| September 24, 2008 | Wednesday | Ramazan 23, 1429 |
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Capitalism in intensive care
SMALL government good, big government bad. That’s the traditional neoliberal mantra, and it’s been the guiding philosophy behind deregulation since the birth of Reaganomics in the 1980s. The best thing a government can do, in this view, is to stay out of the way.
Yet there was nary an audible squeak or whimper from those who subscribe to this school of thought when the largest capitalist economy in the world witnessed an unprecedented bout of nationalisation. “Ben Bernanke, the chairman of the Federal Reserve, and Hank Paulson, the Goldman Sachs tycoon who became the US treasury secretary, have done more for socialism in the past seven days than anybody since Marx and Engels,” The Guardian’s economics editor Larry Elliott commented last Friday.
That tends towards hyperbole, of course: socialism was neither intended nor achieved by the US government’s takeover of the mortgage behemoths Freddie Mac and Fannie Mae, and the insurance giant AIG. But the point isn’t entirely absurd. Had Barack Obama, for instance, suggested a couple of months ago that it may prove prudent to nationalise such institutions, there can be little doubt that his Republican rivals would have derided him as a closet Marxist.
However, using taxpayer funds to rescue endangered capitalist giants is of a piece with an economic philosophy that favours the privatisation of profits and the socialisation of losses. That’s not quite socialism: it’s more like a mixed economy, with the balance heavily tilted towards the private sector. Of course, even ‘mixed economy’ is a dirty term for neoliberal fundamentalists, and that might help to explain a certain inconsistency, whereby three mega-firms were nationalised and Bank of America was encouraged to bail out Merrill Lynch by purchasing it, but the investment bank Lehman Brothers was allowed to go under, despite its flagship status on Wall Street.
Nobel Prize-winning economist Joseph Stiglitz explains this apparent anomaly thus: Paulson felt the demise of Freddie Mac and Fannie Mae — and, by extension, AIG — would “imperil the financial system as a whole ... but there was not sufficient systemic risk seen in Lehman”. In Stiglitz’s view, the crisis “springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets.”
One of the forms of risky behaviour is known as leveraging. It’s neatly explained by Robert J. Samuelson in The Washington Post: “Suppose you buy a stock for $100. It goes to $110. You made 10 per cent. Now suppose you borrowed $90 of the $100 ... If it goes to $110, you’ve doubled your money.” The result is “huge windfalls” if you get lucky, and equally dramatic wipeouts when your luck runs out.
Speculative behaviour of this variety has enthusiastically been encouraged by the very institutions that are now in intensive care. As Samuelson points out, “Wall Street’s compensation is heavily skewed towards annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years’ experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.” In other words, the “greed is good” mantra has been institutionalised, and the more money you can make out of next to nothing, the greater the rewards.Except when it all goes wrong. Even in those circumstances, it is not uncommon for executives to walk away with millions of dollars in severance payouts, while less privileged employees are obliged to share the pain of ordinary investors.
There’s nothing particularly illogical about all of this: it’s of a piece with the driving force of capitalism, which is the profit motive. But there is an annoying little fly in the ointment: when the survival of supposedly the fittest is threatened, laissez-faire goes out of the window. At the beginning of this week, Paulson was urgently urging the US Congress to legislate a $700bn package in order to buy back the bad debt taken on by financial institutions across the western world. It is, he said, “a humbling experience to see such fragility in capital markets and to ask how did we ever get here”. There’s a one-word answer to his question: deregulation.
A more robust supervisory regime is now more than likely. But the road ahead remains shrouded in darkness: even the best minds in the economic sphere are gripped by uncertainty. The soul-destroying Great Depression occurred less than 100 years ago, and America continues to be haunted by the fear of a repetition.
“Most economists,” opines Stiglitz, “believe we have the monetary and fiscal instruments and understanding to avoid collapse” on the 1929 scale. He adds, however, that “it is difficult to have faith in the policy wherewithal of a government that oversaw the utter mismanagement of the war in Iraq and the response to Hurricane Katrina. If any administration can turn this crisis into another depression, it is the Bush administration.”
Small wonder, then, that even John McCain, the Republican presidential candidate, just weeks after describing the US economy as “fundamentally sound”, has felt obliged to lash out against Wall Street’s “casino [of] greed” and “corruption of excess”. However, given his history of support for deregulation, it’s equally unsurprising that, according to a recent opinion poll, a considerably larger proportion of Americans have greater faith in the untested economic management skills of Barack Obama.
The Great Depression of the 1930s was remedied by Franklin Roosevelt’s New Deal, which was perceived by many as socialism in disguise. It wasn’t entirely a fair designation, but it had some basis in fact. The Keynesian orthodoxy survived in one form or another for a couple of decades, not least because of the fear that working classes might be attracted to the Soviet or Chinese model of development. They were, as the Bard might have put it, won over by trifles only to be betrayed in the deepest consequence.
Once the Soviet Union began steering itself towards an implosion and post-Mao China fell into the hands of those who had once been derided as capitalist roaders, the gloves came off. By the turn of the century, the welfare state was effectively extinct and capitalism in its rawest form was being touted as the be-all and end-all. The latest crisis, more serious than its predecessors (albeit not terminal) should help to curtail that illusion. There has got to be life beyond hedge funds, derivatives and bubbles. Marx and Engels underestimated the resilience of capitalism, but they weren’t wrong in seeing it as a stage of economic development that must, sooner or later, be transcended by a less inequitable alternative.
Email: mahir.worldview@gmail.com
