Working my way through the acreage of coverage of the banking crisis last week, I came across this gem in The Guardian of October 4th.
Senator ……………of Virginia has addressed a letter to …….the governor of the Federal Reserve Bank of Boston, advocating legislation “making it mandatory on the administrators of banking laws to prevent, by penalisation, such disasters in stock-gambling operations as recently have disgraced our country.”
The dateline for this was November 11th 1929. The item was included in a facsimile double-spread of the paper’s coverage of the crash of that year. The senator was Carter Glass, founder of the U.S. Federal Reserve system and co-sponsor with Henry Bascombe Steagall, of the legislation that led in 1933 to the Glass-Steagall Act enforcing the separation of investment and commercial banking activities.
As my familiarity with this legislation was limited to the knowledge that the Act had been abrogated by Clinton in 1999, I needed more information. I turned to Investopedia where a certain Reem Heakal dispenses sound advice to investors. His brief entry on the Glass-Steagall Act leaves no doubt about his attitude to its repeal:
“To the delight of many in the banking industry…in November 1999 Congress repealed the Glass-Steagall Act with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restriction against affiliation between commercial and investment banks. Furthermore, the GLB Act allows banking institutions to provide a broader range of services, including underwriting and other dealing activities.”
This was apparently written recently – but probably not within the last week or so. How about the following, from the same source, for an informed assessment of social responsibility in the financial markets:
“Furthermore, big banks of the post-Enron market are likely to be more transparent, lessening the possibility of assuming too much risk, or making unsound investment decisions. As such, reputation has come to mean everything in today’s market, and that could be enough to motivate banks to regulate themselves.”
It is difficult to read this sort of thing now without bursting into fits of laughter – or, more likely, outbursts of anger. But it should not be forgotten that only weeks ago this was the received wisdom about the way the banking system operated.
According to the orthodoxy of “free market” fundamentalism, the only acceptable form of regulation was self regulation which, it was claimed, would operate according to the natural laws of the market. Now, in Britain, the term Nationalisation has been resurrected from a thirty year hibernation. No mainstream political party would have dreamed of suggesting that privatised utilities and industries – let alone the banks – should be nationalised. But now, part-nationalisation or possibly full nationalisation of the whole banking system is on the political agenda. Politicians of all parties, and contributors to the financial columns of British newspapers (most of whom never uttered a word of criticism of the de-regulated financial system) have been converted overnight into champions of tighter regulation and Keynesian-style interventionism. And just as nationalisation is back on the agenda, so too is discussion about capitalism. Until now use of the term was confined mainly to the pages of journals regarded by their critics as representative of the “unreconstructed left.” Now, the perceptive neo-Keynesian commentator, Will Hutton writes in The Observer : “There is a combination of a worldwide bank run, seizure of credit markets and collapse of asset values that could plunge the globe into depression. This is history’s joke: the crisis of capitalism long predicted by communists and socialists who are no longer able to take advantage of it.”
The crisis facing us is truly terrifying. There has, understandably, been an outburst of rage against the ideologues and profiteers of free market fundamentalism. Hutton refers to the Financial Times’ How to Spend it magazine advertising dresses costing £30.000, and to a hedge fund manager acquaintance who complained that he was being underpaid when he received $200m for one year’s work. During the past 20 years or so one has become increasingly familiar with a “celebrity” world, inhabited by Russian oligarchs, hedge-fund managers, investment bankers, football stars – all possessing fabulous wealth beyond the imagination of ordinary mortals. Conspicuous consumption and ostentation has broken all bounds as the billionaires cruise the world in their private jets, or sail the seas in their luxury yachts and private submarines. Now, the members of this global kleptocracy are set to hold on to their billions. The rest of us will be left to face an arid future of welfare cuts, rising prices, mass unemployment, erosion of pensions, loss of savings and environmental devastation that will be the price paid by taxpayers for bailing out banks that are “too big to fail.”
But the banking system has failed. The emergency measures that U.S., British and other European governments are attempting to put together at the G.7.summit, amount to a salvage operation for a global financial system that has failed. No-one knows the size or extent of the unsaleable “securitised loans” or junk assets held by these banks. No-one really seems to know how much – how many trillions of dollars – may be required to bail them out. Presumably that is why Gordon Brown was so evasive when asked this week-end whether he had learnt lessons from the Great Depression. He said “I want people to know that we are doing everything we can to rectify the failures. Looking back to the lessons of the past, if you have fundamental failure that has been exposed and you are now acting upon it, then that is the best solution.” His government has just made available £500bn of taxpayers’ money to keep the banks afloat. There is no guarantee that it will succeed. The bankers, cheerleaders for deregulation and fierce opponents of state “interference” in the financial markets, still operate, as they always have, on the principle “profits are private; losses are public.” They now come, cap in hand, to be saved from the consequences of their own egregious excesses. Apart from proffering the begging bowl the bankers have remained silent through this crisis of their making. There have been no apologies and no resignations. They regard themselves as blameless. They remain adamantly opposed to any governmental presence on their boards of directors, imagining, it seems that once they have their hands on the taxpayers money they can remain accountable to no-one but themselves. Recently a new term has been coined for such people: Banksters. It is singularly appropriate.
Whether the measures taken so far to stabilize the situation will succeed remains to be seen. There will be some indication when the markets open tomorrow (13.October). There is already talk in Britain of the need to nationalise the whole banking system. That such an option is now being considered by politicians formerly committed to completely deregulated markets, is an indication of how serious things are.
Whatever happens, the future for millions of working people, the victims of this crisis, looks very bleak. There is widespread and growing anger. Many are asking “how could it have come to this?” Without attempting to provide anything like an answer to the question, I will conclude by offering a few insights that I have gleaned from history.
In Britain between 1945 and the late 1970s the economic policies of governments, Tory and Labour, were based upon a consensus sometimes referred to as “Butskellism”, a term derived from the names of two post-war chancellors of the exchequer, Butler (Tory) and Gaitskell (Labour). The “commanding Heights” of the economy had been nationalised by Labour between 1945 and 1951 and Tory governments accepted the “mixed economy.” By the mid 1970s, with rising inflation and increasing trade union strength, the advocates of free market fundamentalism – taking their inspiration from the Milton Friedman’s Chicago School, demanded an end to regulation of the market, the crushing of trade unions and de-nationalisation. In 1979 Thatcher came to power in Britain, followed closely by Reagan in the U.S. The free-market fundamentalists took control. In Britain the trade unions were shackled, the manufacturing base destroyed and all the nationalised industries privatised. This process continued unabated throughout the 1980s.
During this process the collapse in 1991 of the Soviet Union has a significance often overlooked. However flawed an example of socialism the Soviet system may have been – and it certainly was – it nevertheless represented an example of a possible alternative economic system to capitalism. With its collapse, it could be – and was – argued that there was “no alternative” to the “free world”, free-market version of totally unregulated capitalism. And so it took off as a system to be applied globally – with the consequences that now stare us in the face.
One final comment. The neo-Keynesian critics of the unregulated market, from J.K. Galbraith to Will Hutton, have exposed its defects and predicted its consequences. They have argued passionately for a socially responsible, fairer version of capitalism based on state intervention and regulation. They believe that it is possible to operate such an alternative and through it avoid the kind of crises that we are now experiencing. But this is questionable.
Another view is that such crises are systemic. Capitalism is a system that will always be driven by the forces of the market, and those in whose interests it operates will always strive to rid it of the “impurities” of state intervention and market regulation. If this is right, then the conclusion can only be that intervention and regulation are not enough to prevent the recurrence of the kind of global crisis that is now upon us. The system itself will have to be changed, and that can only be done by harnessing the rising mass anger into a global movement capable of achieving it.