R E S E A R C H O N M O N E Y A N D F I N A N C E

Discussion Paper no 11

At the Heart of the Matter:Household Debt in Contemporary Banking and the

International Crisis

Paulo L dos SantosDepartment of Economics, School of Oriental and African Studies

11 May 2009

Research on Money and Finance Discussion Papers

RMF invites discussion papers that may be in political economy, heterodox economics, and economic sociology. We welcome theoretical and empirical analysis without preference for particular topics. Our aim is to accumulate a body of work that provides insight into the development of contemporary capitalism. We also welcome literature reviews and critical analyses of mainstream economics provided they have a bearing on economic and social development.

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Paulo L dos Santos, Address: Department of Economics, Soas, Thornhaugh Street, Russell Square, London, WC1H 0XG, Britain. Email: ps45@soas.ac.uk.

Research on Money and Finance is a network of political economists that have a track record in researching money and finance. It aims to generate analytical work on the development of the monetary and the financial system in recent years. A further aim is to produce synthetic work on the transformation of the capitalist economy, the rise of financialisation and the resulting intensification of crises. RMF carries research on both developed and developing countries and welcomes contributions that draw on all currents of political economy.

Research on Money and FinanceDepartment of Economics, SOAS

Thornhaugh Street, Russell SquareLondon, WC1H 0XG

Britain

www.soas.ac.uk/rmf

2

Abstract

Thispaperconsiders the nature androle ofhousehold indebtedness incontemporarybankingandthecurrentfinancialandeconomiccrises.Itoffers a concise empirical exposition of the centrality of householdlending and related financial services to leading banking institutionsandto thecreditsystemsofanumberofadvancedandmiddle‐incomeeconomies. It also offers socioeconomic characterizations of thisdebtand its macroeconomic significance from the standpoint of Marxistpoliticaleconomy,affordingtwodistinctiveinsights.First,theconcretesocial content ofhouseholddebtover the past twodecadeshashelpedensure this lending remained highlyprofitable to lenders, making it anaturalvehiclefordestabilizingcapital‐marketcompetition.Second, acrisis characterized by record levels of over‐indebted wage‐earninghouseholds is likely to pose distinctive difficulties to a process ofmarket‐basedrecovery.Whilethedestructionofcapitalvaluesduringacrisis lays the basis for the eventual restoration of profitability andsolvencyforsome enterprises,over‐indebted wage‐earning householdsface no analogous opportunity. Without new speculative asset‐pricebubbles,the restorationoftheirfinancialstabilityhingesonreductionsinconsumptionorincreases inwages,bothofwhichpresentobstaclestoamarket‐basedprocessofeconomicrecovery.

3

1.IntroductionTheworldeconomyiscurrentlyundergoingoneofthemostsevereanddistinctivecrisesin

thehistoryofindustrialcapitalism.Theveryideathatdefaultsonhomemortgagesbysome

ofthepoorestelementsoftheUSworkingclasswouldhavewipedoutleadinginternationalfinancial institutions,andtriggeredaworldwiderecession,wouldhavebeenunthinkableas

recentlyas25yearsago.Theextentanduniquenessofthecrisishavecastasharpfocusontheoperationsofleadinginternationalbanks,andtheeconomicandpolicydeterminantsof

theUSsubprimemortgageimplosionanditsinternationalspread.

Anumberofcontributionshavesoughttoconceptualize,onthebasisofapluralistrangeof

analyticalframeworks,bothrecentchangesto theactivitiesofbanksandthedeterminantsofthecurrentcrisis.Thechangesinbankinghavebeenlongdocumented.Bergeretal(1995)

providedearlysystematicevidenceofthesteadylossbyUScommercialbanksoftraditional

business of lending to corporations and of captive deposit bases, attributing bothdevelopmentstofinancialderegulationandincreasedcompetition, aswellastechnological

developments.AllenandSantomero(2001)havenotedtheshiftfromnetinterestmarginstovariousservicefeesinbankbusinessmodels, interpretingthechangesinbankingasashift

in the relative importance of risk management services and traditional information

gathering functions. Erturk and Solari (2007) have emphasized the importance of bankentrepreneurial alertness in the development of newbank business lines in a context of

shiftingfinanciallandscapesandgrowingcompetitionfromcapitalmarkets.

Thecrisishasseentherapiddevelopmentofanextensiveliteratureonitsdeterminants,too

numerous to examine in detail here. Broadly, mainstream contributions have located thesources of the crisis in combinations of ‘market failures’ or ‘regulatory failures’,

conceptualized in relation to ideal,perfectly functioningmarkets.1 Heterodoxandradicalpolitical economists havesought to identifydeeper tendencies and processes inherent to

capitalistmarketsandcontemporarycapitalism.Numerouscontributionshaveemphasized

anddevelopedHymanMinsky’sconceptualizationofendogenoustendenciesincompetitiontowardsincreasinglyfragilefinancial structuresbyenterprises.2 More recently,Fosterand

Magdoff (2008) have attributedthe crisisto thestructural shift in theUSeconomyaway

4

1 Incentiveproblemsposed inmortgageoriginationand securitizationhavebeenofferedascausesof ‘marketfailures’, ashastheabsenceofliquidmarketsforCDOswrittenoverresidential mortgagesand thecorrespondingstrongreliance onstatisticalmodels for the establishment of prices. A ‘regulatory failure’conceptualization clearly underlies the extensiverecentcontributionofferedinBrunnermeieretal(2009).

2TheseincludeWhalen(2007),Wray(2007,2008),Kregel(2008).

from productive and towards financial activities. The authors identify this shift as anultimately self‐defeating capitalist response to the tendencies the authors find in

contemporarycapitalismtowardschronicstagnation.3

Yetfewcontributionshavesoughtoutanintegratedunderstandingofthecurrentcrisisasa

distinctiveresult of specificcontemporarybanking practices.4 ThispapermakesamodestcontributiontowardsuchanunderstandingdrawingonMarxistpoliticaleconomy.5

It arguesthat themostsignificant aspect ofrecent changes inbanking activitieshasbeentheturntowardsindividualwageincomeasasourceofbankprofits.Banklendinghasbeen

reorientedawayfrom loans to enterprises and towards various formsofconsumptionandmortgageloanstohouseholds.Investmentbankingbusinesshasalso increasedforall types

ofbanks,significantlydrivenbytheriseofretailinvestmentfundservices.6

Thesedevelopments have been conditionedby arange of seculareconomic and financial

changes in capitalism over the past three decades. Financial liberalization, the rise ofinstitutional investors, and changing financial behavior by non‐financial corporations

erodedtraditionalbankingandforcedbanksto lookfornewbusinessandfundingsources.

Wagestagnation,growinginequalityandthesteadyexpansionofprivateprovisionofbasicnecessities in housing, education, health and retirement, have increasingly forced wage

earnerstoapproachbanksandotherfinancialintermediariesinordertogainaccesstobasicnecessitiesandobtainsomedegreeofprotectionagainst risks they now faceindividually.

AlthoughtheseprocessesaremostclearintheUS,theirsalientfeaturesareevidentacrossa

rangeofadvancedandmiddle‐incomeeconomies.

The current crisis may be understood as a crisis of the distinctive type of banking thatemerged through these changes. First, itwas triggeredbythe subprimemeltdown, which

developedasbankssoughtto extendhouseholdlendingtohistoricallyoppressedsegments

of the US population. The meltdown had irreducibly financial causes related tosecuritization, access to moneymarkets,high levelsofbank leverage, and thepotentially

destructivenatureoffinancialcompetition.Yetunderpinningtheresulting frenzyandbustlaylendingtowage‐earninghouseholdsandthedistinctivenewsocialrelationsitdefines.

5

3LaidoutinBaranandSweezy(1968).

4AnotableexceptionisKregel(2008).

5BasedonresearchmostrecentlyreportedindosSantos(2009a),Dymski(2009),andLapavitsas(2009).

6SeeWilhelmandMorris(2007).

And second, recent household lending has also given rise to record levels of household

indebtedness acrossmanyeconomies. The current crisis has seen largenumbers of over‐

indebted households in those countries face increasing difficulties in servicing debt.Widespreadfinancial distressby largenumbersoffinalconsumersrepresentsadistinctive

feature of the current international recession that is likely to condition significantly theprospectsforeconomicrecovery.

AMarxian approach to these developments affords two distinctive insights motivated indetail in this essay. First, by pitting households aiming to secureaccess to consumption

againstfinancialenterprisesseekingtomaximizeprofits,householddebthasinthepresentcontextcreatedsocialrelationsthataresystematicallydisadvantageous toborrowers.Such

disadvantages underpin the high effective interest rates realized by lenders and the

sustained high profitability until recently enjoyed by financial intermediaries lending toordinaryconsumers.Highratesofprofit,inturn,madethislendingparticularlywell‐suited

forthedevelopmentofexcessivelendingandinstability intheprocessoffinancialmarketcompetition.

Second andmost significantly, there are good theoretical reasons to expect that a crisistriggered and characterized by over‐indebtedness by wage earning households will pose

distinctive difficulties to the process of recovery. At the broadest level, Marx (1909)identified a number of mechanisms through which the devastation of capital values

(includingwages paid to variable capital) ushered by an industrial crisis creates the very

bases for an eventual recovery ofprofitability. Such a recovery improves the solvency ofindebted enterprises, facilitates financial stabilization, and fosters broader economic

recovery. In contrast, a crisis sets into motion a range of macroeconomic processes thatunambiguouslydeterioratethefinancialpositionofwage‐earninghouseholds.Theveryreal

reductionsin wagerates uponwhich an eventual recoveryis significantly predicatedmay

plunge over‐indebted householdsdeeper into financial distress, creating further financialdisruptions, and further limiting household demand. In such a setting, it is likely that

recessionswillproveunusuallylonglastingwithoutsignificantstateinterventionintolaborandfinancialmarkets.

The rest of the paper proceeds as follows. Section two documents the changes in theconduct of banks and the related reorientations of credit systems toward credit to

households. It also offers a discussion of the broad policy, labor‐ and financial‐marketfactors conditioning these developments. Section three offers a conceptualization of the

6

different social relations associated with lending to capitalist enterprises and lending toindividualwageearners,basedonMarxianschemasofreproduction.Onthesegrounds,the

section identifies possible grounds for systematically higher effective interest rates in

lendingtowage‐earninghouseholdsforpurposesofconsumption.

Sectionfouroffersinitialanalyticalconsiderationssuggestingthatrecoveryfromarecessioncharacterized by high levels of household indebtedness and financial distress may pose

distinctiveandstubborndifficulties.Sectionfiveconcludes.

2. TheReorientationofBanking

Banking in the advanced capitalist economies has undergone significant transformationsover the past 25years. Lending has been reoriented away from loans to enterprises and

towards various forms of consumption and mortgage loans to households. Investment

bankingbusinesshasalso increased forall typesofbanks,drivenmost significantlybytheriseofretail investmentfundservices.AsdocumentedindosSantos(2009a)andLapavitsas

(2009), these developments can bemeaningfully understood as embodying an importantshift in the sources of bank profits, away from the profits of productive enterprise and

towardsthewageincomeofordinarypeople.

Recordlevelsofhouseholddebthavefollowedthesedevelopments.Risingindebtednesshas

imposed higher debt servicing costs onto wage‐earning households even in economieswhereinterestrateshaveseenclearseculardeclinesinthepast25years.Thisgrowingdebt

burdenhastransformedgrowingsharesofwageincomeintobankrevenuesandprofits.

WhiletheseprocesseshavebeenclearestintheUS,manyoftheircentralaspectsareevident

in Britain, and other OECD economies. They are also evident in many middle‐incomeeconomies,whereleadingUSandEuropeanbankshaveledthesetransformationsoverthe

past 15years.7 Thissectionbrieflydocumentsthesechangesinbankbehavior,theirimpact

on the overall allocation of credit and the burden of debt on households, and offers a

discussiononthedeterminantsofthesedevelopments.

2.1TheNewBankActivities

Basedonastudyofcorporatedisclosuresfornineleading international banks, dosSantos(2009a)offersasnapshotofabankingsystemgearedtowardstheextractionofprofitsfrom

individual wage revenue. Activities and revenues centre significantly on lending toindividuals,money‐dealingfeesonretailaccounts,andtheprovisionofretailinsuranceand

77SeedosSantos(2009b).

investment fund services. Lending to individuals is clearly a major lending activity forleadinginternationalbanks,especiallythosefromtheUS.

Table1‐LoanstoIndividualsasPercentageofTotalLoanPortfolio,December2006

HSBC Citigroup BofA RBS Barclays Paribas Dresdner SMFG

40.5 77.7 76.3 24.0 44.0 33.0 20.1 26.8

Source:dosSantos(2009a)

Yet even these figures understate the importance of this type of lending. The very

organisationofCitibank,HSBCandBankofAmericarevealstheirorientationtoindividualcredit.Citibank’s“GlobalConsumer” businesssegmentgeneratedprofitsofUS$12.1billion,

or56percentofallprofits,in2006.Revenuesfromcreditcardsandconsumerlendingstood

atUS$13.5billion,or31.6percentofallrevenues.Citigroupalso reportedatotal ofUS$220millioninprofitsfromitsUSstudentloansdivisionalone.8

That same year HSBC’s “Personal Financial Services” segment, which focuses on

consumptionandmortgagecredit,generatedUS$9.5billion inprofits, 42.9percent ofthe

total,aheadofcommercialandinvestmentbankingdivisions,whichaccountedfor27.3and26.3 percent of profits respectively. Central to this performance is HSBC’s credit card

network of over 120 million cards worldwide. Bank of America’s “Global Consumer andSmallBusiness” segment,whichfocusescentrallyonconsumptionandmortgagecreditand

retailaccounts,accountedfor65.6%ofnetinterestincomethatyear.

Money‐dealingfeesinretailaccountshavealsodevelopedasamajorsourceofbankrevenue

drawing onwageincome. In 2007, Bank ofAmerica andCitigroupreceived almostUS$30billion in such fees, with HSBC and Barclays US$23.6 billion. Overdraft charges, late

payment fees,creditcardcharges, etcareleviedasfeesbutarecostsofconsumerlending.

BankofAmericaattributedthesignificantriseinitsnon‐interestincomebetween2005and2006toitspurchaseofBritish‐basedcreditcardissuerMBNA,whichresultedinincreasesin

excessservicing,cashadvance,andlatefees.Similarly,Furnace(2004)reportsthattotalUSlatecreditcardfeesrosefrominsignificantlevelsin1990tooverUS$1billionin1996,andto

almost US$9billion in 2003.Other fees relate to access to new services, such as ATMs,

phoneandinternetbanking facilities,whosehighinstallationcostshavesuccessfullybeenpassedtoclientsbybanks.9

8

8AllinformationonindividualbankswasobtainedfromcorporateAnnualReports.

9SeeLapavitsasanddosSantos(2008).

Finally, banks have benefited significantly from the growing reliance on private pension

provisionbydevelopingnewmassretailservicesininvestmentfunds.Worldwide,managed

fundsheldatotalofUS$63.8 trillioninassetsattheendof2006.10 Evensmallmanagementfeesonsuchvolumescanleadtolargerevenues.IntheUSalone,mutualfundmanagement

feeshavegrownconsiderablysince1980.

Table2‐TotalMutualFundFeesPaidbyHoldersinUS,US$billion

1980 1985 1990 2000 2001 2002 2003 2004 2005 2006

0.0 0.2 1.1 3.4 11.0 8.9 9.1 10.3 10.6 11.8

Source:InvestmentCompanyInstitute

Inaddition to these fees, fundmanagersstandinahighlyadvantageousposition toprofit

fromdocumented ‘behavioural’ tendenciesbyretail investors to buywhileprices arehigh

andsellwhen theyarelow.11 Asaresult,fundmanagement isremarkablyprofitable.Inaninternationalsurveyofmoneyfundmanagers’performanceintheleanyearof2002,Boston

ConsultingGroup(2003)foundthat64percentofthefundsreportedpre‐taxprofitmarginsabove 20 percent. A full 42 percent of the funds reported profit margins higher than 30

percent.Fundstargetingretailinvestorswerereportedlythemostprofitable.

2.2TheGrowingBurdenandProfitsofDebt

These activities have turned the debt of households into a major component of overallprivatedebtacrossanumberofeconomies.InMexico,Estonia,RomaniaandPoland,where

leading international banks have come to dominate banking markets, bank loans to

householdsstoodrespectivelyat40.0,46.6,49.8and54.1percentoftotalbankcreditbythestart of this year.12 In Britain household debt reached 78.9 percent of all private non‐

financial debt and160 percent ofgrossdisposableincomeby theendof2007.13 IntheUShouseholddebtreached58.3percentofallprivatenon‐financialdebtliabilitiesinmid2006.

Italsopeakedatarecord133percentofdisposableincomeinearly2008,remainingaround

130percentinthesecondhalfof2008despiteaggressivecutsinbaseinterestrates.14

9

10dosSantos(2009a).

11Ibid.

12Calculatedfromrespectivecentralbanks,exceptforMexicowheredatafromtheCNBVwasused.

13CalculatedfromUnitedKingdomNationalAccounts:BlueBook.

14CalculatedfromFlowofFundsoftheUnitedStates.

All layersoftheUSpopulationhavebeenaffected,withtheheaviestproportionalvolumes

ofdebthittinghouseholdsinthebottom20percentoftheUSincomedistribution,andthe

lightestonthosehouseholdsatthetop10percent.

Table3–USMeanHouseholdDebttoMeanIncome1989‐2007,byincomepercentile

0‐20 20‐39.9 40‐59.9 60‐79.9 80‐89.9 90–100

1989 87.5 86.0 84.7 95.9 83.7 60.2

2007 258.5 154.8 170.2 182.5 178.0 86.7

CalculatedfromFederalReserveSurveyofConsumerFinances,2007Chartbook

Despiterecent seculartrendsto lowerratesofinterest,thecosttohouseholdsofservicing

thisdebthasincreasedconsiderably.TheFederalReserve’sFinancialObligationsRatio,anestimateoftheshareofdisposableincomepaidoutasinterest andforaseriesofhousing‐

related services, reached a record 19.39 percent in the fourth quarter of 2007. Despite

significantinterestratecutssincethen,itstillstoodat19percentoneyearlater,alevelonlyreachedduringtheheightoftherealestateboominmid‐2005.

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10

The distribution of this debt burden can be quantifiedmore exactlywith data from the

recentlyreleasedUSSurveyofConsumerFinances. It showsthisburden fallingheavilyon

all households acrossthe incomedistribution, saveforthosein thetop10 percent,withaslightlyheavierrelativeburdenonthetwomiddlequintiles.

Table4‐AverageDebtPaymentstoFamilyIncome2007,byincomepercentile

0‐20 20‐39.9 40‐59.9 60‐79.9 80‐89.9 90‐100

17.6 17.2 20.3 21.7 19.7 8.4

FederalReserveSurveyofConsumerFinances,2007Report

Asthefiguresprovidedaboveonleadinginternationalbankssuggest, theyhavedeveloped

veryprofitablebusinesslinesrelyingonappropriationsofthesegrowinghouseholdoutlays.Ausubel(1997)providesrobustevidenceoftheexceptionallyhighlevelsofreturnsonassets

USbanksreceivedoncredit‐cardlendingcomparedwithotherlendingactivities.InBritain,

Bank of England figures on realized effective interest rates show a consistent threepercentage point premium on returns on unsecured overdraft loans to households over

equivalentloanstonon‐financialcorporationsbetween2004and2008.15

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1115Thegaphaswidenedtofivepercentinthefirstthreemonthsof2009.

The profitabilityof this lendingmayalso be inferred from the aggressivenesswithwhichbanks in theUShave pursued acquisitionsof independentfirmsengaged in this lending

sincetheearly1990s.In1995theyheldnomorethan25percentofcreditcardreceivablesin

theUS.16Aslateas1999,thetoptenUSissuerscontrolled55percentofthemarket;manyofthemwereindependent creditcardcompanies.17 Sincethenlargebanksbought theirway

into dominant market share, acquiring Associates, Bank One, British‐basedMBNA, andProvidian.After2004,thetoptenUSissuerscontrolledover90percentofthemarket,and

countedonlyone independent,non‐bank enterprise.18 During thereal estateboom ofthe

mid‐2000s, US banks pursued similarly aggressive acquisitions of independent mortgagecompanies,pavingthewayforseverelossesoncethesubprimecrisisexploded.

2.3TheBroadDeterminantsPavingWaytoCrisis

A series of secularand policy developments over thepast 25 yearshave conditioned the

developmentofhouseholddebtoverthepast25yearsandthebuilduptothecurrentcrisis.As above, these are clearest in the US, even though their central elements have been

observedacrossmostoftheadvancedandmanymiddle‐incomeeconomies.

Onthedemandside,anumberoflabor‐marketandsocialpolicydevelopmentshavehelped

pushwageearnerstoaccesscreditandotherfinancialservicesinordertomeetbasicneeds.Fromdifferentanalytical perspectives,Iacoviello (2008) aswell asBarbaandPivetti (2008)

have established empirical and conceptual linkages between rising levels of incomeinequalityandrisinghouseholddebtintheUSeconomy.Lapavitsas(2009)anddosSantos

(2009)emphasizeacloselyrelatedaspect:thathouseholdindebtednesshasrisenagainsta

backgroundofstagnantincomesandthegrowingroleofprivateprovisionin thesupplyofnecessities in housing, health, education andpension services. These developments have

forcedwageearnersincreasinglytoborrowandtoaccessvariousinsurance,investmentandrisk‐managementservicesprovidedbybanksandotherfinancialfirms.

Onthesupplyside,scopeforthetraditionalbankingbusinessoflendingtoenterpriseshasbeen greatly reduced. Financial liberalization intensified capital‐market competition for

banks,whiletheriseofprivatepensionsavingscontributedtoanexplosionintheissuanceofcorporatebondsstartingintheUSsinetheearly1980s.Non‐financialcorporationshave

increasingly been able to rely on bond markets and retained earnings to meet their

12

16AllenandSantomero(2001).

17Land,Mester,andVermilyea(2007).

18JPMorgan,Citigroup,BankofAmerica,theindependentCapitalOne,HSBCandWashingtonMutualheldthetopsevenspotsatthetime.SeeAkersetal(2005).

investmentneeds.Further,theirrealfixedinvestmenthastendedtofallinrelationtoGDP,whilevariousmeasuresinvolvingtherepurchaseofoutstandingequitythroughbuybacks,mergers,and

leveragedbuyouts,oftenfinancedthroughbondissuance,haveincreasedinsignificance.19

Bankswerethusforcedtodevelopnewlinesofbusiness,whichtheyfoundintheprovision

of investmentbanking services andbyturning to theindividual. Inthistechnological andtechnical developments such as credit scoringmethods and programswereinstrumental.

Theypermittedtheextensionofretailcredittolargenumbersofborrowers,includingthose

at considerable geographical removes from banks’ head offices, on the basis of ‘hard’quantitativeestimatesofcreditworthiness.20

Asdiscussed above, thehigh relativeprofitabilityofthis typeof lendingcompelledbanks

increase market share and market size, often by aggressively offering consumption and

mortgagecredit.21Inthesettingoflowinterestratesandanincipientreal‐estatebubbleofthemid‐2000s, this evolvedintopredatorylending to historicallyoppressedandexcluded

sectionsoftheUSpopulation,22fuelledbytheadoptionofinvestment‐bankingfundingandinvestmenttechniques.23Thelureofhighreturns,theverynatureoffinancialcompetition,

andhubrisconcerning thedescriptivepowerof variousnewriskmanagement techniques

andinstruments,pavedthewayfortheextensionofsuchpracticesintopreviouslyexcluded‘sub‐prime’marketsegments—withdisastrouseffects.

Finally,governmentsactivelysupportedhouseholdindebtednessasanincreasinglycentral

tenetofmacroeconomicpolicy.In theUS,fixedproductiveinvestment and theincomeof

thebottom90percentofhouseholdsstartedto experiencesignificantfallsrelativetoGDP

in the mid 1980s.24 Household debt offered an easy macroeconomic solution to theconsequentdemandproblems.AsadmittedbyAlanGreenspan(2007),ithasbeenpursued

assuchsinceatleasttheearly1990s.Borrowinghasrisensteadily sincethen,asshownin

figure1,whiletheshareinGDPofhouseholdconsumptiongrewfroma1952‐1982averageof62percenttoover70percentby2002.Whilethedot.combubbleofferedabriefrespite,the

13

19SeedosSantos(2009a).

20SeeLapavitsasanddosSantos(2008).

21 Pre‐approved credit cardshave longbeen aggressively awarded to students and youngadultssince the early 1990s.Throughsuchstrategiesissuersseektoprofit fromdocumented tendency for consumerstocontinueusingthefirst cardtheyeverobtained,regardlessofitscomparativeinterestrates.SeeGruberandMcComb(1997).

22SeeDymski(2009).

23SeeLapavitsas(2009b)inthisvolume. 24SeeNIPAandIRSdata,whichdocumentthesetendenciesrespectively.

falling trends in investment and income resumed quickly from 2001. From then on, asGreenspanhimselfcandidlynotes,

“Consumer spending carriedthe economythrough thepost9/11malaise, andwhat carried consumer spending was housing. In many parts of the United States,

residentialreal estate, energizedbythefall inmortgageinterest rates,beganto see values surge.... Since 1994, the proportion of American householderswho became

homeownershadaccelerated....ThegainswereespeciallydramaticamongHispanics

andblacks,asincreasingaffluenceaswellasgovernmentencouragementofsubprime mortgageprogramesenablesmanymembersofminoritygroupstobecomefirst‐time

homebuyers.Thisexpansion...gavemorepeopleastakeinthefutureofourcountry andbodedwellforthecohesionofthenation....

“Capital gains,especiallygains realizedin cash[throughhomeequitywithdrawals],

began burning holes in people’s pockets. Soon statisticians could see a bulge in consumerspendingthatmatchedthesurgeincapitalgains.Someanalystsestimated

that3percentto 5percentoftheincreaseinhousingwealthshowedupannuallyin thedemandforallmannerofgoodsandservices.”25

Meanwhile,US householdswerefinancing growing levels of consumptionand residentialinvestmentwithborrowings,whichreachedsustainedrecordlevelsbetween2003and2006.

1425Greenspan(2007),p229‐230.

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ConcernsaboutthemountingsignificanceandmagnitudeofhouseholdborrowinganddebtweredismissedbyFederal Reserveofficials,who thought theyhaddiscovered aperpetual

motionmachineinrisinghouseprices.Risinghousepricesappearedto improvehousehold

networthandwerearguedtorenderrisinglevelsofdebtsustainable.AscanbeseenintheFed’sMonetaryReporttoCongressof2004,noattentionwasgiven(atleastinpublic)tothe

factthatitwasrisingindebtednessthatwashelpinginflatehomeprices.

Againstthisbackdropthecurrentcrisisappearsasacrisisofcontemporarybanking,andof

thebroadereconomicandpolicyregimethatconditioneditsdevelopment.Attheheartoftheseprocesseslayanewsetofcreditrelationsthat havebecomecentral tocontemporary

capitalism: Lending to wage‐earning households. Its distinctive social content and likelyimpactoncrisisandrecoveryarepursuedinthenexttwosections.

3.OntheSocialContentofDebtClassicalMarxistanalysisofbanklendingisfoundedonthedistinctiveconceptofinterest‐bearing

(orloanable) capital.Loanablemoneycapital(LMC)isapeculiartypeofcapital thatisdistinctfromindustrialandcommercialcapital.Itoriginatesfromidlepoolsofmoneycapitalthatappear

inthefirstinstanceoverthecourseofthecircuitofindustrialandmerchantcapital.26Suchpools

aremobilisedandtransformedintoloanablemoneycapitalbythecreditsystem,whichchannelsitbackintocirculation,inthefirstinstanceasloanstocapitalistenterprises.

TradinginLMCinvolvescreditrelations,that is,theadvanceofvalueagainst apromiseof

repaymentwithinterest.Inthislight,banksandotherfinancialintermediariesarecapitalist

enterprises that specialize in all aspects of dealing in LMC, accruing revenues from thedifferenceinthepricepaidfordepositsandthatpaidonloans.LMCcommandsrepayment

with interest,andtheentire aimof itscirculation is itsreturn to its originaugmentedbyinterestpayments.Itssuccessfulreproductionmaybedescribedschematicallyas,

M‐F‐M’ (1)

WhereMdenotesthevalueoftheoriginalLMC,F isthefinancialclaimitbecomesonceit

isadvanced,andM’>MdenotesthevaluereturningtotheownerofLMC.Notably,process

(1) is characterized by the qualitative identity and quantitative difference between itsstartingandendingpoints.

AsintermediariesdealinginLMC,banksarespecialistsinoverseeingsuccessintheprocess

1526SeeItohandLapavitsas(1999).

describedin(1)onbothassetandliabilitysidesoftheirbalancesheets.Inthisspecializationtheymustaddressdifficultiesrelatedto thepeculiarcharacterofinterestratesasapriceof

LMC. To Marx (1909),27 the rate of interest contains an element of irrationality. It is a

peculiarprice:anexpressionofvalueinmoney,ofafutureflowofmoney.Italsorevealsnounderlyingsocio‐economicrelationshiporinherentmaterial aspectofsocialreproduction,

not least because it is not the price of aproduced commodity. Interest ismost generallydeterminedsimply throughtheinteractionofsupplyanddemand.Its relativedetachment

from the material realities of production makes relations defined over LMC highly

susceptibletotheinfluenceofbroaderpatternsofsocio‐politicalpower.28

As a result, the extension ofLMC to different classes of borrowers entails fundamentallydifferentsocialandeconomicrelations.Thisincludesdifferencesinthebasesforrepayment

with interest,differences intherelationshipbetweenthevalueadvancedthroughtheloan

and theborrower’s reproduction, andin thedifferent reproduction aimsand imperativesgoverning borrowers’ need for credit. This section illustrates these differences with a

comparison,atthehighest levelofabstraction,ofthesocialcontentoflendingtocapitalistenterprises and that of lending to wage‐earning households based on classical Marxist

analysisofLMCandtheprocessofreproductionofeachclassofborrower.

3.1LendingtoCapitalistEnterprises

The process of social reproduction of capitalist enterprises in Marxist political economyinvolves the self‐expansion of value through the appropriation of surplus value. This is

achievedascapital istransformedintocommoditieslaborpowerandmeansofproduction,

C(lp,mp).Thosearecombinedintheproductionofnewcommodities,whosesaleallowsthecapitalist to realize profits. Central to the process is the appropriation by the capitalist

enterpriseofvaluecreatedbylaborpoweroverandabovethevaluerepresentedbywages.Schematically,

M‐C(lp,mp)‐M’ (2)

SuccessinthisreproductionrequiresthatM’>Manddefinestherateofprofit,takenhere

withreferenceasingleturnovertime,

16

27Chapter22.

28Lapavitsas(2003).

ρ=(Μ’‐Μ)/Μ (3)

The rate ρ provides the central concern for all aspects of the reproduction of capital.

Expectationsabout its level governtheoperationsofeverystage inprocess (2). Theyalso

driveinvestmentplansanddemandforinputs,aswellasthebroaderprocessofallocationofcapital.Significantly,itdependsonthequantitativerelationshipbetweenΜandΜ’.Inorder

to succeedinitsreproduction,capitalmustofnecessitydealwithall aspectsofcombininginputstoproduceoutputsandallqualitativetransformationsitentails.Butnarrowtechnical

orengineeringissuesarenot thecentral imperativeoftheprocess.Thatisprovidedbythe

quantitativeexpansionofvalue.

Whenextendedtofinanceacapitalistenterprise,theinterestpaymentsonLMCrepresentadivisionofprofitsrealizedbytheenterprise.Whileshapedbytheunanchoredinteractionof

supplyanddemandforLMC, thisdivisionmustyieldcertaingeneral regularities ifoverall

reproduction istobesuccessful.Therateofinterest typicallyliesbelowthegeneralrateofprofit, ensuring repaymentwith interest canproceedwithout the lossofcapitalvaluesby

theborrowingenterprise.

Duringnormal business, thesystematicbasisfor thepayment of interest is the increased

turnoveroftotal capital achievedby themobilisationof idlemoneyand itsapplicationtofunctioning circuits of capital through lending.More concretely, individual firms will be

abletoincreasethereturnsontheirowncapitalbyleveragingitthroughborrowing,solongas thereturn on appliedcapital exceeds therateof interest. In eithercase, theadvanced

LMChelps generate the source of its own repaymentwith interest, by circulating in the

borrower’scircuitandexpandingthroughtheappropriationofsurplusvalue.

Intimesofcrisis the rateof interestmaygenerallyexceedtherateofprofit,posing averydifferentpotentialsetofrelationsbetweenlenderandborrower.Debtprovesdestructiveof

capital and disruptive of accumulation.29 Its repayment poses elements of borrower

expropriation, as repayments may require the liquidation of assets and the transfer tolendersofvaluesecuredbytheborrowingenterpriseindependentlyoftheloan.

Finally, in the social relation posed by LMC advanced to enterprises the borrower

approachestheloanonthesamebasisasbankingcapital:seekingtosecurethequantitative

augmentationofcapitalΜintoΜ’.Theresultingsocialrelationsaredefinedbetweensocial

1729ItohandLapavitsas(1999).

equalswho,atthislevelofabstraction,havecomparableexpertiseinseekingtheexpansionofvalue.

3.2LendingtoWage‐EarningHouseholdsMatters are fundamentally different in credit relations between banks and wage‐earning

households.Undercapitalistconditionswageearnershavenomeansotherthanthesaleoftheir own labor power as the means to secure access to necessary consumption.

Schematically,theirreproductionmayberepresentedas,

C‐M‐C’ (4)

HerewageearnersselllaborpowerC,inordertoobtainanequivalentquantityofvalueasmoneyM,whichallowsthepurchaseofequallyvaluedconsumptioncommoditiesC’.

This reproduction is fundamentally different from that of LMC and industrial capital. Its

purposedoesnot relateto changingquantitativemagnitudes,whichstayconstantateverystep. It lies in the qualitative difference between the original commodity and the

commodities accessed. The governing imperative in this process is the fulfillment ofconsumption needs. Significantly, the development of such needs, norms, habits and

expectationstakesplacethroughcomplexnon‐economic,socialprocesses.30

Debtplaysadistinctiverolehere.ItmayallowwageearnerstoaccesscommodityvaluesC’in

excessofthevalueoftheircurrentearningsandanypossiblesavings.Therationalesforthe

paymentofinterestarefarmorecomplexherethaninthedebtofindustrialenterprises,andrequireconsiderableseparateanalysis.MainstreamcontributionslikethoseinspiredbyMilton

Friedman’s(1957)Life‐CycleorPermanentIncomehypotheses,pointtothegainsinborrower

welfare arising from consumption smoothing by consumers facing uneven or stochasticincomepaths.Inadditiontonotinquiringintothedeterminantsofconsumptionpreferences,

suchviews implya long‐term individual calculus thatbearslittleresemblanceto theactualbehaviorofthemassofwageearnerstowardsdebtandanuncertaineconomicfuture.31

A perspective far more likely to yield fruitful research has been recently advanced byCynamon and Fazzari (2008), who argue that, as with consumption habits, ‘financial

preferencesevolveassocialnorms[and]interactwithbothculturaltrendsandinstitutional

18

30See,forinstance,Lapavitsas(2003),Saad‐Filho(2002),orCynamonandFazzari(2008).

31SeeMiles(2004),CampbellandCocco(2003),forillustrations.

changes in householdfinance’.32 Under this light, themotivations and social content ofhousehold debt and consequent flows of interest payments should be understood with

reference to the concrete evolution of consumption habits, norms and expectations and

theirrelationshiptowagelevels.

Twodistinguishinggeneralfeaturesofborrowingbywage‐earninghouseholdsconditionitssocial content.First,it inherentlyposesanelementofexpropriation.Moneyloanedoutto

individualsforconsumptionormortgagesdoesnotordinarilygeneratethevaluefromwhich

it is to berepaidwith interest.33 Interest paymentsare generallymade from subsequentwagereceiptsbyborrowers,representinganappropriationofvalueborrowershavesecured

independentlyoftheloan.

Second, in this borrowing wage‐earning households are primarily concerned with the

satisfactionofqualitativeconsumptionneeds,asrepresentedby(4).Andwhileinthispursuitthese households generally ensure themaintenance of quantitative equality across trades,

tradingoverLMCposesseriousdifficultiesdueto theindefinitenessofitsvalueinexchange.Insuchtradestheyfaceprofit‐maximizinglenders,specializedintheexpansionofvaluegiven

by(1),whowillapproachtherelationshipfromaclearlyadvantageousposition.

Intheconcretesettingofstagnantwages,risinginequality,andgrowingrelianceonprivate

provision of housing, health, and education, wage earners have been increasingly forcedonto debt relations in order to secure theirown reproduction. Thedistinguishinggeneral

features of consumption debt and this element of social compulsion suggest that the

transfersofwage income in the formofinterestpaymentsmay beusefully understoodasusuriousandcontaininganimportantexploitativeelement.

They also help identify the general class and concrete historical bases for the high

profitabilitygenerallyassociatedwiththistypeoflending.Highratesofprofit,inturn,made

this lending particularly well‐suited for the development of excesses in the process offinancialmarketcompetition,andhelpedpavethewaytothecurrentcrisis.Atthebroadest

level, the usurious and exploitative elements of this lending helped condition thevulnerabilitiesthatburstopeninAugust2007intheUS.

19

32CynamonandFazzari(2008),p1.

33Theobviousexceptionsrelatetoequityandresidentialrealestatebubbles.

4. Debt,CrisisandRecoveryTheevolutionofdebt, itsburdensonborrowersanditssustainabilityhavebeen longand

widely understood to be an important factor in the origin and propagation of capitalist

crises. Hyman Minsky’s Financial InstabilityHypothesis,34 most notably, identifies in thecompetitiveeconomicprocessendogenoustendenciesforincreasinglyfragilecorporatedebt

structures,advancingthemasthebasisofcapitalism’sinherentandrecurringcrises.Fisher’s(1933)debtdeflationadvancescorporateover‐indebtednessnotonlyasthetrigger,butalso

as thecentral transmissionmechanism ofeconomic depressions, leading to distressasset

selling, falling asset prices, and a contraction of credit, confidence, profits, and output.35Even neoclassical economists have sought to identify in debt and its associated

‘transactionalproblems’potentialsourcesforthepropagationintimeofone‐off exogenousshocks.36

These and related contributions have helped offer insights into a number of importantelementsofthecurrentcrisis.37Butinthemselves,theyprovidescantbasesforapproaching

the potentially distinctive role and origins of household over‐indebtedness in thedevelopmentandpotentialrecoveryfromacrisis.Thissectionoffersinitial elementsfora

conceptualisationofsuchpossibledifferencesdrawingonMarxistpoliticaleconomy.

Theanalytical emphasis inMarxist approaches to crises liesnotonthe evolutionofdebt,

interest rates or financial structure, but on various tendencies inherent to the processofaccumulation that periodically reduce rates of profit.38 Recurring systemic reductions in

profitabilitynot onlyinhibitinvestment and triggerindustrial crises,butalso compromise

theabilityofenterprisestoservicedebt,potentiallycreatingsignificantfinancialdisruptionsthataugmentthesize,durationandscopeofthecrisis.

Whenconsideredfromthestandpointofthecurrentcrisis,Marx’sunderstandingofprofits

andtheir rolein theoriginsandrecoveryfrom crisesafford two important insights. First,

thecurrentcrisisdidnotimmediatelyoriginateasaresultofdisruptionstotheprofitabilityof capitalist enterprises. Its spread followed from the severe international financial

20

34LaidoutsuccinctlyinMinsky(1992).

35Fisher(1933),p342.

36See,forinstance,KiyotakiandMoore(1997).

37SeeinparticularKregel(2008).

38SeeDay(1981)andSweezy(1970)forsummarydiscussions.

disruptionsthatfollowedunexpectedbanklossesinhighlyleveragedinvestmentsinclaimsonUSwage‐earninghouseholds.Itishistoricallynovelinthatregard.

Second and most significantly, recovery from a crisis triggered and characterised byunprecedented levels of household debt poses a range of distinctive difficulties. The

depressioninthevaluesofallformsofcapitalduringaclassicalindustrialcrisishelpscreatethe conditions for the eventual recovery of profit rates, financial stability, and aggregate

demand. Capitalist enterprises able to pursue operational and financial restructuring, or

simplycapableof securing accessto funds,mayfindattractivepickings amid thegeneralcarnage of a depression. Wage earners, in contrast, face no analogous vulturous

opportunities.Deflation in consumer goodsdoesnot in itself facilitate ‘restructuring’, thedevelopmentofnewincomesources,andeventualboostsindemand.Infact,improvements

in their financial situation generally rely on reductions in consumption and increases in

wages,bothofwhichstandopposedtotheneedsofamarket‐basedrecovery.

This sectionofferspreliminaryconsiderationson thesematters. First, it considersMarx’sownanalysisofpossiblesourcesofrestoredprofitabilityamidstthedevastationwreakedby

ageneralcrisis.Itthenconsidersthesituationofaacrisischaracterizedbyhouseholdover‐

indebtedness.

4.1TraditionalCrises,EnterprisesandRecoveryFor Marx, capitalism is incapable of sustained and stable accumulation and the

corresponding development of productive capacities and living standards. Competition,

individual appropriation and the corollary economic anarchy help render the systemvulnerabletodisruptionstoprofitability,itsveryorganizingprinciple.Marxandsubsequent

contributionstoMarxistpolitical economyhaveadvancedanumberof inherentprocessesthat tend to erode profitability in contemporary capitalism. Those include tendencies

present in competitive accumulation to over‐investment and over‐production, the

possibilityofsustainedandsignificantgainsinaveragewages,andpossibledifficultiesintherealizationofthevalueofproducedcommoditiesduetodemandproblems.39

Whateveritsimmediatecauses,adeclineinprofitabilitymayquicklyripplethroughoutthe

system ascuts ininvestmentandemploymentdisrupt themyriad interdependenciesupon

whichpreviousinvestment,production,consumptionplanshadbeenmade. Intheensuingeconomicdecline,capitalist societyfinds itselfwith anoverabundanceoftheentiresocial

process of capital: means of production and labour power organized according to the

2139SeeDay(1981)orSweezy(1970).

imperatives of profit extraction, the various claims on the resulting surplus, and allattendant social relationships. Thisoverabundance of capital generates losses to all those

with claims on it.ToMarx, crisesset inmotioncompetitive struggles betweencapitalists

overthedistributionoftheselosses,

‘thelossinnotequallydistributedoveralltheindividualcapitalists,butaccordingtothe fortunes of the competitive struggle, which assigns the loss in very different

proportions and in various shapes by grace of previously captured advantages or

positions,sothatonecapitalisrenderedunproductive,anotherdestroyed,athirdbutrelativelyinjuredbutmomentarilydepreciated,etc.’40

Thegoalofthiscompetitiveprocessistoensure‘equilibriumisrestoredbymakingmoreor

lesscapitalunproductiveordestroyingit.’Thechiefmechanismsforthisdestructioninvolve

not somuchthephysicaldestructionofcapital,but thedestructionofthevariousformsofcapitalvalue,includingthosecontainedinfinancialclaimsandcapitalgoods.

‘Thatportionofthevalueofcapitalwhichexistsonlyintheformofclaimsonfuture

shares of surplus‐value of profit, which consists in fact of creditor’s notes on

productionanditsvariousforms,wouldbeimmediatelydepreciatedbythereductionofthereceiptsonwhichitiscalculated.Oneportionofthegoldandsilvermoneyis

renderedunproductive,cannot serveascapital.Oneportionofthecommoditiesonthemarketcancompleteitsprocessofcirculationandreproductiononlybymeansof

an immense contraction of its prices, which means a depreciation of the capital

represented by it. In the same way the elements of fixed capital aremore or lessdepreciated.’

Variable capital also depreciates through reductions in wages, as ‘The stagnation of

productionwouldhavelaidoffapartoftheworking‐classandtherebyplacedtheemployed

partinacondition,inwhichtheywouldhavetosubmittoareductionofwages,evenbelowthe average.’ Finally, Marx understood quite well that these processes set into motion

monetaryandfinancialdisruptionsthatcompoundedandextendedtheoriginalcrisis.

WhileMarxincludedtherecurrenceofsuchdevastatingcrisesinhisgeneralindictmentof

capitalism, he identifiedthem not as terminal systemiccrisesbut aspart of acontinuousanddisruptiveprocessofcrisisandrecoveryincapitalism.Infact,muchasheidentifiedin

2240AllquotesfromMarxinthissectionarefoundinMarx(1909),p297‐299.

successfulaccumulationtheseedsofcrisis,Marxalsopointedtotheelementsofcrisesthathelpedpavethewayforaneventualrecovery.

‘thefallinpricesandthecompetitivestrugglewouldhavegiventoeverycapitalistanimpulseto raisethe individualvalueofhistotalproduct above itsaveragevalueby

means of newmachines, newand improved workingmethods, new combinations,whichmeans,toincreasetheproductivepowerofagivenquantityoflabour,tolower

the proportion of variable to the constant capital, and thereby to release some

labourers.... The depreciation of the elements of constant capital itself would beanotherfactortendingtoraisetherateofprofit.Themassoftheemployedconstant

capital,comparedto thevariable, wouldhave increased,but thevalueof thismassmight have fallen. The present stagnation of production would have prepared an

expansionofproductionlateron,withincapitalisticlimits.

‘Andinthiswaythecyclewouldberunoncemore.’

In contemporary terms, a setting of falling prices for capital goods, labor inputs, andcorporate securities, createopportunities forrestored rates of profit forsomeenterprises.

Firms that happen to be in better financial states, or simply to possess better access to

finance,willgenerallybeinapositiontoimplementoperationalandfinancialrestructuringmeasuresthatbuttresstheirprofitability,improvetheirsolvency,andboostdemand.

In addition to the operational measures noted by Marx, some enterprises may divest

themselvesofparticularlyproblematicareasofoperations.Suchmeasurespotentiallyyield

significantpresentlosses,butpavethewayforhigherexpectedprofitrates,onthebasisofwhichnew investment may beundertaken.41 Similarly, asettingofdepressed asset prices

offersparticularlyauspiciousopportunitiesforprofitabilityforthoseenterprisescapableofdeveloping and undertakingproduction of newproduct lines, particularly when theyare

capableofdefendingmonopolisticrents.42

Fallsinprices forcorporatesecuritiesopenfurtherpossibilitiesforfinancial andeconomic

stabilizationandeventualrecovery.Depreciateddebtclaimsoncorporationsmaybeboughtupbystrongerinvestorsorfinancialintermediaries.Suchpurchasesmayentailsignificantor

evenfatal lossesforincumbentholders,diminishingoreliminatingtheircapacitytoextend

additionalcreditandcompoundingthecrisis.Butcapitallossesalsoensurenewholdersface

23

41SeeDonaldson(1994).

42AsemphasizedbySchumpeter(1976).

considerablybetteryields,possiblyplacing them inbetterpositionsfromwhicheventuallytohelprestorecreditactivity.

Falling equity prices may facilitate corporate takeovers and other types of mergers andacquisitions. These may be undertaken in conjunction with the pursuit of the various

operational restructuringmeasures laid out above. Theymay also be associatedwith theconcentration andcentralizationof capital, through which the resulting corporationmay

enjoyenhancedeconomiesofscaleormarketpower.Ineitherevent,thepurchaseofequity

mayfacilitateaneventualrestorationofprofitability.

In sum, the destruction of capital values in their various forms facilitates processes ofoperationalandfinancial restructuringbysomeproductiveenterprises.Thesemeasureslay

the basis for the eventual recovery of profitability, solvency, and levels of activity across

productive capitalistenterprises.Theyalso contributeto the recoveryoffinancial stabilityandlevelsofactivity,pavingthewayforthenewupswinginaccumulation.

4.2HouseholdDebtandtheCurrentCrisis

Therearecompellingtheoreticalreasonsto expecttheprospectsformarket‐basedrecovery

to beconsiderablydimmerduring thecurrent recession. Theuniquesocial andeconomiccontent of household indebtedness throws up distinctive obstacles to the process of

economicrecoveryunlikelytobesurmountedwithoutsignificantstateintervention.

The crisis has placed millions of households under considerable financial distress.

Wholesalefundingandsecuritizationofloanstohouseholdshaveallbutdisappeared,whileon‐book bank lending has also contracted severely. This has cut credit flows that were

increasingly central to sustaining household consumption. As shown in figure 3, US nethouseholdborrowing as a shareof consumption and residential investment had reached

record levels in mid‐2005. As a result, the subsequent collapse of credit has triggered

staggering fallsin consumption,whichdroppedby arecord1.58percent on real, year‐on‐yeartermsinthefinalquarterof2008.

24

Such recordfallsin consumptionhave taken placedespitetheexhaustionofexpansionary

monetarypolicy,whichhastakentheFedFundsrateto anaverageof0.15percent inApril

2009.43 And while the reduction of base rates has doubtlessly improved the financialpositionofmanyindebtedhouseholds,overalldebtandservicingcostsmeasuredinrelation

to personal disposable incomeare yet to fall significantly,as suggestedbyfigures 1 and 2above.44 Similarly, default rates on carried commercial bank loans to households have

continuedtorise,asshowninfigure5below.

25

43 It isnotable thaninthetwopreviousepisodesofsignificantcontractionsinconsumption, in1973‐74and1980,USbaseinterestrateswererisingsignificantly.

44Despitethecutsandactualdeflation,USaverage creditcardratesstoodat13.5percentbytheendof2008,onlyslightlybelowthe recentpeakof15.2 in September 2007or the 14.7percentaverage of2006‐2007. InBritain realizedreturnsoncreditcardloansstoodat12.4percent,thehighestratesince2001.

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Whilethisevidenceisdoubtlesslypreliminaryandtheevolutionofthesevariablesrequires

ongoingmonitoring,it pointsunambiguouslyto severehouseholdfinancial distress.Based

on thediscussioninsection4.1above, itispossibleto identifyanumberofconsiderationsthatsuggestfinanciallydistressedhouseholdscreatedistinctivedifficultiestotheprocessof

market‐basedrecovery.

Aswithproductivecapitalist enterprises, a recessiondirectlyaffectsthe incomesofwage‐

earninghouseholds.Unemploymentandfallingrealwagestendstoreducethesector’slaborincome,whilefallingassetpricesfurtherlimitconsumptioncapacityandforcespotentially

dramaticfallsinhouseholdnetworth.Yetunlikeproductiveenterprises,theseprocessesdonot in themselves offer wage‐earning households new opportunities to increase their

incomesandimprovefinancialsolvency.45

At thebroadest level, thereis limitedscopeforoperational andfinancial restructuringof

households.46 Fundamental adjustments in consumption are likely to be much moredifficult and sociallydisruptive than corporate restructuring. Further, consumption is an

inalienableprocess, and individualconsumerscannotbe ‘takenover’and ‘restructured’ by

other consumers. Finally, even when entrepreneurial discovery takes place among final

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26

45Theobviouspossibleexceptioninvolvestheunlikelyinflationofanewhousingbubble.

46Currentdifficultieswithsellingsecuritizedclaimsonthedebtofhouseholdsalsopointtodifficultiesinrestructuringfinancialclaimsonhouseholds.

consumers, it is inherently limited in its scope to various economies in consumptionunlikelytoprovidebooststobroadereconomicactivity.

Asaresult,improvementstothesituationoffinanciallydistressedwage‐earninghouseholdswill rely exclusively on reductions in consumption and increases in wages, both ofwhich

standopposedto theneedsofamarket‐basedrecovery.Mostsignificantforthepurposesofthisessay,arecoveryledbyproductivecapitalistenterprisesispremised,mostsignificantly

amongseveral factors, ongeneral reductionsin therealwage. In fact,thepersistenceand

depth of the Great Depression have long been attributed in considerable part to thedownwardinflexibilityofwages.47

Herein lies a distinctive paradox posed by recovery from a recession characterized by

financial distress by wage‐earning households. A recovery led by capitalist enterprises is

predicated on reductions in the real value of wages. Even if such reductions succeed infosteringeventualeconomicrecovery,intheshortruntheywouldfurthererodethecapacity

ofhouseholdstoservicedebt,compoundingfinancialstresses.Yetfurtherfinancialstresseswouldalsoarisefromafailuretoreducetherealvalueofwages,which,withoutadditional

stateinterventions,wouldquicklytranslateintorisingratesofunemployment.

Aneventualreturnofinflation,oftenlookedtoasanaidtotheprocessofdeleveraging,also

posesdistinctivedifficulties.Risingpricelevelsmayreducerealdebtburdens,but thiswilldependon thecapacityof lenders to maintain thereal valueofdebt,and thecapacityof

borrowerstomaintaintherealvalueoftheirincomes.Particularlyinarecessionarysetting,

wageearnerswill generallynotbevery successful inmaintaining the real valueofmoneywagesinrelationtoconsumptioncommoditiessoldbyfunctioningcapitalistsandtoclaims

onhouseholdsbyfinancialenterprises.

At the broadest level, during typical industrial crises falling wages and inflation effect

transfers and shifts of value from financial enterprises and wage earners to productivecapitalistenterprises.Becausethoseenterprisesmonopolizetheappropriationofnewvalue,

and some of them may be able to found their economic plans on the yields this valuerepresentsonlevelsofinvestmentdepressedbyrecession,suchtransfersmayhelppavethe

wayforaneventualrecovery.

Thecurrentcrisispresents amorecomplexpicture.Thereturnoffinancial andeconomic

stability poses the need for transfers from financial and productive enterprises to wage

2747See,ofcourse,Keynes(1973),andBernanke(1995)orBordoetal(2000).

earners. Suchtransfersareunlikely to takeplace onmarket terms, eitherthrough higherwagesorthroughinflation.Withoutsignificantstateintervention,theprocessofhousehold

deleveragingis likelyto continueto involveweaklevelsofconsumption,ongoinglosseson

householdcredit,andconsequentdisruptionstobroaderprocessesofeconomicrecovery.

5. ConclusionsDrawing onMarxist political economy, this essay has sought to document the economic

significance and distinctiveness of rising levels of debt by wage‐earning households,

advancingthemasadefiningfeatureofcontemporarybanking,macroeconomicpolicy,andof the current crisis. Householddebt isat the centreofthe turn bybanks to individual

incomeasasourceofprofits.Itprovidedthestapleforthespeculativebingethat triggeredthecurrent crisis, and it liesat theheartofthebroadereconomicandpolicyregimes that

appeartobeunravelingasaresult.

Fromthisperspective, theessayadvancedpreliminary analytical discussions that afforded

two broad insightsoncontemporarybankingandthe international crisis that helpinformpolicyandresearcheffortsinrelationto theunfoldinginternational recession.First,itwas

the usurious and exploitative character of lending to wage‐earning households, as it

developed in the concrete setting of rising inequality andprivatization of thepast threedecades, that made it highly profitable. High profitability made it a natural locus for

destructiveprocessesoffinancialcompetitionandinstability.

Second,recordlevelsofhouseholdindebtednessposedistinctivedifficultiesfortheprocess

of recovery from the current recession. In the first instance, theycompromise consumerdemand.Butmoreimportantly,theycreateaconflictbetweentheneedforlowerrealwages

to support restored profitabilityof capitalistenterprisesand theneed forhigherwagestorestorefinancial stabilitytohouseholdsandbroadereconomy.Thereisno reasontoexpect

financialandlabormarketstoresolvethisconflictinatimelyandsociallydesirablefashion.

Analytically, the preliminary discussions offered here point to the need for robust

conceptualizations of credit relations in the process of accumulation, including thedistinctivesocial content ofcredit to wage‐earning households.At the level ofpolicy,this

essay points to theneed fora series of state interventions to facilitatetransfers towage‐

earning households—through gains in real wages, reductions in inequality, and growingscopes for social provision of basic necessities—as central to economic recovery. In the

currentcontext itisincreasinglyclearthataddressingbasicissuesofsocioeconomicequityisindispensabletotherestorationofeconomicgrowthandstability.

28

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