Long-time reader Jeff Singer passed along this very interesting essay on the financial crisis. The burden of the authors’ argument is that that the crisis resulted primarily from a failure of government, and they marshal a considerable amount of evidence to support this view. Most of it elaborates on what we know of the housing market collapse, adducing the vast collection of government interventions in the decades leading up to the collapse. The perfidy of the ratings agencies looms large, as does the reckless expansion of leverage, facilitated by Fannie and Freddie alongside private (but FDIC-backed) banks. Nor does the Federal Reserve’s easy-money policy escape critical notice.
But it seems to me that the authors give away much of the game near the middle of the essay. They provide a list of “six major government policies that together rewarded short-sighted collective risk-taking and penalized long-term business leadership,” and number 4 is particularly striking:
The FDIC, Federal Reserve, Treasury Department, and Congress undertook explicit or implicit creditor bailouts for large financial institutions starting in the 1980s (First Pennsylvania, Continental Illinois, the thrift industry, the Farm Credit System, etc.) and continuing to 2008 (Bear Stearns). These regulatory decisions led to an absence of creditor discipline of financial institution leverage and risk-taking (especially at Fannie and Freddie) and the “too big to fail” expectation of a government bailout.
Starting in the 1980s! Sweet sunshine, what a concession that this!
In other words, one of those six government failures is thirty years of cosseting the country’s captains of finance. Virtually the entire era of neoliberal globalization rests on this clemency toward banks and finance firms when they get in trouble. The hollowing out of American manufacturing coincides with the integration of global capital markets, all undergirded by the beneficence of government toward finance capital. I have regularly cited a statistic that presents a similarly stark view of the last few decades in American political economy: namely, that finance as a share of business profits quadrupled from 1950 to 2005.
Throw in the long era of easy money from the Fed, which helped to engender the feverish race for more yield, which means riskier assets being purchased and held by more people; the generational shift that increasingly made retirees, aggregated into huge pension and other institutional funds, one of the major influences on the finance sector; the rapid improvement in technology to facilitate near-instantaneous capital transfers around the world; the avaricious bent toward short-term gain rather than long-term value; and the deregulation of finance such that government-guaranteed capital could be deployed in even the riskiest securities — throw these and other factors in and you have in hand all the elements for a crash and panic of historic proportions, which issued in a peculiar regime of plutocratic socialism.
The authors of the essay assert that “Without excessive government protection of creditors, there is little doubt we would have seen creditors act to reduce risk in the U.S. financial system,” which is a very interesting statement indeed. Creditors left undisciplined by market forces, as we have seen, is a recipe for ruin and disaster. But the thing about it is, since almost the whole age of globalization and neoliberalism featured “excessive protection of creditors,” who can even say what the alternative would look like? We’re sunk so deep in plutocracy we’ve essentially no perception of what a better political economy would be.
What happened, I submit, is that America degenerated from a commercial republic into a plutocracy. The government was, beyond all doubt, a major catalyst of this degringolade; but so were developments in the world of finance, some of which have familiar names and are still regularly cheered. It is vital to see that the commercial republic was subverted not merely for the sake of subverting, like some Jacobin irruption of anarchy and destruction; it was subverted for a purpose — the enrichment and enthronement of a certain class or faction, for which plutocracy is probably the best appellation.