You’ve got to hand it to the folks on Wall Street. Having wrecked the US economy and given us the GFC, the Masters of the Universe could have slumped into a depressive funk. But instead they picked themselves up and, with nothing but huge bailouts, government guarantees and a flood of liquidity to aid them, staged a miraculous recovery. It’s a story of redemption unlikely to uplift the millions who’ve lost jobs and homes in the recession but it does at least provide a clear picture of the relative power of US financial elites over ordinary Americans.
At the moment around 8.5 million Americans have lost their jobs in the recession and one million people lost their homes in just the last three months of 2009. Without Obama’s US$787 billion stimulus package the situation would have been much worse. On the flipside, Goldman Sachs, JP Morgan and Morgan Stanley all reported strong quarterly profit surges in recent weeks. Goldman reported a five-fold increase in profits and a doubling of revenue in 2009. In a concession to public outrage it cut the percentage of revenue set aside for remuneration from 48 per cent to 35 per cent and made a US$500 million donation to its own charity — Goldman Sachs Gives.
President Obama was clearly impressed, stating last week that he didn’t "begrudge" Goldman Sachs chief Lloyd Blankfein and his JP Morgan counterpart Jamie Dimon their multi-million-dollar bonuses. He likened the pay of these "savvy businessmen" to that of star baseball players but as Paul Krugman points out, while major league baseball players may be greedy and self-absorbed, they’ve "never brought the world economy to the brink of collapse and cost millions of innocent Americans their jobs and/or houses".
That Wall Street banks that owe their existence to the Government should prosper while tens of millions of Americans suffer is bad enough. That there has been no serious reform of the system that led to the GFC makes the situation even worse. As economist and former Labor Secretary Robert Reich wrote: "It has been more than a year since all hell broke loose on Wall Street and, remarkably, almost nothing has been done to prevent all hell from breaking loose again."
Despite this new, softer tone on bankers’ pay, President Obama has proposed some sensible, much-needed reforms. There’s a Consumer Financial Protection Agency that would protect people against the type of predatory lending that drove the subprime housing crisis; there’s a Financial Crisis Responsibility Tax designed to claw back some of the cost of the bailouts; and the so-called "Volcker Rule" that would prevent banks from running hedge funds, private equity vehicles and making risky bets with their own funds. But these reforms require congressional approval and are being fiercely resisted. As Reich points out, Wall Street spent US$344 million on reform-wrecking lobbying in the first nine months of 2009 alone.
So, why do the organisations and individuals who trashed the US economy still wield so much power? Why do the likes of Lloyd Blankfein, Jamie Dimon and the recently reappointed Ben Bernanke still have their jobs? The answer lies at least in part in structural economic change that drove rapid growth of the finance sector, the free-market theories used to justify these changes and the corporate lobbying alluded to above.
The big structural changes were those created by the free-market economic policies of financial deregulation, privatisation and trade liberalisation, which helped to spur the growth of the finance, insurance and real estate industries through the 1980s and 1990s. By 2006 the financial sector accounted for 40 per cent of all US corporate profits. Private debt soared from 110 per cent of GDP in 1970 to 293 per cent in 2007 while real wages for average workers fell.
As we now know, the main effect of the debt explosion was to create the US$8 trillion housing bubble that burst in 2007. But another effect that gets less attention was the way this structural change led to the emergence and empowerment of what Keynesian economist James Galbraith has called a "predator class" within the financial sector. In his 2008 book The Predator State, Galbraith (son of economist J.K. Galbraith) characterised these predators as an essentially opportunistic class of uber-rich executives driven more by increasing their own wealth and power by whatever means than by any free-market ideological project.
The predators may mouth platitudes about "fiscal conservatism", "free markets" and "small government" but in practice their aim was to control — not limit — government "in the way that would bring them as a group, the most money, the least disturbed power and the greatest chance of rescue should something go wrong". From the massive public bailouts to the stalled financial reform agenda, it’s a strategy that appears to have paid rich dividends.
The predators have been able to convince politicians, including President Obama, that the path to economic recovery lies in re-inflating the asset bubble economy. This meant extending more debt — via the banks — to heavily indebted households to enable them to help the banks make good on their bad loans. But that strategy will only work so long before it collapses. As ex-Wall Street economist Michael Hudson argues, the financial oligarchs know that American indebtedness has reached saturation levels and have therefore not resumed lending. "Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run — paying it out in bonuses, or buying other banks and foreign affiliates," writes Hudson.
They have also banked on continued falls in the already cheap US dollar to buy a wide range of other financial assets, creating new asset bubbles that according to economist Nouriel Roubini must ultimately burst.
So, while the GFC dealt a devastating intellectual blow to proponents of free-market economics, it is abundantly clear that this intellectual defeat has not as yet translated into a political defeat of free-market ideology and the interests it serves.
Republicans and conservative Democrats are making familiar calls to cut the budget deficit, reduce debt and guard against inflation. It’s pressure that was clearly evident in Obama’s commitment to freeze all discretionary non-security spending (excluding massive programs like Medicare, Medicaid and Social Security) in his first State of the Union address. That move will have little impact on Government debt but it demonstrates Obama’s fealty to conventional wisdom. All this in a context of mass unemployment where, as Nobel laureates Paul Krugman and Joseph Stiglitz argue, what’s needed is a large new stimulus package focused on job creation. That this is not even being considered demonstrates the enduring power of the financial elites and their discredited economic ideology.
For this situation to change progressives need to lose their inferiority complex when it comes to economics. As Galbraith writes in The Predator State, "the cult of the free market serves as a kind of legitimating myth [that]limits the range of presentable ideas." Adherence to the myth means that certain lines of argument are deemed illegitimate. For example, the sensible notion that modest medium-term inflation (rather than very low inflation) is a good way to reduce the household debt burden is considered sacrilegious. Similarly, using stimulus packages to get people back into jobs and paying taxes are the best way to cut the deficit over time is usually felt to be unthinkable because of an obsession with avoiding deficit.
Rejecting the cult of the market is important but progressives also need to learn to speak about the GFC in an explicitly moral language that resonates with the values and experience of the majority of people. Right-wing populists like Rush Limbaugh and Glenn Beck are good at this. Calling Obama a socialist may be as absurd as calling Miranda Devine a journalist but it works on people because it’s part of a powerful narrative grounded in the moral universe of political conservatives.
The world of high finance can appear complex and remote from the lives of most people but progressives need to communicate the message that behind terms like "market sentiment", "Wall Street" or "free-market" there are only people. Yes, people working through institutions and organisations, but still people who have interests, values and agendas that can be understood and challenged. The public should know, for example, that "Market slams Obama bank tax" can be just as easily written "Super-rich economy-wreckers whinge about reform".
The banksters who bear a major responsibility for the GFC have not been held accountable for their actions. They have used bailout money and cheap US dollars to return to their pre-GFC high-risk, big-bonus culture while working hard to derail financial reform. Unless their power is challenged the US runs the risk of a second financial crisis and a double-dip recession with severe consequences for the battered global economy.
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