June 2012

Juan Ibez Martin

A 30-year financial experiment has come crashing to end. Now we need a fairer capitalism (Will Hutton, Observer Economics Editor, 5 October 2008)
The present financial crisis that began in 2007 commonly known as the "Great Recession"1 (in allusion to the Great Depression of 1929) hasn't just proved to be an economic crisis of historical proportions but could well be on its way to become the worst economic downturn known to date bringing into disrepute the long held orthodox view that Capitalism like the forces of nature can find its own equilibrium and is best left alone. As Capitalism does not operate in a political organizational vacuum, a discussion of the essay question would necessarily imply an assessment regarding the legitimacy of our form of governance. The long held traditional dichotomy between laissez-faire and government intervention (in order to counter-act the negative effects of capitalism) has morphed into a different kind of intervention, that is, one that only favours the wealthy at the expense of the unprivileged in an unprecedented scale. As some radical political economists will argue, Capitalism is not in crisis but quite the opposite, it is rather Capitalism's success that has produced the present crisis. The strategy deployed by capitalists always results in austerity plans in spite of social struggles (Samir Amin 2011a). So to claim that Capitalism is not in crisis lead us to the inevitable admission that liberal democracies are. Bearing in mind the above, discussing the present financial crisis involves analysing the crisis of liberal democracy, in other words, whether the present crisis lies primarily in capitalism or in our government's failure to protect its citizens (and not just the 1% to take an analogy from the Occupy Wall Street movement) or the failure of both, but never ignoring the fact that Capitalism and liberal democracies are intrinsically linked to each other. According to Samir Amin: "The real objective of the liberal option.....was to proceed to a redistribution of income in favour of capital" he continues: "The success of this option has indeed weakened growth; it has not happened in spite of it" (Samir Amin 2011a p25). To illustrate this point let us look at some of the consequences of the neoliberal period prior to the financial crisis and their unparalleled contribution to social inequality. According to research there had been a drop of 9% in average incomes in the 90% of the American population between 1973 and 2002. By contrast the top 1% had experienced a substantial increase of 101% in the same period and a further 227% increase in the incomes of just 0.1% of Americans. Likewise the same trend is true at the global level with 0.7% of the population holding over 30% of the global wealth (McNally 2011 793-795).

The term recession greatly underestimates the degree of seriousness of the present crisis.

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These facts provide evidence to assert that Capitalism has become if anything more inequitable since the adoption of neoliberal political theory by the West. The myth inculcated by orthodox economists and politicians alike that a faster economic growth would trickle-down to the poor is evidently questionable (Alex Callinicos 2003). The history of neoliberalism is closely linked to the financial deregulation of the market. The inherited safeguards put in place against the financial excesses of the past like the Bretton Woods system of fixed exchange rates came under attack in the 70's. The markets as it was claimed by bankers, would perform better in an environment of floating exchange rates and free capital movements (Hutton 2010, 2495-2496). The collapse of the Bretton Woods was the first casualty in a long list of deregulatory frenzy in the West and a warning of worst things to come. With the first signs of the economic crisis of 1971, the monetary arrangements put in place by the Bretton Woods system by which the dollar was pegged to gold broke down and allowed governments "to increase the money supply to spend their way out of the crisis." (McNally 2011, 579-580). The consequences were devastating as prices began to increase. Between 1971 and 1973 the US had increased their money supply a whopping 40% (McNally 2010, 579-580). The rise of inflation meant an increase in food, housing and oil prices. Oil was not the trigger to the 1973 crisis contrary to popular belief but the depreciation of the dollar that forced oil producing countries to increase their prices to account for the equivalent devaluation (Koopman et al 1987 according McNally 2011, 591-592) The way was paved for the political erosion of the Keynesian discourse that was prevalent during the post-war years giving birth to the doctrine of neoliberalism. As soon as Paul Volcker became the chairman of the Federal Reserve in 1979, he began to increase interest rates in order to keep inflation under control. The economy stagnated because it was too expensive to borrow money. A further deregulatory wave of employment rights affected the airlines and trucking industries. The consequences translated into high unemployment, national strikes, and power struggles between unions and government. Meanwhile on the other side of the Atlantic Margaret Thatcher was busy introducing her own neoliberal policies not without opposition that culminated with the defeat of Britain's National Union of Mineworkers in 1985. Margaret Thatcher successfully diminished the power of British trade unions in favour of the bankers. For the subsequent 30 years after Thatcher taking office in 1979 the proportion between bank assets and Britain's annual output (of one and a half times the national output) more than trebled (Hutton 2010, 573-576) The neoliberal state which was by then in full swing, favoured in theory the "individual private property rights, the rule of law and the institutions of freely functioning markets and free trade" (Harvey 2005 p64). The legal framework was based on the sanctity of contractual obligations between juridical individuals (corporations being regarded as individuals) therefore, any interference with contractual obligations between such parties in the market place has to be opposed because such legally binding obligations were being created by individuals that were just performing their right to freedom of action, expression and choice (Harvey 2005

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p64) notwithstanding the fact that a truly fair contract can only be achieved between parties of a similar bargaining power. According to Harvey (2005), neoliberals are suspicious of democracies. Governance by the majority is seen as a threat. Democracy is a luxury only possible with the advent of wealth and a sizeable middle class and they also express their preference of governance by experts and elites. In December 1986 and in line with the neoliberal period of deregulation, Paul Volcker (a technocrat himself) decided to further erode the restrictions that the Glass-Steagall Act of 1933 had established preventing the separation between banking and commerce in the financial system (Sherman 2009 pp 8-9). From then on banks could make up to 5% gross profits in investment banking business. This was the direct consequence of the London Stock Exchange scrapping the old system which imposed fixed commissions and virtual bans on new entrants in what became known as the famous Big Bang of 1986. (Hutton 2010, 2532-2534). British banks and financial institutions took the opportunity to establish themselves as the dominant economic power in the City of London and built a position of influence. Light-touch regulation was exacerbated by the freedom awarded to them in order to exploit tax havens (Hutton 2010, 581-582) With the fall of Communism in the late 1980's and early 1990's the rules of the game had changed. Capitalism did not have to contend with the threat of Communism and the so hard fought rights and freedoms of the working class became susceptible to attack at any given time. The post-war consensus in the UK on social welfare provisions was forged in the context of a serious threat from the Communist Soviet Union and their expansionist intentions towards Western Europe. The political and capitalist elites had no choice but to compromise with the working class. Liberal democracies the world over began to show a gradual democratic deficit. Financial institutions exerted a great deal of influence on politicians and still do. Bankers and big corporations with their big contributions had penetrated governments in order to influence policies. In the US Robert Rubin an ex co-chairman of Goldman Sachs became the Treasury secretary under Clinton's Administration; Henry Paulson an ex CEO of Goldman Sachs also became a Treasury secretary this time under the George W. Bush administration (Hutton 2010, 2759-2764). The picture isn't less worrying in the UK. According to Hutton (2010) Baroness Shriti Vadera, who was Gordon Brown's right hand worked for the investment bank Warburg. Sir James Sassoon had worked for UBS before joining the Treasury in 2002 and he is now a minister in the coalition government. Mike Clasper was appointed chairman of the HM Revenue and Customs having previously worked for Terra Firma. If that wasn't sufficient to convince the sceptics, Lucas Papademos a former European Central Bank vice president was sworn in as Prime Minister in Greece soon after Prime Minister George Papandreu had dared to call a referendum on the Greek bailout. Meanwhile in Italy another unelected technocrat and former EU commissioner and economist was appointed as Italy's Prime Minister. This is a trend which 3|Page

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politicians are justifying on the grounds of calming down international bond markets (The Telegraph 2011) but it puts into serious question the legitimacy of the democratic system. This trend is not only constrained to governments. Mario Draghi the president of the European Central Bank is also a former vice chairman and managing director of Goldman Sachs International. It comes to no surprise Hutton's claim that: "Big finance...has...the politicians in its pockets. The degree to which bankers have penetrated government...has been extraordinary, beyond any reasonable justification" (Hutton, Will 2010, 2759-2760) In the words of UKIP MEP Nigel Farange politicians have formed an unholy alliance with the bankers2 in detriment of the majority of the population that has to pay for their excesses. Back in the UK, James Crosby an ex-chief executive of HBOS became a deputy chair of the FSA. Something had gone seriously wrong when institutions that allegedly represent the interests of the general public like the FSA have to recruit nine out of its eleven members from the ranks of the banking industry and still claim to be an independent and unbiased organisation. As Noam Chomsky argues, "a dominant theme is to restrict the public arena and transfer decisions to the hands of unaccountable private tyrannies. One method is privatization which removes the public from influence on policy" (Chomsky 2006 p218). According to him, the elites have been busy since the 1960's trying to counterbalance the incorporation of marginalised sectors of the population (women, labour, minorities, etc) into the political arena to press their demands in what they called the excess of Democracy. The project of restoring the political arena back into the hands of the elites was also advanced by "neoliberal reforms which are antithetical to promotion of democracy" (Chomsky 2006 p218). Those neoliberal reforms and the liberalisation of the financial sector meant the creation of a "virtual Senate" through which financiers could exercise their veto on government decisions (if not coercion) with the threat of capital flight and attacks on currencies to mention the least. (Chomsky 2006 p219) To conclude and going back to my introduction the question I would like to answer is where does the trouble come from? Capitalism itself or liberal Democracy? The essay title give us a clue as to where the problem lies. The "now we need a fairer Capitalism" implies that Capitalism itself is not fair as most of us would agree with. In other words, if Capitalism is unfair we have two possible answers to the question. Either we abandon it or we try to make it fairer through the reform of governance in order to regain its control with a fair redistribution of wealth being at the centre stage of policy making. Up to some extent I can agree with Callinicos (2003) that the problem does not come from Capitalism (although in my opinion Capitalism creates enough trouble of its own) "but from a particular set of misguided policies being pursued by Western governments and the international financial institutions" (Callinicos 2003 p26). He concludes that if there was a reversal of neoliberal policies to a more "regulated and
2

http://www.ukip.org/content/video-zone/2344-bankers-and-politicians-unholy-alliance

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humane capitalism of the post-war era, then most of the worst ills afflicting humankind could begin to be addressed."" (Callinicos 2003 p26). But the above claim is little more than wishful thinking and in my opinion clearly not possible. I would undoubtedly agree with Samir Amin as he wrote that: "We are not living in a historical moment in which the search for a social compromise is a possible option...our present historical moment is not the same...the conflict is between monopoly capital and workers and people who are invited to an unconditional surrender. Defensive strategies of resistance under these conditions are ineffective and bound to be eventually defeated." (Samir Amin 2011b point 5 ) I believe that it is unrealistic to argue for a return to the post-war models of social democracy, maybe for that reason we need a more radical approach to the problem like Samir Amin's proposal for the socialisation of the ownership of Monopolies or Callinicos's call for the nationalisation of the financial institutions as they have been rescued with public money. Finally, neoliberal theory used to discourage interference with the market (whilst it suited them) because they argued markets can find their own equilibrium and therefore government's only obligation had to be reduced to upholding the sanctity of whatever contractual obligations capitalists imposed on workers. However as we have recently experienced it is now clear that the system has failed in one important aspect, that is, the begging of the bankers (the too big to fail) for state intervention in order to rescue their corporations when the normal course of action (according to their orthodox neoliberal views) would dictate the refusal of such intervention in order promote the survival of the fittest, that is if they had ever genuinely believed that the market was an immutable force of nature and that it was best left alone. This is where the system and its theories have come to an abrupt end, that is, the moment that they socialised the debts of the too big to fail.

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Bibliography.
Amin, S (2011)a Ending the Crisis of Capitalism or Ending Capitalism? Pambazuka Press, South Africa Callincos, A. An Anti-Capitalist Manifesto, Cambridge: Polity Press. Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009), 208. Chomsky N (2007) Failed States. Penguin Books, London. Harman, C. (2009) Zombie Capitalism, London: Pluto Press. Harvey, D. (2009) A Brief History of Neo-Liberalism, Oxford: Oxford University Press. Hutton, Will (2010-09-30). Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society. Hachette Littlehampton. Kindle Edition. McNally, David (2011-06-13). Global Slump (Spectre). Turnaround. Kindle Edition. Sherman, M (2009) A Short History of Financial Deregulation in the United States. Centre for Economic and Policy Research. Washington DC Online sources: Amin, S (2011)b Audacity, More Audacity, Socialist Project E-Bulletin No. 577 December 6, 2011 http://www.socialistproject.ca/bullet/577.php#continue The Telegraph 2011 Who Voted for you Mario Monti, http://www.telegraph.co.uk/news/politics/8896719/Who-voted-for-you-MarioMonti.html UKIP http://www.ukip.org/content/video-zone/2344-bankers-and-politicians-unholyalliance

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