A financial September 11 - Lessons of the banking crisis Part Two

Marxist Analysis · 2026-05-13

Core Argument

The article argues that the 2007 banking crisis is not a temporary malfunction of financial markets but an inescapable expression of capitalism's internal contradictions at a stage of systemic decline. Alan Woods claims that the crisis — triggered by the US sub-prime mortgage collapse and manifested in the Northern Rock run — is the beginning of a new phase of instability, not an isolated event that can be managed away by central banks or governments. The central thesis is that reformist attempts to "smooth out" the cycle through state intervention, credit expansion, and interest rate manipulation merely postpone the reckoning while preparing a more severe crisis. The article insists that the laws of motion of capital — booms and slumps — are inherent to the system, and that the current conjuncture marks a turning point where fictitious capital, inflated by decades of easy credit, must be violently written down.

Theoretical Grounding

The analysis is rooted in Marx's theory of crisis, particularly the distinction between the real economy of production and the sphere of finance. Woods draws on Marx's insight that credit temporarily expands the market beyond its "natural confines" — i.e., beyond the limits imposed by effective demand and the realisation of surplus value — but that this expansion necessarily collides with the underlying contradictions of overaccumulation. The article deploys the concept of fictitious capital (Marx, Capital Volume III) to describe the ballooning of stock market capitalisation and house prices that are not backed by a corresponding expansion of productive activity. The tendency of the rate of profit to fall is not explicitly named but is present in the argument that rising inflation, tightening credit, and falling consumer demand will squeeze profits and slow production.

The article also engages critically with bourgeois economics, particularly the subjectivism of Alan Greenspan, who reduces crises to "human nature" or "confidence." Woods counters that confidence is not subjective but rests on material conditions — debt levels, deficits, the health of the real economy. This is a classic Marxist polemic against the fetishism of finance: the appearance of autonomous financial markets conceals the real relations of production and exploitation that ultimately determine the trajectory of accumulation. The article sits within the tradition of Marxist crisis theory associated with Trotsky's analysis of the 1929 crash and the long-term decline of capitalism, and it explicitly rejects Keynesian and reformist solutions as palliative at best.

Conjunctural Relevance

The article was written in September 2007, at the precise moment when the sub-prime crisis was metastasising into a global credit crunch. Woods identifies the Northern Rock run as a "financial September 11" — a shock that reveals the fragility of the entire system. He correctly predicts that the crisis is not over but only beginning, and that the Bank of England's guarantee of deposits merely postpones a deeper reckoning. The article notes specific data points: US house prices falling, two million homes repossessed, the US current account deficit at $800 billion annually, and the need for $70 billion monthly in foreign financing. It highlights geopolitical tensions — Saudi Arabia breaking the dollar peg, China threatening to liquidate US treasuries — as signs that the dollar's role as reserve currency is under strain.

Woods also anticipates the transmission mechanism from finance to the real economy: falling house prices will hit construction, then steel and cement, then broader industry; rising interest rates and inflation will squeeze consumer demand and corporate profits. The article's warning that the Fed's rate cuts are "heroin for credit junkies" — prolonging the bubble rather than resolving the underlying insolvency — proved prescient. The crisis did indeed deepen into the global financial crash of 2008, with Lehman Brothers collapsing, Bear Stearns failing, and a generalised recession following. The article's conjunctural analysis is thus not merely descriptive but predictive, grounded in the Marxist understanding that credit bubbles must eventually burst.

Where the Argument Continues

The article is Part Two of a two-part series. Part One (also by Alan Woods, published earlier in September 2007) presumably lays out the immediate mechanics of the sub-prime crisis and the Northern Rock run. The argument continues in Woods's broader theoretical work on world perspectives, particularly his speech "The International Situation and Perspectives," referenced in the text and available on marxist.com. The themes developed here — the inevitability of crisis under capitalism, the futility of reformist management, the interconnection of finance and production — are taken up in subsequent IDOM articles on the 2008 crash, the Eurozone crisis, and the long-term stagnation of the global economy. The RCI's theoretical journal, In Defence of Marxism, regularly returns to these questions, and the analysis is consistent with the tradition's emphasis on the tendency of the rate of profit to fall as the underlying driver of capitalist crises.

Connections

This article should be read alongside Marx's discussion of credit and fictitious capital in Capital Volume III, particularly chapters 25–36. Lenin's Imperialism, the Highest Stage of Capitalism provides the framework for understanding the global integration that Woods invokes. Trotsky's writings on the 1929 crash and the long-term decline of capitalism — especially The Third International After Lenin and his articles in the Bulletin of the Opposition — are the political-theoretical tradition from which Woods draws. For a more recent Marxist analysis of the 2008 crash, see David Harvey's The Enigma of Capital or Andrew Kliman's The Failure of Capitalist Production. Within the IDOM corpus, Alan Woods's The International Situation and Perspectives (referenced in the text) and subsequent articles on the Eurozone crisis and the COVID-19 economic shock are natural extensions.

Key Quotes

1. "The bourgeois economists are incapable of understanding crises, which are an inescapable result of capitalism. It is quite amusing to read the comments of Alan Greenspan, the guru of modern bourgeois economics."

2. "Under capitalism crises are inevitable and there is no way of altering the pattern. If you accept capitalism then you must accept the laws of capitalism: that is to say, you must accept booms and slumps (now referred to in polite circles as 'corrections')."

3. "The government and the Bank of England were powerless either to prevent a major banking crisis or to calm the nerves of depositors and investors. In the end they only succeeded in preventing a total collapse by giving a promise of unlimited funds to the bankers, paid for out of the taxpayers' pockets. This has temporarily halted the downward slide, but only at the cost of preparing the way for even steeper falls in the future."

4. "As Marx explains, credit is a way of expanding the market beyond its natural confines. But this has its limits and these have now been reached. If the capitalists cannot find markets for their commodities, no surplus value will be realised and a crisis of overproduction will ensue."

5. "The market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and so on. This was not the result of an expansion of productive activity but because of a massive increase in fictitious capital: more dollars chasing the same number of securities."

6. "A cut in the Fed Fund rate is simply heroin for credit junkies."