September 30, 2008 -- The Bullet -- '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 criticised 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 from 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 US 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 US 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 US 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 organising 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 internationalisation 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 US 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 US 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
US-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 US 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 US 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 'Americanisation of finance' in other states and the consequent access this provided the
US 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 (finance, insurane, real estate) 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
characterised the whole era. This was reinforced by the US 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 pay cheques
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 US 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
The scale of the current
crisis, which significantly has its roots in housing finance, cannot be understood apart from how the defeat of US 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 securitised 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 privatised 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'eral Reserve's dramatic lowering
of real interest to almost zero in response to the bursting of the dotcom 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 US
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 US 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 nationalisations 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 US '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 US
state cannot act in the interests of US capitalism without also reflecting the logic of US capitalism's integration with global
capitalism both economically and politically. This is why it is always misleading to portray the US 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 US 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
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 recognised would serve bankers' interests. In the absence of a central bank,
both the US Treasury and Wall Street relied on JP Morgan to organise 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
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 decentralised 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
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 crystallised 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 organising 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 securitisation 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 analysing financial risk) were already in train. With the
development of the unregulated Euromarket in dollars and the international expansion of US multinational corporations, the
playing field for US 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
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 recognised 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 nationalisation 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 nationalise 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 nationalisations, 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 nationalised 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 characterised the new era.
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 characterised
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 characterised 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 universalisation 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 financialisation
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 US 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 globalisation 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 US 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
The US state in crisis
The era of neoliberalism
has been one long history of financial volatility with the US 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
bailout). 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 Stabilisation 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 nationalised
one of the world's biggest banks), the head of the New York Federal Reserve summoned the CEOs 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 chair 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 organise, first,
a consortium of international banks and investment funds, and then an overlapping consortium of mortgage companies, financial
securitisers 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
JP 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 nationalisations 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?
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 stabilising
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 US 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 liberalisation 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 US 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-dotcom 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 reorganise 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 Americanisation 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
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 DC. But it also reflects the continuing material underpinnings
of the empire. Those who dwell on the fact the US share of global GDP has been halved since World War Two not only underplay the continuing global weight of the US economy in the world economy,
but fail to understand, as US policy makers certainly did at the time, that the diffusion of capitalism was an essential condition
for the health of the US economy itself. Had the US tried to hold on to its postwar share of global GNP, this would have stopped
capitalism's globalising 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 US multinational corporations 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 US 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... [were] 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
...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 US 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
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. US 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 $18.7m 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 US 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, institutionalization 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 realising 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, Dean Baker:
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... [on] 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 mobilisations 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 democratisation 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
democratisation of both the broader economy and the state. It is highly significant that the last time the nationalisation
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 recognised 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 US 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
[Leo Panitch and Sam Gindin teach political economy
at York University. This article first appeared at the Socialist Project's The Bullet.
1. Robert Rubin, In an Uncertain World: Tough Choices from Washington to Wall Street, New
York, 2003, p. 297.
2. Some the main themes in this paper are also taken up in M. Konings and L. Panitch, 'US Financial
Power in Crisis', forthcoming Historical Materialism, 16, 2008, esp. pp. 31-2, and even more fully in many of the chapters
in L. Panitch and M. Konings, eds., American Empire and the Political Economy of International Finance, London, Palgrave,
3. German Finance Minister Peer Sienbrück, in Bertrand Benoit, 'US "will lose financial superpower status"', Financial Times, Sept. 25, 2008.
4. Ron Chernow, The House of Morgan, New York: Simon & Schuster 1990, p. 121; C.A.E.
Goodhart, The New York Money Market and the Finance of Trade, 1969, p. 116; Paul Studenski and Herman E. Krooss, Financial
History of the United States, 1965, p. 252; and Milton Friedman and Anna J. Schwartz, A Monetary History of the United
States, 1867-1960, p. 159.
5. Chernow, pp. 123-5.
6. Ibid, p.128.
7. Murray N. Rothbard, 'The Origins of the Federal Reserve', The Quarterly Journal of Austrian
Economics, 2:3, Fall 1999. See also J. Livingston, Origins of the Federal Reserve System. Money, class and corporate
capitalism, 1890-1913, Ithaca,: Cornell University Press, 1986.
8. Cited in John J. Broesamle, William Gibbs McAdoo: A Passion for Change, 1863-1917, Port
Washington, N.Y: Kennikat Press, 1973, p. 129.
9. Giovanni Arrighi, The Long Twentieth Century, London: Verso, 1994, p. 272.
10. Michael Moran, The Politics of the Financial Services Revolution, New York: Macmillan,
1991, p. 29.
11. Alan Brinkley, The End of Reform: New Deal liberalism in recession and war, New York:
Alfred A. Knopf.1995), pp. 89-90.
12. This and the following quotation are from Robert Herzel and Ralph F. Leach, 'After the Accord:
Reminiscences on the Birth of the Modern Fed' in Federal Reserve Bank of Richmond, Economic Quraterly, 87:1, Winter
2001, pp. 57-63. Leach, who later became a leading J.P. Morgan executive, was at the time of the Accord the Chief of the Government
Planning Section at the Board of Governors of the Federal Reserve System.
13. Gerald A. Epstein and Juliet B. Schor, 'The Federal Reserve-Treasury Accord and the Construction
of the Postwar Monetary Regime in the United States', Social Concept 1995, p. 27. See also, Edwin Dickens 'US Monetary
Policy in the 1950s: A Radical Political Economy Approach', Review of Radical Political Economics, 27:4, 1995, and
his 'Bank Influence and the Failure of US Monetary Policy during the 1953-54 Recession', International review of Applied
Economics, 12:2, 1998.
14. Dick Bryan and Michael Rafferty, Capitalism with Derivatives: A Political Economy of Financial
Derivatives, Capital and Class, London, Palgrave, 2006. See also Leo Melamed on the markets: twenty years of financial
history as seen by the man who revolutionized the markets, New York: Wiley, 1992, esp. pp. 43, 77-8.
15. 'A Socialist Alternative to Unemployment', Canadian Dimension, 20:1, March 1986.
16. Angus Maddison, The World Economy: A Millennial Perspective Paris: OECD, 2001, p. 265.
17. See Ben Bernanke, Essays on the Great Depression, Princeton, N. J.: Princeton University
18. Speech by Alan Greenspan at the Federal Reserve System's Fourth Annual Community Affairs Research
Conference, Washington, D.C. April 8, 2005.
19. 'A Professor and a Banker Bury Old Dogma on Markets', New York Times, Sept. 20, 2008.
20. Willem Buiter, 'The Fed as the Market Maker of Last Resort: better late than never', Financial Times, March 12, 2008.
21. See Susanne Soederberg, 'A Critique of the Diagnosis and Cure for "Enronitis": The Sarbanes-Oxley
Act and Neoliberal Governance of Coporate America', Critical Sociology, 34:5, 2008.
22. Peter Gowan, 'The Dollar Wall Street Regime and the Crisis in its Heartland', forthcoming.in
the Austrian Journal of Development Studies, Special Edition, 1/2009.
23. Ding Gang, 'Who Is to Carry the Burden of the U.S.?' (Translated by Warren Wang) Oriental
Morning Post, September 19, 2008.
24. Philip Augar, 'Do not exaggerate investment banking's death' Financial Times, Sept.
22, 2008. See also The Greed Merchants: How the Investment Banks Played the Free Market Game, London, Penguin 2006.
25. 'Paulson Gives Way on CEO Pay', New York Times, Sept. 24, 2008.
26. 'Wall Street man', The Guardian, Sept, 26, 2008.
27. Robert G. Gordon, '“The Ideal and the Actual in the Law”: Fantasies and Practices
of New York City Lawyers, 1870-1910', in Gerard W. Gawalt, The New High Priests: Lawyers in Post-Civil War America,
Westport, Ct.: Greenwood Press, 1984, esp. pp.53, 58, 65-66.
28. Moran. The Politics of the Financial Services Revolution, p. 13.
29. 'Paulson Gives Way on CEO Pay', New York Times, Sept. 24, 2008, italics added.
30. John Atlas, Peter Dreier and Gregory Squires, 'Foreclosing on the Free Market: How to Remedy
the Subprime Catastrophe', New Labour Forum, Fall 2008.
31. Dean Baker, 'Big Banks Go Bust: Time to Reform Wall Street', Truthout, Sept. 15, 2008,
32. The best popularly written example of this, and still worth reading today, is Richard Minns,
Take over the City: The case for public ownership of financial institutions, London, Pluto 1982.