The US financial crisis: locating the real locus of the debate with Rick Wolff
Economic Crisis, Ideological Debates
Capitalist Crisis, Marx’s Shadow
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Economic Crisis, Ideological Debates
By Rick Wolff
In US capitalism’s greatest financial crisis since the 1930s Depression, status-quo ideology swirls. The goal is to keep this crisis under control, to prevent it from challenging capitalism itself. One method is to keep public debate from raising the issue of whether and how class changes — basic economic system changes — might be the best “solution.” Right, center, and even most left commentators exert that ideological control, some consciously and some not. Hence the debates where those demanding “more or better government regulation” of financial markets shout down those who still “have more confidence in private enterprise and free markets.” Both sides limit the public discussion to more vs less state intervention to “save the economy.” Then too we have quarrels over details of state intervention: politicians “want to help foreclosure victims too” or “want to limit financiers’ pay packages” or want to “weed out bad apples in the finance industry” while spokespersons of various financial enterprises struggle to shape the details to their particular interests.
We need to recall that crises always generate “solutions” — like all those above — that preserve the basic system. We also need to advance alternatives not subordinated to the status quo, that open up the discussion by showing the risks of not changing the system and the virtues of doing so.
Let’s begin with the issue of government regulation. Note first that corporations like investment banks, commercial banks, stock and mortgage brokerages, and so on are all run by boards of directors. These boards — usually numbering 15 to 25 people — make all basic corporate decisions. They hire the millions who do the work, and they tell these employees what to do with the tools and equipment they provide. Today’s financial mess and economic crisis are first and foremost results of decisions by these boards of directors.
In previous economic crises — especially the 1930s Depression — financial corporations were subjected to government laws and regulations passed under pressure of mass suffering. However, the politicians who wrote those laws and regulations soon thereafter allowed financial corporations to evade them, then later to amend them, and finally to eliminate many of them. Politicians accommodated financial corporations because they were major contributors to their campaigns and major supports of their political careers or because they believed government intervention to always be “bad” for economic wellbeing. Financial corporations’ directors used profits also to hire armies of lobbyists who shaped every government step in deciding whether and how to enforce laws, rewrite regulations, etc. Thus, US regulators depended increasingly on the financial corporations they supposedly regulated. Nor should we forget the profits financial corporations have always devoted to “public relations” — costly campaigns to undermine the very idea of government regulation in school curricula, mass media, politics, and across our culture. So now we return to square one as deregulated finance — having done its job of making billions for the industry — produces another crisis and another set of calls for regulation.
In short, arguing over whether to leave finance to financial corporations or to have government regulate them is no real debate. In the US, financial corporations’ boards of directors have dominated the operations of the financial industries either way. Since all regulations imposed on US financial enterprises have left their boards of directors as sole receivers and distributors of all profits, the boards used them to evade or gut the regulations. What the right, center, and left now debate is merely another set of regulations all of which again leave untouched the profits accruing to financial companies’ boards of directors.
Finance has been grossly mismanaged by the institution of the corporation under deregulation: hence the crisis. Responding to this fact requires more than government reregulation. We need also to change the corporation in basic ways that can avoid or correct financial mismanagement. Nothing could better assure that new and tougher government regulations might work this time than making the workers inside financial corporations real partners with the government in monitoring and enforcing properly regulated financial activities.
To that end, we propose a radical restructuring of financial corporations. Their employees at all levels must become major participants in decision-making activity. That means elevating workers to significant membership on boards of directors and all board committees. Only then can employees know corporate realities and so make sure financial activities conform to the spirit and letter of regulations. Only then will inappropriate activities get reported to and investigated by regulators long before they accumulate into today’s sort of crisis. Masses of employees institutionally empowered inside corporate decision-making are the nation’s best hope for a better, fairer financial system than we have had to date.
In short, if the US government — ultimately the tax-payers — will now pay the costs and take the risks to bail out a failed financial system, then it has the right and obligation to change that system. We need such changes to avoid repeating the failures of the past. These changes would also introduce some democracy inside the corporation — where it has been excluded for too long and with disastrous consequences.
The current debates also fail to face how the underlying economy helped produce the financial mess. Real wages stopped rising in the US in the 1970s, yet the American psyche and self-image, subject to relentless advertising, was committed to rising consumption. To enable that, workers with flat wages had to borrow to afford rising consumption. For the last 30 years loans replaced wages, but rising consumer debt introduces new risks and dangers. If, simultaneously, politicians use state borrowing to avoid taxing the rich while providing vast corporate subsidies and waging endless wars, the debt problems mushroom. Aggressive, deregulated financial companies grabbed the resulting “market opportunity” by devising ever more complex, hidden, and dangerously risky ways to profit hugely from the social debt bubble.
A sub-prime economy produced sub-prime wages, sub-prime borrowers, sub-prime lenders, and sub-prime government regulation. Bailing out and reregulating financiers — the current plan being debated across the nation — does far too little too late. The proposal above exemplifies the much bigger and more basic changes that now need active public discussion.
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Capitalist Crisis, Marx’s Shadow
By Rick Wolff
Capitalism happens. When and where it does, capitalism casts its own special shadow: a self-critique of capitalism’s basic flaws that says modern society can do better by establishing very different, post-capitalist economic systems. This critical shadow rises up to terrify capitalism when — in crisis periods such as now — capitalism hits the fan. Karl Marx poetically called that shadow the specter that haunts capitalism.
The so-called financial crisis today is a symptom. The underlying disease is capitalism: an economic system that weaves implacable and destructive conflict into its production and distribution of goods and services. Employers and employees need to cooperate to make the economy work, but they are forever adversaries whose conflicts periodically burst into crises. So it is today. Capitalism also locks employers into those endless struggles with and against one another that we call competition. It too periodically erupts into conflicts and crises. And so it is today.
Employer-employee conflict contributed to today’s global capitalist meltdown as follows. In the 1970s, employers found a way to stop the long-term slow rise in real wages of their employees. By outsourcing jobs overseas to take advantage of cheaper wages, by drawing US women into the labor force, by substituting computers and other machines for workers, and by bringing in low-wage immigrants, employers drove down their employees’ wages even as they produced ever more commodities for sale. The results were predictable. On the one hand, company profits soared (after all, workers produced ever more while not having to be paid any more). One the other hand, after a few years, stagnant workers’ wages proved insufficient to enable them to buy the growing output of their labor. Given how capitalism works, employers unable to sell all that they produce lay off their own employees. And of course, that only compounds the problem.
Thus, in the 1970s, another capitalist crisis loomed as a bad recession hit hard. But that crisis was kept short because US capitalism found a way to postpone it: massive debt. Since employers succeeded in keeping wages from rising, the only way to sell the ever-expanding output was to lendworkers the money to buy more. Corporations invested their soaring profits in buying new securities backed by workers’ mortgages, auto loans, and credit-card loans. Owners of such securities were thereby entitled to portions of the monthly payments workers made on those loans. In effect, the extra profits made by keeping workers’ wages down now did double duty for employers who earned hefty interest payments by loaning part of those profits back to the workers.
What a system!
Postponing the solution to crisis of the 1970s only prepared the way for the bigger one now. Booming consumer lending in the 1980s, 1990s, and since 2000, especially in the deregulated financial world of Reagan and Bush America, provoked wild profit-driven excesses and corruption (the stock market “bubble” and then the real estate “bubble’). It also loaded millions of Americans with unsustainable debts. By 2006, the most stressed borrowers — “sub-prime” — could no longer pay what they owed. This house of debt cards then began its spiraling descent.
Competition among enterprises also contributed to this crisis. As some banks made big profits rushing to lend to workers, other lenders feared that those banks would use those profits to outcompete them. So they too rushed into “consumer lending.” To raise the money to make such profitable loans to workers, lenders made expanded use of new types of financial instruments, chiefly securities backed by workers’ debt obligations (securities whose owners received portions of workers’ loan repayments). US lenders sold these securities globally to tap into the entire world’s cash. The whole world thus got drawn into depending on a whirlpool: US capitalism propping up its workers’ purchasing power with costly loans because it no longer raised their wages. The competing rating companies (Fitch, Moody’s, Standard and Poor, etc.) inaccurately assessed these securities’ riskiness. These companies competed for the business of lenders who needed high ratings to sell the debt-backed securities. Private and public lenders around the world competed with one another by buying the US debt-backed securities because they were rated as nearly riskless and yet paid high interest rates.
Enterprise competition and employer-employee conflicts — both core components of capitalism — have been major causes of today’s “financial crisis.” Yet the huge government bailout now proposed by Treasury Secretary Paulson and FED Chairman Bernanke does not address either the problem of stagnant wages or that of competition. Instead the proposed bailout plans to “fix” the financial crisis by throwing vast sums at the big lenders in the hope that they will resume lending and so pull the economy out of its crisis. Because this “solution” ignores the underlying problems of our capitalist economy, its prospects for success are poor.
No questioning, let alone challenging, of capitalism’s role is conceivable for US leaders. Quite the contrary, their “policies” aim chiefly to preserve capitalism — largely by keeping its responsibility for the current crisis out of public debate and thus away from political action. Yet this crisis, like many others, raises Marx’s specter, capitalism’s shadow, once again. The specter’s two basic messages are clear: (1) today’s global financial crisis flows from core components of the capitalist system and (2) to really solve the current crisis requires changing those components to move society beyond capitalism.
For example, if workers in each enterprise became their own collective boards of directors, the old capitalist conflicts between employers and employees would be overcome. If state agencies coordinated enterprises’ interdependent production decisions, the remaining enterprise competition could be limited to focus on rewards for improved performance. The US government might not just bail out huge financial institutions but also require them to change into enterprises where employers and employees were the same people and where coordination and competition became the major and minor aspects of enterprise interactions. The US government took over Fannie Mae, Freddie Mac, and AIG, it changed neither the organization of these enterprises nor the destructive competition among them. That was a tragically lost opportunity. If the political winds continue to change far enough and fast enough, solutions responding to the current crisis by moving beyond capitalism might yet be tried.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst.