The eruption of the financial crisis in 2008-2008 led to a massive discrediting of neoliberalism and the revitalization of Keynesianism, after two decades of being marginalized. Keynesians came to power with the new administration of Barack Obama in 2009. Expectations were high for a vigorous recovery program, the key points of which would be a vigorous fiscal stimulus, monetary expansion, debt relief for households snagged by the subprime loan crisis, and reform of the banks.
Over next eight years, that promise withered away. The fiscal stimulus was too small to trigger a sustained recovery. Expansive monetary policies prevented the recession from getting worse but did little more, there was very little assistance given to bankrupted homeowners, and banking reform fell by the wayside. What happened?
How Wall Street Fought Off Reform
At a meeting with Wall Street bankers early in his term, President Barack Obama warned the financiers, “My administration is the only thing that stands between you and the pitchforks.” That statement was more bark than bite, however, with Obama frittering away the leverage he had at the beginning over the next eight years. Banking reform under his administration was a case of the regulated capturing the regulators. In spite of their severe crisis of legitimacy, the financial elite was able to resist reform. Despite a national consensus for radical reform of the banking, Keynesian reforms were stopped dead in their tracks.
Finance capital and its allies were able to wage a skilled defensive warfare from their entrenched positions in the US economic and political power structure. This structural power had developed over the nearly 30 years of neoliberal hegemony, wherein the balance of power in government-business relations had shifted decisively in the direction of business.
Capital’s Structural Power I: The Power of Inaction
The first line of defense in the deployment of this “structural power” was to get the government to rescue the banks from the financial mess they themselves had created. The banks flatly refused Washington’s pressure on them to mount a collective defense with their own resources. The banks simply told government that they were responsible for their own balance sheets and not for dealing with any systemic threat.
This is what Cornelia Woll so aptly called the “power of inaction”or the power to influence developments by not acting. Even when Lehman Brothers was about to go under in the fall of 2008, the banks did not budge. Revealing the banks’ sense of their strong bargaining position vis-à-vis government, Merrill Lynch CEO John Thain remarked that in hindsight the only thing he regretted in the tense days of negotiations leading up to the collapse of Lehman Brothers was that the bankers did not “grab [the government representatives] and shake them that they can’t let this happen.” It was up to government to come up with the resources to save the banks and save the system, not the banks themselves.
The banks calculated right. The Bush administration pressured Congress to approve the $787 billion Troubled Assets Program (TARP) and used this to recapitalize the banks, with the dividend for the government shares so low that Vikram Pandit, CEO of Citigroup, the most troubled Wall Street giant, exclaimed, “This is really cheap capital.” Accepting the banks’ implicit position that “they were too big to fail,” Treasury and Federal Reserve funds that went to the banks through various conduits either as capital for recapitalization or as guarantees eventually came to $3 trillion.
Government action—and taxpayers’ money–saved the day, but the banks also calculated right that, despite pressures from Keynesian economists like Paul Krugman and Joseph Stiglitz, nationalization was out of the question since it was “not the American way.” So generous—or intimidated–was Washington that what should have been standard operating procedure—the firing of top management and the shake-up of the board of what were essentially insolvent institutions was not even considered seriously.
Capital’s Structural Power II: The Power of Action
To the power of inaction must, however, be added the power of action. As shown in the various cases cited above—the debates over burden sharing between the banks and indebted homeowners, bank equity levels, Dodd-Frank—Wall Street deployed massive lobbying and cash to accompany it. Indicative of the bank’s lobbying firepower was the $344 million the industry spent lobbying the US Congress in the first nine months of 2009, when legislators were taking up financial reform. Senator Chris Dodd, the chairman of the Senate Banking Committee, alone received $2.8 million in contributions from Wall Street in 2007–2008. The result of the lobbying offensive was summed up by Cornell University’s Jonathan Kirshner:
[The] Dodd Frank regulatory reforms, and provisions such as the Volcker rule, designed to restrict the types of risky investments that banks would be allowed to engage in, have … been watered down (or at least waterboarded into submission) by a cascade of exceptions, exemptions, qualifications, and vague language… And what few teeth remain are utterly dependent for application on the (very suspect) will of regulators.
Capital’s Structural Power III: “Productive Power”
The third dimension of the structural power of the banks was ideological, that is, the sharing of its perspectives with key government personnel about the centrality of finance, about how the good health of the financial system was the key to the good health of the whole economy, including the government. Some analysts called this the bank-lending point of view. Others called it the Wall Street-Washington connection. Woll characterizes this as “productive power,” the joint production of worldviews, meanings, and interpretations that emerge from shared perspectives.
The perspective in question developed from the thorough discrediting of government interventionist approaches by the stagflation of the 1970’s and 1980’s and their yielding primacy to the supposed superior efficacy of private sector initiatives. It was a central part of the neoliberal revolution. Through education and close interaction, regulators and bankers had come to internalize the common dictum that finance, to do its work successfully, must be governed with a “light touch.” By the late nineties, according to Simon Johnson and James Kwak, this process had created a Washington elite worldview “that what was good for Wall Street was good for America.”
Neoliberalism may have gone on the defensive with the financial crisis, but it was not without influence within the Obama administration, especially in the years 2009 to 2012, when the administration was forging its strategy to deal with the fallout from the financial crisis. The new regime’s core economic technocrats had a healthy respect for Wall Street, notably Treasury Secretary Tim Geithner and Council of Economic Advisors’ head Larry Summers, both of whom had served as close associates of Robert Rubin, who had successive incarnations as co-chairman of Goldman Sachs, Bill Clinton’s Treasury chief, and chairman and senior counsellor of Citigroup.
More than anyone else, Rubin has, over the last two decades, symbolized the Wall Street–Washington connection that had dismantled the New Deal controls on finance capital and paved the way for the 2008 implosion. Over a period of nearly 20 years, Wall Street had consolidated its control over the US Treasury Department, and the appointment of individuals that had served in Goldman Sachs, the most aggressive investment bank on Wall Street, to high positions became the most visible display of the structural power of finance capital. Rubin and Hank Paulson, George W. Bush’s Secretary of the Treasury, were merely the tip of the Goldman Sachs iceberg at the center of Washington politics.
Wall Street was afforded an opportunity to make an ideological counteroffensive when the financial crisis entered its second phase, which was dominated by Greece’s sovereign debt crisis. During the debate on the fiscal stimulus, which involved the government going into deficit spending and increased the national debt, and even as they enjoyed tremendous monetary support from the Federal Reserve and the Treasury, the banks and their Republican allies in Congress were able to change the narrative from the irresponsible banks to the “profligate state.” Greece was painted as the future of the United States. In the words of one Wall Street economist:
As federal and state debt mounts up, the U.S. credit rating will continue to be downgraded, and investors will become reluctant to hold US bonds without receiving much higher interest rates. As in Greece, high interest rates on government debt will drive federal and state governments into insolvency, or the Federal Reserve will have to print money to buy government bonds and hyperinflation will result. Calamity would result, either way.
Wall Street’s hijacking of the crisis discourse and shifting the blame for the continuing slowdown on government convinced some sectors of the population that it was the Obama Administration’s pallid Keynesian policies that were responsible for the continuing stagnation, and this contributed to putting it on the defensive and going slow on bank reform. Cornelia Woll’s conclusion is that “For the administration and Congress, the main lesson from the financial crisis in 2008 and 2009 was that they had only very limited means to pressure the financial industry into behavior that appeared urgently necessary for the survival of the entire sector and the economy as a whole”.
Technocracy and Political Demobilization
The structural power of Wall Street certainly contributed to making Obama less aggressive in pushing banking reform and taking state action that would decisively end the recession. But Woll’s analysis is too deterministic an explanation for failure. The presidency is a very powerful position, and in 2009 to 2011, the Democrats also controlled the House and the Senate, which put them in a position of pushing decisive measures for recovery. Moreover, no other office can compare in terms of mobilizing the citizenry in support of reform.
In other words, if power could be productive on the side of Wall Street, it could also be productive on the side of the administration. Here, the contrast between Obama and Franklin Delano Roosevelt is stark. Whereas Roosevelt used the presidency as a bully pulpit to rally the population, setting in motion the massive organizing drive of labor, that became a key pillar of the New Deal, Obama wed a technocratic approach that demobilized the base that had carried him to the Wall Street-biased prescriptions of the conservative wing of his economic team. This pallid, pragmatic Keynesianism was precisely what people were not looking for in a period of deep uncertainty and crisis.
Building a mass base for reform would, of course, have necessitated an inspiring comprehensive alternative vision to the discredited neoliberal one. Perhaps it was precisely articulating such an agenda that Obama, with his pragmatic instincts, feared, for it could run out of his control. But such are the risks that must be taken by serious reformists. The opportunity that presented itself and the way it was wasted is well described by Eichengreen:
An administration and a president convinced of the merits of a larger stimulus would have campaigned for it. Obama could have invested the political capital he possessed as a result of his recent electoral victory. He could have appealed to GOP senators from swing states like Maine and Pennsylvania. Going over the heads of Congress, he could have appealed to the public. But Obama’s instinct was to weight the options, not to campaign for his program. It was to compromise, not confront.
The derailment of progressive Keynesianism by Obama’s conservative, technocratic Keynesianism resulted in a protracted recovery, continuing high unemployment, millions of foreclosed or bankrupt households fending for themselves, and more scandals in a Wall Street where nothing had changed. Obama did not pay for this tragic outcome in 2012, but Hillary Clinton did in 2016.
The Political Consequences of Economic Failure
If there’s one certainty that emerged in the 2016 elections, it was that Clinton’s unexpected defeat stemmed from her loss of four so-called “Rust Belt” states: Wisconsin, Michigan, and Pennsylvania, which had previously been Democratic strongholds, and Ohio, a swing state that had twice supported Barack Obama.
The 64 Electoral College votes of those states, most of which hadn’t even been considered battlegrounds, put Donald Trump over the top. Trump’s numbers, it is now clear, were produced by a combination of an enthusiastic turnout of the Republican base, his picking up significant numbers of traditionally Democratic voters, and large numbers of Democrats staying home.
But this wasn’t a defeat by default. On the economic issues that motivate many of these voters, Trump had a message: The economic recovery was a mirage, people were hurt by the Democrats’ policies, and they had more pain to look forward to should the Democrats retain control of the White House.
The problem for Clinton was that the opportunistic message of this demagogue rang true to the middle class and working class voters in these states, even if the messenger himself was quite flawed. These four states reflected, on the ground, the worst consequences of the interlocking problems of high unemployment and deindustrialization that had stalked the whole country for over two decades owing to the flight of industrial corporations to Asia and elsewhere. Combined with the financial collapse of 2007-2008 and the widespread foreclosure of the homes of millions of middle class and poor people who’d been enticed by the banks to go into massive indebtedness, the region was becoming a powder keg of resentment.
True, these working class voters going over to Trump or boycotting the polls were mainly white. But then these were the same people that placed their faith in Obama in 2008, when they favoured him by large margin over John McCain. And they stuck with him in 2012, though his margins of victory were for the most part narrower. By 2016, however, they’d had enough, and they would no longer buy the Democrats’ blaming George W. Bush for the continuing stagnation of the economy. Clinton bore the brunt of their backlash, since she made the strategic mistake of running on Obama’s legacy — which, to the voters, was one of failing to deliver the economic relief and return to prosperity that he had promised eight years earlier, when he took over a country falling into a deep recession from Bush.
Failed policies have massive political consequences.
Walden Bello is the author of Capitalism’s Last Stand? (London: Zed, 2013) and Food Wars (London; Verso, 2009)
The full study is found at the Transnational Institute site: https://www.tni.org/