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the immediate problem is the financial system. The roots go back to the early 1970s, when finance was liberalized; it was freed from the constraints of the post-war period. Now, the constraints of the post-war period, roughly 1945 to 1970, they were instituted by the United States and Britain for a reason, one, because it was assumed correctly that allowing governments to control capital movements and currencies would provide a basis for rapidly expanding growth and trade and so on, which indeed happened. That’s called the golden age of modern capitalism. Whereas freeing these constraints would retard growth and development, as indeed it has done. But there was a second reason, which isn’t being discussed much: allowing governments to control capital movements provides them with a certain space for introducing what we call welfare state programs. If capital movements are free, attacks on currencies are free, there’s what economists call a “virtual parliament” of investors and lenders who actually vote, every minute in fact. If they don’t like what a government is doing, they attack the currency, there’s capital flow…
When the $700 billion bailout was announced, the public was outraged. There was furious objection, so much so that the House of Representatives had to vote it down. Now, on the surface, that looks like an exercise of democracy, but it isn’t. Even in a dictatorship, if the dictator does something outrageous, the public can riot and he’ll have to back down. Now, in a democracy, functioning democracy, what happens is different: not just shouting “no,” which is what happened, but active popular organizations like unions or political clubs or whatever would be coming forth with specific proposals and demanding that their representatives implement them.
And there are proposals; there’s quite a lot of proposals on the table. Joseph Stiglitz, who’s [inaudible] from outer space, made a very simple point. He said if we put money into the banks, pour liquidity into the banks, we can pour it in, and they’ll pour it out—mergers and acquisition, anything—for their own benefit, ’cause that’s what they’re in business for, for their benefit, not for our benefit. So he said we have to have veto power. Well, veto power means voting rights, and if it’s a real democracy, voting rights means popular participation and initiative. Well, the initiative should be coming from the population, like with health care, where the population has definite views. But the country is so depoliticized that popular views are considered politically impossible, lacking political support. Well, that’s what’s called a democratic deficit: formal democratic institutions, but not functioning. And we have to overcome that. That underlies lots of issues.
t’s well known among economists that markets are inefficient from the narrowest perspective. So let’s make it simple. Suppose you sell me a car, okay? We may make a good deal for ourselves, but we’re not taking into account the effect on him. It’s what’s called an externality. And there’s an effect. If you sell me a car, it increases gas prices, it increases pollution, it increases congestion. And that extends very broadly; these so-called externalities can be very large.
Now, in financial institutions it’s far worse. They are in the business of taking risks. If they’re well managed, say, Goldman Sachs, they calculate the potential cost to themselves if there’s a loss. But the important words are “to themselves.” They don’t calculate in what’s called systemic risk, the effect on the whole system if I go bust, you know, and it has a huge effect. The result is that risk-taking is under-priced, meaning there’s a lot more of it than there would be in a reasonable system. And so, therefore, it was predicted right off that when financial liberalization took place, there would be more regular financial crises and deeper ones. And this particular one is accelerated by the fact that there was a subprime housing bubble and many other factors, so it became far more severe than anyone expected. But it’s built into the system. Now, this was kind of combined with a kind of religious market fundamentalism based on doctrines of, you know, self-regulating markets and so on, which are pure fantasy. So the regulatory apparatus was dismantled. Well, that accelerates the pace of potential financial crisis. And along with that came the creation of highly exotic financial instruments.
Well, all of this combined, it was pretty clear the early part of this decade that a major crisis was brewing. Alan Greenspan, head of the Federal Reserve, refused to prick the bubble as could have been done in simple ways, on the basis of religious belief in self-regulating markets. And finally it came to this catastrophe where there’s a credit freeze, the system’s freezing up. Something has to be done, and it’s interesting what the choices are. It goes back to our earlier discussion. So this morning on the radio, George Bush announced that the government is intervening in the banks, but we want to make sure that we go back to the profit motive, not policy motives, not political motives. What are political motives? Well, that means participation of the population in making decisions. So we hate democracy; we don’t want the public to be involved in decisions about things; we want to go back to the profit motive, meaning that a private tyranny, which is what a corporation is, should look out for itself, not for the public interest.
In fact, since financial liberalization was instituted about thirty five years ago, there has been a trend of increasing regularity of crises and deeper crises, and the reasons are intrinsic and understood. They have to do fundamentally with well understood inefficiencies of markets. So, for example, if you and I make a transaction, say you sell me a car, we may make a good bargain for ourselves, but we don’t take into account the effect on others. If I buy a car from you it increases the use of gas, it increases pollution, it increases congestion, and so on. But we don’t count those effects. These are what are called by economists externalities, and are not counted into market calculations.
These externalities can be quite huge. In the case of financial institutions, they are particularly large. The task of a financial institution is to take risks. Now if it is a well managed financial institution, say Goldman Sachs, it will take into account risks to itself, but the crucial phrase here is to itself. It does not take into account systemic risks, risks to the whole system if Goldman Sachs takes a substantial loss. And what that means is that risks are underpriced. There are more risks taken than should be taken in an efficiently working system that was accounting for all the implications. More, this mispricing is simply built into the market system and the liberalization of finance.
The consequences of underpricing risks are that risks become more frequent, and, when there are failures the costs are higher than taken into account. Crises become more frequent and also rise in scale as the scope and range of financial transactions increases. Of course, all this is increased still further by the fanaticism of the market fundamentalists who dismantled the regulatory apparatus and permitted the creation of exotic and opaque financial instruments. It is a kind of irrational fundamentalism because it is clear that weakening regulatory mechanisms in a market system has a built-in risk of disastrous crisis. These are senseless acts except in that they are in the short-term interest of the masters of the economy and of the society. The financial corporations can and did make tremendous short term profits from pursuing extremely risky actions, including especially deregulation, which harm the general economy, but don’t harm them, at least in the short term that guides planning.
The system we live in should be called state capitalism, not just capitalism. So, take the United States. The economy relies very heavily on the state sector. There is a lot of agony now about socialization of the economy, but that is a bad joke. The advanced economy, high technology and so forth, has always relied extensively on the dynamic state sector of the economy. That’s true of computers, the internet, aircraft, biotechnology, just about everywhere you look. MIT, where I am speaking to you, is a kind of funnel into which the public pours money and out of it comes the technology of the future which will be handed over to private power for profit. So what you have is a system of socialization of cost and risk and privatization of profit. And that’s not just in the financial system. It is the whole advanced economy.
So, for the financial system it will probably turn out pretty much as Stiglitz describes. It is the end of a certain era of financial liberalization driven by market fundamentalism. The Wall Street Journal laments that Wall Street as we have known it is gone with the collapse of the investment banks. And there will be some steps toward regulation. So that’s true. But the proposals that are being made, which are major and severe, nonetheless do not change the structure of the underlying basic institutions. There is no threat to state capitalism. Its core institutions will remain basically unchanged and even unshaken. They may rearrange themselves in various ways with some conglomerates taking over others and some even being semi-nationalized in a weak sense, without infringing much on private monopolization of decision making. Still, as things stand now, property relations and the distribution of power and wealth won’t alter much though the era of neoliberalism operative for roughly thirty five years will surely be modified in a significant fashion.
There is a tremendous amount of mythology to be dismantled here, including the talk about the great growth and escape from poverty which, as I said earlier, isn’t false, but is missing the fact that it took place overwhelmingly in areas that ignored the neoliberal rules, while the areas that kept to the rules are the ones that suffered. The same holds in the U.S. To the extent that the neoliberal rules were applied, it was quite harmful to the majority of the population. So to talk about these matters, we first have to sweep away a lot of mythology and then, when we look, we see that a state capitalist economy that has, particularly since the Second World War, relied very heavily on the state sector, is now returning to reliance on the state sector to manage the collapsing financial system, its collapse being the predictable result of financial liberalization. The underlying institutional structure itself is being modified, but not in fundamental ways.
But if you look at the U.S., even with all the damage Bush has done, it is still the biggest homogeneous economy, with the largest internal market, the strongest and technologically most advanced military force, with annual expenses comparable to the rest of the world combined, and an archipelago of military bases throughout the world. These are sources of continuity even though the neoliberal order is eroding both within the U.S. and Europe and internationally, as there is more and more opposition to it. So there are opportunities for real change, but how far they will go depends on people, what we are willing to undertake.
The simultaneous unfolding of the US presidential campaign and unraveling of the financial markets presents one of those occasions where the political and economic systems starkly reveal their nature.
The immediate origins of the current meltdown lie in the collapse of the housing bubble supervised by Federal Reserve chairman Alan Greenspan, which sustained the struggling economy through the Bush years by debt-based consumer spending along with borrowing from abroad. But the roots are deeper. In part they lie in the triumph of financial liberalisation in the past 30 years – that is, freeing the markets as much as possible from government regulation.
Also predictably, the narrow sectors that reaped enormous profits from liberalisation are calling for massive state intervention to rescue collapsing financial institutions.
Such interventionism is a regular feature of state capitalism, though the scale today is unusual. A study by international economists Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20 companies in the Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments “socialise their losses,” as in today’s taxpayer-financed bailout. Such government intervention “has been the rule rather than the exception over the past two centuries”, they conclude.
The financial market “underprices risk” and is “systematically inefficient”, as economists John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalisation and reviewing the substantial costs already incurred – and proposing solutions, which have been ignored. One factor is failure to calculate the costs to those who do not participate in transactions. These “externalities” can be huge. Ignoring systemic risk leads to more risk-taking than would take place in an efficient economy, even by the narrowest measures.
The task of financial institutions is to take risks and, if well-managed, to ensure that potential losses to themselves will be covered. The emphasis is on “to themselves”. Under state capitalist rules, it is not their business to consider the cost to others – the “externalities” of decent survival – if their practices lead to financial crisis, as they regularly do.
Financial liberalization has effects well beyond the economy. It has long been understood that it is a powerful weapon against democracy. Free capital movement creates what some have called a “virtual parliament” of investors and lenders, who closely monitor government programs and “vote” against them if they are considered irrational: for the benefit of people, rather than concentrated private power.
Investors and lenders can “vote” by capital flight, attacks on currencies and other devices offered by financial liberalization. That is one reason why the Bretton Woods system established by the United States and Britain after the second World War instituted capital controls and regulated currencies.
John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement.
In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the US treasury now regards free capital mobility as a “fundamental right”, unlike such alleged “rights” as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as “letters to Santa Claus”, “preposterous”, mere “myths”.
The cost of the global rescue package is, as the frontpage of today’s Telegraph screams, over £2 trillion. Britain has pledged £500 billion to bail out its banks, the EU states have committed £1.16 trillion and America has invested £457 billion in an effort which, commentators are finally beginning to remark upon, will undoubtedly have huge ramifications for political debates on taxation and social spending. Presumably this is equally true of defence spending though there will inevitably be more resistance to this and in an increasingly mutlipolar world the geopolitical ramifications will take a generation to fully play themselves out. If this rescue plan does nothing more than restore neoliberalism for business as usual then a truly grievous crime has been committed here.
There’s an interesting article on the Economist website discussing the ambiguities in the French response to the crisis.
There is nonetheless a common thread in European responses to America’s troubles. It goes like this. We always knew that unbridled free markets were a mistake, yet we were derided for saying this; and now we are all paying the price for your excesses. In the face of popular consternation at capitalist decadence, the activist state is newly in fashion—and Europeans are taking the credit for it.
Yet there are doubts whether this will really alter any country’s policies. A good test is France. Judging by his recent declarations, the centre-right MrSarkozy has taken a decidedly leftward turn. In the space of two days, he twice laid into free-market capitalism. “Laissez-faire is finished,” he declared in Toulon. “The all-powerful market that is always right is finished.”
But does this imply a genuine shift of economic policy? In the past Mr Sarkozy has been labelled l’Américain, but in truth Sarkonomics has always defied classification. In industrial policy, he has a long record of supporting state bail-outs. As finance minister in 2004, he fought off European Commission disapproval to use state money to rescue Alstom, an engineering firm. In campaign speeches in 2007, he declared that “free trade cannot be a dogma” and called for financial capitalism to be “moralised”.
Yet Mr Sarkozy has also gone out of his way to press on the French the need to respond to, not deny, globalisation. He has implored the country that invented the 35-hour week to work more, take more initiative and expect fewer hand-outs from the state. He has exempted overtime work from taxes and social charges. He is tightening welfare rules to cut benefits if the jobless refuse more than two reasonable offers of work. He has strengthened the competition watchdog, and made it easier for discount retailers to set up shop. MrSarkozy was elected because French voters knew, however reluctantly, that they had to adapt to global capitalism.
It underscores the risk that the political elites who’ve presided over this mess will capitalize on the anti-finance sentiment that’s been building over the last month with shallow performances rather than substantive policy shifts. It seems the long-term political outcomes of the crisis depend a lot on whether the depoliticization of economic policy we’ve seen in the capitalist world over the last two decades gives to a renewed normative treatment of economic issues. This is why it’s important to resist any attempt to portray the issue as a merely technical one, that it’s simply a flaw in the regulatory architecture of global financial markets rather than a problem in the rather opaque normative assumptions underlying it. I’m just about to listen to this week’s moral maze which (according to the advert) covers the moralization of the crisis: the emerging moral narrative of greed and self-interest inevitably leading to breakdown and anomie. Given I start my PHD on Monday, on moral understanding and socio-economic life, I’m finding this all rather interesting.
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
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.
The breathtaking rises in the price of bank shares this morning are symptomatic of a stock market that is bereft of reason and is being driven almost purely by hysteria and momentum.
They are surging in part because of the FSA’s crackdown on short-sellers but mostly because of the overnight news that the US Treasury Secretary, Hank Paulson, and the Chairman of the Federal Reserve, Ben Bernanke, are preparing a bold – or possibly impetuous – plan to tackle what can now be classified as the most severe and intractable malfunction of the banking system since the late 1920’s.
As I put it on the Ten O’Clock News last night, yesterday’s co-ordinated intervention by central banks, led by the US Federal Reserve, to pump an additional $180bn of short-term loans into the banking system treats only a symptom, not the cause, of banks’ reluctance to lend to each other and to us.
It’s a stopgap, while Paulson prepares to absolve many of the world’s biggest banks of their idiocy during the boom years, by nationalising their bad debts.
To understand the pros and cons of what’s being considered by Paulson, it’s worth reminding ourselves of what created the latest terrifying phase of the credit crunch.
The ultimate cause is the chronic downturn in the US housing market. The proximate causes are the rotten loans to US homeowners sitting on banks’ and other financial institutions’ balance sheets that has mullered their capacity to make new loans.
The recent trigger has been the crises at Lehman, AIG, Fannie Mae and so on, which have created a climate of fear, in which bankers and managers of money appear to believe that almost any bank could collapse.
One important new stress has been a significant withdrawal of investors’ cash from US money-market funds, because of the perception that the funds aren’t as safe as was widely thought – which has in turn deprived banks of an important source of wholesale deposits (this sudden rise in the perceived riskiness of these funds was sparked by the announcement of a loss at the Reserve Primary Fund).
The drying-up of liquidity from money-market funds is in part what drove HBOS to acknowledge that the game was up, and that a rescue takeover by Lloyds TSB was the best form of protection for its savers and shareholders.
To reiterate, the big point is that Paulson is working with Congress on a package of measures that – he hopes – will attack the roots of the crisis.
It would involve buying many hundreds of billions of the banks’ bad loans to overstretched US homeowners.
And it would also attempt to re-establish confidence in money-market funds by insuring them, in the way that retail bank deposits are insured against loss.
This would be the mother of all bailouts. It would certainly involve the deployment of hundreds of billions of US taxpayers’ money, possibly more than a trillion dollars.
And it comes on top of the $300bn commitment of public money already made by Paulson to the rescue of Fannie, Freddie and AIG.
It all represents a massive humiliation for Wall Street, the giant US financial services industry and bankers supposed to be the canniest on the planet.
Paulson, himself, was one of their ilk, as the former boss of Goldman Sachs.
There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
The American way of capitalism doesn’t seem all that brilliant right now.
In that sense, a degree of moral authority – as well as financial clout – will shift east.
It’ll also damage the robustness of the US public finances.
Possibly the biggest risk for the US is that in bailing out the finances of the private sector, Paulson would dent international investors’ confidence in the American government’s balance sheet – which could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities.
Maybe the US is still big enough and powerful enough to persuade the rest of the world to pay for the mistakes of its financial sector – which is broadly what’s being proposed.
But, as I mentioned here yesterday, surely it would be more rational for the Chinese to own the American financial system itself, rather than lend to the US Government (and in that context, it’s resonant that Morgan Stanley may well be close to selling almost half of itself to CIC, China’s state investment fund).
In this game of Wall Street Monopoly, there’s no “get-out-of-jail-free” card.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/
The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures – yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.
As Joseph Stiglitz argues in the Guardian today, the current crisis has forced a reluctant confrontation between the American state and the grossly hypocritical attitude towards regulation that’s been campaigned for, with growing vigour and shrill indignation (“how dare you regulate us? we are the wealth creators!”) by the financial services sector within the Anglo-American sphere of influence since, in the UK, the big bang deregulation of financial markets, which Thatcher promised would ensure Britain’s future in a changing world (though of course this ‘new world’ and its harsh realities were, at least in part, a function of the deregulation itself). For obvious reasons - namely that it’s a very difficult case to make with a straight face – the political and economic elites campaigning for regulatory regimes friendly to the financial services sector have tended to shy away from offering moral defences of the self-serving hypocritical nonsense described by Stiglitz. Instead a utilitarian appeal is made to the systemic risk of these major players failing. As Stiglitz describes,
But ever since the credit crunch set in last year, the US Treasury and the UK government have bailed out banks that ran into trouble
They feared that if Fannie Mae, Freddie Mac, Bear Stearns and Northern Rock had been allowed to collapse, the havoc wreaked on global markets and economies would have seen excessive pain inflicted on too many innocent people.
Yet the very fact of offering these bailouts serves to underwrite (and thus perpetuate) the insufficiently risk-adverse corporate practices that (basically) underlie the current crisis. This very concrete systemic failure has its corollary in a deep ideological inconsistency: neoliberalism bemoans moral hazard and yet its insistence that the state must act, on the final instance, to underwrite the stability of financial markets is a particularly destructive example of it. As Seth Freedman observes, “Once upon a time, stockmarkets were there to provide companies with a means to raise capital from investors; today’s financial world is a vastly different beast”. The nature of the transformation, so long obscured behind fuzzy ideological fault lines of capitalism/socialism in the post-USSR unipolar world that’s now drawing to a close, seems to be belatedly subject to elite scrutiny.
Unfortunately this didn’t extend to imposing conditionality on the bail-outs that have happened. If failing banks and other financial institutions want to invoke the public good, so long decried by their ideological warriors as a dangerous fiction, in order to justify the bail outs then let them but (crucially) treat the claim reciprocally. When they fail, as they inevitably do, the notion of “individual responsibility” (key to the neoliberal vision of market democracies) is so readily abandoned. Yet it’s done so in a one-sided way: public underwriting is sought for risk but future gains in calmer times will be held to be purely private. As Frank Turner puts it,
And it seems a little bit rich to me,
The way the rich only ever talk of charity
In times like the seventies, the broken down economy
Meant even the upper tier was needing some help.
But as soon as things look brighter,
Yeah the grin gets wider and the grip gets tighter,
And for every teenage tracksuit mugger
There’s a guy in a suit who wouldn’t lift a finger for anybody else.
Can we really let them continue to do this? The management of the economy is not a technical problem, no matter how deeply the relevant technocrats believe it or how repetitively they assert it. This depoliticisation of the economy (insulating policy from politics by moving state regulatory functions upwards to institutional institutions and sideways to non-elected and non-accountable bodies like national banks) has obscured the deeply normative considerations that are inherent in all macroeconomic planning and has simply removed any substantive possibility of public scrutiny or democratic control over the culturally homogeneous financial elites who run both the regulatory institutions and the corporations that profit from their lax regimes. To argue that this is an unjust and dangerous state of affairs is not necessarily a left-wing or anti-capitalist position (witness the critiques of Clinton insiders like Robert Reich and Joseph Stiglitz). It’s just common sense, presuming that in future we want to avoid precisely the sort of crisis that now seems to be facing us for some time.
