Booms and bezzles

14 September 2021 by Michael Roberts

Major stock markets are hovering near all-time highs and commodity prices (food and materials) are rocketing. At the other end of the scale, short-term interest rates are near or below zero, and even long-term government and corporate bonds are at record prices (record low yields).

All this is driven by huge injections of money created by central banks to buy bonds and allow corporations and investment institutions to borrow at very low ‘margin’ rates to speculate in stocks, bonds, property and crypto-currencies; and also enable so-called ‘private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. ’ firms and hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. to raise funds to buy up companies to ‘asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). -strip’ and then sell on – merger and acquisition deals are at record levels. A staggering $1.2 trillion in mergers and acquisitions transactions announced and pending or completed so far in 2021 have involved a private equity Private equity Private equity or investment capital designates a specific form of institutional investment in private companies with the goal of financing their development, transformation and expansion. The most common forms of private equity are venture capital, which refers to investments in the creation and development of innovative start-ups, and Leveraged Buy-Outs. party.

This speculative fever inevitably breeds swindles, tricks and frauds.

Liberal left economist JK Galbraith back in the 1950s,

when referring to the ‘roaring twenties’

. Pettis links Galbraith’s definition of bezzle in these speculative financial booms to the work of Hyman Minsky, the semi-socialist post-Keynesian economist of the 1980s, who argued that financial markets can create (temporary) impressions of false wealth very similar to those of Ponzi schemes (where one investor is paid back with the money from a new investor).

Minsky explained, “over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.” Pettis adds: “because the bezzle is, by definition, temporary (though it may last for a few years or even a decade or two), at some point the bezzle will be eliminated, and its elimination will reverse the earlier boost to the economy. When that happens, what appeared to be a virtuous cycle becomes a vicious cycle.” But what is odd about Pettis’ account of ‘bezzle’ is that nowhere does he mention the work of Marx on credit and financial crashes – indeed everything Minsky and Galbraith have offered was developed by Marx before them.

On the question of speculation and criminality, Marx wrote in Capital, “The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, from enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling.” On the question of the speculative boom turning into financial crash, again, Marx was ahead. “In every stock-jobbing swindle everyone knows that some time or other the crash must come, but everyone hopes that it may fall on the head of his neighbour, after he himself has caught the shower of gold (ie money – MR) and placed it in safety.”

Galbraith says that the speculator comes to believe that the money made from buying and selling stocks, bonds and derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). is real and requires no reference to the creation of value by productive labour. Again, Marx had already shown this: “All standards of measurement, all excuses more or less still justified under capitalist production, disappear.” Marx, however, provides a much clearer analysis than ‘bezzle’ by referring to what he called ‘fictitious capital’.

Fictitious capitals are “titles of ownership…. to real capital. They ..merely convey legal claims to a portion of the surplus-value to be produced by it. They “become paper duplicates of the real capital”. The “gain and loss through fluctuations in the price of these titles of ownership, … become, by their very nature, more and more a matter of gamble, which appears to take the place of labour as the original method of acquiring capital wealth and also replaces naked force. This type of imaginary money wealth constitutes a very considerable part of the money wealth of private people.” Marx summed up the rise of the financial sector and its role in modern capitalism over 150 years ago as “a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation.” Bezzle, if you like.

As Pettis puts it: “the bezzle represents recorded or perceived wealth that does not exist as real wealth (productive capacity), and as such it boosts collective recorded wealth above real economic wealth.” Just insert fictitious capital for bezzle here. Pettis argues that the credit (debt) created to speculate will eventually lead to “higher levels of investment than can be economically justified and encourages more spending than households and businesses can really afford. In this way, a period of rapid growth can become a speculative boom.” At a certain point, “the opposite happens: instead of artificially boosting growth when it is already high; amortization depresses growth through forced debt repayment and negative wealth effects just as it is already slowing.” So credit can lead to over-investment not only in financial assets but also in productive sectors and the consequent slump can increase the loss in the value of productive capital.

But what turns a bezzle boom into a debt disaster? Pettis hints that it depends on the returns from productive investment. Pettis then cites John Mills (sic) who wrote more than 150 years ago that “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” These are perceptive points about financial speculation and its eventual demise: from leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. of debt to deleveraging; from boom to crash, brought down by investment in ‘unproductive sectors’. As Marx put it: “since property here exists in the form of stock, its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange Stock-exchange
The market place where securities (stocks, bonds and shares), previously issued on the primary financial market, are bought and sold. The stock-market, thus composed of dealers in second-hand transferable securities, is also known as the secondary market.

But what causes money to be increasingly invested ‘unproductively’? Galbraith, Minsky, Mills and Pettis have no answer to this question. As Galbraith admits: “Economies at times systematically create bezzle, unleashing substantial economic consequences that economists have rarely understood or discussed.” It just happens – or as Minsky puts it: stability turns into instability.

In contrast, Marx offers an answer based of the law of the tendency of the rate of profit to fall. Falling average profitability leads eventually to a slowing in the growth of total profits from value-producing capital, which even a switch into speculative sectors cannot reverse indefinitely. Eventually overall profits can fall absolutely. Marx called this point an ‘absolute over-accumulation of capital’. A slump in investment, production and financial asset prices then ensues. Credit is necessary in a capitalist economy to extend economic growth and productive investment, but it cannot sustain that expansion because that is dependent on the creation of real value, not fiction. If new value does not grow to match more credit, credit will turn into unpayable debt.

Financial crashes occur in sectors or even across the board, but they are not always accompanied by a collapse in investment and production ie a slump. But a slump in production always engenders a financial crash as credit drains away and debt defaults emerge. This suggests that what is going on in the ‘real economy’ is what decides a financial crash, not vice versa. Indeed, that’s the evidence from the post-war slumps in the US, as G Carchedi has shown (see graph below): when profits in productive sectors fall, so do financial (fictitious) profits.

Capitalism is littered with bezzles in booms, but when the boom ends, those bezzles stop.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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