Financial crisis

Minsky Explains Financial Instability

Published by Anonymous (not verified) on Wed, 11/12/2019 - 7:36am in

In this rare video from 1987 (there is very little surviving footage of Minsky discussing his work), Hyman Minsky summarizes his theory of the financial fragility at the heart of modern capitalist economies:

This was part of an event in Bogotá, Colombia (which is discussed in this working paper by Iván D. Velasquez).

Minsky Explains Financial Instability

Published by Anonymous (not verified) on Wed, 11/12/2019 - 7:36am in

In this rare video from 1987 (there is very little surviving footage of Minsky discussing his work), Hyman Minsky summarizes his theory of the financial fragility at the heart of modern capitalist economies:

This was part of an event in Bogotá, Colombia (which is discussed in this working paper by Iván D. Velasquez).

The Shadow of September 2008 Continues to Lengthen

Published by Anonymous (not verified) on Wed, 13/11/2019 - 11:55pm in

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It is now 11 years since the bankruptcy of Lehman Brothers. The crisis in the real economy, instead of fading from memory, has become a fixture.

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Capitalism's New Economy: The Working Class

Published by Anonymous (not verified) on Wed, 11/09/2019 - 6:26am in

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On re-reading this piece, what is striking about the picture of the working class in capitalism's self-styled service economy in 2006 is how much it resembles the situation today. After decades of capitalist restructuring in the face of problems stemming from the declining rate of profit (problems by no means confined to the economy of the UK) there are now recognisable constants in the socio-economic profile of the 'restructured' working class.

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What Negative Interest Rates Mean and What We Should Do

Published by Anonymous (not verified) on Thu, 22/08/2019 - 6:57am in

Alright, so Germany has now introduced a zero interest bond. That means, given inflation, people will get back less effective money than they started with.

At this point, outside the US, the average interest rate is negative.

As Stoller pointed out, that means that people with money can’t figure out anything productive to do with it which will make a profit.

That means that capitalists and banks, including central banks, have failed. It is their function, in a capitalist society, to allocate resources. Money represents resources: people, stuff, and land.

Now if we lived in a utopia, with no real problems, this would make sense, but we don’t. There are tons of real problems which need solving, lots of money floating around, and other capacity indicators show there are people and resources which are not being used, or which could be redeployed.

So capitalism is failing to do what it’s supposed to do, and so are capitalists.

The correct action in a situation like this is to get that money working. The government could borrow it massively, and do what needs to be done. It could (and I would suggest this is the better option) tax it away, and then spend it.

If capitalists absolutely insist on private enterprise doing the work, then they should massively raise taxes on any income or capital gains not used productively, and not count less productive things like loans–they should stipulate that the money must be invested into business activity. They should make stock option grants, stock buy-backs, and all similar activities intended to allow cash-outs impossible. They should get rid of private equity; just make it illegal. Almost all of its activity destroys viable business to create a pay day for a few people.

Heck, you should do away with all those things anyway.

People are very confused about profit. Profit is mostly socially constructed. It is not an independent variable. Taxes, laws, and regulations determine what is profitable and what isn’t. Billions of subsidies, tax breaks, and favorable land deals make extraction industries profitable, for example. Banks get to print money. Media companies like Disney rely on characters and ideas which, in the past, they would long have lost control over. Companies are allowed to pollute for free, to use vast amounts of water for nominal prices, and so on.

Meanwhile, a vast array of regulations and nickel and dime costs makes it impossible for small business to compete. Try starting a bank. Yeah, good luck with that.

This, too, is by design. Before Reagan, regulations were set up to make small businesses easier to start and keep running.

The point is that if investors can’t find anything in which to invest, government has failed to tweak profits correctly. You shouldn’t get rich in land speculation unless you’re building stuff that should be built. You should get rich in alternative energy, but mostly you don’t. You should get rich in making homes that are healthy and energy neutral, but instead we keep building unhealthy and environmentally-degrading housing.

You should make money rebuilding infrastructure, or building high speed trains, or reducing carbon, or reforesting, or making fish and phytoplankton stocks recover.

Yet, you don’t, so these things which need to be done in order to, like, avoid a few billion deaths, don’t get done.

That’s government failure.

Capitalism does not work without effective government control, if it is the dominant economic mode in a society.

So. We have lots of stuff that needs to be done. We have lots of resources and money which aren’t doing those things and, indeed, resources and money which apparently can’t find anything to do

Only a moron can’t look at those facts and know what to do.

Oh, and the 2008/9 bailouts made this situation far, far worse than it should have been. This endless printing of money is only to keep the useless rich afloat when they serve no useful, productive function. They are actually counterproductive, as they are actively stopping productive activity from happening.

Tax them. Stop propping them up and let incompetents die. Destroy, utterly, those members of the ruling class who are actively destructive, like Private Equity. Alter the rules so that productive activity is profitable, and while you’re doing all that, just have governments do the most important stuff themselves, with negative real interest rate loans.

None of this isn’t obvious to anyone who pays any attention.

Yet we don’t do it, because governments have been captured by failed rich people.

Normal. But not acceptable when the cost of inaction could be billions of dead people.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

 

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Capitalism's New Economy: The Illusion of a Productive Economy

Published by Anonymous (not verified) on Mon, 12/08/2019 - 1:41am in

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Part four of this article was written before the biggest financial crash was followed by the biggest banking bail-out in capitalism's history, yet it is interesting to see that essentially the same economic profile presents itself today.

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Why We Need to End Banks and Shadow Banks

Published by Anonymous (not verified) on Thu, 08/08/2019 - 9:10pm in

Banks and various other financial companies have one important privilege: They can create money. When a bank lends you money, they don’t take it from another account and apply it to yours, they just put a number into a ledger, and voila, the money exists, created as debt.

Now, there are those who argue that creating all money as debt is stupid, but let’s move on from that and emphasize the important point:

Banks and other financial companies create money out of thin air.

Now, there are various caveats, and the amount they can create isn’t unlimited (though for practical purposes it’s close), but this is the bottom line.

They then get paid back by the people they loaned money to on money they created out of thin air.

It takes a special sort of genius to run a business which can actually create money, yet still lose money.

This chart gives an idea of how much genius:

I mean, you create the money out of nothing, and then you charge 17 percent returns (which underestimates the real rate of return, because of all the charges), and you still manage to cause a financial crisis because your liabilities wind up higher than your assets?

Wonderment aside, let’s circle back to the ability to create money.

Let’s say you’re Joe, guy who wants to start a business or buy a house. You go to a bank, and the bank decides whether you can do that.

Banks have the ability to create money in exchange for doing something: They decide who should get to do things. They give permission.

If a bank lends you 5o million, that’s the right to command 5o million dollars worth of other people’s labor: To hire them, or to buy the goods created by them. You get to choose what those people do.

Resources, especially people, aren’t infinite. Banks choose who gets to use them. The deal, spelled out is, “Give us the right to create money, and we’ll choose the people who do the most good with society’s resources to control those resources.”

And the banks have failed–over and over again they’ve failed. They don’t even actually make their returns (see 2007/8), let alone actually make good choices about how we should use our resources–with labour or other limited resources. I trust I don’t need to spell all of this out: Look at ecological collapse, climate change, and so on.

So banks, in their current form, shouldn’t have this incredible privilege, because they’ve repeatedly used it badly. This isn’t the first time, or even the second, or the tenth. Among others was the collapse of 1929 and the Great Depression, which effectively caused WWII. We thought we’d fixed the banking sector after that, and we were wrong, because rich people bought out government and undid all the fixes put in by FDR and the New Dealers.

So banks can’t be fixed, they do near apocalyptic damage, plus they suck at their actual job.

We need to find another way to give people permission to use scarce resources, including other people’s labor.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

 

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Capitalism's New Economy: The Booming Financial Sector

Published by Anonymous (not verified) on Wed, 31/07/2019 - 11:42pm in

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Part three of this series was published in 2005, two years or so before the great financial crash when the economic pundits were lauding the move away from manufacture to 'business and financial services'.

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An economy that supports healthy communities, local and planetary

Published by Anonymous (not verified) on Mon, 24/06/2019 - 2:09pm in

[This is a talk given to the Canberra Hub of New Economy Network Australia, 23 June 2019 on the topic ‘What could our economy look like in 2030?’ Check out NENA, I think it is a very promising network.]

At present our economy is structured and managed in ways that subvert the many good things people like us are trying to do.

I think it is possible to change that, so the larger economy supports clean, local, healthy living, strong communities and a thriving planet.

First, a few examples of good things that are already happening and just need to be promoted, examples involving food and energy:

Regenerative farming works with natural ecosystems to draw on their resilience and productivity. Perennial native grasses are deep rooted and well adapted to this land, surviving dry spells and pests. Regenerative farming pulls carbon out of the atmosphere and puts it back into the soil. Regenerated soil can hold far more water than the dead soil of industrial monocultures.

Clean electricity generation and storage is basically a solved problem. Wind and solar are abundant and cheap. The best storage option is pumped hydro: pairs of small to medium reservoirs, located away from main rivers. When power is abundant water is pumped from a lower reservoir to a higher reservoir. When power is needed, water is run back down through a turbine and into the lower reservoir, ready to be pumped back up. It is all mature technology, just put together in a new way.

Hydrogen is the ultimate clean fuel – its wasted product is water. It can be made from water, using clean electricity. A hydrogen industry is already starting in other countries. Australia will miss out unless it is fostered here. The ACT, with its abundant clean electricity, is well placed to promote a hydrogen economy.

These innovations are all fine, but we need to engage people with this potential. To do that we have to use the language of the mainstream: jobs, the economy, the cost of electricity, house prices, education costs and so on.

This means we have to use the e-word. We have to explain how to get the economy to serve people and to save the planet. It is possible. It is just waiting there for us to wake up.

I will use a strong word because I think it is justified. Current economic management is moronic – aside from perverse goals like making the rich richer, the economic managers fail to understand how a market economy works, where money comes from, how the Federal budget can work, private sector debt bubbles, parasitic financial markets, and more. To monitor their management the managers measure activity that involves money (aka the Gross Domestic Product), rather than measuring the wellbeing of people; thus they promote money over people. They are stuck in the fantasy of eternal growth. It’s a wonder we function at all.

Unfettered competitive markets are destroying everything worthwhile. They are doing this because they off-load costs onto people and the planet, and because they are driven always to produce MORE. They cannot just do enough.

But well-structured and well-managed markets might promote healthy people and a healthy planet. The key is to look at incentives. What are the incentives that firms operate under?

At present the incentive of most business firms is to produce more and more and to cut costs to the bone. The result is more and more stuff, exploited people and a polluted world. The firms have no choice, because if they don’t do these things they will be out-competed by other firms. We have to look at the incentives we impose on corporations, as Tim Hollo argues.

On the other hand, Interface Carpet Inc., a billion-dollar corporation, switched from selling carpet to leasing carpet. They provide a floor covering service. This switch reversed their incentive. Instead of maximising profit by producing (and dumping) as much carpet as possible, their incentive was to make durable, easily replaced, recyclable carpet. They redesigned their product to make it tougher, and easier to recover and recycle. They invented benign dyes to replace toxic dyes. And they doubled their profit. They use clean energy. Their goal is to be a company that nurtures people and the planet, in the same way a forest does.

Incentives can also be managed through taxes, subsidies and regulations, so the good stuff is profitable. That’s the idea behind a carbon price, though it has usually been badly implemented. Tax the bad stuff, call them brown taxes, and use the proceeds to subsidise the good stuff that is struggling to get established. At present we subsidise fossil fuels with around $10 billion of public money per year. Instead, we could use the coal industry to finance the hydrogen industry.

Of course such market intervention is against the current economic religion (and I use that term advisedly). The mainstream theory of markets is an abstract fantasy that has nothing to do with real-world economies. In that fantasy world everyone can predict the future. Everyone is an asocial brute materialist that calculates their optimal path through life – I call them calculating reptiles. There are no social interactions and no economies of scale. The economy tends to a mythical optimal equilibrium in which all supplies just balance all demands.

In the real world, we are highly social beings, economies are full of instabilities and the future is intrinsically unpredictable. The mainstream theory is not just a poor approximation to reality, it is radically different from reality, as different as a rocking horse from a brumby. It is grossly misleading.

Mainstream economists failed to anticipate the Global Financial Crisis, that wrecked millions of livelihoods, and lives, and whose effects continue today. That’s because in their theories they exclude money and debt. Financial crises are caused by too much debt.

The Hawke-Keating Government deregulated the banks. Banks make most of their profit from loans. They threw money at entrepreneurs like Alan Bond. They inflated a debt bubble. The bubble burst in 1990, triggering the worst Australian recession since the Great Depression. It still retains that distinction. I call it the Keating Recession. Interest rates hit 17% and unemployment hit 11%. Angry, unemployed older white men became Pauline Hanson’s constituency.

Banks were much more closely regulated in the 1950s and 60s. Credit was restricted if the economy became ‘overheated’. We need to regulate the banks again, and restrict them to being a minor sector serving the productive economy.

Financial markets trade about 50 times faster than is needed by the productive economy. This happens because the markets are being gamed. The gaming magnifies their fluctuations, which impedes the productive economy. It siphons wealth into the gamers’ pockets. The financial markets are destabilising and parasitic. We need to restrict them also to being a small service sector, as they used to be. If we charged a small tax on every financial transaction it could take the profit out of the speculation and improve the efficiency of the productive economy.

In the 1950s and 60s unemployment averaged 1.3%. That is regarded as impossible by today’s economic managers. The economy back then was managed to keep it going at full steam instead of carrying the burden of 5% or more unemployed.

GDP growth averaged over 5% in the postwar decades. Strong unions ensured a good share of the wealth flowed to employees, and the lives of many Australians improved markedly.

We should not maintain such growth indefinitely, we are quite rich enough by now. The problem is the rich get most of the loot. The system is rigged to pump much of the wealth upwards. That can be fixed. Progressive taxes, government services and regulation of finance can play a role. But we could fix a lot of inequality at the source by encouraging collective ownership – for example by employees, by local community ‘stakeholders’, by suppliers.

We can wrestle the demon growth by distinguishing growth of quality from growth of quantity. At present our system is geared to produce more and more stuff. It is a once-through system: extract, use once and dump.

We can reverse the growth of material use by developing a circular economy that recycles most materials. That is what Interface Carpet is doing. That is how the living world works. There are many examples of innovative recycling and there is great scope for extending it through the economy.

With good incentives and smarter management we can improve the quality of our lives, without limit. Do we have enough material goods? Are we less stressed? Are our children healthier? Are our communities strong? Is pollution declining? Is global warming being tamed?

In my vision for 2030, the goal of economic managers is quality of life. Healthy food is grown on healthy land. Electricity is 100% clean, and the economy as a whole is 75% clean. Banks are a small service industry, debt is low, unemployment is low, inequality is dropping and working hours have dropped. Our society is less divided, social problems are declining and local communities are strengthening.

Crashed: How a Decade of Financial Crises Changed the World

Published by Anonymous (not verified) on Sat, 03/11/2018 - 3:39am in

Book Review

Adam Tooze. Crashed: How a Decade of Financial Crises Changed the World. Viking. New York. 2018

The global economic crisis is now more than a decade old, and is far from definitively behind us. Indeed, many fear, with good reason, that the recent, uneven and lethargic global recovery may soon come to an end, and that the next crisis of global capitalism could be even worse than that of 2008.

The financial crisis and resulting crisis of the real global economy triggered by the collapse of Lehman Brothers and other major Wall Street banks has already prompted the release of a small library of books. ( The best, to my mind, is Martin Wolf’s, The Shifts and the Shocks.) But Adam Tooze provides us with the first truly comprehensive account. It is the work of a contemporary historian who draws on political and economic theory to frame a compelling and disturbing narrative, and is likely to become a standard and indispensable reference.

Over more than six hundred pages, Tooze looks at the origins and implications of the financial crisis around the world, proceeding both chronologically, geographically and thematically. In an extraordinary work of scholarship, he surveys the global political economy and financialized capitalism of the pre crisis period, the unfolding of the financial crisis in the United States and Europe, the spread of the crisis to developing countries and Eastern Europe, the extraordinary response of China, the euro zone crisis and the agonies of Greece and Southern Europe, and the political implications of the crisis.

He offers a coherent account of how the crisis set the stage for the rise of right-wing populism around the world, and speculates on how the global economy may evolve in a new age of explicit and escalating rivalry between the United States and China. What is at stake is the possible collapse of the “neo liberal” global economic and political order.

One relatively novel argument made in the book is that the global economy has to be seen, not so much as a set of discrete national economies trading with each other, as a vast “macro financial” web of corporate balance sheets and financial flows. In such a world, states can rapidly experience an exit of capital and economic collapse without necessarily running large trade or public finance deficits, while the hegemonic power, the United States, can readily finance such deficits by virtue of the unique status of the US dollar as the global reserve currency.

Tooze does not look in detail at the underlying contradictions of the pre crisis period, but he does note the key point that growth in an age of rising inequality and redistribution of income from labour to capital was dangerously reliant upon the growth of private debt, speculative bubbles, and the recycling of global trade surpluses to deficit countries, notably from China to the United States.

He broadly endorses the view that neo liberal capitalism has been associated with “secular stagnation” due to inadequate demand, offset only by the massive expansion of debt. As he notes, the fear was that crisis would result from a collapse of the US dollar, but instead it came from the collapse of global finance due to a massive accumulation of bad debts dispersed across the world. In response to the crisis there was, somewhat ironically, a flight to the US dollar as US government bonds were seen as the safest asset available.

Where Tooze departs a bit from the standard account is in his understanding and insistence that this was not just a crisis of the US banks, but a crisis of global and especially North Atlantic finance. Tight links between the Wall Street banks, the City of London, and the major European banks produced a global systemic financial crisis, not a crisis of so-called Anglo-Saxon capitalism as many European critics have argued. The euro crisis was also the consequence of low quality debt and speculative housing bubbles in some countries (the UK, Spain) rather than the excessive growth of public debt. Indeed the fiscal problem of countries hit by crisis in southern and eastern Europe were mainly the result of the crisis of the real economy which increased government deficits and debts, and the decision of many governments (most notably Ireland) to transfer bad bank assets to the public sector.

Building on the historical analysis of Leo Panitch and Sam Gindin in The Making of Global Capitalism, Tooze argues that the global economy has been economically and politically dominated by the United States, which remained in 2008, and remains even more so today, the only power capable of providing global economic leadership. “The crisis had the effect of recentering the world financial economy on the United States as the only state capable of meeting the challenge it posed.” He recounts how the US Treasury and the US Federal Reserve were absolutely key to resolution of the crisis of the banks in 2008, extending liquidity (very low interest US dollar credit lines) to global and not just US banks.

Similarly, massive US government purchases of distressed financial assets to bail out the financial system through the TARP and other programs were extended from the US banks to major European and even developing country banks. Key officials like Larry Summers and Tim Geithner won the day when they argued for “big bazooka, shock and awe” tactics to stabilize the financial system.

While there was a lot of bungling, experimentation and political resistance along the way, the US Treasury and the US Federal Reserve were indeed able to stabilize the US financial system fairly quickly by a combination of outright injections of new capital and arm twisting to force mergers. “Hair cuts” for those who had caused the crisis by investing in high risk, low quality assets and through reckless speculation and outright fraud were modest at best.

These bail-outs have been widely criticized, with good reason, for saving financial capital at the expense of working people who had to endure high unemployment and a huge wave of home foreclosures. But the US political system, even progressive Democrats included, would not even contemplate nationalizing the banks. In that context, a viable financial system and normal credit flows had to be restored by socializing bad debts.

The alternative to bail outs was to experience what happened in the eurozone, a failure to deal with insolvent banks through “extend and pretend” half measures which postponed an outright collapse of the banking system but without dealing with bad debt. “The eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s style recession. It was one of the worst self-inflicted disasters on record.” Tooze argues that the euro area also effectively sidelined itself from any pretensions to global economic leadership.

Fortuitously, US leadership also extended to fiscal policy in response to the collapse of the real economy. The stimulus program of the Obama administration could and should have been far bigger and lasted far longer, as was understood by those who had learned the lessons of the Great Depression in the 1930s, but again it was much more significant than similar programs in the UK and Europe endorsed by a new global forum, the G20 as an immediate fix.. Here there was a quick return to fiscal austerity and deep spending cuts long before growth and employment had recovered, with Germany and smaller Northern European countries demanding harsh and indeed sadistic fiscal measure as the precondition for any help to heavily indebted countries. In the most troubled countries, there was a death spiral as insolvent banks became every more shaky as the real economy collapsed and interest rates soared well above those of Germany.

The euro zone as a whole failed to act until very late in the game, when the European Central Bank finally announced in July, 2012 that it was prepared to “do what it takes” to bring down interest rates on debt denominated in euros. This failure was partly due to institutional architecture (the narrow mandate of the ECB, tight rules on fiscal policy) and partly due to German insistence that recovery had to be based on austerity and wage discipline to restore global competitiveness, without heed to the immediate consequences. Greece was crucified as a salutary lesson to others. Today, the banking crisis is far from fully resolved, most notably in Italy, public debt has reached very high levels in some countries where the crisis has hit hardest, and output has grown little above pre crisis levels while unemployment remains very high.

Toooze further notes and details that China was an absolutely key player in resolving the crisis through massive fiscal stimulus, and continued willingness to retain and expand its enormous holdings of US dollars. “China’s response to the financial crisis it imported from the West was of world historic importance, dramatically accelerating the shift in the global balance of economic activity towards East Asia.” To give an idea of the scale, between 2008 and 2014, China built 10,000 kilometres of rail capable of running trains at 360 km per hour, in the process gaining a massive technological advantage. And health care coverage was extended from 30% to 90% of the population through expansion of subsidies and a massive construction program for health care facilities.

Tooze endorses and details the argument that the bail outs of finance, massive unemployment and fiscal austerity set the stage for a major discrediting of centre left neo liberal parties and the rise of right-wing populism in the US, the UK in the form of Brexit, and much of Europe. In the United States “in the name of economic nationalism and the American dream, the right wing claimed the cause of systemic change, while the Democratic Party establishment filled the middle ground the Republicans vacated. “ Trump explicitly challenges the global capitalist order in the form of America first economic nationalism and rejection of global institutions like the WTO.

More widely, “(s)ince 2007 the scale of the financial crisis has placed the relationship between democratic politics and the demands of capitalist governance under immense strain. Above all, this strain has manifested itself … in a crisis of the political parties that have mediated the two.” Moderate parties of the centre left which championed global capitalism and did little to alleviate the impacts of the global crisis on working people have paid a high political price, threatening the future of the global system as is it still exists. Social democracy in the eurozone has massively retreated as the populist right has rejected globalism and even the European Union itself in favour of economic nationalism and racial xenophobia.

Looking to the future, Tooze notes with many others that the recent global recovery has been built on the fragile base of continued growth in debt with very limited reform of global finance. Future crises are hard to predict, but are inevitable. He could, perhaps, have said more about what a stable and equitable growth model might look like. What he instead stresses, rightly, is the crisis of global political capacity to regulate the system. “With Trump as president and the Republicans dominating Congress, it is an open question whether the American political system will support even basic institutions of globalization let alone any adventurous crisis fighting at a national or global level”

The eurozone is seemingly incapable of resolving its own problems, as not just the UK but also Italy and the right in France look to the exits. Meanwhile, “China’s economic triumph is a triumph for the Communist Party. This is still the fundamental reason for doubting the possibility of truly deep co-operation with China in global economic governance. Unlike South Korea, Japan or Europe, China is not a subordinate part of of the American global network.”

We indeed live in profoundly dangerous times. Fortunately Adam Tooze has given us a narrative and analysis that illuminates where we have been, though he has no clear view of how progressive forces should and could re-shape the crisis prone and deeply inequitable global capitalist system created in the run-up to 2008.

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