The crisis is obviously not over. The stock market crash is, as of last week, officially the worst since the Great Depression (via), while $300 billion bailout has just been announced for the world's largest financial corporation, Citigroup (via).
Joel Geier, who's written several excellent articles on the crisis, gave the best concise explanation of the way what's happening is rooted in the US economic system that I've heard yet in a talk at last weekend's Northeast Socialist Conference. I'm going to try to write up his argument from my notes, here.
Capitalism is a dynamic and contradictory system. It is crisis prone, but it is also able to overcome its crises. An explanation of how this happens must go back to the social relations of production, the relationships between labor and capital, and between use, exchange, and profit.
Capitalism has two kinds of crises. The first are the cyclical crises, which occur every 8-10 years. These are 'realization crises' (that is, the value embodied in commodities due to the labor which produced them cannot be 'realized' as profit) or crises of 'relative overproduction' (that is, too many commodities have been produced relative to the market). The problem in such crises is that capital can't sell the commodities it has produced at the expected profit rate. Supply has become disjointed from demand. This is because the means of production have expanded much faster than the consumption, which in turn is rooted in labor's systematic subordination to capital.
Most bourgeois economists acknowledge these crises, as part of the 'business cycle'. Many of these economists (Keynesians) theorize them as the product of 'underconsumption' - people are not consuming enough, and so demand is too low. But 'underconsumption' has existed since the time of the Pharoahs, without crises taking the form that they do in capitalism. They come at the height of the boom, typically, when wages and profits are both at their highest. (Though this is not true in the current case, since the debt bubble has complicated the process; wages peaked in 1998.)
Capitalism has a second kind of crisis, which is deeper and which bourgeois economists do not acknowledge. This is a crisis, not in the 'realization' of surplus value as profit, but in the rate of profit, caused by too little surplus value being produced, period. The rate of profit falls because the 'organic composition' of capital, the ratio of non-labor expenses in production to the cost of labor, rises, and all profits ultimately come from labor. With the accumulation of capital, which is what capitalism is all about, this ratio naturally rises, meaning higher productivity, but (in an apparent but false paradox) a fall in the rate of profit.
There are ways in which this tendency may be postponed or overcome. Capitalists may get by on a rise in the mass of profit - even if the profit rate is lower, if capitalists invest enough, they will make a lot of money. The working class may be squeezed, directly by union-busting or indirectly through lower taxes & services. Labor may even be paid, for some time, less than its value. New export markets may provide an outlet for surplus capital, and the entry of new populations into the working class may improve the ratio from the other side. The elements of capital may be made cheaper.
Nevertheless, these deeper and more systematic crises occur. The Great Depression was one. The next and most recent one was at the end of the post-war boom, between 1973 and 1982, when the US saw three recessions, and the transformation of a system known as the 'permanent arms economy', where the US was the main world manufacturer and its economy was driven by military spending, by the rise of capitalist competitors such as Germany and Japan. This led to a massive restructuring; at the beginning of the crisis, US wages were higher and productivity lower than in Germany and Japan, but by 1990, the situation had been reversed. With the introduction of deregulation, privatization, and the other policies that went under the name of 'neoliberalism', profit rates were restored. In 1973, per capita GDP was $20000. In 2007, the same figure was $40000. Meanwhil, wages were lower in real terms. Everything went to capital.
A few on the Left (Robert Brenner, Chris Harman) have denied that the neoliberal boom was based on real growth. But the organic composition of capital was really lowered, most obviously by the collapse of Stalinism and the entry of the Russian and especially the Chinese populations into the global workforce, in regions with very little accumulated capital. By some academic estimates this cut the organic composition of capital in half. 2006 was a year with a record high both for profit rates and for profits as a percentage of GDP.
But, in the last business cycle, between 2000 and 2006, there was no expansion of the reproduction of capital in the US. There were fewer factories in 2006 than a decade before. Instead, growth came from a foreign trade deficit and a corresponding debt bubble, where US debt financed growth not just here but across the world.
Marx labeled the process of production from the point of view of a capitalist as 'M-C-M' - money-commodities-money. To a capitalist, the commodities produced are incidental; the point of production is to take money, and invest it to make more money. This perspective lends itself easily to speculation. The most recent speculative bubble is by no means the first in capitalism's history.
When there is an excess of capital, due to a crisis of overproduction, and especially when profit rates are declining, capitalists look for speculations as outlets for investment. The low interest rates and resulting housing bubble of the last decade were not just the work of the Fed - as Alan Greenspan himself put it, there was a 'global savings glut'. This created an asset bubble, a growth in 'fictitious capital'. Fictitious capital is what is created when there is a growth in the paper value of a company or other asset without a growth in its real value, the labor embodied in it. This is what happened in housing. Such bubbles are unstable, and can collapse very quickly, leading to enormous destruction. And the destruction is not 'fictitious' - not only is real capital destroyed, but people are bankrupted and human lives are devastated.
Thanks to the fact that we live in an imperialist world, where capitalist states compete against each other economically and politically when not militarily, there can be no centralized response to crises of this sort. The current crisis is pulling apart the global trading system.
This system has grown very bizarre, especially since the Asian debt crisis of 1997-1998. The US trade deficit went from a miniscule figure to the range of $700/$800 billion each year. Growth in the US surpassed growth in most other developed countries, but not that in China, South Korea, etc, and so US capitalism has become less competitive relative to the world as a whole. Instead of producing things, the US has acted as the 'buyer of last resort'. 55% of goods produced in the East Asian countries are exported. As far as the means of productions go, China has become a full member of the advanced industrial world - but the Chinese working class gets only 35% of what it produces, making it probably the most exploited national working class in the world.
The US can finance its trade and budget deficits by means of a 'savings glut' elsewhere, but this involves a giant transfer of wealth away from the US, and relative US decline. But then, of course, the rest of the world is being hit as hard, if not harder, by the current crisis, so we can't say that the US is necessarily about to lose its dominant position. In fact, this is the first time since 1973 that the entire world is going into crisis together.
Crises are overcome. Profits are restored by cutting the cost of the elements of capital, variable and constant. The two most important ways this happens: (1) cutting wages, which involves a class struggle; and (2) cutting the other element of capital, 'constant' capital, partly by shutting down or destroying factories and offices, and partly by simply devaluing them.
Surviving firms can benefit from collapses and bankruptcies. Best Buy is happy to see Circuit City go bust. Warren Buffet can buy a company whose shares were $100/each a year ago for $0.26/share - and partly the dropping price is just the disappearance of fictitious capital, but he's still getting a deal. PNC can buy National City, with some bailout money. All this leads to the concentration of capital, which can enhance future crises - witness the systemic impact of the collapse of Lehman Brothers.
The US is a low-wage country now. This is already visible in the auto industry, but is extending to others.
The current crisis started with the debt bubble of 1997-8, when, to avoid recession, the US government stimulated an economy already in boom, with massive liquidity. This fed the dot com and stock bubble. This postponed the recession, but still 2001 saw the biggest fall in profits in decades. But then the economy bounced back the next year, with giant government stimulus in the form of a domestic spending package, tax cuts, and war spending. This expanded a debt bubble, especially in housing.
Working class debt exploded, because the only way to maintain consumption was through more credit, more debt, borrowing against houses. $5 trillion in home equity loans were made in the last five years. The expansion of debt was facilitated by the deregulation of the banking system, and the growth of a shadow banking system larger than the regular one, consisting of investment banks, hedge funds, SIVs, etc. All of these were unregulated and held large amounts of mortgage debt. Now, the banks are bankrupt, because the debt is worthless, and they held it at fantastic leverage.
'Leverage', the ratio of money loaned out to money held, is traditionally 10:1 for a bank. But in the last few years it has become effectively 30, 40, 50:1. This led to enormous profits, and therefore even more investments in subprime mortgages, etc. In turn this meant overproduction of housing, followed by price decline, then market collapse, foreclosures, and bank meltdowns, and therefore enormous destruction of both fictitious and real capital.
There have been $11 trillion total in stock losses and $5 trillion in housing, with $2 trillion lost by pension funds and $1 trillion in bank capital - which means a $10 trillion decrease in lending. The rate and mass of profits are in free fall.
How deep is the crisis? It already requires restructuring of the finance, auto, airline, and other industries. Banks have been recapitalized by $2-3 trillion in Europe and $3-4 trillion in the US, but this may not be enough, because the debt bubble was not only in housing, but also in corporate assets, which have not yet really popped. And when banks must sell their assets to raise capital, that leads to further asset deflation. Deleveraging leads to a credit squeeze, preventing economic expansion. Things will get worse. Unemployment will go up; we went from 7 to 10 trillion unemployed last year, and there will be more.
This is an international crisis. There were housing and asset bubbles outside the US too. The theory of 'decoupling', that national economies had become less interdependent, was of course a myth. On top of the debt bubble bursting, there is a commodities bust, and not just in the price of oil. This produces recessions in commodities-exporting countries. Stock markets in most of the world have dropped more than in the US, 50-70% in 'BRIC' - Brazil, Russia, India, and China. There is currency instability, with a rising dollar, and currency crises in Brazil, Mexico, and Korea. Trade has collapsed, withe the cost of shipping measured by the Baltic Dry index down 93%.
Will this be the 1930s again? Bush said it would be worse, absent action. This is possible, but won't necessarily happen. The Great Depression only became 'Great' in 1931, because of international bank collapses which had to do with the post-World War One imperialist system. The world economy even in 1929 had grown no bigger than in 1913.
Capitalism learned its lesson: save the banks! But the bank rescues haven't led to resumed lending. So now Paulson is saying the government will put up money for consumer lending directly. The plan is that the government will put up $50 billion and get 20 times that in private leverage - good luck with that.
It's too early to say what will happen. There will be many more surprises, with new companies and new countries going bankrupt. We do know that this will be a long and deep recession, but not the last crisis of capitalism - unless we overthrow it, the system will find a way out.
Update: Videos of another talk of Joel's at Prisoner of Starvation.