Costas Lapavitsas Talks to Class Unity About the 2007-09 Global Financial Crisis

Class Unity recently spoke with economist Costas Lapavitsas about the global financial crisis of 2007–09, the financialization of capitalism, and the unstable economic order that followed. The discussion examines the changing conduct of large corporations, banks, shadow banks, households, and states, along with the central role of public debt and central-bank liquidity in contemporary capitalism. It also considers financial predation, the limits of rentier and “parasitism” analyses, public banking, the euro area’s long crisis, and Greece’s experience after 2015. The final portion turns to European left politics, immigration and working-class community, the emergence of new populist formations, and the claim that platform capitalism has become “technofeudalism.” Lapavitsas is Professor of Economics at SOAS University of London and coauthor of Profiting Without Producing: How Finance Exploits Us All; readers can also watch the original Class Unity conversation.

Class Unity: Welcome back to the Class Unity speaker series. Our political education program promotes materialist analysis of politics, economics, and social issues. Today we are joined by economist Costas Lapavitsas to discuss the global financial crisis and the financialization of capitalism. Our group read two of your articles on financialization and the crisis. Could you explain your view of the 2007–09 crisis, and whether it has changed since your 2009 article?

Costas Lapavitsas: Thank you very much for the invitation. It is a pleasure to be with you. I admire your aims and agree with them. I do not propose to advise you about how to navigate the difficult task ahead—you know your own circumstances best—but I want to help as much as I can. What radical and Marxist thinking needs more than anything at present is political economy. Marxism has spent a long time becoming a theory of conduct, equality, oppression, and related matters. Those are important, but Marxism is fundamentally a political economy of capitalism. Marx called himself a political economist, and contemporary Marxism has too often sidelined that work.

Let me begin with why financialization matters and what the crisis of 2007–09 signifies. Marxism has traditionally analyzed capitalism through historical periods. Capitalism changes as it encounters new conditions and develops new institutional arrangements: freely competitive liberal capitalism in the first half of the nineteenth century, monopoly capitalism toward the end of that century, and different forms of state and financial involvement during the twentieth. This historical perspective is essential because capitalism has a theoretical core but is also historically contingent.

Financialization should be understood in this way—as a characterization of capitalism’s development over roughly the last four and a half decades. It belongs alongside globalization. The two are not identical, but they are closely related. Financialization cannot be reduced to the quantitative expansion of finance or to the claim that everything has somehow become finance. Finance has expanded extraordinarily, especially in the United States, but we have to understand the transformation systemically and ask what it reveals about capitalism as a historical order.

The period from the late 1970s to the present can broadly be described as one of financialized and globalized capitalism. The crisis of 2007–09 is its decisive landmark and the most important capitalist crisis since 1873–75. Major crises often bookend periods in capitalism’s development. The 2007–09 crisis condensed the characteristic features of financialization and marked its peak. Capitalism has remained financialized and globalized during the fifteen years since, but the earlier dynamic has weakened.

To understand financialization systemically, we must examine the conduct of capitalism’s fundamental agents. We begin with nonfinancial corporations—the producers and traders of commodities and services. Large corporations have become financialized, though this does not mean that they have turned into banks. Rather, financial transactions have become more important to them. They invest less than they once did, retain enormous quantities of liquid money capital, and use that liquidity for share buybacks and financial operations. The balance sheets of large American and other multinational corporations make this readily visible. Historically low investment and enormous liquid reserves are central features of their transformation.

This change has occurred alongside a transformation of banks and other financial institutions. Banks increasingly seek profits not mainly by lending, but by transacting. They behave more like brokers and deal not only with businesses but with households. Working-class and middle-class households have themselves become more deeply involved in finance, and their personal income has become a field of profitability for banks and financial institutions. Historically, we understood bank profit as a share of the surplus produced through capitalist production: exploitation occurs in production, profit accrues to the industrial capitalist, and the bank takes a portion. That remains true, but under financialized capitalism banks also extract profit directly from the income of households.

Housing and mortgage debt are central to this process in developed capitalist countries, but household financialization is not simply a matter of indebtedness. Households also hold assets—homes, pensions, and savings—that become entangled with financial markets and serve as sources of profit for large institutions. Financialization therefore rests on three related transformations: the financial conduct of large nonfinancial corporations, the changing operations of banks, and the deeper incorporation of households into finance.

The crisis of 2007–09 brought those tendencies together in an enormous shock driven initially by household debt. That is a remarkable development in the history of capitalism. If Marx had been told that a global crisis would arise from mortgage lending to the poorest layers of the American working class, he would have been astonished. Yet that is what occurred.

Treating personal income as a source of profit also recalls what James Steuart and Marx called profit upon alienation. The dominant source of profit remains capitalist production and the exploitation of workers, but capital has always sought profit by every available means. Financial expropriation takes income directly from people’s pockets and converts it into financial profit without the mediation of production. Banks and other institutions squeeze household income directly.

What followed the crisis is equally important. The pandemic shock nearly produced another gigantic crisis in early 2020. The financial system was already overextended in 2019, although we cannot know whether it would have broken down without the pandemic. The crisis was avoided through state intervention. The period since 2007–09 can therefore be understood as an interregnum: financialization reached its peak, the old dynamic no longer works as before, but a new order has not emerged. In an interregnum, to use Gramsci’s formulation, political monsters appear because the old is malfunctioning while the new cannot yet be born.

During these fifteen years, financialization has weakened while its center of gravity has shifted away from conventional banks and toward shadow banks. Shadow banks were already important during the housing boom, but they have grown far more powerful since 2009. They are not banks in the traditional political-economic sense: they do not accept deposits and generate new deposits through lending. They are primarily portfolio managers. They acquire financial assets, manage portfolios, and seek returns through interest and capital gains.

The largest institutions—BlackRock, Vanguard, and State Street—have become enormous holders of American equities. They generally track market indices rather than selecting individual enterprises, making them passive investors with a built-in interest in rising stock markets. Their managers’ personal fortunes are tied to this process. These institutions depend fundamentally on liquidity, even more than traditional banks do, because liquidity is integral to their business model. Their portfolios are also international, spanning securities around the world.

This shift would have been impossible without the state. Financialized capitalism during the past fifteen years has been state-based financialization. Both the 2007–09 crisis and the 2020 pandemic crisis demonstrated the absolute centrality of the state. Governments supplied capital, but central banks supplied the liquidity that allowed banks and shadow banks to continue operating. Central banks have consequently become pivotal institutions of contemporary capitalism. At the height of intervention, the Federal Reserve’s balance sheet reached about nine trillion dollars—an unprecedented quantity of fiat money created on the authority of the state.

The counterpart is public indebtedness. Central banks create liquidity by purchasing public debt. The government issues debt; the central bank buys part of it; banks and shadow banks receive liquidity; and financial markets continue to operate. Contemporary capitalism therefore depends absolutely on the state. Public debt has become the chief lever of the interregnum. Household debt has continued to rise in absolute terms but has declined relative to income and GDP, while public debt has taken center stage.

Capitalism remains, of course, a system of production and of the creation of value and surplus value. Financialization since the late 1970s has developed alongside the globalization of productive capital. This is not merely the cross-border trade in commodities or the older model in which an American multinational established and owned a foreign subsidiary. During the 1980s, 1990s, and 2000s, corporations internationalized production through contractual chains. A Turkish, Thai, or Brazilian capitalist could retain ownership of an enterprise while entering a production network led by a major multinational. The lead corporation controls the chain through technology, access to finance, patents, and market power.

This globalization of production is unprecedented. Roughly two-thirds of world trade occurs within these chains. Globalized productive capital and globalized financial capital together form the most aggressive capital in history. They seek profit everywhere, do not require territorially exclusive empires, and treat the world itself as their field. They need stable conditions for production and trade, cheap and efficient labor power, and the ability to move across borders. The United States supplies the hegemonic state framework, while the dollar supplies the global money.

Since 2007–09, however, this order has encountered a profound challenge from independent centers of capitalist accumulation, including China, India, Brazil, and others beyond the traditional centers of capitalism. The United States and its allies do not readily accept that challenge, while the new centers will not remain subordinate. The interregnum is therefore marked by competition among leading capitals and an intensifying threat of world war. Marxist political economy must formulate internationalist answers grounded in the common interests of working people and the need for peace.

Class Unity: In one of the articles we read, you say that financial profit has a predatory aspect that sets it apart from profit in production. Yet capitalism’s productive side also begins with dispossession: people lose access to the means of production and must sell their labor power, while households now must borrow to secure housing and other necessities. Why describe the latter as especially predatory? What distinguishes financial expropriation from the exploitation occurring in production?

Costas Lapavitsas: All capitalism is predatory and oppressive. Even primitive accumulation depends on violence and the exercise of political and social power. Exploitation in production also involves coercion, although market exchange can disguise it. In the market, workers sell their capacity to work and receive its price, creating an appearance of equality and quid pro quo. Inside the workplace, however, there is no market equality. There is hierarchy. Workers obey direction and work longer than the time necessary to reproduce the value of their wages; otherwise surplus value and profit could not arise. Productive capitalism therefore contains its own predatory and oppressive element.

Finance is nevertheless different because it produces nothing. It is an intermediary. Banks provide services essential to capitalism, but they do not produce commodities; they shift claims and paper. Because finance stands one step removed from production, it is less constrained by technology and material processes. A small office can conduct transactions worth billions or trillions. Car production can be organized in several ways, but material and technological limits still determine what can be built. Finance is much more footloose.

This detachment has two consequences. First, finance is particularly open to institutional regulation because its operations are not fixed by the physical requirements of production. Second, the way it obtains profit lacks the same internal connection to production. Finance has historically dealt in claims: it advances money, retrieves money, and transacts with people and enterprises at a distance. Under pressure, it may recover its claim by destroying the borrower’s productive capacity. It can take not only what the borrower can afford, but what the borrower needs in order to continue producing or living. In that sense, predation is intrinsic to finance.

Financial capitalists are not simply parasites, because they perform functions necessary to capitalism, but they have something of the vulture embedded in their role. The same is true in a different way of industrial capitalists, whose role contains the oppressor. These characteristics follow from the social relations that generate their profits.

Class Unity: The expanding scale of public and private debt seems alarming. Some argue that debts that cannot be paid will not be paid. Are there limits to the debt burden a financialized economy can sustain, or can central banks indefinitely create more money and maintain the system? Could the interregnum become a lasting status quo?

Costas Lapavitsas: We must first distinguish among kinds of debt. Enterprise debt is integral to capitalist accumulation. Advanced capitalism cannot exist without advanced finance and credit. A capitalist extends trade credit, receives credit from suppliers, and borrows to invest or expand. The financial system redistributes the capitalist class’s spare money from surplus units to deficit units and draws in idle funds from elsewhere in society. A sophisticated credit system is therefore an aspect of capitalist development, not merely a parasite attached to it.

Household debt is different because households are not capitalist enterprises. Workers borrow to obtain a home, maintain consumption, or anticipate future income; they do not generally borrow to invest and extract surplus value. The distinction appears economically, legally, and morally. Sovereign debt is different again. It is incurred by a state and treated as an obligation of society. A bankrupt company disappears, its creditors seize what remains, and the claims are extinguished. Governments are succeeded by governments, so sovereign obligations persist.

We must also distinguish debt owed to domestic creditors from debt owed abroad. A state owing money to foreign lenders is in a much more precarious position because the legal, institutional, and monetary relationships differ. Historically, public debt has been an extraordinarily effective mechanism of class enrichment: the obligation is borne socially, while claims on the society’s future output are held privately.

The United States occupies a singular position. A large share of its public debt is held abroad because foreign states and institutions need dollars to operate in the global system. They obtain and hold dollars partly by purchasing Treasury securities and government-backed agency debt. China, Japan, and many other countries hold large quantities. The United States can repay foreign holders by creating more dollars. No ordinary state enjoys that privilege. It is a foundation of American hegemony.

There are still limits. If foreign holders continually receive more dollars and lose confidence in dollar-denominated assets, they may cease purchasing them. The United States must therefore consider how debt expansion affects the dollar’s position. A serious weakening of the dollar would strike at American imperial power.

On the domestic side, the Federal Reserve holds a substantial share of public debt. The government issues securities, the central bank purchases them by creating money, and the money enters the financial system. The consolidated state, in effect, issues debt with one hand and buys it with the other. This may contribute to inflation, as recent experience showed. Debt held by private financial institutions also reorganizes claims on national output, producing capital gains and profits on a vast scale. Shadow banks hold large quantities of government securities, and fluctuations in their prices and yields directly affect financial profit. Those profits ultimately rest on claims supported by taxation and the state.

Public debt therefore remains central to capitalism even in the United States, which faces fewer immediate constraints than smaller countries. A small or medium-sized state whose public debt expands too far may quickly face currency depreciation and a foreign-exchange crisis. The United States avoids that immediate problem because it issues the dominant world money, but it faces the longer-term monetary, distributional, and imperial constraints I have described.

Class Unity: Could you clarify the distinction between predation and parasitism? Classical political economy often distinguished profit from rent and interest, treating the latter as fees for controlling an asset. When finance creates credit to capture wages or generate speculative gains through asset-price inflation, why should that not be called parasitic?

Costas Lapavitsas: Those examples certainly indicate predation, and some finance can indeed be parasitic. I am not defending bankers. Much financial activity is socially useless. Suppose a trader in Manhattan and another in London reduce the time required to determine the price of a derivative by an eighth of a second. They might earn enormous profits, but the idea that humanity receives a corresponding efficiency gain is laughable.

The everyday efficiency of financial institutions is also greatly exaggerated. When I lived in the United States and taught at the New School, opening and using an ordinary bank account was astonishingly cumbersome. Even conventional neoclassical research has found that the cost per unit of financial intermediation has not fallen for decades despite the sector’s enormous growth. If genuine economies of scale were operating, the charge should decline as volume increased. Instead, the system expands without becoming cheaper. Someone is making money out of old rope.

Still, it is important not to move from those observations to the conclusion that finance as such is unnecessary. Marx detested bankers and often treated them dismissively, but capitalism cannot function without banks. The distinction matters politically. There are strong arguments for public or nationalized banking and for the public provision of credit. Society must decide how credit is allocated to workers, households, and businesses. The remarkable expansion of finance has coincided with a credit shortage for small and medium-sized enterprises. Transforming credit into a public service requires understanding the necessary function that private finance presently monopolizes. If finance is dismissed as nothing but a parasite, we may fail to develop the public alternative.

Class Unity: So the danger of describing finance only as parasitic is that we stop analyzing its necessary functions and lose sight of the public institutions that must replace it?

Costas Lapavitsas: That is one important danger. There is another. The language of parasitism often accompanies an analysis of bankers as rentiers and finance as the province of the rentier. The rentier is an old figure in political economy, going back at least to the eighteenth century: an owner of money who does not invest productively but makes funds available to another capitalist and receives interest or some other return. Keynes also wrote about the rentier, and many contemporary writers speak of rentier capitalism.

Rentiers certainly exist. Individuals and institutions own financial assets and draw unearned income from them. But the structure of modern financial ownership is exceedingly complicated. Large asset managers hold portfolios; those institutions are owned through other funds; pension funds and still other institutions hold stakes in them. It is difficult to isolate a clearly bounded social layer of pure rentiers. Many asset owners also work or receive other forms of income.

Finance is therefore better analyzed through the systemic redistribution of spare monetary resources by financial institutions. Those institutions perform a capitalist function and tend to receive the average rate of profit. This approach allows us to identify predatory, parasitic, or useless operations without mistaking them for the whole of finance.

Class Unity: We would like to turn to Europe and Greece. You were directly involved in Greek politics during the euro-area crisis. What would have been the best coordinated political response for Greece, and what went wrong?

Costas Lapavitsas: Europe is in one of the darkest political moments of its recent history. The governments of its major countries are staffed by remarkably weak politicians. That is not accidental. It reflects the decline of European capitalism and the European Union’s gradual fall into insignificance. It has become difficult to say what purpose the Union serves beyond supporting particular large corporations and providing good careers and incomes to parts of the elite.

European politics during the interregnum is deeply troubled and moving to the right. Some emerging formations are straightforwardly fascist, though it would be a mistake to call the entire new right fascist. Fascism need not reproduce the costumes and rhetoric of the 1930s; it takes historically specific forms. The broader crisis arises because financialization and globalization have lost momentum in Europe, while European institutions offer no alternative path. Large firms do not invest, productivity growth is dismal, and austerity is structurally embedded. The German elite, which should be the regional hegemon, has proved incapable of leadership.

Greece is a disaster within that larger disaster. The Greek elite reached a settlement roughly a decade ago: it would accept the demands of the European institutions in order to protect its domestic interests and avoid a challenge from below. It remained within the euro framework and implemented the prescribed program. The outcome was precisely what critics predicted—stabilization without growth.

Greek GDP remains substantially below its 2008 level. Nearly two decades have been lost, and even regaining the old level will take years. Corruption is rampant, the compromised domestic elite is more powerful than before, and the political system is bankrupt. The Greek people were profoundly disillusioned because they trusted the left in 2015 and believed it offered a way out, only to be let down. Under present conditions, the eventual reaction is unlikely to move leftward because no organized force on the left offers a credible path to people under enormous pressure. Greece has become one of the poorest countries in the European Union by disposable income and risks falling still further behind.

Class Unity: What do you make of emerging political movements in Britain, France, and Germany—especially the projects associated with George Galloway and Sahra Wagenknecht? They combine positions on labor and class with views on borders or the family that are often described as conservative. Do they offer an appropriate response or a promising basis for working-class politics?

Costas Lapavitsas: George Galloway is not in the same category. He is a gifted and eloquent individual, but there is no substantial party or durable political current behind him. Sahra Wagenknecht’s project is far more serious. At present, the two significant left initiatives in Europe with some promise are Jean-Luc Mélenchon’s movement in France and Wagenknecht’s party in Germany. They are very different, but they may indicate possible directions for the European and global left.

Mélenchon belongs more recognizably to the traditional radical left on personal rights, sexuality, gender, and immigration. He has genuine working-class support, especially among immigrant communities around Paris. His clear position on Palestine was both correct and crucial to his electoral success among France’s Arab-origin and Muslim population. He is a powerful orator and speaks in a familiar radical-left idiom. His movement has developed parliamentary weight but still lacks the structure of a traditional working-class party centered on a mass membership.

Wagenknecht also occupies a highly personalized organization, but her trajectory is different. She insists that the left must confront immigration and economic reorganization directly. I have reservations about the economic program because it places too much emphasis on small and medium-sized businesses and too little on working people, but that can be debated and corrected. The question is what kind of German economic model the left should propose.

On immigration, Wagenknecht asks necessary questions even if her answers remain open to criticism. During the last two or three decades, much of the left has adopted the internationalism of capital and mistaken it for working-class internationalism. The position that anything goes across borders often amounts to a large-business policy: bring in vulnerable workers cheaply, house them miserably, deny them protections, and use them to increase profits.

Working-class internationalism means something else. Workers ultimately share interests across borders, but people who migrate to work must have union rights, health care, education, housing, and the means to live as civilized human beings. Their movement must occur in a way compatible with defending the conditions of workers already present. The left needs a policy for crossing borders, not the borderless freedom demanded by capital. Wagenknecht is willing to ask how Germany can protect wages and the welfare state under these conditions. Calling her a fascist or crypto-fascist merely for posing the question is thoughtless.

I am not endorsing every answer her movement supplies. I am reserving judgment. But the debate it generates is important because it may help produce a genuinely radical left position on immigration. Working-class community is crucial. The left has detached itself from the working class, while the working class has also lost much of its traditional community. Community cannot be manufactured by journalistic rhetoric. It rests on shared norms, values, practices, experiences, and struggles. The destruction of those bonds leaves people rootless and produces disturbing political outcomes. The left cannot permit big business, capitalism, and money-making to dissolve every social bond and reduce people to unattached individuals. Immigration policy must take that reality seriously.

Class Unity: One final question. Some argue that capitalism has ended and been replaced by “technofeudalism,” in which digital platforms and their owners exercise a new form of power. Do you agree?

Costas Lapavitsas: No. There is no substance to the claim that capitalism has ended. The changing form of capitalism is important, and we must analyze large technology companies, platforms, new forms of value and money, and changing forms of exploitation. I am working with colleagues on precisely those issues. But what has emerged is capitalism red in tooth and claw—the most aggressive capitalism we have yet seen—not a noncapitalist order.

“Technofeudalism” is a memorable and attractive phrase, and it predates its most prominent recent use, but I do not think it explains anything. Platform capitalism must be analyzed as capitalism.

Class Unity: Thank you very much for taking the time to speak with us. This has been a valuable discussion, and we hope to have you back again.

Costas Lapavitsas: It was my pleasure. Keep doing what you are doing; I am sure good things will come from it. I will be happy to discuss these questions with you again in the period ahead.