Sunday, September 21, 2008

The Left on the Crisis

The main problem with the Bush bailout and its colossal scale is that we don't know what the public gets in return for its money, and we don't know that decision-making power will be moved from Wall Street to Main Street. We need some arguments to accomplish this.

If you are looking for a clearly progressive or left-wing perspective on the Internet, what can you find? Here's a start (just from this past week).
  • William Greider at The Nation. Greider is one of the country's leading financial journalists, and has written books on the Federal Reserve, globalization as the return of super-exploitation of labor, democratic economics, and much more. His short piece says that the "new financial architecture" was based on irrational leverage, the absence of prudent reserves to cover possible losses, and the selling of false hopes for sustainable high returns. The problem is systemic, he writes, and this may be a new 1930s. He concludes: "At some point, the new president might have to do what FDR did in the wreckage of early 1933--declare a "bank holiday" and announce emergency rules to govern banking and finance until the crisis is broken. For the country's sake, I think this a better approach than buying up junked banks and failed financial firms, one by one. People have the right to ask: what exactly are the rest of us getting for our money?"
  • Naomi Klein argues that since market ideology is a "servant to the interests of capital," its ideologues will use the version that works best at a given time. For many years financiers made the most money off of laissez-faire (utterly untaxed transactions, capital gains federal taxes at about half what wage-earners pay - this one especially bothers me). Now they will make the most money (or lose the least money) with massive government intervention and taxpayer-funded bailouts, not to mention transaction restrictions like the temporary ban on short-selling a list of 799 financial stocks). When the wind shifts, Klein says, laissez-faire will come roaring back: the consistency can be found in the financial interests behind the statements. Klein ends by saying that governments ignored speculative excesses because they thought they lead to economic growth: "What is really being called into question by the crisis is the unquestioned commitment to growth at all costs. Where this crisis should lead us is to a radically different way for our societies to measure health and progress."
  • Willliam Pfaff, a genuine conservative "maverick," most clearly points out that "The financiers, as Joseph Stiglitz has observed (in a recent CNN interview), were doing what the system demanded of them. They were assured generous rewards for managing risk and allocating capital so as to improve the efficiency of the economy enough to justify their generous compensation. 'But they misallocated capital; they mismanaged risk-they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.'" Incentives must be redesigned to favor public rather than private interests.
  • Chuck Collins points out that the financial leaders that caused this crisis get to keep what they made while we pay what they lost. The head of Lehman, which declared bankruptcy last week, does not "disgorge" his $354 million in compensation from the last 5 years. Collins offers six taxes that would raise the bailout money from its beneficiaries, including closing off-shore corporate tax havens (the sucking of major capital away from large, complex societies and into "fiscal paradises" is a big issue in Europe), and "Instituting a 50 percent tax rate surcharge on incomes over $5 million and a 70 percent rate on incomes over $10 million[that] would generate $105 billion a year."
  • In another Nation article, Greider calls the Paulson bailout (the $700 billion general one) a "historic swindle" that will cause popular unrest. "The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government." Greider is calling for a serious nationalization that would not mean Washington running finance permanently but an imposing of political and social imperatives on the financial system and its leaders. For starters, a new "central authority' would obligate banks to continue to lend responsibility to individuals and business at affordable rates so that the real economy doesn't tank. Direct government lending may be required, as with some loans for college students.
  • Then there is the old-fashioned "Screw Wall Street." Why should we figure out how to save them. Let them drown.
  • There is also the "unchecked greed" thesis, accompanied by the observation that the little people will pay yet again for this rich man's bailout.
  • And a somewhat classic summary from Steve Fraser: "It's time for a reversal of course. Stringent re-regulation of FIRE is not enough anymore. Washington's mission may, at this late date, be an even greater one than Roosevelt's New Deal faced. The government must figure out how to deploy its power to shift the flow of investment capital out of the mine-fields of speculative paper transactions and back into productive channels that will help meet the material needs of American society. Real value must be created in place of chimeras. In the meantime, we all have ringside seats -- in fact, far too close to the action for comfort -- as another gilded age is ending. What comes after is, in part, up to us."
I got this first clump of pieces from "Common Dreams," which is a progressive site that has in general not covered economics at all until now. Most of the pieces come from "The Nation,' and the rest from the Nation alum who run a handful of prog websites. Maybe this says something about Common Dreams, but it also says something about the current state of the Left on economics. For starters, it is too small.

The spectrum of Left responses runs something like this.

1. the financial system was spoiled by greed and excess (of leverage, of made-up securities, etc). Most conservatives would also agree with this, and it wouldn't not allow, say, Obama, to distinguish himself from McCain. This view is compatible with a $700 billion Bush-Paulson bailout.

2. new regulations are necessary to block future bubbles by stamping out greed and excess, starting with the deeds of the bad actors . We could implement new rules about minimum margin requirements to reduce leverage, for example. This is compatible with the Barney Frank position as a liberal Democrat in Congress who hated having his chops busted about the evils of big government for 25 years and is going to get a little payback. It is also close to Dean Baker's preoccupation with bubbles that competent professional economists can measure and deflate before they blow up.

3. We need not only reform, but a government takeover of the financial system. This is Grieder's position, and few others', as far as I can tell.

4. We need to identify the winners and the losers when the financial system was working, and make the winners pay for their crimes. The losers under Bush should not lose again by paying for the crisis. This is Collins' position, and is compatible with Greider's. It is sometimes called "populism" in the press, and it makes class distinctions. It is an insurgent view in the US only because conservatives who say the wealth of the wealthy helps the poor have successfully marginalized clear discussions of wealth and and income inequality for 25 years.

5. We need to reconceptualize the purpose of economics, and resubordinate economics to the public's cultural, political, and social goals. This is Klein's position, and Fraser's, and also Pfaff's, and historically speaking is a close to the old Popular Front, to Marxist humanism, to various kinds of democratic socialism, to parts of the enivronmental movement, to some forms of anarchism, and also to civic republicanism (small r), which helps explain Pfaff.

The most urgent position for the Left is (3), in order to block a Trickle-Down Bailout, in which the public will buy private junk that enables the main perpetrators to keep deciding what does and doesn't get funded in the wider economy.

The problem with American politics is trying to get beyond (2) to some combination of (3-5). A lot of people like (5), and I have argued in Unmaking the Public University that the public university was unmade in part because it was cranking out a millions of grads a year who thought economics should serve their existential, personal, and political visions. This was very bad for conservative rule, and conservatives managed to discredit most if not all of this vision with culture wars and budget wars, among other things.

But even where (5) is solid, most Americans are uncomfortable talking about class inequality and economic victims, especially when it involves contemplating the possibility that the victimization was deliberate - that big investors win big by getting the companies they own to outsource jobs, pay less in taxes for hospitals, schools, and in general shrink the middle class and impoverish lower-wage workers.

So (4) is an uphill battle. And few people in the US love (3), Greider's government takeover, unless they are absolutely desperate. We don't have France's tradition of "la republique" in which the central government constitutes a balanced and effective society. To get (5) in the US, a kind of humanist economic democracy, by using (4) to justify (3) - that is, by using systematic inequity to justify government control - you need an acute, desperate crisis (e.g. the Great Depression). And skeptics like me would point out that (3) doesn't generally lead to (5) - the New Deal was limited and lacked a strong economic alternative to neoclassical economics, which made it vulnerable to the politicization of technical critiques of monetary and inflation people (cf. the strange triumphs of Milton Friedman).

Left economics needs to work much harder this time around on the Klein-Fraser-Pfaff side of the critique, without abandoning Greider. We now need much stronger humanist visions of what economics is for.

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