The current crisis is a colossal failure of the US and UK’s political philosophy and regulatory syst em.
At the time of writing, one House of the US Congress is still to pass the legislation providing for a $700 billion rescue for the US financial system. European governments also have not escaped the gathering storm. Several banks in the UK and the continent have needed to be supported with taxpayer’s funds running into tens of billions of euros and pounds. Even if the US Congress passes the bill, and there are no further bank failures, the whole episode is a colossal failure of both a political philosophy and the regulatory system that flowed therefrom, particularly in the US and UK, those citadels of finance capital.
Turning first to the political/economic philosophy, the last 80 years of history in the US can be broadly divided into two equal halves — say 1929 to 1968 and 1969 to 2008. In the first period, Democrats occupied the White House for 28 years and Republicans the remaining 12; the proportions were exactly reversed in the second period: income disparities narrowed in the first and widened sharply in the second. In 1916, the top 0.01 per cent of Americans earned 4.5 per cent of the national income. With progressive taxation and other measures of social security, their share had dropped to just 0.5 per cent by the end of the 1960s; it widened to 3 per cent by 1998 (data from an article by Chrystia Freeland, Financial Times, September 25). By now the proportion has surely gone up further. This reversal of the previous egalitarian policies was the result of Robin Hoods in reverse like Ronald Reagan and George W Bush, who slashed taxes on the rich, reduced social services and believed in reducing the role of government in the economy as much as possible. Jimmy Carter, who claimed that “piling up material goods cannot fill the emptiness of lives which have no (other) purpose”, was defeated by Reagan who averred that “the government cannot solve any problem — in fact, government is the problem”. It followed that governmental intervention or regulation of the economy got a bad name and market fundamentalism became the accepted creed. Marauding finance capital led to the profits in financial services going up from 10 per cent of the aggregate corporate profitability in the US to 40 per cent last year. Finance increasingly became the master of the economy, not its servant.
While much of the excesses were limited to the US, market-determined exchange rates and unrestricted cross-border movement of capital came to be thrust on the developing world to create more trading opportunities for Wall Street, by a compliant IMF and World Bank. (There is little empirical evidence that either of these measures helps growth.) To my mind, one of the underlying causes of the series of crises in east Asia in 1997-98 was the free movement of capital. Prime Minister Mahathir Mohamad of Malaysia was roundly criticised by the west for putting some restrictions on capital outflows to protect the domestic economy. (The result was that the Malaysian economy suffered least amongst the affected countries.) It also blamed weak financial systems and internal controls in the banking system, and “crony capitalism” for the crises. The current crisis amply manifests the strength of US banking and its risk management capabilities.
Crony capitalism? What better example than the manning of not only the US Treasury secretary’s post, but also that of the president’s chief of staff by former executives of Goldman Sachs (incidentally, the president of the World Bank also comes from the same investment bank). These are only the current examples of the revolving door between Wall Street and the US Administration prevalent for long — and often presented as a manifestation of the public service spirit of Wall Street bankers. To be sure, the public service urge comes only after hundreds of millions have been earned in “trading” profits. To appreciate the culture of investment banks, I can do no better than quote two instances cited in The Economist’s (September 27, 2008) review of “The Partnership: The Making of Goldman Sachs”, by Charles D Ellis. A female job candidate was asked if she would have an abortion rather than lose the chance to work on a big deal! This may be an aberration; but surely it also manifests the culture of money being the only value, consciously or unconsciously cultivated by the investment banks. The second instance cited in the review is no aberration: surely the top management knew that Goldman traders were making huge profits betting house prices would drop, even as the bank continued to sell mortgage backed securities, and continued to claim that, in its corporate value system, clients come first.
Henry Paulson, the current US Treasury secretary was chairman of Goldman Sachs for a long time before taking up the present job. He also wants unfettered rights to use $700 billion of taxpayers’ money to buy sub-standard assets from the banking system, in order to save it. (Can things get any more bizarre?) Incidentally, the original draft of the bill had no money for helping those deprived of their houses through repossession.