere, debt has increased massively, an unregulated shadow banking system has developed, asset price bubbles have emerged, and risky speculation in real estate and the under-regulated stock market has burgeoned.

With China’s increasing insertion into the global economy the contagion of a Chinese crisis that Bello and many others believe to be a real possibility in the coming years would dwarf the current fear around the Coronavirus. Indeed, Bello suggests that the bursting of the Chinese bubble could precipitate the next phase of the global financial crisis.

Bello’s proposed reforms to address these insanities are logical in purely capitalist terms. It is, he recognises, a minimum programme — a sort of Keynesian common sense of greater banking regulation, closure of tax havens, restraint of hedge funds, abolition of financial derivatives, and so on. But the realisation of even this minimum programme will require the activism of workers and social movements to break the resistance of capital.

Without workers’ self-activity we should anticipate capital’s preferred option in any future crisis, further austerity. Fascists would very quickly try to take advantage. But, Bello remains hopeful that the struggle for reform will increase pressure for a more fundamental transformation. He calls it post-capitalism, but whatever the label, workers’ struggle is the key.