Any system of borrowing like we have, is bound to run into trouble at some time. The cost of a loan is the interest we pay. Fair enough. But that system has an inbuilt limit. Like a chain letter the system of loans reached a point where no real wealth could possibly be produced to support the virtual. Individuals go bankrupt and so did many companies. Who will pay the interest on the loans that are needed by financial institutions to lend us the money we need to pay off the rent on our own debts? The financial crisis is a crisis of unaffordable interests – though interest was supposed to mean money making money.
One could buy a real house with real money in a distant age – but a house can be priced above and beyond its real value and by its illusory market value increase the wealth of the seller, which wouldn’t work unless it could be purchased with money that hasn’t been earned yet. The real wealth of the seller increased beyond measure because the virtual wealth of the buyer increased by his loan and second mortgage. But that is normally not where the buck stops. The seller does not use this money to buy another house for its real value, but again, he has to buy a house with this fictional market value, based on the assumption that the buyer can borrow money and generate virtual wealth in order to obtain this property.
This real wealth is then again – as down payment or collateral – a means to using virtual wealth to buy, let’s say, an even bigger and more expensive house. The higher the price, the higher the market generated addition of virtual value to an object. The seller will do that because, remember, we are still in a culture that defines its own value by the level of consumption. And because, remember, the expectation is that productivity will rise, hand in hand with consumption and profits.
Why did houses cost more than they were truly worth? Some say that the phrase “real value” has no meaning in a market economy, that price is the same as value. But that means replacing all value of things by their “virtual” worth, i.e. the symbolic worth attached to them within the system.
But that system is not driven by the needs of the buyer that are grounded in some bodily reality, but by the system itself. High prices, high loans, high interest earnings. But what if the bank cannot sell the collateral when it has to foreclose a loan? Then it looses money. And then it cannot lend money to the next house buyer.
Why do people participate so willingly in this obviously flawed system? ? Because owners need money to pay for (the interest on) their own debts, in order to get fresh loans for yet another round of consumption. The need for higher levels of consumption is the explicit drive that consumers and managers share as their dream of affluence. That is what wealth is supposed to do: to buy us freedom and give us the opportunity for endless enjoyment.
The explosion of borrowing as a therapy for falling wages and the pricing of consumer goods, especially real estate, beyond their real value, this replacement of real value and wages by a virtual representation, is how the system produced its own downfall.
In the 1970s the average worker received less real salary than ever before – real wages had gone up steadily since the middle of the 19th century – but around the managers more than quadrupled their income. The gap that opened between desirable consumption and real wages was bridged by borrowing money. In stead of paying higher wages to make more consumption possible, consumption being what drove the economy in the first place, the system came up with more loans. And of course, the market for loans – all kinds of packaging and repackaging of loans with complex systems of high risk collateral – increased to give the financial industry a boost.
Workers paid double: first by the decrease of their real income and then second by paying the interests on their loans. At the same time consumption increased and therefore profits rose precisely because of this dual strategy, the virtual wealth system could go even further and ultimately cross the limit of sustainability. The chain letter reached the end, when there were simply no more people to borrow from or to produce the wealth that grounds it all. The increase in virtual wealth – by prices beyond the real worth and diminishing wages – has to be paid for ultimately by a decreasing real wealth. In hindsight it is easy to see, that this is not just a minor crisis, but a logical outcome of the system itself. Why does it work like that? And, what does the State do? Or rather, why did the State do nothing?
I am far from providing a solution to or even a diagnosis of this financial crisis, but it is possible to shed some light on the principles involved. At least to purify the rhetoric that has been developing. Two of the major elements of the current discourse being wealth as a social reality in itself and the State as the condition or guarantor of that wealth.
3. Since the mid 1960s profits were being used in the financial industry more than in the real production of goods and services.