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Naphon Phumma

The 2008 Financial Crisis: The Marxian Approach

by Naphon Phumma

2 June 2009

The 2008 Financial Crisis: The Marxian Approach.

0. Introduction
The current financial crisis is widely known as the most serious crisis since the Great Depression in the 1930s. The root of the crisis, according to what a ton of economists argue, is regarding credit defaults of subprime borrowers, and the burst of the housing bubble. Banks that expected large profits from lending during the boom in the 1990s to 2000s made a lot of mortgage loans to borrowers. These borrowers were not just those who had good credit histories, which were important criteria to evaluate their abilities to meet monthly mortgage requirements, but they also included those who had poor credit histories. Borrowers with poor credit histories were known as subprime borrowers, and banks had to lend them at a higher interest rate in order to offset higher default risks from having poor credit histories. This is what we call a subprime rate, while the rate for borrowers with good credit histories is called a prime rate. The banks’ logics of lending to subprime borrowers were very simple; they believed that these borrowers would be able to repay, or even though they could not repay, collaterals which most of them were borrowers’ residences could be sold at good prices. Therefore, subprime loans rose from 9 percent of the market in 2002 to 25 percent in 2005 out of total mortgage loans. (Baker, 2008) In addition, banks also created financial innovation called mortgage-backed securities that put a number of loans together and then sold them to investors throughout the world at prices that were high enough to cover the principals of loans plus decent profits. Investors who bought these securities would gain money inflow from mortgage payments and capital gains from reselling these assets in the market, but they had to encountered credit default risks. Nevertheless, these investors came to the market with the expectation that borrowers would be able to meet mortgage requirements, or even though they could meet the requirements, collaterals could be sold at decent prices in the housing market. This market then became very big with the entries of many big financial companies. However, things went in the opposite way. The economy turned down, so many subprime borrowers could not service mortgage requirements. Meanwhile, in the mean time, housing bubble bursted, so houses’ prices dramatically dropped. As a result, prices of mortgage-backed securities went down, so investors, especially big financial institutions, encountered huge losses from these falling prices. This then led to several problems such as a liquidity problem, credit crunch, deflation, and eventually a slowdown of the economy with higher unemployment in the whole world. The crisis was very severe!
Above is the ordinary brief summary of the origin of the current financial crisis, which started in the 1990s. However, in this paper, I will do something different. The purpose of this paper is to present a deeper perspective on this financial crisis by using the Marxian approach. The main argument is that the origin of this crisis is the historical process of exploitation in the current social structure of accumulation starting from the 1970s, and this process roots deeply in the changes in people’s economic behaviors. The first part of this paper aims to show my model on income flows between classes that are composed of the nonfinancial capitalist class, the financial capitalist class, and the working class. The second part is the place to discuss the interactions between these three classes, the changes of the economic structure, and the changes in people’s economic behaviors. The third part mainly focuses on exploitation that is embedded in the capitalist economy, and overexploitation is the major reason for the current financial crisis. The last part will be my suggestion to prevent the next financial according to the model constructed in the first part.

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