Almost every day we hear that the crisis is now behind us though the recovery is slow. Too slow. In fact, besides growth of only zero point something, all the factors that gave rise to the crisis, and prevent any real recovery, remain, and are getting worse.

Let’s start with a recent financial issue surrounding Deutsche Bank, the largest German bank, and one of the most important in the world. Deutsche Bank was recently accused of “misbehaviour” (we prefer to call it “financial fraud”) towards its customers and international financial markets, due to its sale of "toxic" products, contributing to the colossal financial crisis at the end of the 2000s. This still continues and has put tens of millions of workers out of work, exacerbating the crisis in production[1] that has already existed for decades. The indictment also includes a fine of $14 billion that the German bank’s managers are hoping to reduce to $5 billion, a figure far more bearable for the “made in Germany” financial giant. The real motivation behind the accusations though is that the U.S. Department of Justice, wants to punish it for the "dirty operations" carried out during the financial crisis. What could these "dirty operations” be? They involve the release of highly toxic securities linked to so-called subprime mortgages, those that literally destroyed the global credit system between 2007 and 2009, intensifying the crisis of a world economy already on the brink of recession. The aggravating circumstance is that the directors of the Bank, such as financial officers, recommended the purchase of these securities to its customers, rendering all such operations criminally fraudulent.

In practice, these toxic instruments were packaged as subprime loans, in other words, they were made official and "hidden" within fixed income securities that functioned as normal bonds even though the underlying debt was, and still is, represented by uncollectable loans. It was in this way, by hiding the underlying mortgages, that "normal" financial stocks became a virus that invaded the world's financial markets. Of course this financial crime did not only involve Deutsche Bank, U.S. banks were by far the main cause of the failure. The U.S. Department of Justice gave major U.S. banks equally hefty fines. The highest fine, which amounted to $16.65 billion, was paid in 2014 by Bank of America. In April 2015 Goldman Sachs paid out $5 billion. For the same reasons Citigroup, JP Morgan, Morgan Stanley were fined a total of $23 billion. There are further fines to come for Barclays and Credit Suisse.

The German mess exploded when Deutsche Bank lost 50% of its value, approximately €16 billion in 2015. At that point a hundred hedge funds precipitously abandoned the German bank by placing their assets with other international financial institutions, highlighting the weakness of Deutsche Bank, made worse by the presence of other toxic assets to a value of €55 trillion, equal to 15 times the German GDP. This much is what we gather from well informed bourgeois financial sources, but it is not enough to describe the real state of a German (and world) economy in the grip of a crisis that leaves no space for a real recovery. The same sources judge that the crisis of 2008 is behind us but wonder at the same time why this ‘recovery’ is so slow as well as the lack of a much-desired and deliberately encouraged connection between the world of finance and the real economy.[2] ​ Meanwhile, they define the crisis which came "suddenly" in 2008, to be exact in August 2007, as a financial crisis. One which has stifled the real economy, producing social disasters which the world proletariat carries on its shoulders to this day in the form of layoffs, shrinking wages, destruction of the welfare State and intensification of exploitation.

Financial crisis? Sure, but it originated within the productive mechanisms of the economy as a crisis of profits that, in turn, boosted capital flight from the real economy to speculation, creating financial bubbles (subprime) which – when they exploded – fell back on the real economy from where it had started out, ravaging the global economic order. By that time bourgeois economic "science" was striving unsuccessfully to restore the whole, especially the relationship between bank capital and enterprises, in order that the other relationship, that between capital and labour, could fully resume to produce the coveted industrial profits, the only ones able to create new value through the exploitation of the workforce.

Despite the measures taken, such as the low cost of borrowing, the thousands of billions of euros and dollars allocated by the ECB and the Federal Bank to encourage lenders (QE), little has changed. Many businesses are suffering from debts incurred over the past few years. They have little faith in the future and distrust getting into debt to finance risky restructuring processes. When they do so, they fall into the abyss of relatively high interest rates, despite the low cost of money. Even the largest banks, like Deutsche, still have to dispose of the "toxic bundles" they couldn't package fraudulently to private depositors, other banks or investment funds. The persistence of the crisis renders the task of raising capital difficult, partly because household savings have dwindled for years and the small increase in the propensity to save is definitely not enough. The low cost of money makes it difficult to make "sufficient" returns on loans and mortgages, whose market remains asphyxiated despite a few minor hints of recovery. In addition, banks are suffering heavily due to the significant number of bad loans to industries which are now either in crisis or have even gone bankrupt with the crash. Banking capital is therefore now wary of lending to the real economy so loans are both very difficult to obtain and carry such high charges that they discourage, in most cases, firms from taking on more debt. The result is that, despite the downpour of billions flowing from banks' coffers, the much hoped for renewed relationship between banking capital and the real economy remains at the level of good intentions, while the only real sector which is growing enormously is, as usual, speculation. Despite the very serious risks and the recent subprime experience, capital, rather than being directed at production and so as not to remain "idle", continues to chase the lure of easy profits through speculation, no matter if it is in stocks, futures, gold, the commodities market or currencies.

The real problem of the entire capitalist system is that low rates of profit due to the high organic composition of capital, encourages capital to seek out low-cost areas of labour-power, or go for speculation. But the same problem of capital valorisation[3] affecting businesses contaminates even the banks so that, faced with problems of making profits on their deposits, they are in turn forced into the risky "gamble" of speculation. This means through mainly the usual funds of various kinds, financial schemes of all types, high-risk hedge funds and insurance companies. Together, and alongside industrial capital which has fled from the real economy, they have managed to put in place a mass of fictitious capital as big as the gross world product multiplied thirteen times over. A toxic cloud that wafts out and over the “productive” economy, able to again destroy the economic systems of any market, anywhere in the world, for only speculation is deemed to be a profitable investment. And hence capitalism in crisis advances only through the conquest by force (wars) of commodity markets, precious metals, financial and currency markets, and the control of the major energy sources. Last, but not least, it must take the road of a further attack on real wages, the greater exploitation of the workforce and the reduction of the "unbearable" burden of what remains of the “welfare state”. It is therefore not surprising that even the largest European bank is a creator and victim of the global crisis from which capitalism cannot escape.

FD

October 20, 2016

[1] Due to a rate of profit that is too low to encourage investment.

[2] The disconnect between rising share prices and stagnating or falling investments and profits is due to the fact that firms are using existing savings and borrowing at every low interest rates to continue paying shareholders dividends. This makes the shares hold up and in a world where there is low interest rates they become the most profitable investment for individuals and corporations despite having no relation to the real current performance of the economy.

[3] i.e. realisation of commodities at a sufficient profit rate to add new value and thus re-enter the cycle of accumulation. See Capital Volume 1 (Penguin Classics p. 302-4)