One of the remarkable features of the Crisis of Usury is how thoroughly it has exposed the flaws of our reigning public orthodoxies; and yet how invincible they remain in many particulars touching on those flaws.
To me this peculiar quality of the times is most prominent when it comes to the orthodoxy of globalization. For our purposes globalization may be defined as simply the integration of world capital markets. Globalization allows an investor in Asia or Europe, working through credit intermediaries — banks, funds, shadow banks — to deploy his capital in, say, the US housing sector by a few strokes of a keyboard. For decades this development was praised by almost everyone, Right or Left, as a manifest advance for human prosperity; more importantly, it was commended particularly for the stability it would secure for all of us.
The Great Recession has blown that theory to pieces. In the event, what globalization achieved was a condition of appalling fragility — and what’s worse, an exploitable fragility. The integration of capital markets across borders and cultures meant that, as a finance firm, all that was necessary for “too big to fail” status was a position sufficiently integral to the infrastructure of finance that the consequences of bankruptcy would destructively ramify to all corners of the globe. The key attribute need not even be sheer size. AIG included a sizeable shadow banking operation, to be sure, but what was far more important than its size was its crucial role in guaranteeing for other banks vast swaths of the mortgage-backed securities market. These guarantees were extended around the world; after Goldman, the next biggest institution to receive billions in US taxpayer cash after the chaotic September 2008 rescue of AIG was a French bank. AIG found an integral niche in global finance, and exploited it to the hilt.
More than systemic fragility, as can be readily observed, globalization presented the financiers with irresistible opportunities for high-tech blackmail. Corner a certain market in systemically important securities — commercial paper, say, or overnight repurchase agreements, or any number of a vast array of credit derivatives — and the unscrupulous financier could count on winning any stare-down with regulators in the event of panic and crisis.
Liberal economists like Yves Smith and Simon Johnson can perceive all this, and certainly elucidate the intricate details far better than I can; but what they cannot do, what they appear almost congenitally incapable of doing, is undertaking a reexamination of the assumptions behind globalization as such. Mr. Johnson, for instance, indulges in some extraordinary wishful thinking when he writes of a possible “cross-border resolution authority” encompassing the US, UK and Eurozone finance sectors, and empowered to “manage the failure of a financial institution with large cross-border assets and liabilities.” The EU is only barely able manage the financial troubles of one of its small peripheral members like Greece; what folly it is to imagine that any authority on earth could manage the failure of a British bank from Washington or the failure of a US bank from Geneva!
So even among the very best critics of the Usury Crisis, the assumptions undergirding globalization remain, for the most part, unassailable.
My second point under this head I can only offer in the form of the barest sketch. Frustrated by the high finance blackmail, Ms. Smith imagines a bracing lecture read by a US regulator to the heads of our finance firms. These firms launch their swarms of lobbyists to warn of a terrible “destabilization” of markets because of X, Y, or Z regulation, and the reader sympathizes with Smith’s imagined regulator who tells them to go pound sand. She ruefully gestures toward more robust regulatory authority “back in the days of Johnson or Nixon” — authority that would not, it is supposed, have taken these blackmails lying down. Well, maybe not.
But according to my reading of the design and history of the American republican system, the institution with the proper authority to undertake this sort of rebuke to private actors exploiting the bewilderment and inattentiveness of the public is the Legislature. Put otherwise, the congressional power of inquiry, in the American political tradition, is very robust. From the financial intrigues of James Wilkinson and Aaron Burr to the Jay Cooke bankruptcy after the Panic of 1873; from the Teapot Dome oil contracts scandal to the Pecora banking investigations of the Great Depression, Congress usually took the lead role of inquiring into the financial woes of the nation. The power of inquiry, in the republican form of government, is at the very heart of the legislative authority; indeed, sound legislation presupposes a body capable of inquiring into the causes of distress or alarm that may require legislative remedy.
Well, beginning in the middle of the 20th century, liberals, disturbed that Congress was being mean to Communists, mounted a sustained assault on the investigating power of the Legislature. They began by insisting that the Fifth Amendment protection against self-incrimination be extended to congressional committees of inquiry (previously contumacious witnesses had been literally jailed by Congress for failing to answer questions), and broadened the critique include a call for committee hearings to be subsumed under the robust regime of rights for the accused, as in court proceedings — a right to counsel, to cross-examine, to call rebuttal witnesses, and so forth. They developed a new theory of limitation of congressional inquiry to matters of an exclusively public nature. They pushed for stricter Judicial branch oversight of committee proceedings. And, more generally, they steered more and more of the matters formerly compassed by Legislative inquiries toward the sphere of the Executive branch and the enormous bureaucracy which has been built up around it.
Now, as a fact, in the vast majority of these cases, Congress as it were voluntarily relinquished its former investigatory powers. (The relevant Court precedents upholding that older prerogative of Congress remain by and large unchanged.) The power of inquiry lies quiescent.
As with so much else over the past few decades, Congress, under pressure from enlightened opinion, has been happy to surrender its oftentimes nettlesome responsibilities to other political actors — above all the courts and the Executive bureaucracy — and content itself with appropriations of public money and posturing on the Sunday television shows. The retreat of the authority of the Legislature has coincided with the retreat of republican self-government. It would not have surprised Madison.
The point here is that enlightened opinion, once it hardens into public orthodoxy, is remarkably immune to critique even after its flaws are dramatically exposed. For years we have heard an enthusiastic song and dance concerning the immense benefits of globalization, including a “great moderation” of economic uncertainty which was to issue in stability the like of which the world had never seen. A previous generation heard a series of lectures, not all that dissimilar in terms of its enthusiasm for newness and modern reform, about the backwardness of the Congress’s investigating committees; and how modern democratic nations should put their trust in competent Executives, with their armies of professional bureaucrats and experts, to govern society. Yet despite the evidence that continues to pile up suggesting that maybe these orthodoxies leave something to be desired, they remain more or less invulnerable to critique. Even those liberals who realize that globalization has strengthened the hand of the financiers cannot bring themselves to question its assumptions. Even those liberals who realize that the operations of the financiers cry out for thorough investigation and exposure have yet to even consider that the American political tradition actually does provide for this; it was their forebears on the Left who worked to dismantle it.