The Current Crisis: A Socialist Perspective
Leo Panitch and Sam Gindin (from The Bullet, bulletin of the Socialist Project)
'They say they won't intervene. But they will.' This is how Robert Rubin,
Bill Clinton's Treasury Secretary, responded to Paul O'Neill, the first
Treasury Secretary under George W. Bush, who openly criticized his
predecessor' s interventions in the face of what Rubin called 'the messy
reality of global financial crises'.
The current dramatic conjuncture of
financial crisis and state
intervention has proven Rubin more correct than
he could have imagined.
But it also demonstrates why those, whether from
the right or the left,
who have only understood the era of neoliberalism
ideologically – i.e. in
terms of a hegemonic ideological determination to
free markets rom states
– have had such a weak handle on discerning what
really has been going
on over the past quarter century. Clinging to this
type of understanding
will also get in the way of the thinking necessary to
advance a socialist
strategy in the wake of this crisis.
Markets, States and American Empire
The fundamental relationship between capitalist states and financial
markets cannot be understood in terms of how much or little regulation the
former puts upon the latter. It needs to be understood in terms of the
guarantee the state provides to property, above all in the form of the
promise not to default on its bonds - which are themselves the foundation
of financial markets' role in capital accumulation. But not all states are
equally able, or trusted as willing (especially since the Russian
Revolution), to honour this guarantee. The American state emerged in the
20th century as an entirely new kind of imperial state precisely because it
took utmost responsibility for honouring this guarantee itself, while
promoting a world order of independent nation states which the new empire
would expect to behave as capitalist states. Since World War Two, the
American state has been not just the dominant state in the capitalist world
but the state responsible for overseeing the expansion of capitalism to its
current global dimensions and for organizing the management of its economic
contradictions. It has done this not through the displacement but through
the penetration and integration of other states. This included their
internationalizatio n in the sense of their cooperation in taking
responsibility for global accumulation within their borders and their
cooperation in setting the international rules for trade and investment.
It was the credibility of the American state's guarantee to property which
ensured that, even amidst the Great Depression and business hostility to
the New Deal's union and welfare reforms, private funds were readily
available as loans to all the new public agencies created in that era. This
was also why whatever liquid foreign funds that could escape the capital
controls of other states in that decade made their way to New York , and so
much of the world's gold filled the vaults of Fort Knox . And it is this
which helps explain why it fell to the American state to take
responsibility for making international capitalism viable again after 1945,
with the fixed exchange rate for its dollar established at Bretton Woods
providing the sole global currency intermediary for gold. When it proved by
the 1960s that those who held US dollar would have to suffer a devaluation
of their funds through inflation, the fiction of a continuing gold standard
was abandoned. The world's financial system was now explicitly based on the
dollar as American-made 'fiat money', backed by an iron clad guarantee
against default of US Treasury bonds which were now treated as 'good as
gold'. Today's global financial order has been founded on this; and this is
why US Treasury bonds are the fundamental basis from which calculations of
value of all forms of financial instruments begin.
To be sure, the end of fixed exchange rates and a dollar nominally tied to
gold now meant that it had to be accepted internationally that the returns
to those who held US assets would reflect the fluctuating value of US
dollars in currency markets. But the commitment by the Federal Reserve and
Treasury to an anti-inflation priority via the founding act of
neoliberalism -- the 'Volcker shock 'of 1979 -- assuaged that problem.
(This 'defining-moment' of US-state intervention, like the current one,
came in the run-up to a presidential election -- i.e. before Reagan's
election, and with bipartisan support and the support of industrial and
well as financial capital in the US and abroad.) As the American state took
the lead, by its example and its pressure on other states around the world,
to give priority to low inflation as a much stronger and ongoing commitment
than before, this bolstered finance capital's confidence in the substantive
value of lending; and after the initial astronomical interest rates
produced by the Volcker shock, this soon made an era of low interest rates
possible. Throughout the neoliberal era, the enormous demand for US bonds
and the low interest paid on them has rested on this foundation. This was
reinforced by the defeat of American trade unionism; by the intense
competition in financial markets domestically and internationally; by
financial capital's pressures on firms to lower costs through restructuring
if they are to justify more capital investment; by the reallocation of
capital across sectors and especially the provision of venture capital to
support new technologies in new leading sectors of capital accumulation;
and by the 'Americanization of finance' in other states and the consequent
access this provided the American state to global savings.
Deregulation was more a consequence than the main cause of the intense
competition in financial markets and its attendant effects. By 1990, this
competition had already led to banks scheming to escape the reserve
requirements of the Basel bank regulations by creating 'Structured
Investment Vehicles' to hold these and other risky derivative assets. It
also led to the increased blurring of the lines between commercial and
investment banking, insurance and real estate in the FIRE sector of the US
economy. Competition in the financial sector fostered all kinds of
innovations in financial instruments which allowed for high leveraging of
the funds that could be accessed via low interest rates. This meant that
there was an explosion in the effective money supply (this was highly
ironic in terms of the monetarist theories that are usually thought to have
founded neoliberalism) . The competition to purchase assets with these funds
replaced price inflation with the asset inflation that characterized the
whole era. This was reinforced by the American state's readiness to throw
further liquidity into the financial system whenever a specific asset
bubble burst (while imposing austerity on economies in the South as the
condition for the liquidity the IMF and World Bank provided to their
financial markets at moments of crisis). All this was central to the uneven
and often chaotic making of global capitalism over the past quarter
century, to the crises that have punctuated it, and to the active role of
the US state in containing them.
Meanwhile, the world beat a path to US financial markets not only because
of the demand for Treasury bills, and not only because of Wall Street's
linkages to US capital more generally, but also because of the depth and
breadth of its financial markets -- which had much to do with US financial
capital's relation to the popular classes. The American Dream has always
materially entailed promoting their integration into the circuits of
financial capital, whether as independent commodity farmers, as workers
whose paychecks were deposited with banks and whose pension savings were
invested in the stock market, as consumers reliant on credit, and not least
as heavily mortgaged home owners. It is the form that this incorporation of
the mass of the American population took in the neoliberal context of
competition, inequality and capital mobility, much more than the degree of
supposed 'deregulation' of financial markets, that helps explain the
dynamism and longevity of the finance-led neoliberal era. But it also
helped trigger the current crisis -- and the massive state intervention in
response to it.
From 'Great Society' to sub-prime mortgages
The scale of the current crisis, which significantly has its roots in
housing finance, cannot be understood apart from how the defeat of American
trade unionism played out by the first years of the 21st century.
Constrained in what they could get from their labour for two decades,
workers were drawn into the logic of asset inflation in the age of
neoliberal finance not only via the institutional investment of their
pensions, but also via the one major asset they held in their own hands (or
could aspire to hold) -- their family home. It is significant that this
went so far as the attempted integration via financial markets of poor
African-American communities, so long the Achilles heel of working class
integration into the American Dream. The roots of the sub-prime mortgage
crisis, triggering the collapse of the mountain of repackaged and resold
securitized derivative assets to hedge the risk involved in lending to poor
people, lay in the way the anti-inflation commitment had since the 1970s
ruled out the massive public expenditures that would have been required to
even begin to address the crisis of inadequate housing in US cities.
As the 'Great Society' public expenditure programs of the 1960s ran up
against the need to redeem the imperial state's anti-inflationary
commitments, financial market became the mechanism for doing this. In 1977,
the government sponsored mortgage companies, Freddie Mac and Fannie Mae
(the New Deal public housing corporation privatized by Lyndon Johnson in
1968 before the word neoliberalism was invented), were required by the
Community Reinvestment Act to sustain home loans by banks in poor
communities. This effectively initiated that portion of the open market in
mortgage-backed securities that was directed towards securing private
financing for housing for low income families. From modest beginnings this
only really took off with the inflation of residential real estate values
after the recession of the early 1990s and the Clinton Administration' s
embrace of neoliberalism leading to its reinforcement of a reliance on
financial markets rather than public expenditures as the primary means of
integrating working class, Black and Hispanic communities. The Bush
Republicans' determination to open up competition to sell and trade
mortgages and mortgage-backed securities to all comers was in turn
reinforced by the Greenspan Fed's dramatic lowering of real interest to
almost zero in response to the bursting of the dot.com bubble and to 9/11.
But this was a policy that was only sustainable via the flow of global
savings to the US , not least to the apparent Treasury-plated safety of
Fannie Mae and Freddie Mac securities as government sponsored enterprises.
It was this long chain of events that led to the massive funding of
mortgages, the hedging and default derivatives based on this, the rating
agencies AAA rating of them, and their spread onto the books of many
foreign institutions. This included the world's biggest insurance company,
AIG, and the great New York investment banks, whose own traditional
business of corporate and government finance around the globe was now
itself heavily mortgaged to the mortgages that had been sold in poor
communities in the US and then resold many times over. The global
attraction and strength of American finance was seen to be rooted in its
depth and breadth at home, and this meant that when the crisis hit in the
sub-prime security market at the heart of the empire, it immediately had
implications for the banking systems of many other countries. The scale of
the American government's intervention has certainly been a function of the
consequent unraveling of the crisis throughout its integrated domestic
financial system. Yet it is also important to understand this in terms of
its imperial responsibilities as the state of global capital.
This is why it fell to the Fed to repeatedly pump billions of dollars via
foreign central banks into inter-bank markets abroad, where banks balance
their books through the overnight borrowing of dollars from other banks.
And an important factor in the nationalizations of Fannie Mae and Freddie
Mac was the need to redeem the expectations of foreign investors (including
the Japanese and Chinese central banks) that the US government would never
default on its debt obligations. It is for this reason that even those
foreign leaders who have opportunistically pronounced the end of American
'financial superpower status' have credited the US Treasury for 'acting not
just in the US interests but also in the interests of other nations.' The
US was not being altruistic in doing this, since not to do it would have
risked a run on the dollar. But this is precisely the point. The American
state cannot act in the interests of American capitalism without also
reflecting the logic of American capitalism's integration with global
capitalism both economically and politically. This is why it is always
misleading to portray the American state as merely representing its
'national interest' while ignoring the structural role it plays in the
making and reproduction of global capitalism.
A century of crises
It might be thought that the exposure of the state's role in today's
financial crisis would once and for all rid people of the illusion that
capitalists don't want their states involved in their markets, or that
capitalist states could ever be neutral and benign regulators in the public
interest of markets. Unfortunately, the widespread call today for the
American state to 'go back' to playing the role of such a regulator reveals
that this illusion remains deeply engrained, and obscures an understanding
of both the past and present history of the relationship between the state
and finance in the US .
In October 1907, near the beginning of the 'American Century', and exactly
a hundred years before the onset of the current financial crisis, the US
experienced a financial crisis that for anyone living through it would have
seemed as great as today's. Indeed, there were far more suicides in that
crisis than in the current one, as 'Wall Street spent a cliff-hanging year'
which spanned a stock market crash, an 11 per cent decline in GDP, and
accelerating runs on the banks. At the core of the crisis was the practice
of trust companies to draw money from banks at exorbitant interest rates
and, without the protection of sufficient cash reserves, lend out so much
of it against stock and bond speculation that almost half of the bank loans
in New York had questionable securities as their only collateral. When the
trust companies were forced to call in some of their loans to stock market
speculators, even interest rates which zoomed to well over 100 per cent on
margin loans could not attract funds. European investors started
withdrawing funds from the US .
Whereas European central banking had its roots in 'haute finance' far
removed from the popular classes, US small farmers' dependence on credit
had made them hostile to a central bank that they recognized would serve
bankers' interests. In the absence of a central bank, both the US Treasury
and Wall Street relied on JP Morgan to organize the bailout of 1907. As
Henry Paulson did with Lehman's a century later, Morgan let the giant
Knickerbocker Trust go under in spite of its holding $50 million of
deposits for 17,000 depositors ('I've got to stop somewhere', Morgan said).
This only fuelled the panic and triggered runs on other financial firms
including the Trust Company of America (leading Morgan to pronounce that
'this is the place to stop the trouble'). Using $25 million put at his
disposal by the Treasury, and calling together Wall Street's bank
presidents to demand they put up another $25 million 'within ten or twelve
minutes' (which they did), Morgan dispensed the liquidity that began to
calm the markets.
When the Federal Reserve was finally established in 1913, this was seen as
Wilson 's great Progressive victory over the unaccountable big financiers.
(As Chernow's monumental biography of Morgan put it, 'From the ashes of
1907 arose the Federal Reserve System: everyone saw that thrilling rescues
by corpulent old tycoons were a tenuous prop for the banking system.' ) Yet
the main elements of the Federal Reserve Bill had already been drafted by
the Morgan and Rockefeller interests during the previous Taft
administration; and although the Fed's corporatist and decentralized
structure of regional federal reserve boards reflected the compromise the
final Act made with populist pressures, its immediate effect was actually
to cement the 'fusion of financial and government power.' This was so both
in the sense of the Fed's remit as the 'banker's bank' (that is, a largely
passive regulator of bank credit and a lender of last resort) and also by
virtue of the close ties between the Federal Reserve Bank of New York and
the House of Morgan. William McAdoo, Wilson 's Treasury Secretary, saw the
Federal Reserve Act's provisions allowing US banks to establish foreign
branches in terms of laying the basis for the US 'to become the dominant
financial power of the world and to extend our trade to every part of the
world'.
In fact, in its early decades, the Fed actually was 'a loose and
inexperienced body with minimal effectiveness even in its domestic
functions.' This was an important factor in the crash of 1929 and in the
Fed's perverse role in contributing to the Great Depression. It was class
pressures from below that produced FDR's union and welfare reforms. But
the New Deal is misunderstood if it is simply seen in terms of a dichotomy
of purpose and function between state and capitalist actors. The strongest
evidence of this was in the area of financial regulation, which established
a corporatist 'network of public and semi-public bodies, individual firms
and professional groups' that existed in a symbiotic relationship with one
another distanced from democratic pressures. While the Morgan empire was
brought low by an alliance of new financial competitors and the state, the
New Deal's financial reforms, which were introduced before the union and
welfare ones, protected the banks as a whole from hostile popular
sentiments. They restrained competition and excesses of speculation not so
much by curbing the power of finance but rather through the fortification
of key financial institutions, especially the New York investment banks
that were to grow ever more powerful through the remainder of the century.
Despite the hostility of capitalists to FDR's union and welfare reforms, by
the time World War Two began, the New Dealers had struck what they
themselves called their 'grand truce' with business. And even though the
Treasury's Keynesian economists took the lead in rewriting the rules of
international finance during World War Two (producing no little tension
with Wall Street), a resilient US financial capital was not external to the
constitution of the Bretton Woods order: it was embedded within it and
determined its particular character.
In the postwar period, the New Deal regulatory structure acted an incubator
for financial capital's growth and development. The strong position of Wall
Street was institutionally crystallized via the 1951 Accord reached between
the Federal Reserve and the Treasury. Whereas during the War the Fed 'had
run the market for government securities with an iron fist' in terms of
controlling bond prices that were set by the Treasury, the Fed now took up
the position long advocated by University of Chicago economists and set to
work successfully organizing Wall Street's bond dealers into a
self-governing association that would ensure they had 'sufficient depth and
breadth' to make 'a free market in government securities', and thus allow
market forces to determine bond prices. The Fed's Open Market Committee
would then only intervene by 'leaning against the wind' to correct 'a
disorderly situation' through its buying and selling Treasury bills.
Lingering concerns that Keynesian commitments to the priority of full
employment and fiscal deficits might prevail in the Treasury were thus
allayed: the Accord was designed to ensure that 'forces seen as more
radical' within any administration would find it difficult, at least
without creating a crisis, to implement inflationary monetary policies.
Profits in the financial sector were already growing faster than in
industry in the 1950s. By the early 1960s, the securitization of commercial
banking (selling saving certificates rather than relying on deposits) and
the enormous expansion of investment banking (including Morgan Stanley's
creation of the first viable computer model for analyzing financial risk)
were already in train. With the development of the unregulated Euromarket
in dollars and the international expansion of US MNCs, the playing field
for American finance was far larger than New Deal regulations could
contain. Both domestically and internationally, the baby had outgrown the
incubator, which was in any case being buffeted by inflationary pressures
stemming from union militancy and public expenditures on the Great Society
programs and the Vietnam War. The bank crisis of 1966, the complaints by
pension funds that fixed brokerage fees discriminated against workers'
savings, the series of scandals that beset Wall Street, all foretold the
end of the corporatist structure of brokers, investment banks and corporate
managers that had dominated domestic capital markets since the New Deal,
culminating in Wall Street's 'Big Bang' of 1975. Meanwhile, the collapse of
the Bretton Woods fixed exchange rate system, due to inflationary pressures
on the dollar as well as the massive growth in international trade and
investment, laid the foundation for the derivatives revolution by leading
to a massive demand for hedging risk by trading futures and options in
exchange and interest rates. The newly created Commodity Futures Trading
Commission was quickly created less to regulate this new market than to
facilitate its development. It was not so much neoliberal ideology that
broke the old system of financial regulations as it was the contradictions
that had emerged within that system.
If there was going to be any serious alternative to giving financial
capital its head by the 1970s, this would have required going well beyond
the old regulations and capital controls, and introducing qualitatively new
policies to undermine the social power of finance. This was recognized by
those pushing for the more radical aspects of the 1977 Community
Reinvestment Act, and who could have never foretold where the compromises
struck with the banks to secure their loans would lead. Where the socialist
politics were stronger, the nationalization of the financial system was
being forcefully advanced as a demand by the mid 1970s. The left of the
British Labour Party were able to secure the passage of a conference
resolution to nationalize the big banks and insurance companies in the City
of London , albeit with no effect on a Labour Government that embraced one
of the IMF's first structural adjustment programs. In France , the Programme
Commun of the late 1970s led to the Mitterand Government's bank
nationalizations, but this was carried through in a way that ensured that
the structure and function of the banks were not changed in the process. In
Canada , the directly elected local planning boards we proposed, which would
draw on the surplus from a nationalized financial system to create jobs,
were seen as the first step in a new strategy to get labour movements to
think in ways that were not so cramped and defensive. Such alternatives --
strongly opposed by social democratic politicians who soon accommodated
themselves to the dynamics of finance-led neoliberalism and the ideology of
efficient free markets -- were soon forgotten amidst the general defeat of
labour movements and socialist politics that characterized the new era.
Financial capitalists took the lead as a social force in demanding the
defeat of those domestic social forces they blamed for creating the
inflationary pressures which undermined the value of their assets. The
further growth of financial markets, increasingly characterized by
competition, innovation and flexibility, was central to the resolution of
the crisis of the 1970s. Perhaps the most important aspect of the new age
of finance was the central role it played in disciplining and integrating
labour. The industrial and political pressures from below that
characterized the crisis of the 1970s could not have been countered and
defeated without the discipline that a financial order built upon the
mobility of capital placed upon firms. 'Shareholder value' was in many
respects a euphemism for how the discipline imposed by the competition for
global investment funds was transferred to the high wage proletariat of the
advanced capitalist countries. New York and London 's access to global
savings simultaneously came to depend on the surplus extracted through the
high rates of exploitation of the new working classes in 'emerging
markets'. At the same time, the very constraints that the mobility of
capital had on working class incomes in the rich countries had the effect
of further integrating these workers into the realm of finance. This was
most obvious in terms of their increasing debt loads amidst the
universalization of the credit card. But it also pertained to how workers
grew more attuned to financial markets, as they followed the stock
exchanges and mutual funds that their pension funds were invested in, often
cheered by rising stocks as firms were restructured without much thought to
the layoffs involved in this.
Both the explosion of finance and the disciplining of labour were a
necessary condition for the dramatic productive transformations that took
place in the 'real economy' in this era. The leading role that finance came
to play over the past quarter century, including the financialization of
industrial corporations and the greatest growth in profits taking place in
the financial sector, has often been viewed as undermining production and
representing little else than speculation and a source of unsustainable
bubbles. But this fails to account for why this era -- a period that was
longer than the 'golden age' -- lasted so long. It also ignores the fact
that this has been a period of remarkable capitalist dynamism, involving
the deepening and expansion of capital, capitalist social relations and
capitalist culture in general, including significant technological
revolutions. This was especially the case for the US itself, where
financial competition, innovation, flexibility and volatility accompanied
the reconstitution of the American material base at home and its expansion
abroad. Overall, the era of finance-led neoliberalism experienced a rate of
growth of global GDP that compares favourably with most earlier periods
over the last two centuries.
It is, in any case, impossible to imagine the globalization of production
without the type of financial intermediation in the circuits of capital
that provides the means for hedging the kinds of risks associated with
flexible exchange rates, interest rates variations across borders,
uncertain transportation and commodity costs, etc. Moreover, as competition
to access more mobile finance intensified, this imposed discipline on firms
(and states) which forced restructuring within firms and reallocated
capital across sectors, including via the provision of venture capital to
the new information and bio-medical sectors which have become leading
arenas of accumulation. At the same time, the very investment banks which
have now been undone in the current crisis spread their tentacles abroad
for three decades through their global role in M&A and IPO activity, during
the course of which relationships between finance and production, including
their legal and accounting frameworks, were radically changed around the
world in ways that increasingly resembled American patterns. This was
reinforced by the bilateral and multilateral international trade and
investment treaties which were increasingly concerned with opening other
societies up to New York 's and London 's financial, legal and accounting
services.
The American state in crisis
The era of neoliberalism has been one long history of financial volatility
with the American state leading the world's states in intervening in a
series of financial crises. Almost as soon as he was appointed to succeed
Volcker as head of the Fed, Greenspan immediately dropped buckets of
liquidity on Wall Street in response to the 1987 stock market crash. In
the wake of the Savings and Loan crisis, the public Resolution Trust
Corporation was established to buy up bad real estate debt (this is the
model being used for today's bail-out). In Clinton 's first term Wall Street
was saved from the consequences of bond defaults during the Mexican
financial crisis in 1995 by Rubin's use of the Stabilization Exchange Fund
(this Treasury kitty, established during the New Deal, has once again been
called into service in today's crisis). During the Asian crisis two years
later, Rubin and his Under-Secretary Summers flew to Seoul to dictate the
terms of the IMF loan. And in 1998 (not long after the Japanese government
nationalized one of the world's biggest banks), the head of the New York
Federal Reserve summoned the CEO's of Wall Street's leading financial firms
and told them they would not be allowed to leave the room (reminiscent of
Morgan in 1907) until they agreed to take over the insolvent hedge fund,
Long-Term Capital Management. These quick interventions by the Fed and
Treasury, most of them without waiting upon Congressional pressures or
approval, showed they were aware of the disastrous consequences which the
failure to act quickly to contain each crisis could have on both the
domestic and global financial system.
When the current financial crisis broke out in the summer of 2007, the
newly appointed Chairman of the Fed, Ben Bernanke, could draw on his
academic work as an economist at Princeton University on how the 1929 crash
could have been prevented , and Treasury Secretary Henry Paulson could draw
on his own illustrious career (like Rubin's) as a senior executive at
Goldman Sachs. Both the Treasury and Federal Reserve staff worked closely
with the Securities Exchange Commission and Commodity Futures Trading
Commission under the rubric of the President's Working Group on Financial
Markets that had been set up in 1988, and known on Wall Street as the
'Plunge Protection Team'. Through the fall of 2007 and into 2008, the US
Treasury would organize, first, a consortium of international banks and
investment funds, and then an overlapping consortium of mortgage companies,
financial securitizers and investment funds, to try to get them to take
concrete measures to calm the markets. The Federal Reserve acted as the
world's central bank by repeatedly supplying other central banks with
dollars to provide liquidity to their banking systems, while doing the same
for Wall Street. In March 2008 the Treasury -- after guaranteeing to the
tune of $30 billion J.P Morgan Chase's takeover of Bear Stearns -- issued
its Blueprint for a Modernized Financial Regulatory Structure especially
designed to extend the Fed's oversight powers over investment banks.
Most serious analysts thought the worst was over, but by the summer of
2008, Fannie Mae and Freddie Mac, whose reserve requirements had been
lowered in the previous years to a quarter of that of the banks, were also
being undone by the crisis. And by September so were the great New York
investment banks. The problem they all faced was that there was no market
for a great proportion of the mortgage-backed assets on their books. When
the sub-prime mortgage phenomenon was reaching its peak in 2005 Greenspan
was claiming that 'where once more-marginal applicants would simply have
been denied credit, lenders are now able to quite efficiently judge the
risk posed by individual applicants and to price that risk appropriately. '
But financial capital's risk evaluation equations unraveled in the crisis
of 2007-8. And as they did, so did financial markets' ability to judge the
worth of financial institutions balance sheets. Banks became very reluctant
to give each other even the shortest term credits. Without such inter-bank
credit, any financial system will collapse. The unprecedented scale of
interventions in September 2008 can only be understood in this context.
They have involved pumping additional hundred of billions of dollars into
the world's inter-bank markets; the nationalizations of Fannie Mae, Freddie
Mac and AIG (the world largest insurance company); the seizure and fire
sale of Washington Mutual (to prevent the largest bank failure in US
history); a blanket guarantee on the $3.4 trillion in mutual funds
deposits; a ban on short-selling of financial stocks; and Paulson's $700
billion TARP ('troubled asset relief program') bailout to take on toxic
mortgage assets.
Amidst the transformation in the course of a week of New York 's investment
banks through a dramatic series of bankruptcies and takeovers, the Treasury
undertook to buy virtually all the illiquid assets on the balance sheets of
financial institutions in the US , including those of foreign owned firms.
We now know that Bernanke had warned Paulson a year before that this might
be necessary, and Paulson had agreed: "I knew he was right theoretically, "
he said. "But I also had, and we both did, some hope that, with all the
liquidity out there from investors, that after a certain decline that we
would reach a bottom." Yet the private market has no secure bottom without
the state. The Fed and Treasury needed to act not only as lender of last
resort, but also, by taking responsibility for buying and trying to sell
all those securities that couldn't find a value or market in the current
crisis, as market maker of last resort.
Is it over? This is the question on most people's minds today. But what
does this question mean? The way this question is posed, especially on the
left, usually conflates three distinct questions. First, is the Paulson
program going to end the crisis? Second, does this crisis, and both the
state and the popular reaction to it, spell the end of neoliberalism?
Third, are we witnessing the end of US hegemony?
There is no way of knowing how far this most severe financial crisis since
the Great Depression might still have to go. On the one hand, despite the
condition of the (no longer) 'Big Three' in the US auto sector, the overall
health of US non-financial corporations going into the crisis - as seen in
their relatively strong profits, cash flow and low debt -- has been an
important stabilizing factor, not least in limiting the fall in the stock
market. The growth of US exports at close to double-digit levels annually
over the past five years reflects not only the decline in the dollar but
the capacity of American corporations to take advantage of this. That said,
the seizing up of inter-bank and commercial paper markets even after
Paulson's program was announced leaves big questions about whether it will
work. And even if it does, unwinding such a deep financial and housing
crisis is going to take a long time. As of now, foreclosures are still
rising, housing starts and house prices are still falling, and the
financial markets have not yet calmed. Moreover, it is has been clear for
over a year that the US economy will fall into -- or already is in -- a
recession.
The immediate problem in this respect is where consumer demand will come
from. Credit is obviously going to be harder to obtain, especially for low
income groups, and with the end of housing price inflation closing off the
possibility of secondary mortgages, and especially reinforcing concerns
about retirement alongside the devaluation of pension assets and even
company cutbacks of benefits, most workers will be not only less able to
spend, but also inclined to try to save rather than spend. To the extent
that a great deal of US consumption in the neoliberal era was also spurred
on by the enormous appetites of the rich, this is obviously also going to
now be restrained. Fiscal stimulus programs are unlikely to be enough to
compensate for this, especially given the nervousness over the impact of
the bailouts on the fiscal deficit, the size of the US public debt and the
value of dollar, and hence over whether low interest rates can be
maintained. To the extent that global growth through the neoliberal era was
dependent on credit-based mass consumption in the US , the impact of this
being cut back will have global implications, including on US exports. This
is why the current recession is likely to be deeper and longer than the
last significant one in the early 1990s, and maybe even than the severe
recession with which neoliberalism was launched in the early 1980s.
Yet when it comes to the question of whether this crisis spells the end of
neoliberalism, it is more important than ever to distinguish between the
understanding of neoliberalism as an ideologically- driven strategy to free
markets from states on the one hand, and on the other a materially-driven
form of social rule which has involved the liberalization of markets
through state intervention and management. While it will now be hard
politicians and even economists to uncritically defend free markets and
further deregulation, it is not obvious -- as exemplified by the
concentration by both candidates on tax and spending cuts in the first
presidential debate of 2008 -- that the essence of neoliberal ideology has
been decisively undermined, as it was not by the Savings and Loan crisis at
the end of the 1980s, the Asian and LCTM crises at the end of the 1990s, or
the post-dot.com Enron and other scandals at the beginning of the century.
On the more substantive definition of neoliberalism as a form of social
rule, there clearly is going to be more regulation. But it is by no means
yet clear how different it will be from the Sarbanes-Oxley type of
corporate regulation passed at the beginning of the century to deal with
'Enronitis'. Nevertheless, it is possible that a new form of social rule
within capitalism may emerge to succeed neoliberalism. But given how far
subordinate social forces need to go to reorganize effectively, it is most
likely that the proximate alternatives to neoliberalism will either be a
form of authoritarian capitalism or a new form of reformist social rule
that would reflect only a weak class realignment.
But whatever the answers to the questions concerning the extent of the
crisis or the future of neoliberalism, this does not resolve the question
of 'is it over?' as it pertains to the end of US hegemony. Just how deeply
integrated global capitalism has become by the 21st century has been
obvious from the way the crisis in the heartland of empire has affected the
rest of the globe, quickly putting facile notions of decoupling to rest.
The financial ministries, central banks and regulatory bodies of the
advanced capitalist states at the centre of the system have cooperated very
closely in the current crisis. That said, the tensions that earlier existed
in this decade over Iraq have obviously been brought back to mind by this
crisis. European criticisms of the Bush administration' s inadequate
supervision of finance, including that US leaders ignored their pleas for
more regulation during the last G8 meetings, may seem hypocritical in light
of how far they opened their economies to the Americanization of their
financial systems. But it is nevertheless significant in terms of their
expectation that the US play its imperial role in a less irresponsible or
incompetent manner.
This is reminiscent of the criticisms that were raised during the 1970s,
which was an important factor in producing the policy turn in Washington
that led to the Volcker shock as the founding moment of neoliberalism. US
hegemony was not really challenged then; the US was being asked to act
responsibly to defeat inflation and validate the dollar as the global
currency and thus live up to its role as global leader. With the economic
integration and expansion of the EU and the emergence of the Euro, many
would like to think that Europe has the capacity to replace the US in this
respect. But, as Peter Gowan insightfully puts it, 'this is not realistic.
Much of the European financial system is itself in a mess, having followed
the Wall Street lead towards the cliff of insolvency. The Eurozone
government bond markets remain fragmented and there is no cohesive
financial or political direction for the Eurozone, leave alone a consensus
for rebuilding the Eurozone as a challenger to the dollar through a
political confrontation with the United States .'
If and when the Chinese state will develop such capacities to assume the
mantle of hegemonic leadership of the capitalist world, remains to be seen.
But for the interim, a sober article in China 's business newspaper, the
Oriental Morning Post, reflects a better understanding of the real world
than some of those among who look to China as an alternative hegemon:
Bad news keeps coming from Wall Street. Again, the decline of U.S. hegemony
became a hot topic of debate. Complaining or even cursing a world of
hegemony brings excitement to us. However, faced with a decline of
U.S.hegemony, the power vacuum could also be painful. We do not like
hegemony, but have we ever thought about this problem when we mocked its
decline... at present the world's financial system does not exist in
isolation. It is the result of long-term historical evolution, closely
associated with a country's strength, its openness, the development of
globalization, and the existing global economic, political patterns. The
relationship can be described as 'the whole body moving when pulling one
hair'... The subprime crisis has affected many foreign enterprises, banks,
and individuals which in itself is again a true portrayal of the power of
the United States ... Therefore, the world's problems are not merely whether
or not the United States are declining, but whether any other country,
including those seemingly solid allies of the United States , will help
bear the load the U.S. would lighten.
For the time being, what is clear is that no other state in the world --
not only today, but perhaps ever -- could have experienced such a profound
financial crisis, and such a enormous increase in the public debt without
an immediate outflow of capital, a run on its currency and the collapse of
its stock market. That this has not happened reflects the widespread
appreciation among capitalists that they sink or swim with Wall Street and
Washington . D.C. But it also reflects the continuing material underpinnings
of the empire. Those who dwell on the fact the American share of global GDP
has been halved since World War Two not only underplay the continuing
global weight of the American economy in the world economy, but fail to
understand, as American policy makers certainly did at the time, that the
diffusion of capitalism was an essential condition for the health of the
American economy itself. Had the US tried to hold on to its postwar share
of global GNP, this would have stopped capitalism's globalizing tendencies
in its tracks. This remains the case today. Not only is the US economy
still the largest by far, it also hosts the most important new high-tech
arenas of capital accumulation, and leads the world by far in research and
development, while American MNCs directly and indirectly account for so
large a proportion of world-wide employment, production and trade.
Moreover, in spite of the New York investment banks having come undone in
this crisis, the functions of American investment banking are going to
continue. Philip Augar (the author of the perceptive inside account of the
investment banking industry, The Greed Merchants), while affirming that
'the eight days between Sunday September 14 and Sunday September 21,
2008... part of the most catastrophic shift among investment banks since
the event that created them, the Glass Steagall Act of 1933', goes on to
argue that
...it is likely that investment banks will exist as recognisable entities
within their new organisations and investment banking as an industry will
emerge with enhanced validity... While they are licking their wounds, the
investment banks may well eschew some of the more esoteric structured
finance products that have caused them such problems and refocus on what
they used to regard as their core business. While we may have seen the
death of the investment bank I would be very surprised if we have seen the
death of investment banking as an industry.
Indeed, the financial restructuring and re-regulation that is already going
on as a result of the crisis is in good part a matter of establishing the
institutional conditions for this, above all through the further
concentration of financial capital via completing the integration of
commercial and investment banking. The repeal of Glass-Steagall at the end
of the last century was more a recognition of how far this had already gone
than an initiation of it; and the Treasury's Blueprint for a Modernized
Financial Regulatory Structure, announced in March 2008 but two years in
preparation, was designed to create the regulatory framework for seeing
that integration through. There is no little irony in the fact that whereas
the crisis of the 1930s led to the distancing of investment banking from
access to common bank deposits, the long-term solutions being advanced to
the insolvencies of investment bankers today is to give them exactly this
access.
It ain't over until it's made over
The massive outrage against bailing out Wall Street today is rooted in a
tradition of populist resentment against New York bankers which has
persisted alongside the ever increasing integration of the 'common man'
into capitalist financial relationships. American political and economic
elites have had to accommodate to -- and at the same time overcome -- this
populist political culture. This could be seen at work this September when
Henry Paulson declared before the House Financial Services Committee, as he
tried to get his TARP plan through Congress, that 'the American people are
angry about executive compensation and rightfully so'. This was rather
rich given that he had been Wall Street's highest paid CEO, receiving
$38.3m in salary, stock and options in the year before joining the
Treasury, plus a mid-year $18.7 bonus on his departure as well as an
estimated $200 million tax break against the sale of his almost $500
million share holding in Goldman Sachs (as was required to avoid conflict
of interest in his new job). The accommodation to the culture of populism
is also seen at work in both McCain's and Obama's campaign rhetoric against
greed and speculation, while Wall Street investment banks are among their
largest campaign contributors and supply some of their key advisers.
This should not be reduced to hypocrisy. In the absence of a traditional
bureaucracy in the American state, leading corporate lawyers and financiers
have moved between Wall Street and Washington ever since the age of the
'robber barons' in the late 19th century. Taking time off from the private
firm to engage in public service has been called the 'institutional
schizophrenia' that links these Wall Street figures as 'double agents' to
the state. While acting in one sphere to squeeze through every regulatory
loophole, they act in the other to introduce new regulations as 'a tool for
the efficient management of the social order in the public interest'. It
is partly for this reason that the long history of popular protest and
discontent triggered by financial scandals and crises in the US , far from
undermining the institutional and regulatory basis of financial expansion,
have repeatedly been pacified through the processes of further
'codification, institutionalizatio n and juridification' . And far from
buckling under the pressure of popular disapproval, financial elites have
proved very adept at not only responding to these pressures but also using
them to create new regulatory frameworks that have laid the foundations for
the further growth of financial capital as a class fraction and as a
lucrative business.
This is not a matter of simple manipulation of the masses. Most people have
a (however contradictory) interest in the daily functioning and
reproduction of financial capitalism because of their current dependence on
it: from access to their wages and salaries via their bank accounts, to
buying goods and services on credit, to paying their bills, to realizing
their savings - and even to keeping the roofs over their heads. This is
why, in acknowledging before the Congressional hearings on his TARP plan to
save the financial system that Wall Street's exorbitant compensation
schemes are 'a serious problem', Paulson is also appealing to people's
sense of their own immediate interests when he adds that 'we must find a
way to address this in legislation without undermining the effectiveness of
the program.' Significantly, both the criticisms and the reform proposals
now coming from outside the Wall Street-Washington elite reflect this
contradiction. The attacks on the Fed's irresponsibility in allowing
sub-prime mortgages to flourish poses the question of what should have been
said to those who wanted access to the home-ownership dream given that the
possibility of adequate public housing was (and remains) nowhere on the
political agenda. No less problematic, especially in terms of the kind of
funding that would be required for this, is the opposition to Paulson's
TARP program in terms of protecting the taxpayer, presented in a pervasive
populist language with neoliberal overtones. It was this definition of the
problem in the wake of Enron that led to the shaming and convictions of the
usual suspects, while Bush and Republican congressmen were elected and
reelected.
At the same time, many of the criticisms and proposed reforms today often
display an astonishing naiveté about the systemic nature of the
relationship between state and capital. This was seen when an otherwise
excellent and informative article in the New Labour Forum founded its case
for reform on the claim that 'Government is necessary to make business act
responsibly. Without it, capitalism becomes anarchy. In the case of the
financial industry, government failed to do its job, for two reasons --
ideology and influence-peddling. ' It is this perspective that also perhaps
explains why most of the reform proposals being advanced are so modest, in
spite of the extent of the crisis and the popular outrage. This is
exemplified by those proposals advanced by one of the US left's leading
analysts of financial markets:
The first target for reform should be the outrageous salaries drawn by the
top executives at financial firms... While we don't want a chain reaction
of banking collapses on Wall Street, the public should get something in
exchange for Bernanke's generosity. Specifically, he can demand a cap on
executive compensation (all compensation) of $2 million a year, in exchange
for getting bailed out... The financial sector performs an incredibly
important function in allocating savings to those who want to invest in
businesses, buy homes or borrow money for other purposes... The best way
to bring the sector into line is with a modest financial transactions
tax... options, futures, credit default swaps, etc...
This is a perfect example of thinking inside the box: explicitly endorsing
two million dollar salaries and the practices of deriving state revenues
from the very things that are identified as the problem. Indeed, even
proposals for stringent regulations to prohibit financial imprudence mostly
fail to identify the problem as systemic within capitalism. At best, the
problem is reduced to the system of neoliberal thought, as though it was
nothing but Hayek or Friedman, rather than a long history of contradictory,
uneven and contested capitalist development that led the world to 21st
century Wall Street.
The scale of the crisis and the popular outrage today provide a historic
opening for the renewal of the kind of radical politics that advances a
systemic alternative to capitalism. It would be a tragedy if a far more
ambitious goal than making financial capital more prudent did not now come
back on the agenda. In terms of immediate reforms and the mobilizations
needed to win them -- and given that we are in a situation when public debt
is the only safe debt -- this should start with demands for vast programs
to provide for collective services and infrastructures that not only
compensate for those that have atrophied but meet new definitions of basic
human needs and come to terms with today's ecological challenges.
Such reforms would soon come up against the limits posed by the
reproduction of capitalism. This is why it is so important to raise not
merely the regulation of finance but the transformation and democratization
of the whole financial system. This would have to involve not only capital
controls in relation to international finance but also controls over
domestic investment, since the point of taking control over finance is to
transform the uses to which it is now put. And it would also require much
more than this in terms of the democratization of both the broader economy
and the state. It is highly significant that the last time the
nationalization of the financial system was seriously raised, at least in
the advanced capitalist countries, was in response to the 1970s crisis by
those elements on the left who recognized that the only way to overcome the
contradictions of the Keynesian welfare state in a positive manner was to
take the financial system into public control. Their proposals were
derided as Neanderthal not only by neoliberals but also by social democrats
and post-modernists.
We are still paying for their defeat. It is now necessary to build on their
proposals and make them relevant in the current conjuncture. Of course,
without rebuilding popular class forces through new movements and parties
this will fall on empty ground. But crucial to this rebuilding is to get
people to think ambitiously again. However deep the crisis and however
widespread the outrage, this will require hard and committed work by a
great many activists. The type of facile analysis that focuses on 'it's all
over' -- whether in terms of the end of neoliberalism, the decline of the
American empire, or even the next great crisis of capitalism -- is not much
use here insofar as it is offered without any clear socialist strategic
implications. It ain't over till it's made over.
Leo Panitch and Sam Gindin teach political economy at York University .