Opinion Sur
A major victim of the global crisis has been the credibility of the U.S.-based global capitalist system. One surprising consequence of the economic turmoil, apart from independent and joint efforts by leading countries to brake the plunge into depression, has been the exposure of the dangerous, uncontrolled proliferation of financial capital in the very center of the system. Recent studies on the economy have reached similar diagnoses and unexpected analogies about this situation. In the group photo taken at the closing of the summit of the 20 leading industrialized and emerging nations in London, the leaders of the world radiate “official satisfaction” on stage. They are putting on a good front in bad times. They have put away their differences and agreed on three sets of coordinated measures: 1) the use of funds to stimulate demand and trade, 2) improved vigilance of the financial and parafinancial sectors and 3) the elimination of “fiscal paradises.” Perhaps the most impressive outcome of the summit was the resurrection and recapitalization of the International Monetary Fund for the purpose of providing a life raft for those countries barely staying afloat. None of these measures, however, attacks the root of the crisis, the bottomless well of destroyed (mostly paper) value and ways to make these sums disappear from accounting ledgers. While new measures do put forth a new financial architecture with the aim of avoiding future economic train wrecks, they fail to take stock of the real dimensions of the current crisis. These measures are, in other words, structural in part. Meanwhile, production, international trade and employment continue to free-fall. Nonetheless, more was achieved at the summit than was expected, as shown in the smiling and rather satisfied faces in the photograph.
Considering that we are used to viewing the U.S. as a hegemonic ogre – benevolent or sinister, depending on your political ideology – recent opinions published by distinguished American economists (conservative and liberal) on the economic crisis are both decidedly novel and controversial. These opinions compare the American crisis (and, by extension, the global crisis) to the crisis in the so-called emerging markets over the last ten years, particularly the disasters in Argentina and Russia at the turn of this century. Until recently, it would not have occurred to anyone that a process of financial and economic disintegration like that unleashed in Argentina between 2001 and 2002, or that a Russian-style default like the one in 1998, could happen in the world’s leading power.
Simon Johnson, now a professor at MIT, was until recently the lead economist at the International Monetary Fund. In the latest issue of the magazine Atlantic, he published a very interesting essay1 in which he maintains that the current American crisis reminds him of the crisis that he had to deal with ten years ago in Argentina, Russia and Malaysia. “In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending . . .. This is precisely what drove Lehman Brothers into bankruptcy on September 15 . . .” Johnson writes . The “masters of the universe,”2 owners of the “financial kingdom” behaved like Russian oligarchs, Johnson maintains. They speculated recklessly, took on enormous risks with other peoples’ money (above all, the savings of pensioners, who did not have the least idea that someone was playing roulette with their money) and took comfort in the likelihood that the government would run to their rescue if their bets failed.
In Argentina, this same situation was described in detail more than 100 years ago in Julian Martel’s novel La Bolsa (The Stock Market), whose context was the financial panic of 1890. Fifteen years later in the U.S., Louis D. Brandeis – a commercial lawyer and future member of the Supreme Court – warned the public of the combined risk of greed, lack of transparency and limited vigilance in the financial sector in his book titled Other Peoples’ Money – and How the Bankers Use It. The years and economic cycles went by, bringing the 1907 Banker’s Panic, which compelled J.P. Morgan to “cleanse” the financial sector of crooks and clowns, and the massive crisis of the 1930s, the Great Depression, which today we should call the First Great Depression. In response to that event, the U.S. Senate put Wall Street’s leading bankers on the witness stand. The revelations were sensational. Practices uncovered were as absurd as they were obscene. The Senate commission’s lead investigator, whose job was to interrogate the bankers, was Ferdinand Pecora. Years later, in 1939, Pecora published his notes and memories in the book Wall Street under Oath.5 His work reveals that we have learned very little in the subsequent 80 years of capitalist evolution.
Some months ago, I obtained a copy of Pecora’s book from the New York University library. No one had checked it out in years. Reading its pages was like sitting in on a modern-day hearing of a Congressional investigation committee. The characters are nearly the same; the excesses and errors made are exceedingly similar. The only significant difference is the interplay between four factors: the volume of funds, the velocity of their movement, global reach and the mathematical formulas employed in speculation [i.e. derivatives: financial products constructed or derived from other forms of equity (stocks, bonds, currencies or commodities). Derivatives may be traded on the stock market or outside of it (on the OTC, over-the-counter derivative market). A derivative, mathematically speaking, is the second derivation of the function that expresses the price of a bond with respect to its profitability.] These examples suggest similarities between the crises of advanced capitalism of then and now (Remember that in 1910 Argentina enjoyed the second highest per capita income in the world). Today, critics are going a step further, drawing comparisons between the financial sectors in the U.S. and in emerging markets. Perhaps these resonances are an undesired side effect of the intense wave of globalization that began in 1989.
Johnson does not mince words in his article. He talks about the potential of the U.S. becoming a banana republic. And Johnson is not the only one applying this critical, anti-tropical label. Another leading liberal economist has also used the phrase, last year’s Nobel Prize winner, Paul Krugman.6 It also resonates with criticisms from another Nobel Prize-winning economist, Joseph Stiglitz.7 Both Krugman and Stiglitz have studied the Argentine crisis of 2001-2002 in detail. Neither are analysts to be taken lightly. In defense of Argentines, let me say that we do not grow bananas in Argentina. We import them from Brazil. The economists using us as a bad example could at least adopt the term “soybean republic.”
But Johnson is respected by Larry Summers, who is Obama’s most trusted economic advisor and hardly a liberal. Interestingly, Johnson’s criticisms correspond with those from Desmond Lachman, another ex-director of the IMF – of a very different political bent – who was formerly a Wall Street banker and is today an economic analyst for the ultra-conservative American Enterprise Institute. Statements from the conservative Lachman resonate with the liberal views of Johnson.8 Lachman explains that, when he traveled to countries with troubled, emerging economies in his role with the IMF, he felt like a fortunate man. “At the time, I could not imagine that anything remotely similar could happen in the United States . . .. These days, though, I’m hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a “lost decade” . . .. I’m more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets . . ..” In recent weeks, in my own chats with conservative American investors, I have heard similar sentiments.
To explore the matter further, I set out in search of studies with a broader, or more “sociological” perspective, looking particularly for research from outside the U.S. in order to counterbalance ethnocentric influences. Standing out among these studies, by virtue of its depth and objectivity, was one conducted recently by Ronald Dore, an expert on the Japanese economy who is currently teaching and researching the financialization of the global economy at the London School of Economics.9
Dore’s thesis is the following. The instability of the global financial system, which has been plain to see over the last decade, is a consequence of a growing dominance of financial capital over the real economy. Dore does a detailed study of the origins and the advance of the financialization of the economy. According to the author, this is not merely a matter of the increasingly mortgaged, complex and incomprehensible character of the forms of mediation between those with savings and those in the real economy who need credit and insurance. The dominance of financial capital, says Dore, can also be traced to the nearly universally accepted principle that the sole purpose of a business is to maximize profit for its shareholders.
This belief, in turn, sustains the idea that the primary function of government is the creation and maintenance of a “shareholder culture.” This doctrine has its roots in the Chicago School and in the preaching of the brilliant monetarist Milton Friedman, the father of modern neoliberalism. Dore’s thesis is thus deeply sociological, as it attributes the financialization of the economy to a process of massive ideological indoctrination and the resulting culture. The social consequences of this hegemony are, for the author, negative. Among these consequences, he cites an increase in inequality both within and between societies, growing personal insecurity (as related to health, aging and education), a brain drain toward the most speculative sectors of the economy and the erosion of confidence and feelings of solidarity. All of this contributes to uncontrolled economic growth, culminating in systemic crisis of massive proportions.
These diagnoses distance critics on both the right and left from the Obama administration and its strategy to address the crisis. The Obama strategy consists of recapitalizing the financial sector with a massive injection of taxpayer funds while leaving infected structures in place and helping to purge toxic assets. Critics (from both sides) are skeptical about this approach. They compare the strategy to moving new furniture into a burning building. They are instead in favor of more drastic measures for the victim: state-sponsored surgery or natural death.
Left-leaning liberals are in favor of outright nationalizing big banks on the verge of bankruptcy, restructuring them, selling or eliminating toxic assets and then privatizing the financial sector in a more manageable, structured incarnation. In short, they want to impose state discipline (an approach similar to the one used by the Swedish government in response to the 1990 Scandinavian bank crisis). For Johnson – the most Jacobin of the critics – the way forward embraces the very decapitation of the financial oligarchy. Dore, on the other hand, seems to favor cultural revolution. The conservatives, meanwhile, advocate a different solution altogether: market discipline. In other words, they believe that the market’s own functioning will ultimately eliminate dying sectors, no state-sponsored first-aid required. They are banking on the flexibility, productivity and creative energy of American society. This was the tactic used by President Hoover before he lost power to Franklin Delano Roosevelt in 1932. And, in fact, “Hooverism” has enjoyed a kind of resurrection among right-wing market fundamentalists. This camp has adopted a revisionist take on the New Deal, one that critiques Roosevelt’s methods of leading the country out of economic crisis. Nonetheless, this position – today as in the past – fails to consider the political cost of permitting that kind of social free fall.
We are therefore at a crossroads where three paths diverge, what the Romans called a trivium. The government has opted for the middle road. But this choice is hardly trivial. In fact, the middle road might be the riskiest of the three.
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Notes:
1 Simon Johnson, “The Quiet Coup” The Atlantic, March 27, 2009.
2 Masters of the Universe. This title refers to the directors of the big investment banks, hedge funds (part of the extra-bank financial sector) and insurance companies on Wall Street, whose insolence must be endured in city restaurants, at benefit parties, in their Greenwich mansions in winter and in the Hamptons in Long Island in the summer. Business schools have been transformed, from training grounds for socially responsible executives to incubators for young speculators whose talent is fed with greed. For an excellent analysis of this transformation, see Rakesh Khurana’s book, From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession, Princeton University Press, 2007.
3 Julián Martel [pseud. de José María Miró] La Bolsa. Estudio social. Segunda edición, Imprenta artística “Buenos Aires”, 1891.
4 Louis Dembitz Brandeis, Other People’s Money–and How the Bankers Use It. Harpers, 1913-14.
5 Ferdinand Pecora, Wall Street Under Oath: The Story of Our Modern Money Changers. New York: Simon and Schuster, 1939.
6 Paul Krugman, “Don’t Cry for Me, America,” The New York Times, January 18, 2008.
7 Joseph Stigliz, “A Bank Bailout that Works,” The Nation, March 23, 2009.
8 Desmond Lachman, “Welcome to America, the World’s Scariest Emerging Market,” The Washington Post, March 29, 2009.
9 Ronald Dore, “Financialization of the global economy,” Industrial and Corporate Change, Volume 17, Number 6, pp. 1097–1112, October 30, 2008. Originally prepared for the Italian magazine Stato e mercato.
