“Washington can act with breathtaking urgency when the right people want something done. In this case, the people are the Wall Street titans, who are scared witless at the prospect of their enormous implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of the Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven’t seen ‘bipartisan cooperation’ like this since Washington decided to invade Iraq.”
–William, Greider, The Nation, August 18, 2008
(September 24, 2008) So wrote William Greider in The Nation last month. But a week ago it looked as if there weren’t going to be any more bailouts. Secretary of the Treasury Henry Paulson refused to intervene to save the ailing investment bank.
Then Lehman Brothers promptly declared bankruptcy–and sent the Dow plummeting. Credit markets began to freeze up. Paulson and Federal Reserve Chairman Ben Bernanke quickly reconsidered. On Monday Paulson proposed a $700 billion rescue plan for the U.S. financial system–a plan involving more money than any single government program in history, more money even than we’ve spent thus far on the Iraq debacle–and he wants it approved right away, within the week, before Congress adjourns to prepare for the election.
One can’t but think of Naomi Klein’s “Shock Doctrine”–the propensity of neoliberals to push through their radical-restructuring programs when the recipients are too stunned by cataclysmic events (military coup in Chile, collapse of the Soviet Union, shock and awe in Iraq, Hurricane Katrina, etc.) to realize what’s happening.
But there’s a difference. Henry Paulson, formerly with Goldman Sachs, one of the two major Wall Street investment banks still standing (although neither or Morgan Stanley is as independent as it was before Monday, when both agreed to more regulation in return for possible support) does not have a neat package of reforms, carefully crafted by the Chicago boys and other free-marketeers, to push through an ideological agenda. As everyone now realizes, it is precisely that neoliberal agenda–privatize, deregulate, let the markets rip–that has created this colossal mess. There is no Ronald Reagan out there urging that we “get government off our backs.” Are you kidding? The Wall Street wizards are begging the government to intervene. “Please, please, don’t let us go under like Lehman Brothers!” They just want to be sure that the intervention is done the “right way”–so that they may keep their wealth and power, or, if they have to cede some for awhile, to be sure that they can get it all back in short order.
Why the rush? It’s obvious, isn’t it? The looming financial meltdown threatens to raise deep questions about our current financial system, embarrassing questions, questions threatening to a sector of the economy that has generated fantastic profits for its own in recent years, fantastic payouts to the wizards who have been running the financial show, wizards who have gotten us into a terrible mess. (In the 1970s profits from the financial sector accounted for 10% of all corporate profits. The figure is now 30%, profits made, not by growing anything or manufacturing anything or selling material goods, or providing such tangible services as health care or auto repair, but by buying and selling pieces of paper, i.e., ownership claims, debt obligations and their derivatives now processed electronically.) The wizards want to get a plan in place quick, before these questions are asked.
William Greider calls the Paulson plan “an historical swindle” [The Nation, 9/19]. Princeton economist and regular New York Times columnist Paul Krugman calls it “cash for trash.” [NYT 9/22]:
Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached–no quid pro quo on the part of those being bailed out. . . . Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or administrative agency,” and this adds up to an unacceptable proposal. Both Greider and Krugman offer the same advice to Congress. “Stop, take a deep breath and examine what you are being told by so-called ‘responsible opinion’,” says Greider. “Pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it address the real problem.” says Krugman.
But what is “the real problem”? Krugman thinks it’s the fact that the financial losses due to the bursting of the housing bubble have left financial institutions with too little capital. Credit markets are getting tight. If businesses (and potential home buyers) can’t borrow, then we’re in for a serious recession.
Let’s step back for a moment and think more carefully about “the real problem.” It is worth noting than neither William Greider nor Paul Krugman, nor Joseph Stiglitz ["How to Prevent the Next Wall Street Crisis" CNN.com, 9/17/08] nor Thomas Palley ["The Liquidation Trap," thomaspalley.com, 9/17/08] nor any other major left-liberal economist thinks that the government should stand by and let these big financial institutions go under. All are concerned with some quid pro quo, and with some reforms to prevent this sort of crisis from occurring again, but none oppose a bailout now.
Why is that? Isn’t this an ethical matter? Is it right for the Federal government to intervene, putting taxpayers’ dollars at risk, to save a company from bankruptcy, particularly when the bankruptcy is due to the company taking on risks that it should have known were severe? (These guys are supposed to be very smart, after all, and are exceedingly, exceedingly well paid.) The government never intervenes when a small business fails, or when a consumer runs up a credit card debt he or she cannot pay. The government is certainly in no hurry to help out the poor fools suckered by teaser loans who now face home foreclosures.
We all know the rationale, don’t we? Certain companies are “too big to fail.” We can’t risk panicking the financial markets. Stock values would plunge. Hundreds of billions of dollars might be lost–far more than the “bailout” would cost. (That was the rationale for the Bear Sterns bailout last spring, which cost $30b. Paulson tried to get tough with Lehman Brothers, and the Dow Jones dropped 500 points the next day.)
But this raises a deeper question. So what if the stock market plunges? Stock certificates are just pieces of paper, mostly owned by the rich. No one forced these people to buy them. They knew they were taking a risk. They gambled and lost. Isn’t that what capitalism is all about? You take risks. You can win big–very, very big, as we’ve seen in recent years. But you can also lose. Isn’t that the justification for those very big gains–that the risks are also large?
There’s an obvious rejoinder to this line of reasoning. It’s not only the rich who will be hurt. There are millions of ordinary people who are invested in the stock markets, most often via intermediary agencies. For millions our pensions are so invested. So a stock market crash will affect us as well. Surely it’s worth a few billion dollars to preserve millions of pensions.
There’s a deeper reason still why the government cannot sit by and let the financial markets implode. The health of a capitalist economy depends on what Keynes called the “animal spirits” of investors. A healthy capitalism requires a steady stream of real investment flowing into the economy. This keeps the construction industry busy, the machine tool industry busy, and all those other industries producing the things businesses need to expand. But investors won’t invest if it doesn’t appear profitable to do so. And they can’t be forced to invest. It’s their money, after all. But notice–if they don’t invest–or if they decide to invest outside the country instead–then workers start getting laid off. And when workers lose their jobs, they buy less–which means the companies producing the products these workers would buy must also cut back, laying off their workers. Etc. The familiar downward spiral. The economy slides into recession–or worse.
Notice how cleverly the system is structured. In essence everyone has a stake in keeping the investor class, i.e., the wealthy, happy, keeping up their “animal spirits.” Because if investors become unhappy, if they “panic,” then pretty soon almost everyone is negatively affected–not just the rich, but almost everyone in the private sector, whose jobs are now threatened, lots of people in the public sector, since tax revenues are falling, all those dependent on government social programs–same reason. No one benefits (except a few ’short-sellers’ gambling that given stocks will fall). So the government must intervene. No one says “get the government off our backs” when the financial markets melt.
Now here’s something that’s never mentioned in polite company: It doesn’t have to be this way. We don’t have to rely on the animal spirits of the wealthy to keep the economy healthy. Our economy, to be sure, is a capitalist economy. That is to say, we rely on the private savings of private individuals to provide for the investment that any healthy economy needs. But in depending on private savings, we are compelled to keep up the spirits of those with money to invest. This means insuring that they can make a healthy return on their investment, and, above all, not letting too many fail.
But this “solution” is problematic. Apart from the ethical question, there’s also an economic problem, for bailouts generate what the economists call “moral hazard.” If investors are allowed to keep all their gains when times are good, but can be pretty sure that that the government will step in if things turn suddenly sour, the temptation to take ever greater risks becomes irresistible. Consider the case of poor James Cayne, former CEO of Bear Sterns. A year before Bear Sterns was taken over–with government assistance–by Morgan Stanley, his Bear Sterns holdings were worth $1.2 billion. By the time of the takeover they were barely one percent of that–a mere $13 million. Think about it. Will this “catastrophe” cure him–and those like him–from ever taking big risks again? I mean, if I’m pretty sure I’ll never fall below $10 million or so, but can make really, really big money if I gamble big–am I going to be cautious?
What is to be done? Let’s be utopian for a moment. Let us imagine a quick transition from the deeply irrational, ultimately unsustainable economic system we presently inhabit to a democratic, socialist economy, one in which enterprises are run democratically, and economic stability no longer requires keeping our capitalists happy. Suppose we do get a financial meltdown on the scale of the Great Depression. And suppose we had a government newly elected, determined to effect this transition.
The first thing would be to assure everyone, à la Franklin Delano Roosevelt, that there’s nothing to fear but fear itself. I mean, we are not talking about a meteor crashing into the earth, or an incurable plague, or a nuclear war. Pieces of paper have suddenly lost their value. Our resources are still intact. Our skill base is still intact. There’s no reason for ordinary people to lose their jobs or see their incomes plummet–no material reason, that is.
What next? Well, since the stock market has tanked, let the government step in and buy up those now near-worthless shares of the publicly-traded non-financial corporations. (The price tag may well be less than Paulson’s $700b. The government can print the money, if need be. In a depression it’s essential to stimulate the economy by pumping money into it.) Suddenly our government has controlling interest in all the major corporations. (Notice, these assets are not “expropriated” by the government. They are paid for at full market value.)
Since we (the people) now own these enterprises, let’s democratize them. Let’s now turn these enterprises over to the employees, to be run democratically. The employees (now voting members of their enterprise) can keep the existing management–indeed, for six months or so, let’s insist that they do, while worker councils are set up to replace the boards of directors that used to represent the shareholders and oversee management. After six months, they can keep their managers or replace them as they see fit. Thus the “commanding heights” of the economy are democratized. (A democratic corporation is not one in which workers decide policy on a daily basis. Sound management is important. But ultimate authority now rests, not with shareholders–who have been bought out–but with the workforce itself, one person, one vote.) These firms will compete with one another, and with the remaining capitalist firms in the economy–small businesses and privately held companies. (Not much has changed—yet everything has changed.)
There have been a lot of studies indicating that worker-owned firms are viable, that they tend to be at least as efficient as comparable capitalist firms. Indeed, a lot of existing capitalist firms have set up Employee Stock Ownership Plans to take advantage of the efficiency gains these programs often bring. In our case, the workers won’t own the firm. As taxpayers, we’ll keep title to the firm. But the employees, not government officials, will control it. The firm won’t pay dividends to shareholders anymore, for there aren’t any. Instead the workers will lease the firm from the government.
What about the financial sector? To begin with, let’s nationalize all those financial institutions that are “too big to fail.” (Indeed, that is what is happening now–with Fannie Mae and Freddie Mac, with AIG.) Let’s go further. Let’s nationalize all our banks and other financial institutions. As William Butier has recently pointed out:
“There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist without a deposit guarantee and/or deposit of last resort facilities, that are ultimately underwritten by the taxpayer. . . . The argument that financial intermediation cannot be entrusted to the private sector can now be extended to include the new, transactions-oriented, capital-market-based forms of financial capitalism. The risk of a sudden vanishing of both market liquidity for systematically important classes of financial assets and funding liquidity for systematically important firms may be too serious to allow private enterprises to play. [opendemocracy.net, 9/17/08]”
It should be noted that Buiter is no socialist, but a professor of European political economy at the London School of Economics, the former head of the European Bank of Reconstruction and Development, and–get this!–the author of a blog (Maverecon) on the Financial Times website, which is where this posting first appeared. The fact of the matter is, banks can be nationalized. Indeed the Economist proposed a few years back that Japan follow precisely this road to resolve its crisis.
Let’s restructure our banking system, making into something that more closely resembles the system we had in place before deregulation set in some three decades ago. Let’s have a network of Savings and Loan associations that will handle home mortgages and other consumer loans. Funds will be deposited by private savers, and loaned out to creditworthy customers.
Let’s also have a system of investment banks. These are the institutions responsible for providing credit to the business sector. This is the economically crucial sector. Since businesses typically buy their raw materials and pay their workers before their products are sold, businesses must have access to credit. They also need credit to retool or to expand production. (It’s this credit freeze that is so worrying about the present crisis. “The real shock after the feds failed to bail out Lehman Brothers wasn’t the plunge in the Dow, it was the reaction of the credit markets. Basically, lenders went on strike . . . .” [Krugman, "Crisis End Game," NYT 9/19/08].)
Let’s have a system of investment banks, but let’s not generate the funds for these banks by trying to entice private individuals to save. Let’s not rely on the “animal spirits” of the wealthy for the liquidity necessary to keep our economy going. There’s an easier, more transparent way to raise those funds. Let’s raise them the way we now raise funds for infrastructure, for basic research, for all our military hardware, for NASA, etc., i.e. via taxation. Let’s have a special tax, all proceeds to be made available as loans to the market sector of the economy (our newly democratic and remaining capitalist enterprises). Let’s abolish the corporate income tax. Let’s have a simple, flat-rate capital assets tax. Democratic enterprises can consider this their leasing fee for use of public property, capitalist firms a replacement for the tax on profits. (Profit taxes used to comprise a significant portion of our national income tax receipts, but they no longer do. Corporations have figured out how to avoid those taxes. A capital assets tax is much simpler to administer–and impossible to avoid.)
Suddenly we don’t need to worry about those financial markets anymore, which had become so complex, and opaque that no one really understood how they worked. Paul Krugman reports that when Ben Bernanke became Federal Reserve Chairman, he required a face-to-face refresher course from hedge fund managers to explain the system to him. “How did things get so opaque? The answer is ‘financial innovation’–two words that should, from now on, strike fear into investors’ hearts” ["Innovating Our Way to Financial Crisis," New York Times, 12/3/07]. Of course some people understood it well enough to make very big bucks at the game. Hedge fund manager John Paulson (no relation to the Treasury Secretary) took home $3.7 billion for his hard work in 2006. (No, that’s not a typo. It was $3.7 billion, not $3.7 million.)
There’s one more thing we should do. A lot of people have seen their pensions disappear. Let’s restore those pensions. We’ll pick a date before the crash. Whatever value a person’s holdings in a pension fund was at that date will be transferred to that person’s social security account, to be paid out as an annuity supplement to that person’s basic social security income, when s/he retires. (Please don’t say we can’t afford this. Whatever the formal source of one’s retirement income, whether entirely from the government or from the government plus one’s “investments,” the goods and services one purchases with that income must be provided by human beings currently working. If there were enough working people and resources to provide these goods and services before the crash, there will be enough after the crash. As I’ve already noted, we’re talking about pieces of paper losing their value, not a plague that has decimated the workforce.)
That’s it. The basic structure of our new, democratic socialist economy is in place. Notice what we’ve done. A capitalist economy is a market economy. In fact it’s an amalgam of three distinct sorts of markets–markets for goods and services, labor markets and capital markets. Our new democratic socialism is also a market economy. Our enterprises still compete. We’ve learned from the mistakes of the past that complex modern economies cannot be centrally planned. We embrace the healthy competition that keeps producers efficient and innovative. That is to say, we’ve kept those markets for goods and services. But we’ve replaced those labor and capital markets with more democratic institutions.
Okay, time to wake up. We’ve been dreaming. The current crisis is not going usher in a democratic socialism, however desirable such an outcome might be.
But it might bring us a few steps closer. During the Savings and Loan crisis of the late 1980s, the government’s Resolution Trust Corporation wound up owning almost all the Savings and Loan Associations in America. That is to say, they were nationalized (although no one used that word). But we didn’t keep them. Taxpayers absorbed the losses, then the good parts were sold back to the private sector at bargain prices. This time around we (as citizens) are going to own a lot of financial institutions–if we insist on an ownership stake in exchange for the bailout. It’s our money, so let’s insist on ownership. A fair number of economists agree. Krugman notes, “Government takeovers may be the only way to get the financial system working again.” ["Crisis Endgame"]. Dean Baker, co-director of the Center for Economic and Policy Research, wants the government to insist on an equity stake in any company whose bad assets it buys ["Progressive Conditions for a Bailout," Truthout.org, 9/20/08]. Willem Buier acknowledges that this would be a viable solution, even though “it would take the socialization of the U.S. financial system yet a step further” than he would like. [“The Paulson Plan: A Useful First Step But Nowhere Near Enough,” www.voxeu.org, posted 9/25/08.] (He prefers a mandatory debt for equity conversions.)
There will be serious resistance. As Zingales points out, “The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of the pain.” (Zingales, by the way, is unabashedly pro-capitalist. He’s worried that the Paulson plan “will undermine the fundamental workings of the capitalist system.” “The time has come,” he says, “to save capitalism from the capitalists.”) There will be serious resistance to government’s gaining a sufficient ownership stake in a lot of financial institutions to control them, but that resistance may not succeed. If it doesn’t, if the government comes to own these institutions, let’s fight to keep them this time. Let’s not give them back. It’s obscene to socialize losses but privatize gains. Let’s restructured these institutions so that they can fulfill their basic mission effectively (which is to provide credit to worthy businesses) in an open, transparent fashion. Let’s make them democratically accountable. It’s not socialism, but it’s not nothing. The government will be in position to do some good things.
One good thing: It can put a cap on the pay of the executives. Dean Baker urges a $2 million dollar cap. Given that the President of the United States and the Chief Justice of the Supreme Court make only $400,000, that seems a bit too generous. To be sure, they have been used to making a lot, lot more, but they are not likely to find greener pastures elsewhere.
Such a cap might help to the pattern of inequality that has developed over the last three decades, for, as Baker observes, “executives at non-financial companies look at the pay on Wall Street and use this as a basis for demanding outrageous pay packages for themselves as well.” (It’s worth noting that the ratio of CEO pay in the U.S. to that of the average worker is 475. It’s 20 in Canada, 15 in France, 11 in Japan.)
Another good thing: Since the government, if it takes control of these firms, will come into possession of lot of mortgages in various stages of delinquency, it can try to resolve them in a humane fashion. Priority can be given to allow people to remain in their homes, either as renters, paying fair-market rent, or as the holders of renegotiated mortgages.
This is the fight we are in right now. It’s not a fight for socialism–not yet–but it’s an important fight. It might be one we can win. Opposition to the Paulson plan is growing. Disgust with Wall Street is growing. Questions are being raised that haven’t been raised so publicly in a long time. Government control and (God forbid!) salary caps will be resisted mightily by the Wall Street titans, but the giants might not prevail. And if they do win this battle, well, the war isn’t over. They will likely screw things up even more next time around. We might take as our own Milton Friedman’s credo:
“That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. (Capitalism and Freedom, 1982 Preface).”
Loyola University Chicago September 24, 2008
[David Schweickart is Professor of Philosophy at Loyola University in Chicago. He is the author of several books on capitalism, political economy and market socialism, the latest of which is After Capitalism, Rowman and Littlefield Publishers. His ideas are widely discussed in China, Venezuela, Argentina and other areas active in the ‘solidarity economy’ and radical transitions. A debate on his ideas of Economic Democracy versus Michael Albert and his ParEcon school in included in the recently published ‘Solidarity Economy: Building Alternatives for People and Planet, Changemaker Publications, available at http://lulu.com/stores/changemaker This article was first written for http://progressivesforobama.net ]