From December 13 to December 24, 2018 the Dow Jones Industrial Average fell by 2805 points. Despite a substantial surge on December 26, the US stock market finished the year at a loss relative to where it began. Even the wider Russell 3000 index, which attempts to capture almost all of the US stock market (as opposed to the Dow, which tracks the value of 30 large companies) showed the value of American stocks in their totality ending 2018 lower than where they started. Capital therefore did not accumulate, but relative to the year’s high point, something on the order of $4 trillion of wealth disappeared, or never existed in the first place. On December 30, Michael Mackenzie wrote in a Financial Times column entitled ‘December drama ends bleak year for markets,’ that ‘It has left pretty much every major asset class in the red for the year…’
How should we interpret such a fall in the value of global capital? Is this the beginning of a wider crisis, as the apparently unstoppable process of capital accumulation grinds to a halt? Has anything like this happened before? Can the past give us any guidance about what is happening, and why? Mackenzie refers to “every major asset class,” and what is really striking about 2018 is that almost nothing was safe.
That isn’t how financial markets are supposed to work. Equity isn’t debt, after all: if you lose confidence in some borrower’s ability to repay, you would get out of debt and decide to really own something instead, so you’d buy stock. If you worried that your stock was overvalued and the companies you’d bought into weren’t as profitable as you expected, you’d sell your stock before it fell and maybe get into something safe and predictable, like government debt. There is a financial instrument for everything, and you are supposed to always be able to diversify, to find investments that fit any appetite for risk. But unfortunately you can’t diversify away from systemic risk.
Financial history is sufficiently rich in crises to provide examples for any point you might want to make, except perhaps for the idea that markets are rational, efficient, and self-regulating. A brief look at moments of turmoil in the past two centuries is useful for understanding our contemporary moment.
The year 1819 saw a financial panic in the United States. Having grown worried about inflation, the Second Bank of the United States contracted credit it provided to state banks, which in turn called in the farm mortgages they had overextended in the preceding boom years. Coinciding with a fall in agricultural prices that made it more difficult for farmers to pay their debts, the state banks foreclosed on many of these loans and transferred them to their own creditor, which was the Bank of the United States. Land prices dropped as over-indebted farmers and desperate banks all tried to sell land simultaneously, the price of cotton fell 25% in a single day, and the US entered a liquidity crisis as everybody owed everybody money and nobody could get cash to pay with. The ensuing recession ground on for years, and if it is remembered at all today, it is as America’s first peacetime economic crisis. By 1821 Congress passed some limited debt relief, and public demands for tariffs increased, ultimately producing the famous ‘Tariff of Abominations’ in 1828.
By contrast, the year 1919 was bookended by recessions. The first was short and relatively mild, resulting from postwar monetary imbalances in Europe and the labor market effects of returning soldiers. It ended by the middle of 1919, to be followed by a short, sharp recession starting in late December and early January 1920. That recession was distinctive for the single most dramatic one-year deflation in US history, as prices fell by 14-18%. From December 1919 through June 1920, the newly-created Federal Reserve raised interest rates from 4.75% to 7%, contracting the money supply and returning the price level from wartime inflation to the strictures of the gold standard. Raising interest rates means people save instead of spend in order to receive interest on their savings, which reduces sales and driving unprofitable businesses under. It is more expensive to borrow at high interest rates, so fewer people buy houses or land, and fewer businesses expand production.
In short, higher interest rates reduce economic activity, and if raised very fast and very high, they induce recessions. That is not an accident of monetary policy, it is part of what monetary policy is. In 1920, unemployment increased rapidly, President Wilson did essentially nothing, and after taking office in 1921, President Harding increased tariffs and cut income taxes.
There is something both pleasing and alarming about this century-after-century recurrence. None of these crises connect to each other in any meaningful way, but there are a few striking patterns in them that cast some light on what exactly is going on at the moment in the world of international finance.
The 1819 and 1920 crises were not stock market crises but crises caused by monetary policy. Monetary policy is probably the most important determining factor in our lives. Monetary policy can cause recessions or shorten them; it determines how much your student loans cost, whether you can afford a mortgage, whether your life savings erodes, and whether you can find a job. But unlike patriarchy or structural racism, you could fit everyone responsible for monetary policy into a single police van.
In normal times, monetary policy is conducted through raising and lowering interest rates by small increments. In the wake of the 2008 crisis, however, central bankers adopted what Ben Bernanke called ‘unconventional’ policies, which mainly consisted of buying up huge amounts of worthless or risky assets from banks and other financial institutions.
With absolutely no public discussion at all, the Federal Reserve spent 2009-2014 in a gargantuan project of ‘quantitative easing,’ buying tens of billions of dollars of financial assets every month, injecting a total of about $4.47 trillion in liquidity into the global financial system. They kept interest rates close to zero until Federal Reserve Chair Janet Yellen started slowly to raise them in late 2015.
The European Central Bank began its own quantitative easing in 2015, pumping about $2.8 trillion into the European banking sector. The ECB announced the end of that spigot of cash on December 13, 2018. In other words, the anemic economy of the last decade has only been as robust as it was on the back of trillions of dollars of largesse from central banks to the private banking sector. Mostly that money not been recycled into cheap loans for businesses, homeowners, and students, but rather into buying back their own stock, rebuilding their reserves (in 2015 US banks held $2.4 trillion in excess reserves), and dispensing steadily-increasing compensation to their top executives. Now that the stream of central bank liquidity is coming to an end, it appears that the process of capital accumulation itself doesn’t work the way it used to, except on a steady supply of cheap money.
The crises of 1819 and 1919 followed extended periods of emergency, in which wars justified extraordinary government spending and far more central bank liquidity than was permitted by the classical gold standard. In each case, the attempt to return to normality brought with it deflation, bankruptcy, unemployment, and crisis. We are used to thinking about, theorizing, and historicizing the apparently permanent state of political and military emergency that has persisted since September 2001. But there has been another state of emergency in effect since September 2008, one conducted with even less public oversight and more international cooperation, and unlike the endless war on terror, the years of open-ended commitments by central banks to supporting the financial system are now drawing to a close.
Most people have experienced the emergency in monetary policy secondhand, mediated through how difficult it is to find a job or buy a house. Most people are not bankers. Indeed, only about half of Americans have any stock at all, and about 87% of all equity is owned by the top 10% of equity owners. We who do not receive quantitative easing assume that an end to emergency means a return to stability, peace, and the rule of law. But in the world of finance, it appears more likely that an end to emergency means a crisis, because with the exception of the 1945-1971 interregnum—which, incidentally, was the only period in human history with substantial restrictions on international capital flows—economic normality itself is a state of constant crisis.
I do not know if 2019 and 2020 will be as economically turbulent as 1919 and 1819 were, and neither does anybody else. Whether through a manufacturing slump provoked by Trump’s trade war, or through a domestic credit crunch, there are ominous signs of slowing in the Chinese economy, paired against the unimaginable consequences of impeding Brexit, and the aforementioned turmoil in financial markets. But no matter what happens, our contemporary moment is fundamentally the product of the deep inequality in policy responses during the decade since the 2008 crisis.
It is impossible not to read the delegitimation of the old neoliberal political consensus as a result of the emergency decision that gave bailouts to some and austerity to others. We are only beginning to discover the staggering human toll of austerity. The magnitude of the bailouts was likewise far greater than the public realized: not an $800 billion escape hatch in late 2008, but trillions of dollars in a continual flood for a decade. Inequality was starker, more extensive, more structural than anyone realized. We will yet see how years of austerity and increasing inequality respond to the end of the state of financial emergency.