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The lower house of the US Congress has voted down a $700bn (£380bn) plan aimed at bailing out Wall Street.
The rescue plan, a result of tense talks between the government and lawmakers, was rejected by 228 to 205 votes in the House of Representatives.
About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.
Shares on Wall Street plunged within seconds of the announcement, after earlier falls on global markets.
A White House spokesman said that President George W Bush was “very disappointed” by the result.
A US Treasury spokesman said that Mr Bush, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke would meet to discuss the way forward.
http://news.bbc.co.uk/1/hi/business/7641733.stm
I was surprised by the extent of the Republican rebellion on this. Is this a principled defense of free-market ideals and is it one which trumps national self-interest? Obviously many other factors may be in play here. Even so, it’s an interesting counter-example to the kind of reductive critique of free-market economics that explains it away as a rhetorical tool of capitalists.
This is not an either/or thing: it would be a mistake to counterpose the ‘genuine’ beliefs of those Republican rebels who’ve defended these principles against the false/dishonest believers who’ve abandoned their principles out of self-interest. The beliefs people adopt and the stands they’re willing to take intersect with the social relationships they find themselves embedded within and the personal projects they self-interestedly pursue through them. A properly realist approach to understanding political beliefs, what they mean and why they form, requires that we avoid reductive explanations and try and understand the structure of people’s beliefs from the inside. Normative assessment of them should not inform the process of understanding and reductive explanations frequently smuggle them in in a way that precludes our properly understanding what people believe and what those beliefs mean to them. We can then engage with this understanding in a normative way but the question of why people believe what they do is logically distinct from of our appraisal of them. This is a methodological claim, rather than any sort of metaphysical one: it’s not claiming the fact/value distinction but simply saying that unless we’re careful excessive value-commitments can undermine particular factual inquiries.
Former House Speaker Newt Gingrich didn’t mince words, either. “You can’t be for capitalism on the way up and socialism on the way down, and you can’t be for a welfare state for the rich,” Mr. Gingrich told me last week. “The entire policy from Fannie Mae to AIG is a disaster. We need to recognize that most of the American economy is healthy, but Washington and Wall Street are sick. The politicians here would like to change America to be more like Washington, but we need to change Washington to be like the rest of America,” he said.
Weirdly enough I think he’s right about all of this, even down to localizing the problem in the financial sector. Seeing Gingrich be so outspoken at the current time has left me wondering how much of a divergence there is between the ‘true’ free-market capitalists who are still consistently making their case and opposing the bailout and the neoliberals who’ll happily proclaim it as a development model for the world while it serves their interests yet call upon unprecedented state intervention when this serves their interests too. They may give notional assent to a belief in free-market but how much can they possibly believe in them?
There’s a really interesting article in today’s Guardian bout the cultural roots of the Finnish school shooting.
Many Finns are inclined to blame this “violence” on the way in which Finnish men “cannot express their emotions”.
“We cannot express our feelings,” claimed a teacher from Helsinki. “If a man talks a lot he is seen as effeminate… To be a Finn is to be very male… you’re not allowed to talk about your problems.
“It’s like we haven’t got the tools to solve our problems with words but we are passionate deep inside and sometimes this comes out.”
And many Finns commented that wanting to be “alone” is more socially acceptable in Finland, meaning that lonely people are often assumed to wish to be so.
Many researchers in Finland agree that education is crucially important to your place in Finnish society, putting young people under intense pressure and especially men (as women are becoming more educated than men). University is very hard to get into with some students trying four times before giving up and maybe studying abroad.
Obviously I have little knowledge of Finnish culture so I have no idea whether the hypothesis here is true or not. Even so I think it’s a great example of how such questions should be approached. If we’re trying to understand why a group of people act in a certain apparently irrational (and, in this case, violent) way it’s a huge mistake to engage in reductive and/or causal explanations. Any purported explanation needs to be grounded in an understanding of the situations faced in common by the relevant people and common ways in which those situations may be understood and thus acted upon. It’s only through such an understanding that we can start to try and explain people’s actions: not in order to provide some law of why people do x but an account of how the outcome (people do x) emerges out of the interaction of similarly situated free agents and the situations and culture through which they negotiate those situations.
I don’t think I’ve ever heard anyone get so comprehensively ripped apart on live radio. I feel sorry for the poor guy. Here.
Will Hutton’s got a brilliant article in this week’s Observer,
For 30 years the financial system in Britain and America has been the battering ram for the free market revolution. The theory has been that markets are so efficient that regulation and state intervention must be as minimal as possible – allowing a very particular conception of finance, exemplified by hedge funds and private equity, to become the most dominant influence in our economies. Now the theory and its practice have exploded.
It has been that government and business alike have been in thrall to hegemonic deregulated financial markets and their sole interest – to maximise immediate short term profits.
Every chief executive I have spoken to over the last few years has had mounting concern that the financial markets and uncommitted shareholders do not value what business values: research, innovation, motivated people, brand, loyalty, trust, independence. What the markets value instead is the takeover, so many of which go wrong. There is equal concern about how extravagant City pay has become a benchmark for corporate salaries, crippling internal norms of fairness. Nor they do agree with the City ideology that the state necessarily bungles everything because it is the state, while free markets never make mistakes. Serious chief executives know how crucial the state is to fund research, education, skills and the national infrastructure – and that it can be adaptive and intelligent.
But for the change to happen there has to be political leadership. For decades progressive politics has been hobbled by a ball and chain around its feet. Now it can break free. The ideology and practice of the City can be challenged and reformed, and policies that enhance genuine and fair wealth generation be championed. The floundering government has a heaven-sent opportunity: if Brown and Darling have the imagination and chutzpah to seize it. If they don’t, they should stand aside for those who will. This case needs to be made in office, not in opposition.
Thus the new agenda. Today’s City is as over-powerful as trade unions were in the Seventies. Nick Clegg’s Lib Dems could lead, but have got lost. Cameron’s Conservatives are the City’s ally. Only pusillanimity and dither stand between Labour and seizing an extraordinary political chance.
Does Brown still have sufficient flexibility to take this route? It would please me if he did and it would, at least partially, redeem him in my mind as a public figure.
In mid September the former Chairman of the US Federal Reserve, Alan Greenspan, told an American news network that the developing crisis was “by far” the first he had seen in his entire career. He went on to call it “probably [a] once-in a century type of event” (1). This blunt statement of the severity of the crisis was all the more pronounced given that Greenspan himself, through his stewardship of the US Federal Reserve from 1987 to 2006, had been a key policy maker throughout the period when, most commentators agree, the crisis began to develop. The Nobel Prize winner and former chief economist of the World Trade Organization (WTO) Joseph Stiglitz argues that “key regulators like Alan Greenspan didn’t really believe in regulation” and played a crucial role in calling for ’self-regulation’ rather than state-intervention to preserve the integrity of financial markets (2). It was assumed that any risks inherent in free-markets would be inevitably be outweighed by the wealth that would be created through freeing corporations from regulatory constraint. There was seen to be no need or right for the state to intervene in financial markets.
Even earlier on this year, as the Credit Crunch began to develop, Greenspan was still using his public role to make this case. He told the Financial Times earlier this year that he hoped “one of the causalities [of the current crisis] will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance”(3). Once again it is demanded that financial markets be left alone and for financial institutions to police themselves. Yet all around us, evidence suggests the necessity of regulating financial markets mounts up, as corporate failure after corporate failure leaves those who were previously so vocal in decrying government intervention instead demanding that government’s bail them out. As the argument goes: these institutions are simply too big and too important to be allowed to fail, to let them do so would be a dereliction of the government’s duty towards all those who would be affected by the failure.
Certainly it’s true that the impact of these corporate failures would have serious social consequences given their size and the extent of their business dealings. Even so, bailing them out violates one of the basic principles of market economics: as an Economist article on the crisis put it “capitalism requires people to pay for their mistakes”(4) but not, of course, on this occasion. Since the fall of the USSR, political and economic elites have engaged in a theoretically specious triumphalism about the victory of global capitalism that has simply refused to accept that social considerations may justify market interventions. Yet throughout that time they’ve forcefully campaigned for government intervention when their own risk-adverse behaviour, with the American sub-prime mortgages scandal being the most recent of many examples, places their futures in jeopardy. Essentially, it’s being asked that the risks resulting from the anarchic financial markets that have developed over the past two decades be absorbed by the public while the (vast) profits resulting from them are rightfully private. The fact that these bailouts have largely been unconditional, allowing the corporations involved to simply resume business as usual, has only compounded the problem.
Economics refers to it as ‘moral hazard’: the tendency of parties insulated from risk to act differently from how they would were they full exposed to it. Such moral hazards are endemic in the Anglo-American financial sector and, even with the mounting crisis around us, prominent opinion formers are still decrying the attempt to tackle them. As the MIT Economist Ricardo Caballero argues on his Financial Times blog, letting corporations fail “simultaneously hampers the private sector’s ability to solve the crisis and exacerbates the likelihood of further panics” because the ensuing conception of a climate unamenable to business leaves corporations unwilling to take risks (5). Yet given that it’s the non risk-adverse behaviour of corporations, particularly within the financial sector, that has led to the current crisis, the notion that private risk-taking is a long-term route to macroeconomic stability carries little weight. Rather than trying to prop up a failing system, we should be critically scrutinizing the assumptions that underlie the arrangement of Anglo-American capitalism over the last two decades. It’s impossible to ignore the immense growth of wealth within the UK and America over that time but it’s important to look at how that wealth is created and how it is distributed. With the decline in British industry, the growing financial services sector has come to be a crucially important sector of the British economy, currently representing 9.4% of UK GDP (6).
However much of this growth has come about as a result of an unparalleled program of financial deregulation instituted by the Thatcher government and known as the ‘big bang’ (7). The sudden freeing of finance capitalism from long-standing regulatory constraints is at the root of much of the irresponsible business practice that has led to the current crisis. Likewise, at the start of Margaret Thatcher’s government, the richest fifth of the population accounted for 43 per cent of all earned income, and the poorest fifth 2.4 per cent. In 1996, the last year of the Conservative government, the figures were 50 per cent and 2.6 per cent respectively. In 1996, the last year of the Conservative government, the figures were 50 per cent and 2.6 per cent respectively. As the Cambridge political scientist Noreena Hertz puts it, “the poor are getting a smaller slice of a much bigger pie”(8). Moreover, it’s getting more difficult for the disadvantaged to get a bigger slice of the pie. A recent LSE study found social mobility in Britain to be lower than all the western democracies other than the America. As the authors put it, “while the gap in opportunities between the rich and poor is similar in Britain and the US, in the US it is at least static, while in Britain it is getting wider”(9).
The last twenty years of Anglo-American capitalism has led to greater wealth but greater inequality and greater insecurity. Politicians and opinion-formers are reluctantly confronting the issue but new regulation has thus far been designed to smooth the current crisis rather than to confront the problems underlying it. Genuine national debate on these issues has for too long been obscured by fuzzy ideological fault lines of capitalism/socialism yet in a world of declining western power we have a new opportunity to reconsider the economic life of the nation. After all, the Great Depression led to the New Deal in America, as the massive social harm caused by excessive corporate power led to a profound reorientation of American economic life. Does the current crisis not present us with a similar opportunity?
1 http://money.ninemsn.com.au/article.aspx?id=631251
2 http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/
3 http://www.ft.com/cms/s/0/edbdbcf6-f360-11dc-b6bc-0000779fd2ac.html?nclick_check=1
4 http://www.economist.com/opinion/displayStory.cfm?Story_ID=12263158
5 http://blogs.ft.com/wolfforum/2008/07/moral-hazard-misconception/
6 http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=12022
7 http://en.wikipedia.org/wiki/Big_Bang_(financial_markets)
8 Hertz, N (2002) The Silent Takeover p. 59
9http://www.lse.ac.uk/collections/pressAndInformationOffice/newsAndEvents/archives/2005/LSE_SuttonTrust_report.htm
A brilliant report on the impact of corporate and personal tax-evasion on the UK’s tax base: The UK Tax Gap
Well this week’s Economist is (perhaps unsurprisingly) defending the $85 billion bail out of American International Group. Prima facie the article makes a convincing case. AIG had $450 billion in the credit-default swaps market alone. Its collapse would undoubtedly hit ordinary policy holders. Yet upon closer scrutiny the rational falls apart. The somewhat facile invocation of utilitarian imperatives is pursued with a rather ideological opportunism. It would certainly be a mistake to overly-politicize an understand of what’s currently going on in the global economic system but it would be equally mistaken to not take this as an opportunity to critically scrutinize the deep normative assumptions underlying a ‘technical’ view of economic issues. George Bush has made a similarly utilitarian defense of the bailout, in a way that interestingly gets to the heart of the matter that the article in the Economist so articulately passes over.
Mr Bush said the measures required the US “to put a significant amount of taxpayer dollars on the line”.
“But I’m convinced that this bold approach will cost American families far less than the alternative,” he said.
Is this at all true? As Noreena Hertz observes in America, the spoils of a long period of prolonged economic expansion and low unemployment have not been widely distributed: 97% of the increase in income has gone to the top 20 per cent of families over the past twenty years. While the rich earn more – average earnings of the top fifth of male earners rose by 4 per cent between 1979 and 1996 – the bottom fifth saw a 44% drop in earnings”. From the voluntaristic standpoint of a liberal democratic capitalist it’s difficult to see the sort of structural relationship at work here: how the drive to free markets systematically undercuts the bases of socio-economic equality in pursuit of ‘flexible labour markets’ and ‘freedom from red tape’. This occlusion is compounded by an atomistic moral theory that underwrites the legitimacy of all outcomes resulting from legal and non-coerced actions by private and pre-individuated actors. This ‘objective’ and ‘technical’ perspective, with the tacit philosophical universalism that accompanies it, obscures the partiality of the actually existing social and economic interests that pursue their aims through its (allegedly) impartial conceptual framework. The reality of genuine social/economic conflict is theorised away. Yet the extent to which the actual concepts of neoliberal politics become sites of contestation (as the policy framework of a good investment climate simulatenously fuels and resists the precarity which is its inevitable outcome) points to the irreducibility of these conflicts, even when they’re treated in a theoretical language that systematically passes over them.
Advocates of bail outs, the rescue of financial institutions run to the ground through the pursuit of private profit, are invoking utilitarian imperatives (and it would be foolish not to take note of the social consequences the failure of these institutions would have) on a single case where other such considerations would be dismissed by reference to a deontological market fundamentalism e.g. harmful social consequences are fine as long as everyone’s rights have been respected in the process. The Economist article tells us that “in principle [it] is admirable-capitalism requires people to pay for their mistakes” yet (of course) in practice these institutions are just too big and too important to be allowed to fail. There’s such a striking ideological retreat from the fierce deontological voluntarism that usually characterises this sort of position. I just think it’s a deeply dishonest retreat.
