Your sweat measured
Barrelled at the banks of the market
To be thrown in the deluge
In the hope of
a golden axe golden tears
But the giving spirit
Suffers Midas’ gluttony
Lashing the isle of liberty.
Costas Lapavitsas in his new book, Profiting without Producing (2013) gives an interesting theoretical account of the effects of crisis on the credit economy – the growth in NPAs, bad loans, aggravating the crisis further.
The starting point of Marx’s analysis is trade credit, which is assumed to expand in the course of a boom, creating large volumes of bills of exchange and thereby stretching production and trade. As the boom unfolds, however, banking credit enters strongly into play: banks discount bills of exchange, thus supplying loanable money capital that covers the needs of capitalists for liquid funds. At the later stages of the boom, financial speculation begins to occur on a large scale mostly by creating bills of exchange purely to be discounted by banks. Such bills are often tenuously related, or even completely unrelated to productive activity. The overextension of credit (both trade and banking) contributes to overaccumulation and overproduction, resulting in inventory accumulation and excess supply in commodity markets. Given the difficulty of sales, the expansion begins to unravel and a commercial crisis emerges.
For Marx, the appearance of commercial crisis has a decisive impact on the overextended mechanisms of credit. Inability to sell finished output implies inability to honour maturing bills of exchange on the part of borrowing capitalists. Consequently banks begin to accumulate non-performing assets. As the quality of bank assets falls and the creditworthiness of borrowers declines, banks become reluctant to lend. The restriction of banking credit occurs at a moment when liquid money capital is heavily demanded by functioning capitalists pressed by the difficulty of selling. Gradually banks become reluctant to lend even to each other, with the result that the money market becomes extremely tight and interest rates rise rapidly. That is, an absolute shortage of liquidity begins to emerge.
Faced with a liquidity shortage, capitalists no longer demand money capital to sustain or expand the circuit of productive capital. Rather, they are under pressure to obtain plain money to settle bills and other loans that fall due. Maturing loans would have been incurred during the upswing in the expectation that liquidity would be easily available at the time of settlement from banks, or elsewhere. But the destruction of confidence among banks implies that fresh funds are not forthcoming; the banks (and other participants in the money market) prefer to hoard money. In a liquidity crisis, cash becomes king and promises to pay among private capitalists are devalued. In a remarkable turn of phrase, Marx claimed that in a capitalist crisis there is ‘a sudden transformation of the credit system into monetary system’.