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Financial meltdown deepens

Marxist Analysis · 2008-09-16

Core Argument

The central thesis is that the 2008 financial meltdown is not a regulatory failure, a product of greedy bankers, or a temporary liquidity crisis, but the violent manifestation of capitalism's inherent cyclical laws of motion. Michael Roberts argues that the crash was driven by two distinct but interacting cycles: the Marxist profit cycle operating in the productive sector, and the longer real estate cycle operating in the unproductive sphere. The housing bubble represented a massive diversion of resources into fictitious capital, and its collapse was inevitable once house prices became detached from both production costs and workers' incomes. The recovery, when it comes, will only occur through the destruction of capital and the restoration of profitability — at working people's expense.

Theoretical Grounding

The analysis is rooted in Marx's law of the tendency of the rate of profit to fall, which Roberts treats as the "most important law of motion under capitalism." He distinguishes sharply between productive and unproductive labour in the Marxist sense — the former creates new value and surplus-value, while the latter (including much of the financial sector) merely siphons it off. The housing boom is theorised as a process of creating fictitious capital: assets whose prices bear no relation to the value embodied in their production. Roberts also draws on Simon Kuznets' empirical work on long real estate cycles, integrating it into a Marxist framework by explaining that the real estate cycle operates in the unproductive sector and therefore has different timing from the profit cycle in production. This allows him to explain why the housing peak (2006) lagged the profit cycle peak (1997) by nearly a decade.

The article sits within the Marxist tradition that emphasises the cyclical, crisis-prone nature of capitalism as intrinsic rather than contingent — a position associated with Marx's own writings on crises in Capital Volume III and the Grundrisse, and developed in the post-war period by theorists such as Ernest Mandel and Henryk Grossman.

Conjunctural Relevance

The article was written on 16 September 2008, in the immediate aftermath of the collapse of Lehman Brothers and the forced takeover of Merrill Lynch by Bank of America. It captures a moment of maximum financial panic: within 24 hours, two of the top four US investment banks had disappeared. The piece names specific institutions — Lehman Brothers (158 years old, bankrupt), Merrill Lynch (taken over for $50bn), AIG (needing $40bn within hours), Fannie Mae and Freddie Mac (nationalised the previous week) — and connects the financial crisis to real economic effects already underway: the collapse of XL, a British travel agent, due to rising oil costs and the freezing of credit markets. Roberts predicts further bank failures, mass job losses in financial services, and a serious economic downturn across the US, UK, Europe and Japan — all of which materialised in the months that followed.

The article also notes the political paralysis of both the Bush administration and New Labour, observing that the US was forced to nationalise mortgage lenders despite its free-market ideology, while the British government could only express shock.

Where the Argument Continues

This article is an early, conjunctural intervention in what became a sustained Marxist analysis of the 2008 crisis and its aftermath. The argument continues in several directions:

  • Roberts' subsequent work on the rate of profit: The article references "previous articles" on the profit cycle; these are developed at length in Roberts' book The Great Recession: A Marxist View (2009) and his ongoing blog The Next Recession.
  • The long-term trajectory of the crisis: Later IDOM articles by Roberts trace the failure of quantitative easing and near-zero interest rates to restore healthy profitability, leading to the concept of a "long depression" rather than a normal cyclical recovery.
  • The political consequences: The article's closing observation — that recovery requires the destruction of capital — is developed in later analyses of austerity, the assault on wages and conditions, and the rise of political instability across the advanced economies.
  • Against the Stream episodes: The podcast has returned repeatedly to the question of whether the 2008 crisis was resolved or merely postponed, particularly in episodes examining the 2020 COVID crash and the inflationary surge of 2021-23.

Connections

  • Marx, Capital Volume III, Part III: The law of the tendency of the rate of profit to fall and the theory of crisis.
  • Marx, Capital Volume III, Part V: The distinction between productive and fictitious capital, and the role of credit in crisis.
  • Ernest Mandel, Late Capitalism: The theory of long waves and the interaction of cyclical movements in different sectors.
  • Henryk Grossman, The Law of Accumulation and Breakdown of the Capitalist System: The most systematic Marxist treatment of crisis as inherent to accumulation.
  • Michael Roberts, The Great Recession: A Marxist View (2009): The full development of the analysis introduced in this article.
  • Simon Kuznets: The empirical work on 18-year real estate cycles, which Roberts integrates into a Marxist framework.
  • Andrew Kliman, The Failure of Capitalist Production: A more recent Marxist account of the 2008 crisis, emphasising the rate of profit as the key variable.

Key Quotes

  1. "The most important law of motion under capitalism is profitability. As Marx showed, the rate of profit is key to investment and growth in a capitalist system: no profit, no investment and no income and jobs."

  2. "This huge rise in house prices, exhibited around many parts of the world as well as the US, represented a massive diversion of resources by capitalism into unproductive sectors that produced no new profit through investment in technology and productive labour. As a result, it actually reduced the ability of capitalism to invest in new technology to boost economic growth. It was entirely a process of creating fictitious capital."

  3. "Capitalism does not operate in a smooth and steadily increasing way to progress. It operates violently, lopsidedly, in cycles of boom and slump."

  4. "The risk had been diversified so that everybody got hit when things went wrong."

  5. "Eventually, capitalism will recover, unless governments come to power mandated to end the rule of capital. But it will recover only by restoring profitability. To do that, many jobs must go and many companies must be swallowed up by richer ones."

  6. "The real estate cycle does not operate in line with the Marxist profit cycle. The latter is a product of the laws of motion of capitalist accumulation. It operates in the productive sector of the economy... In contrast, the real estate cycle operates in the unproductive sector of the capitalist economy."