Sarkozy calls crisis talks
By David Gow
October 2, 2008
PRESIDENT Nicolas Sarkozy summoned French bankers to an emergency meeting last night amid increasingly desperate efforts in Europe to check the spread of financial market chaos.
With authorities in Belgium, The Netherlands, France, Germany and Luxembourg intervening to save banking groups across the Continent, the president called for a European Union response to the turmoil.
"There have been multiple contacts between the different European governments," Mr Sarkozy said.
"The situation requires rapid reactions. Everybody must show calm and a sense of responsibility."
However, regulators in Brussels insisted on a case-by-case approach to the crisis and ruled out an American-style multi-billion-euro bailout fund.
European Commission spokesman Johnannes Laitenberger said: "This is neither the time nor the place for a European version of the Paulson package."
Mr Sarkozy's initiative came amid growing concern in Paris that the country's banking system could suffer despite official insistence that it is among the most solid in the world, with a broad spread of activities and a high level of deposits.
Mr Sarkozy repeated a pledge made last week to guarantee French banks and the savings of their customers. "We must not give way in the face of destabilisation," he said. "We have to support the banks."
Mr Sarkozy called the heads of France's main banks and insurance firms to last night's meeting to discuss the crisis and the measures that the state could take to help them through it.
French Finance Minister Christine Lagarde indicated her willingness to intervene when she pledged support for Dexia, the embattled Belgian banking group, after panic sparked by reports thatit needed a capital boost.
Last night, Dexia became the latest European bank to need a state bailout, with Belgium, France and Luxembourg agreeing to pump E6.4 billion ($11.3billion) into the group following emergency talks that stretched throughout the night.
"Our ambition was to have very strong political involvement in order to send a signal to the markets," Belgian Prime Minister Yves Leterme said after the deal was reached.
The French Government and the French state financial institution Caisse des Depots will add a further E3billion to the pot, while Luxembourg will invest E376million through a convertible loan.
On Sunday, the governments of Belgium, The Netherlands and Luxembourg injected E11.2 billion ($19.9 billion) into Fortis in a rescue package that left them with 49 per cent of the bank's activities in each of the three countries.
Under the rescue package, Fortis will sell the E24 billion stake it acquired in Dutch bank ABN Amro last year and replace Maurice Lippens as chairman.
Filip Dierckx, who became Fortis's third chief executive this year when he stepped into the post on Friday, admitted that participating with the Royal Bank of Scotland in the takeover of ABN Amro had unsettled his bank. "There was bad timing in the ABN Amro deal," he said.
Analysts said Fortis would be lucky to get E8 billion for its ABN Amro stake.
The German Government was also in interventionist mood as it led a consortium of banks to salvage Hypo Real Estate, the commercial property lender, with E35 billion in credit guarantees.
A government spokesman said the state would guarantee 40 per cent of a first tranche of E14billion and 100 per cent of a second tranche of E21 billion.
Meanwhile, Ireland announced a blanket guarantee on bank deposits to try to bolster its financial system after a record slump on Dublin's stock market.
The move triggered a partial recovery.
Brussels is pressing for tough rules to protect EU banks from meltdown. The French president, Nicolas Sarkozy, has asked Britain, Germany and Italy for emergency talks, possibly this weekend in Paris, to discuss a European response to the crisis. He is rumoured to be mulling over a proposal for a €300bn (£237bn) bail-out plan for EU banks.
José Manuel Barroso, president of the European commission, indicated he was in talks with Sarkozy about an EU approach to stricter regulation, revised rules on evaluating complex assets, improved guarantees for bank depositors and greater transparency on executive pay.
A controversial plan by Charlie McCreevy, the EU's single-market commissioner, to tighten up banking regulation would force the banks to retain 5% of any exotic instruments they develop on their own books to prevent them passing on toxic assets to other banks. It would also restrict a bank's lending to any other single bank to 25% of its capital base and introduce stricter regulation by a group of pan-European supervisors.
"I'm really trying to row back on what's been occurring," he said. "All the incentives have been to wrap up as many mortgages as possible, put them in a package and send them off to someone else - get rid of them to make more and more money."
Barroso also indicated he backed French proposals to make European "fair value" accounting standards more flexible amid substantial disquiet among European banks about the current system, which, they argue, forces them to write down their assets more than necessary and squeeze their capital.
McCreevy admitted it would be "devilishly" difficult to get all 27 countries to agree. He is proposing a "college" of supervisors that would be headed by the regulator in the bank's home country, who would be empowered to "break the Gordian knot" in the event of disagreements.
Sarkozy convenes Summit to discuss financial markets crisis
Kuwait News Agency
10/2/2008 1:36:00 PM
PARIS, Oct 2 (KUNA) -- French President Nicolas Sarkozy, who also currently presides the European Union, is hosting a Summit meeting here Saturday of five major European nations to discuss the ongoing financial crisis on international markets, Sarkozys office announced Thursday.
In addition to the French leader, the meeting will bring together British Premier Gordon Brown, German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi, as well as the Prime Minister of Luxembourg Jean-Claude Juncker.
Senior officials from the European Union Commission, like President Jose-Manuel Barosso will also attend, as will the President of the European Central Bank (ECB), Jean-Claude Trichet.
"This Summit aims to prepare the contribution of European members of the G8 to the next meeting of this body that will be devoted to the international financial crisis," a statement from the French Presidents office indicated.
Major European nations have been acting in concerted fashion this past week to prevent the bankruptcy or threat of bankruptcy to certain major companies because of the financial crisis that has also devastated the financial sector in the United States, mainly due to bad housing loans that have defaulted.
Some troubled European companies have been bought out and others partially nationalized by governments, notably local financing and investment entity "Dexia," which was saved by action on the part of Holland, Belgium and Luxembourg, which took a 49 percent stake in the company. France also provided funds for a bailout of "Dexia." The ECB and many other major Central Banks and the US Federal Reserve have injected hundreds of billions of dollars into the markets to prevent credit availability drying up, thus putting the squeeze on businesses and consumers.
It is unclear if the major European powers are going to propose a plan to bailout other companies or establish a fund for this purpose as is being attempted in the United States.
But on Wednesday, the Organization for Economic Cooperation and Development (OECD), which represents the 30 most industrialized countries in the world, said that the US plan was already having an effect in reversing the sharply negative trend on stock markets and added that a European plan should be considered in the same vein.
Sarkozy working on financial crisis summit
By LAURENT PIROT
France' president, Nicolas Sarkozy, is pushing for a summit with Germany, Britain and Italy and a new law to regulate executive severance pay.
French government spokesman Luc Chatel said the summit could be held in the coming days. An expected participant, top European financial official Jean-Claude Juncker, suggested it would happen Saturday in Paris.
"The financial crisis testifies to a system that is running out of steam," said Chatel. "Therefore we need to find solutions to restructure a capitalism that is adapted to today's era."
His comments echoed a fiery speech last week from Sarkozy, who said the world flirted with catastrophe during the financial crisis and that laissez-faire capitalism "is finished."
Chatel said Sarkozy is in contact with European leaders and wants a meeting in the coming days with other European members of the G-8, which would mean Italy, Germany and Britain. The head of the European Central Bank and Juncker could also take part.
German Chancellor Angela Merkel's spokesman said the meeting appears likely to happen in Paris on Saturday afternoon.
Chatel, speaking after a Cabinet meeting, said Sarkozy also wants a law passed "very quickly" in France to regulate so-called 'golden parachutes' -- big payouts for departing corporate executives.
Sarkozy threatened in his speech last week to legislate if executives did not come up with their own "acceptable" practices by the end of the year.
Chatel said, however, that Sarkozy now no longer wants to wait and wants a law in the coming weeks. Sarkozy's party controls parliament.
Sarkozy urges common safety net
By Ben Hall in Paris
1 Oct 2008
Nicolas Sarkozy's proposal for a European Union-wide bail-out scheme is an audacious bid to seize the political initiative as the financial crisis sweeps through Europe.
The French president is unlikely be put off by criticism from other bloc members from at least discussing the idea at a summit of some EU leaders in Paris on Saturday. He wants an open-minded debate, "putting aside dogma", about ways of addressing the crisis, said an official.
French government figures insisted on Wednesday that there was no fully worked out proposals for the scheme and they rejected the price tag of €300bn ($422bn, £238bn) that some German officials have attached to it.
They attacked the French idea, arguing it was for individual states to handle their own banking bail-outs. Officials in London are also sceptical, but there could be support from other quarters. The idea is believed to have been raised initially by the Dutch government.
The French idea is not necessarily for a single EU bail-out fund. It could be a question of each member state agreeing to set up its own fund according to a common model, say officials.
"This is not an idea for some kind of Paulson plan because we don't have the same magnitude of toxic assets as the US," said a senior official in Paris.
But France is concerned that not all EU countries are in position to bail out a failing bank, especially if they are small economies or have already undertaken a rescue operation.
Christine Lagarde, finance minister, floats the idea of a fund in an interview on Thursday, telling Handelsblatt, a German newspaper: "We in the EU generally agree we need to support the financial sector. That poses the question: Do we need a European [shock]-absorption fund to rescue banks? That's only an idea. We need to discuss that."
Until recently France has publicly shown little interest in a co-ordinated rescue plan beyond tightening up EU financial markets regulation over the longer term.
Paris initially dismissed the request of Hank Paulson, US Treasury secretary, for Europe to set up its own rescue fund last month. Only on Wednesday, François Fillon, prime minister, set out a unilateral approach, vowing to prevent the collapse of any French bank.
Mr Fillon said Paris would "exclude no solution" required to save a bank from failure and indicated it would take stakes or even nationalise institutions in return for recapitalisation.
"We will give ourselves the means to prevent a major financial catastrophe," he said in an interview with Les Echos newspaper. "There will be no failure."
But the spread of panic across Europe and France's participation in the €6.4bn bail-out of Dexia with Belgium and Luxembourg seems to have prompted reflection on whether ad hoc arrangements are sufficient.
For Belgium, Dexia's rescue came after the nationalisation, with the Netherlands, of Fortis.
"French banks will not be sheltered from difficulty if a big European bank fails," Mr Fillon said.
Sarkozy calls in French bank chiefs
By Adam Sage and Rory Watson
October 01, 2008
Sarkozy seeks change to fair value rules
By Tom Fairless
Financial News Online
30 Sep 2008
French President Nicolas Sarkozy has summoned finance executives to discuss ways to reform accounting
SPIEGEL INTERVIEW WITH GERMAN FINANCE MINISTER STEINBRÜCK
'We Were All Staring into the Abyss'
SPIEGEL spoke with German Finance Minister Peer Steinbrück about the roots of the US credit disaster, whether Germany is in grave danger and what the future has in store for world banking.
SPIEGEL: Mr. Steinbrück, Wall Street is imploding. The government of the United States wants to establish a $700 billion (€480 billion) bailout program for its banks and their bad loans. How serious is the situation for the rest of the world?
Steinbrück: We are experiencing the most severe financial crisis in decades, although one should be careful about historic comparisons with 1929. One thing is clear: After this crisis, the world will no longer be the same. The financial architecture will change globally.
SPIEGEL: Could you be more specific, please.
Steinbrück: There will be shifts in terms of the importance and status of New York and London as the two main financial centers. State-owned banks and funds, as well as commercial banks from Europe, China, Russia and the Arab world will close the gaps, creating new centers of power in the financial world.
SPIEGEL: In other words, we are experiencing the beginning of a tectonic shift…
Steinbrück:... but not one that is abrupt and jarring. It will be an evolutionary process that will take several years.
SPIEGEL: The current thunder is certainly deafening. We have just seen all US investment banks disappear in one fell swoop.
Steinbrück: Three of them were either taken over or went bankrupt. The two others, because they abandoned their business model to save themselves. No one would have thought this possible until recently. Meanwhile, 25 financial service providers have disappeared from the market in the United States. All of this is illustrative of an earthquake. In addition, many institutions are still fundamentally lacking liquidity.
SPIEGEL: And is the United States completely to blame?
Steinbrück: The source and focus of the problems are clearly in the United States. There are many causes. After 9/11, a great deal of cheap money was tossed into the market. Apparently some of that money went to people with poor creditworthiness. This led to the growth of the real estate bubble. The banks embarked on a race over profit margins. Then speculation spun completely out of control…
German growth could be dropping.
SPIEGEL: …which also benefited German banks for a while.
Steinbrück: But they didn't invent these transactions. The stokers on the financial markets were responsible for that.
SPIEGEL: And how is the US patient doing now?
Steinbrück: It's in the ICU with pneumonia. This means that here in Europe, we can at least expect to get a bad cold. The US patient lacked legislation, a regulatory framework that could have helped avoid this development. That's the key issue for me. The financial products became more and more complex, but the rules and safeguards didn't change. I don't know anyone in New York or London who would have asked for a stronger regulatory framework 18 months ago. They were always saying: The market regulates everything. What a historic mistake!
SPIEGEL: Your US counterpart, Treasury Secretary Henry Paulson, began by essentially nationalizing the two US mortgage giants, Fannie Mae and Freddie Mac. But then he allowed investment bank Lehman Brothers to plunge in bankruptcy before saving the insurance giant AIG with an $85 billion (€58 billion) bailout. This doesn't exactly look like a clear course of action.
Steinbrück: In the case of Lehman, the US government wanted to send a signal to the market that they are not prepared to offer a bailout under any circumstances. In the case of AIG, we had direct talks at the G7 level and implored them to stabilize the situation. An AIG bankruptcy would have triggered shock waves around the world. We were all staring into the abyss at that point.
SPIEGEL: What role does the US election campaign play in resolving the crisis?
Steinbrück: I hope that my US counterpart will be capable of taking action for as long as possible. We cannot have a six-month vacuum until the next president takes office and his administration is ready to get to work.
SPIEGEL: Paulson headed the investment bank Goldman Sachs for a long time. Does this make him part of the problem?
Steinbrück: He is undoubtedly doing a good job. And at least Goldman Sachs still had the option of making its own decision to transform itself into a bank holding company.
SPIEGEL: That same Paulson snubbed you a year and a half ago. You arrived late for a meeting with him in Washington and he gave you all of 11 minutes of his time -- standing up.
Steinbrück: You don't seriously believe that such trivia plays any role whatsoever in my assessment of a counterpart and of the situation!
SPIEGEL: We are alluding to arrogance and a way of thinking that Paulson may have shared with many major players on Wall Street.
Steinbrück: The way of thinking on Wall Street was quite clear: "Money makes the world go round!" The logic went like this: The government should stay out of our business! And when we Germans began -- and perhaps it was even too late by then -- to ask for controls, for more transparency and equity guidelines, they laughed at us at first.
SPIEGEL: When did those initiatives begin?
Steinbrück: Back in the days of Gerhard Schröder's chancellorship. It was reinforced when Germany assumed the G-7 presidency in early 2007. The first real debate on the subject happened in February 2007, during a meeting of the G-7 finance ministers at Villa Hügel in Essen. Then British Chancellor of the Exchequer Gordon Brown was not very amused by our call for more transparency for hedge funds. The talks have been significantly more constructive since last fall.
SPIEGEL: What, specifically, will you call for?
Steinbrück: A few agreements were already reached with the British and Americans within the G-7 in April. They include imposing new rules on the conduct of the rating agencies, tightening equity regulations and gaining a better handle on cross-border bank supervision. But as far I am concerned, it isn't enough for the industry to develop its own code of conduct. I also want to see the banks no longer allowed to sell all of their risks as they see fit. I think it as a dangerous systemic design flaw that not only loans, but also credit risk is 100-percent marketable. This can lead to uncontrollable wildfires, as we are now seeing.
SPIEGEL: How much government does capitalism need? How much can it tolerate?
Steinbrück: Overall, we have to conclude that certain elements of Marxist theory are not all that incorrect.
SPIEGEL: And you, of all people, are saying this?
Steinbrück: Every exaggeration creates, in a dialectic sense, its counterpart -- an antithesis. In the end, unbridled capitalism with all of its greed, as we have seen happening here, consumes itself…
SPIEGEL: …because it creates an unbridled state?
Steinbrück: That would the wrong development. And I don't believe in it, either. Fortunately, we in Germany have done quite well for ourselves with a happy medium, the social market economy.
SPIEGEL: The German government is unwilling to participate in America's $700 billion bailout package. Is this your final word?
Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.
SPIEGEL: But the United States will certainly bail out US banks first -- a distortion of competition that could put European institutions under more pressure than ever.
Steinbrück: That's an issue, of course. But I can't give you a shoot-from-the-hip solution. First we have to see what exactly the Americans intend to do.
SPIEGEL: And if things became serious in Europe, you would also have to butt heads with Brussels over intervention options.
Steinbrück: You couldn't be more right! And I have already pointed this out. The Americans are clearly faster when it comes to crisis management, because they aren't hampered by these aid procedures.
SPIEGEL: Nevertheless, you do have worst-case scenarios on the back burner.
Steinbrück: It doesn't make any sense to speculate publicly over something like this. A crisis can easily become a self-fulfilling prophecy that way.
SPIEGEL: You recently met with the top executives from the German banking and insurance industries. What was the mood like?
Steinbrück: Very serious and open. But discretion is needed to achieve any progress on this front.
SPIEGEL: The German state-owned banks, at any rate, are a prime example of a case in which government influence does not automatically guarantee more security. On the contrary. The amount of gambling that took place at institutions like SachsenLB was unbelievable. And taxpayers are the ones who end up footing the bill.
Steinbrück: The responsibility lies with the respective shareholders. Some of them, however, are showing signs of wanting to pass this responsibility on to the government. That's when I stop playing Mr. Nice Guy. They should kindly solve their own problems.
SPIEGEL: Some, it would seem, have failed to apply the rules that already exist in the German system.
Steinbrück: I cannot confirm that. The auditors can only examine what is in the financial statements and what is presented to them. IKB and SachsenLB simply outsourced tremendous risks. I also caution against taking a stop-the-thief approach. In one case, for example, a former department head from the finance ministry who was on the supervisory board of one of these banks has been severely criticized. In an effort to pass some blame on to me, it has been conveniently forgotten that half of the who's who in the German economy was on this same board.
SPIEGEL: Perhaps you should have simply allowed something like IKB to go bankrupt, instead of bailing it out with billions from the state-owned bank KfW and then essentially giving it away to an American financial investor.
Steinbrück: And what would have happened then? We had less then five weeks to conduct a thorough audit. We had 36 hours to decide what would be more costly -- stabilization or insolvency. That was the situation on July 28 and 29 of last year. What happens to the €25 billion ($36 billion) worth of deposits at the IKB? Are they supposed to vanish into thin air? What would have been the consequences for the overall German financial economy? The damage would have disproportionately higher. It's easy to be critical now.
SPIEGEL: And what about the fact that KfW just happened to transfer €319 million ($463 million) to Lehman Brothers, the US investment bank that declared bankruptcy that very same day? This sort of thing doesn't exactly create confidence in state-owned banks.
Steinbrück: That was an awful mistake, of course. A grotesque error. But it was a mistake made by bank executives, not the administrative board, which includes politicians among its members.
SPIEGEL: It proves that normal risk management procedures failed completely -- directly under the nose of the finance minister.
Steinbrück: No, it proves that an inexcusably wrong decision was made. Do you think I wasn't livid about this? The entire crisis we are talking about here is incomprehensible for the normal citizen. But such an idiotic transfer -- even my 89-year-old mother is outraged about it. All 80 million German citizens understand this…
SPIEGEL: …and suddenly you had the tabloid Bild calling the KfW "Germany's stupidest bank."
Steinbrück: Okay, okay. But it's also worth noting that KfW passed all tests and checks regarding its risk management procedures that were performed by the federal audit court and auditors last year. Of course, I know that the bottom line is that what happened was completely ridiculous. But even that has to be carefully examined. We cannot simply start shooting at random, just to flush out a few executives and keep the public happy.
SPIEGEL: At any rate, the failures and breakdowns among many state-owned German banks show that the government isn't exactly an effective banker.
Steinbrück: I never claimed that it was. The government is neither better nor worse as a banker. Financial transactions are not its core field of operations. The fact that many bankers working for state-owned banks clearly miscalculated is partly the result of their having lost sight of the relationships between risks and profitability. But let me say this once again: Lehman was no state-owned bank, nor was Bear Stearns, Northern Rock or IKB.
SPIEGEL: How dramatic will the effects of the financial crisis be on the German economy?
Steinbrück: So far, the only obvious outcome is that numbers are getting worse. At this point, no one can provide a credible estimate of how bad they will become. Of course, this crisis will also affect growth. However, some developments are currently moving in the opposite direction. The employment market is still strong. And we are still pleased with our tax revenues.
SPIEGEL: You were optimistic only two weeks ago. You said that there was no reason to expect cataclysmic scenarios, and that growth for the year would remain at 1.7 percent.
Steinbrück: I object to your criticism. I have always been on the cautious side, and at the beginning of the year I stated that 2009 will be worse than 2008. I have no reason to revise my predictions for 2008. But 2009 will be significantly worse than the previous estimate of 1.2 percent growth.
SPIEGEL: Should German depositors be concerned about their savings?
Steinbrück: No. No one should be worried about savings accounts. We will see a tectonic shift in the global financial system. Entire types of banks and their business models will disappear, but that doesn't mean that anyone in Germany should be worried about their savings.
SPIEGEL: Is capitalism currently undergoing a general crisis?
Steinbrück: I don't think so. But the behavior of some elites is worth criticizing. We have to be careful not to allow enlightened capitalism to become tainted with questions of legitimacy, acceptance or credibility. This isn't merely an issue of excessive salary developments in some areas. I'm talking about tax evasion and corruption. I'm talking about scandals and affairs of the sort we have recently experienced, although one shouldn't generalize these occurrences. But they are the sort of thing the general public understands all too well. And when they are allowed to continue for too long, the public gets the impression that "those people at the top" no longer have to play by the rules. There have been times in Germany when these elites were closer to the general population. Some things have gotten out of control in this respect.
SPIEGEL: One cannot regulate morality.
Steinbrück: No, but that too is dialectics. The elites must understand that it is a matter of self-protection, of developing a sense of the right balance or allowing judgment to prevail.
SPIEGEL: Mr. Steinbrück, thank you very much for taking the time to speak with us.
Interview conducted by Wolfgang Reuter and Thomas Tuma
American financial crisis sparks German schadenfreude
The Local - Germany's News in English
Published: 28 Sep 08 10:07 CETOnline:
After years of pressing for tighter financial regulation German politicians got a bad case of schadenfreude and "I told you so" last week as US financial system grappled with the biggest crisis since the Great Depression.
German Finance Minister Peer Steinbrück was at the forefront, hitting out at the lack of oversight in the United States that he said was in large part to blame for the crisis.
"The long term consequences of the crisis are not yet clear. But one thing seems likely to me: the USA will lose its superpower status in the global financial system. The world financial system is becoming multipolar," Steinbrück said in a speech to parliament.
"Wall Street will never be the same again. A few days ago there were two Mohicans left remaining out of the investment banks. Now they no longer exist," Steinbrück said, referring to the change in status of Goldman Sachs and Morgan Stanley into bank holding companies.He added that the entire global economy would be changed by the US crisis. "The whole world over we must adjust ourselves to lower rates of growth and - with a time lag - unfavourable developments on labour markets," the centre-left Social Democrat said.
Steinbrück added that what was needed is "stronger international regulation agreed at international level" in order to "re-civilize" financial markets so that such a crisis was never repeated.Before that it was the turn of Germany's Foreign Minister Frank-Walter Steinmeier, who was recently selected by his Social Democrat party to run for chancellor in September 2009 against the popular conservative incumbent Angela Merkel. We told you so, was Steinmeier's message, made in a visit to the nerve centre of world finance, the New York Stock Exchange.
"I must say that we, and the finance minister (Steinbrück) in particular, were right in the recommendations that we have been making for two years," he told reporters on Wall Street.
"First of all, to ensure more transparency on international finance markets and secondly, to demonstrate more sensitivity to risk." "It is a discussion that we have had for a long time in Europe, that the completely unregulated parts of the international financial market must be more closely monitored and that we must try to reach an agreement on common regulations," he said.
Germany headed the Group of Eight industrialized nations last year and advocated greater transparency in international financial transactions, especially in hedge funds. But it was thwarted by US and British resistance. Merkel, Germany's conservative premier since 2005, was at pains to remind listeners of this.
"I criticise the perception that the financial markets have of themselves," she told the Münchner Merkur newspaper. "Alas, they have opposed for too long the introduction of rules with the backing of the British and American governments," she said. "On top ofnational rules, we need more international agreements to stem irresponsible financial speculation."
The comments of course have to be taken in context -- Germany is warming up for elections when Merkel's conservative CDU and Steinmeier and Steinbrück's SPD want to end their fractious current "grand coalition" in place since 2005.
And Germany's banks have also benefited from the huge banking boom in recent years, not least Deutsche Bank, the country's only bank with a meaningful investment banking presence on Wall Street. Germany is also as much part and parcel of the global economy as any other country.
"One should not lose sight of the fact that regulation is not the answer to everything," said Manfred Weber, head of Germany's banking association. "The role of banks in financing growth should not be complicated by new rules and regulations."
Schadenfreude (IPA: [ˈʃaːdənˌfʁɔʏ̯də] Audio (German) (help·info)) is enjoyment taken from the misfortune of someone else. The word referring to this emotion has been borrowed from German by the English language and is sometimes also used as a loanword by other languages.
Philosopher and sociologist Theodor Adorno defined schadenfreude as “largely unanticipated delight in the suffering of another which is cognized as trivial and/or appropriate.”[2
'Laissez-faire' capitalism is finished, says France
By ELITSA VUCHEVA
26.09.2008 @ 09:30 CET
Both France and Germany on Thursday (25 September) said the current financial crisis would leave important marks on the world economy, with French president Nicolas Sarkozy declaring that the under-regulated system we once knew is now "finished," and German finance minister Peer Steinbruck saying the crisis marks the beginning of a multi-polar world, where the US is no longer a superpower.
"The all-powerful market that always knows best is finished," says France's president (Photo: European Parliament - Audiovisual Unit)
Speaking to an audience of some 4,000 supporters in Toulon, France, Mr Sarkozy said the financial turmoil had highlighted the need to re-invent capitalism with a strong dose of morality, as well as to put in place a better regulatory system.
"The idea of the all-powerful market that must not be constrained by any rules, by any political intervention, was mad. The idea that markets were always right was mad," Mr Sarkozy said.
"The present crisis must incite us to refound capitalism on the basis of ethics and work … Self-regulation as a way of solving all problems is finished. Laissez-faire is finished. The all-powerful market that always knows best is finished," he added.
He accused "this system that allows the ones responsible for a disaster to leave with a golden parachute" of having "increased inequality, demoralised the middle classes and fed [market] speculation."
A European response
The French president also criticised "the logic of short-term financial profit" and said risks were hidden "to obtain ever more exorbitant profits" – something which, he said, was not the true face of capitalism.
"The market economy is a regulated market ... in the service of all. It is not the law of the jungle; it is not exorbitant profits for a few and sacrifices for all the others. The market economy is competition that lowers prices ... that benefits all consumers."
The speech by Mr Sarkozy, who is also the EU's current president-in-office, echoes similar statements he made earlier this week, when he called for an international meeting to discuss the crisis before the end of the year.
On Thursday, he also called on Europe to "reflect on its capacity to act in case of an emergency, to re-consider its rules, its principles," while learning the lessons from what is happening worldwide.
Mr Sarkozy said: "For all Europeans, it is understood that the response to the crisis should be a European one."
"In my capacity of president of the Union, I will propose initiatives in that respect at the next European Council [15 October]," he added.
'The world will never be the same again'
Meanwhile, German finance minister Peer Steinbruck criticised the US for failing to act in the wake of the crisis and said it would now lose its status of "superpower."
"The US will lose its status as the superpower of the world financial system. This world will become multi-polar," with the emergence of centres in Asia and Europe, he told the German parliament on Thursday.
"The world will never be as it was before the crisis," he added.
He notably blamed Washington for resisting stricter regulation, even after the crisis started last summer, and said this free-market-above-all attitude and the argument "used by these 'laissez-faire' purveyors was as simple as it was dangerous," the Associated Press reports.
He stressed that Germany had made recommendations last year for more rules, which Washington refused to consider.
They "elicited mockery at best or were seen as a typical example of Germans' penchant for over-regulation," Mr Steinbruck said.
Earlier this week, German foreign minister Frank-Walter Steinmeier also said the US should have listened to the advice coming from Europe, notably from Germany, that more control was needed.
"It is a discussion that we have had for a long time in Europe, that the completely unregulated parts of the international financial market must be more closely monitored and that we must try to reach an agreement on common regulations," he said during a visit to the New York Stock Exchange on Wednesday, according to Forbes.
Sarkozy Stresses Global Financial Overhaul
By STEVEN ERLANGER
New York Times
September 26, 2008
PARIS — President Nicolas Sarkozy of France tried to reassure citizens on Thursday that their savings and the nation’s economy were safe. While the global financial crisis will have serious consequences for the French economy, he said, bank deposits will be guaranteed and individual taxes will not be raised.
Mr. Sarkozy promised that the government would move ahead with its reforms, especially in shrinking the bloated state sector, and he called for an overhaul of the world’s financial system, arguing that an era of unregulated markets was over.
“A certain idea of globalization is dying with the end of a financial capitalism that had imposed its logic on the whole economy and contributed to perverting it,” he said.
“The idea of the all-powerful market that could not be contradicted by any rules, by any political intervention” was “a crazy idea,” he said. “The idea that the market is always right is a crazy idea.”
Mr. Sarkozy spoke to a rally of 4,000 supporters in the southern city of Toulon, but his speech, described by his office as a major address on the economy, was televised nationwide.
“The crisis isn’t over, and the consequences will be serious,” he said.
“Like everywhere else in the world, the French are scared. Scared for their savings, scared for their jobs, scared for their purchasing power.”
The main threat to the economy, he said, is fear, and it can be conquered only by telling the truth. He called again for a conference of world leaders before year-end to address the underlying reasons for the crisis.
“We’ve just passed two fingers from catastrophe,” he said. “Self-regulation, to fix all problems, is over. Laissez-faire is over.”
Mr. Sarkozy emphasized that he was deeply engaged in trying to manage the crisis and would pursue his main economic reforms. Those include a shrinking of the large state sector, eliminating 30,600 jobs next year and streamlining local government, and allowing more workers, despite the 35-hour week, to get overtime pay without significantly higher taxes.
But his speech, while long on rhetoric about the abuses of capitalism, was short on specifics, especially on regulating and improving the global system.
The French are already anxious about their purchasing power falling behind inflation and are convinced that America’s economic problems will worsen their own financial status.
Already, forecasts for French economic growth for next year have been cut in half to about 1 percent, and slower growth will inevitably mean lower tax revenue and a higher budget deficit.
In the budget he is scheduled to deliver on Friday, Mr. Sarkozy is expected to announce a freeze on government spending and a retreat from promises to balance the budget by 2012 — a target that was already two years behind a European Union goal for member countries.
The public deficit is expected to reach 2.7 percent of gross domestic product this year, and economists worry that without harsher spending cuts, France will exceed the 3 percent limit of the European Union next year. But the high deficit leaves Mr. Sarkozy little maneuvering room to avert a slowdown, especially since the European Central Bank, which controls the euro currency, sees its main mission as controlling inflation.
French business confidence fell in September to its lowest level since mid-2003, according to Insee, the statistics office.
On Thursday, Laurence Parisot, head of the main French business lobby, Medef, said that “the financial crisis, which came from the Unites States, is something extremely serious — it is a Sept. 11 of finance.”
This financial crisis “could provoke a very dangerous economic crisis,” she said, risking a serious recession.
Still, France has so far been reasonably well insulated from the American crisis, in large part because French banks are still heavily retail, mortgages normally require significant down payments and French regulations do not allow subprime mortgages.
This article has been revised to reflect the following correction:
Correction: October 1, 2008 An article on Friday about calls for an overhaul of the global financial system by President Nicolas Sarkozy of France referred incorrectly to the head of the French business lobby Medef. Laurence Parisot is a woman.
Sarkozy demands overhaul of global capitalism
September 25, 2008
French president Nicolas Sarkozy demanded an overhaul of the world's capitalist system today, saying the financial crisis had laid bare serious flaws in international banking.
In a keynote speech on the market mayhem, Mr Sarkozy said the crisis would weigh on the French economy for months to come, but promised that nobody in France would lose their bank deposits.
"A certain idea of globalisation is drawing to a close with the end of a financial capitalism that had imposed its logic on the whole economy and contributed to perverting it," Mr Sarkozy told some 4,000 supporters at a rally in southern France.
"The idea of the absolute power of the markets that should not be constrained by any rule, by any political intervention, was a mad idea. The idea that markets are always right was a mad idea," he said.
He repeated his call for major power leaders to meet before the end of the year to map out a new financial system and said it was vital to review currency levels, adding that both the dollar and Chinese yuan were undervalued.
"We cannot continue to manage the economy of the 21st century with the instruments of the economy of the 20th century," he said.
He also warned bankers and business leaders to curb their salary levels, saying the government would introduce legislation by the end of the year if they failed to reform themselves.
Financial Crisis: US will lose superpower status, claims German minister
By Ambrose Evans-Pritchard
Last Updated: 11:31PM BST 25 Sep 2008
German finance minister Peer Steinbrück has slammed Anglo-American capitalism for endangering global stability in its lust for profit and predicted that the US would now be toppled as the superpower of international finance.
In a remarkable outburst at the German parliament, Mr Steinbrück said the world would never be the same after “Black September”. He demanded a sweeping code of regulations to “civilise the financial markets” and clamp down on speculators.
Mr Steinbrück announced a swingeing eight-point plan to reorder the global markets - which will heighten fears in the City of London of interference by the European Commission.
“The US will lose its superpower status in the global financial system,” he said, predicting a new multi-polar order where power is spread across the globe.
“The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion,” he said, a pointed turn of phrase that excludes Britain’s Alistair Darling.
“This inadequately regulated system is now collapsing, with far-reaching consequences for the US financial market and contagion effects for the rest of the world,” he said.
The current single market commissioner – Irish “Thatcherite” Charlie McCreevy – is almost certain to be replaced by a much more dirigiste successor next year.
Senior politicians in France and Germany have in recent weeks called for a radical shake-up of the market system. A powerful EU faction that has always been hostile to the City of London – which is known in Brussels as “the casino” – see this crisis as a rare chance to ram through irreversible changes.
“They want to regulate the capital levels of every firm and partnership, limit takeovers and regulate asset stripping. In short, they want to regulate the Anglo-Saxon version of capitalism out of existence,” said John Whittacker, MEP and UKIP’s economic spokesman.
Mr Steinbrück said the deft response of the world leaders in recent days had averted catastrophe. “Crisis management worked. We did not have a collapse of the international financial system,” he said.
Mr Steinbrück said the drive for short-term profit and huge bonuses in the Anglo-Saxon world was the root cause of the gravest crisis in decades. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
Meanwhile, ratings agency Fitch said the vast bail-outs agreed yesterday by the US Congress do not add significantly to America’s public debt of 57pc of GDP since the money is being used to buy assets, which are backed by collateral.
“You can’t just add up these liabilities and treat them the same way as government debt,” said Fitch’s managing director, Brian Coulton.
Germany itself is no longer a model risk. Fitch said the country has a public debt of 65pc of GDP, the highest level within the elite group of AAA-rated nations.
Clergymen join politicians in Europe to criticize U.S. capitalism
By Eric Pfanner
International Herald Tribune
Published: September 25, 2008
Criticizing Capitalism From the Pulpit
By ERIC PFANNER
New York Times
September 26, 2008
PARIS — Whatever happened to “God helps those who help themselves?”
Even religious leaders have joined the chorus of Europeans criticizing unbridled, American-style capitalism, which Continental politicians have cited as a root cause of the global financial crisis.
The archbishop of Canterbury, Rowan Williams, wrote this week in The Spectator, a British magazine, that placing too much trust in the market had become a kind of “idolatry.” At the same time, he reminded readers of Karl Marx’s criticism of laissez-faire capitalism, noting, “He was right about that, if about little else.”
Mr. Williams, the spiritual leader of the Anglican church, called for increased regulation of financial markets, praising regulators’ moves to curb short-selling in the wake of the collapse of Lehman Brothers and sharp declines in the share prices of other financial institutions.
“Governments should not lose their nerve as they look to identify a few more targets,” he added.
In the trans-Atlantic sniping over the causes and solutions to the credit crunch, Mr. Williams’s scolding tone has been echoed by some European politicians.
Peer Steinbrück, the German finance minister, blamed a reckless pursuit of short-term profit and outsize bonuses in “Anglo-American” financial centers — as well as a lack of backbone among policy makers unwilling to stand up to this greed.
Addressing the Bundestag Thursday, he said, the long-term consequences would be punitive for American prestige.
“The U.S. will lose its status as the superpower of the world financial system,” Mr. Steinbrück said. “The world financial system will become multipolar.”
Mr. Steinbrück reaffirmed the German government’s opposition to a costly bailout of the financial system. The Bush administration has called on other countries to join in its proposed $700 billion cleanup of troubled bank assets.
Mr. Steinbrück, like Mr. Williams, also urged policy makers to enhance financial oversight.
The Wall Street crisis, with its complex arcana — collateralized debt obligations and the like — might seem like unusual waters for a religious leader to wade into, but Mr. Williams has not shied away from making headlines on sensitive subjects. He caused gasps in Britain earlier this year, for instance, when he said there might be a role for Islamic Shariah law in settling disputes within the British Muslim community.
Another British clergyman, John Sentamu, the archbishop of York, was even less circumspect than Mr. Williams in criticizing hedge funds that had sold short the shares of a British bank, HBOS, forcing it in an emergency sale to a rival, Lloyds TSB.
They were “clearly bank robbers and asset strippers,” he said in a speech Wednesday evening.
Mr. Williams did not specifically blame the United States for the crisis — British investors profited as much as American high-rollers from the boom, and the bust has hit London almost as hard as New York — but Mr. Steinbrück did.
“The United States is the source and the obvious focus of the crisis,” he said, adding that it had spread from America to Europe like a “toxic oil slick.” Mr. Steinbrück said he saw no reason for Germany or other European countries to take part in a bailout.
He argued that the German financial system had weathered the storm better in part because it was anchored by universal banks like Deutsche Bank, with operations that span consumer lending and investment banking. The last two big independent investment banks, Goldman Sachs and Morgan Stanley, have moved toward such a model since the crisis deepened.
Mr. Steinbrück said European banks would now play a greater role in the world financial system.
France's Sarkozy calls for summit on 'regulated capitalism'
23 September 2008, 23:00 CET
(UNITED NATIONS) - French President Nicolas Sarkozy called Tuesday for an international summit to address the global financial crisis, advocating a "regulated capitalism" to end abuses.
In his first public comments since the crisis erupted, Sarkozy went before the UN General Assembly to invite fellow leaders to learn quickly the lessons from the torment that has seized the financial markets.
"I'm convinced that it's the duty of heads of state and government of the countries most directly concerned to meet before the end of the year to examine together the lessons of the most serious financial crisis the world has experienced since that of the 1930s," Sarkozy said.
He hoped such a meeting would set down "principles and new rules" for the financial system, which will help settle big problems with rating agencies, bank solvency, executive bonuses and hedge funds.
"What is important is that no country, even the most powerful in the world, can provide an effective response to the crisis that the world alone is experiencing," the Frensh leader said.
Before the UN General Assembly, Sarkozy did not offer specific recipes for how to put ethical checks on businesses.
But he has long appealed for rebuilding "a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators."
As he did on Monday evening when he received the Elie Wiesel Foundation's humanitarian award, Sarkozy said he wanted a system in which "those who jeapordize people's savings are punished."
Before US and French business and finance leaders, Sarkozy said those responsible for what he called a "disaster" to be "punished and held accountable."
Speaking to reporters, he railed against critics, especially those in France, who dismissed his appeals as simplistic.
"Freedom without accountability will lead us where? It will lead us where we are today," Sarkozy said.
"This crisis came from a real deviation from the market economy mechanisms. Capitalism, which should be geared to production, indulged in speculation," he added.
He slammed the corporate reward system of bonuses for business leaders who succeed and "golden parachutes" for those who are let go.
"This is a rather curious system. When things are going well, when big bonuses are being handed out, mega bonuses, we know who is responsible," he said.
"When it doesn't work on the other hand ... then we don't know who is responsible," he added.
Sarkozy recalled that it was almost exactly a year ago to the day when he pleaded at the same UN forum for a "New Deal" to address problems both with the economy and environment.
It was President Franklin Roosevelt who introduced the "New Deal" to rescue the US economy from the stock market crash of 1929.
Sarkozy pushed for a form of capitalism focusing more on development and less on speculation.
"There is a solution ... It is time now to act," the French leader said.
Text and Picture Copyright 2008 AFP.
A crisis of global statism
By Lawrence Solomon
September 20, 2008
The current financial turmoil is a “crisis of capitalism,” said a spokesman for Britain’s Socialist Workers Party, as good Marxists have been repeating for more than a century.
“[A]n unregulated financial system is a disaster,” echoed Sheila Rowbotham, professor of gender and labour history at Manchester University. Added a leftist London mayoral candidate, “Capitalism has had its chance and failed; now it’s socialism’s turn.”
I wonder what they have been smoking.
Remember that the financial crisis opened last year with the meltdown of the American subprime mortgage market. At that time, half of the residential mortgages in the U.S. were already held or guaranteed by Fannie Mae and Freddy Mac, two so-called “government sponsored enterprises” (GSE). Over the past year, the two GSEs have financed four out of five mortgages. Fannie May was created in the wake of the Great Recession by Franklin D. Roosevelt; Freddy Mac by Congress in 1970. Private investors happily bought securities issued by the two GSEs because they knew the federal government would never let these companies fail – which proved true last week when they were entirely taken over by Washington. Before the crisis started, the American mortgage market was a paragon of socialism, unparalleled in any other Western country.
The 1997 Community Reinvestment Act, which prevents mortgage lenders from “discriminating” against minority applicants, did not help sound financial decisions. At every turn of a financial decision, some regulator is lurking.
The American financial system is tightly regulated. Created in 1934, the powerful Securities and Exchange Commission (SEC) enforces regulations on all kinds of financial transactions, from registration of securities to disclosure of corporate information. The 2002 Sarbanes-Oxley Act further extended the intervention domain of the SEC. The U.S. Department of Justice prosecutes CEOs and entrepreneurs, and the convicted targets are often given long jail sentences. On Thursday, the New York Attorney General, a would-be Elliot Spitzer or Patrick Fitzgerald, announced that he has started a “wide-ranging investigation into short selling in the financial market.”
When Treasury Secretary Hank Paulson says, “I don’t believe in raw capitalism without regulation,” he is not revealing a scoop. He is reiterating what has been official American policy for the last century. Whether the result is financial socialism with a human capitalist face, or state capitalism with a strong socialist flavour, it is a matter of choosing between a half empty and a half full glass.
The partial exportation of American regulation to other countries has led to a sort of global financial statism.
Another source of financial turmoil has been the brisk increase in the money supply by the American central bank, the Federal Reserve System, as indicated in higher inflation and low interest rates. For many years, economists of the so-called “Austrian” school of economics (in the wake of late Nobel prizewinner Friedrich Hayek and Ludwig von Mises) have warned us of an impending disaster if money is pumped into the economy to prevent necessary adjustments. This, they claimed, will ultimately bring a worse crisis.
There is no inherent reason to trust the state to regulate efficiently. The state is made of men (politicians and bureaucrats) who respond to their own incentives and interests. If there is a political gain to be made from expanding mortgages and postponing a crisis for future politicians to deal with, it will be pursued.
Despite this, a false confidence in the power of the state to guarantee stability has developed. Some investors have come to believe that, whatever mistake they make, they have a right to their profits, and the authorities will enforce it. The rescue of Bear Stearns, the two GSEs and AIG will only fuel this belief. But if some people have made bad investments and are relieved from their responsibility for their own mistakes, it only means that the cost will be transferred to others, probably through a worst crisis.
Moreover, as many commentators have remarked, guaranteeing large financial firms from failure will bring calls for regulating them still more tightly. This is old story: past political interventions create the reasons for new ones.
The present financial turmoil is really a failure of global statism. Socialism has failed once again. Let’s try capitalism.
Pierre Lemieux is an economist in the Department of Management Sciences of the Université du Québec en Outaouais and a research fellow at the Independent Institute, Oakland, CA (e-mail: firstname.lastname@example.org).
American socialism; Put not your faith in princes
International Herald Tribune
Published: September 19, 2008
The bailouts of Bear Stearns, Fannie Mae and Freddie Mac and now of AIG ("U.S. takes radical steps to save AIG," Sept. 18) show that nationalization and state intervention are no longer dirty words in the United States.
Ironically, these multibillion-dollar bailouts are being carried out by an administration that preaches the virtues of the free market and private enterprise to the rest of the world.
For decades, Washington has been cautioning the world against injecting public money into the banking system while demanding greater deregulation and privatization of the financial sector. When India and China recapitalized their banking systems some years ago, they were severely criticized by the United States. Do as the United States says, not as it does.
Who says that socialism is dead? It is alive and kicking in America. But this socialism nationalizes losses and privatizes profits.
Kavaljit Singh Delhi, India
America is losing its credibility due to gross mismanagement of foreign policy and economic controls.
One can blame either political party, but collectively, during the past decade, the American government has failed its citizens.
We should remember all empires eventually weaken, if not crumble. Any schoolboy - at least in my generation - knows that a country must raise taxes to fight a war - or it pays in the end. It comes as no surprise that America's madcap spending spree of the past five years has come to no good; nothing defies economic gravity forever.
Tom Coyner, Seoul
Put not your faith in princes
Politicians have failed America. America's children will inherit crises of epic proportions.
If the United States overcomes the severe financial, environmental, energy, health, housing and other challenges, it will not be because of politicians. It will likely be because ordinary citizens and their communities somehow find ways to address the country's life-and-death issues.
The arrogance and self-serving ways of some national politicians is breathtaking. Service leadership is beyond them.
The hope for America seems not to rest with most of the country's leaders, but with people who work with organizations like the Red Cross, Salvation Army, Boy Scouts, religious relief and refugee agencies and chambers of commerce.
Donovan Russell, Moravia, New York
Socialists call for stronger financial and economic coordination. Pervenche Berès MEP, who chairs the European Parliament Committee on Economic and Monetary Affairs, today called for "stronger financial and macro-economic co-ordination in the Euro zone."
THE SOCIALIST GROUP IN THE EUROPEAN PARLIAMENT
11/09/2008 - Socialists call for stronger financial and economic coordination.
Pervenche Berès MEP, who chairs the European Parliament Committee on Economic and Monetary Affairs, today, 11 September 2008, called for "stronger financial and macro-economic co-ordination in the Euro zone."
"I regret that for the time being a coordinated and swift response from the Euro group to the recent bad growth figures seems to be impossible. The US government was able to launch a massive budgetary plan to support its economy while the ECB was able to react quickly last summer. "
Speaking before the informal meeting of the Euro group and Finance Ministers in Nice tomorrow, Pervenche Berès asked "where is the response from the Euro group, when will we finally give ourselves instruments to act?".
European Central Bank President, Jean-Claude Trichet, yesterday confirmed to the European Parliament's Committee on Economic and Monetary Affairs that higher commodity prices had pushed inflation to 4% this year, and that Euro zone inflation is at a "worrying" level and could stay high in the months ahead.
Ms Berès was satisfied with Jean-Claude Trichet's admission at the meeting - "there will be no return to the status quo ante.... This crisis is new because it is at the heart of the system in the industrialised countries," M. Trichet had said.
Pervenche Berès added "obviously the way we are thinking about the relationship between monetary policy and financial markets is fundamentally going to change:"
At the same meeting chaired by Ms. Berès, Jean-Claude Juncker, the President of the Euro group, called for more economic coordination.
"I fully support him," said Ms Berès. "He said that the current situation is 'improving but more has to be done' - and he was quite right."
She added "all the main economic actors should draw lessons from the present financial crisis and use this opportunity after 10 years of successful European Monetary Union to agree on a strong, more ambitious roadmap aimed at improved economic coordination in Europe",
The European Parliament is currently drawing up a roadmap, concrete proposals are on the table for discussion, and these will include the future international representation of the Euro zone.
Contact: David Poyser
GSM/mobile 00 32 476 540886
Global Instability and Challenges to the Dollar: Assessing the Current Financial Crisis
By David McNally
We are living through financial turmoil so serious at the moment that the International Monetary Fund calls it “the largest financial crisis in the United States since the Great Depression.” Already, commercial banks have collapsed in both Britain and Germany, as has the fifth-largest investment bank on Wall Street. A series of hedge funds have gone under or are teetering on the brink of ruin. It is a near certainty that more financial institutions will fail before the crisis burns out.
It is clear that the Left needs serious analysis of just what is happening to world capitalism at the moment. Too often, however, our assessments are stuck in the past, revolving around debates as to whether or not this crisis represents a repeat of 1929 and the Great Depression.
Such debates detract from the hard work of analysis that is needed. Ignoring the inherently dynamic and historical nature of capitalist society and the continual transformations this involves, they take one particular historical moment in the history of capitalism as the norm against which all others will be measured. The end result is a sterile exchange between, on the one hand, those who assume that history tends to repeat itself and, on the other side, those critics who so exaggerate what has changed (particularly the ability of central banks to dampen tendencies to financial instability) that they present a picture of a capitalism whose contradictions have been effectively muted.
The real challenge for Marxist analysis, however, is to grasp both the changes and the enduring economic contradictions within capitalism, in order to understand how capitalist transformation displaces and reorganizes crisis tendencies without eliminating them.
In the absence of such analysis, much of the radical commentary on offer tends to focus on the blatant deceit and corruption of financial players who have contributed to the market upheaval. This has its purposes. But it runs the risk of downplaying the structural features of late capitalism that breed financial meltdowns – and in so doing of suggesting that the Left should focus on issues like financial regulation rather than class struggle against capital.
Trying to make sense of this crisis is one important step toward developing both an analysis of late capitalism and some of the tasks that confront the Left. To be sure, any assessment of unfolding events will necessarily be partial and incomplete. Nonetheless, it is possible to offer some crucial guidelines for making sense of this crisis.
A Banking Crisis, Not a Liquidity Crisis
It is critical to recognize at the outset that, contrary to the claims of central banks, this is not a liquidity crisis, i.e. financial turmoil caused by insufficient supplies of money flowing through the financial system. Instead, we are dealing with an insolvency crisis caused by the fact that many financial institutions are effectively broke. The result is a trauma in the banking sector.
This trauma persists because a myriad of lending institutions hold billions of dollars in massively depreciated paper that nobody is interested in buying from them. There is a host of exotic names for this paper – Collaterallized Debt Obligations (CDOs), Asset Backed Commercial Paper (ABCP) and so on – but essentially it is an array of debt obligations, or titles to payment of interest and principal on a vast array of loans. Until the crisis broke, investors had been treating such paper as a stock of assets that could at any time be sold, i.e. as liquid wealth. Yet, the value of a debt rests in the first instance on the capacity of the borrower to pay. If the borrower cannot pay, the alternative is for the creditor to seize the asset. But if the asset itself is losing value, then it may not cover the loan – and there might not be anyone out there who wants to buy it. In short, it may not be convertible to cash.
And that is precisely what is happening on a larger and more complex scale today. Economic reality is demonstrating that much of this paper – tied in the first instance to tens of millions of US mortgages – is worth billions of dollars less than what was paid for it. So, much of it is being written off or written down (revalued at amounts that involve enormous losses). It is as if you once had $1000 in the bank, against which you had borrowed many times that amount (say, ten times that amount or $10,000), and you have now learned that you only have $500. Once your creditors discover that, they will scramble to collect in the knowledge that there’s no way you will ever pay off all that you owe. But your $500 will be gone pretty fast. And since you owe $10,000, a lot of your creditors won’t be able to collect. And they won’t be able to sell off your debts to anyone else either.
Fictitious Capital in the Current Crisis
To their holders debts, no matter what their exotic names, are forms of fictitious capital, to use Marx’s term. Rather than consisting of actual assets – such as machines, equipment, factories, buildings or stocks of commodities – that have been produced by past labour, fictitious capitals are paper titles to future wealth. So, if I purchase someone’s mortgage, I have bought a claim to their future mortgage payments. But this claim only becomes real when they have met all the payments required. Until such time, my “capital” in the form of someone’s mortgage remains largely fictitious, or unreal. Stocks, bonds and a whole host of complex financial instruments all qualify as fictitious capitals, where money has been paid for future returns that may or may not materialize.
When capitalism is in a boom or prosperity phase, capitalists rarely worry about the idea that future returns might not materialize. Banks, corporations and investors frenetically buy and sell paper claims to wealth, often with manic get-rich-quick expectations. These are the moments when asset bubbles develop, i.e. ridiculously inflated prices for things like shares of dotcom companies or real estate in Tokyo or San Francisco. So over-confident are investors about the solidity of their fictitious capitals that they use them as means of payment between financial institutions and investors as if they were hard cash.Bubbles burst, however. And when they first start to lose air an investor panic sets in. All of a sudden, those holding commercial paper realize it is not as good as cash. Indeed, as its value plummets, buyers are hard to find and the values of fictitious capitals start to collapse. At such moments, institutions and individual investors begin panic selling. And they start to call in their loans to other companies or investors. Over night, cash and cash alone becomes king.
“A monetary crisis,” writes Marx, “occurs only where an ongoing chain of payments has been developed along with an artificial system for settling them. Whenever there is a general disturbance . . . money suddenly and immediately changes over from its merely nominal shape, money of account, into hard cash…” 
And at such moments, capitalists start to trust only those who have great stacks of cash in reserve. Those whose assets consist overwhelmingly of dubious debt paper quickly find they are being abandoned. In such circumstances, an institutional “run on a bank” can occur, of the sort that rocked Bear Stearns in mid-March of 2008. In the course of 48 hours, Bear’s holdings of cash and liquid assets plummeted from $17 billion to $2 billion as investors pulled their funds from the bank.
So, the root problem is not a lack of liquidity in the system. It’s that there are all kinds of institutions out there that to whom nobody wants to lend, and whose ostensible “assets” nobody wants to buy. Worse, none of the players in the system are entirely certain as to who is holding increasingly worthless paper, or how much of it they have. As a result, the flow of funds between banks and between banks and other lenders (like mortgage companies) keeps seizing up.
This is the reason that injecting cash into the system does not restore confidence. In fact, despite deep cuts to interest rates by central banks, particularly the US Federal Reserve (designed to encourage borrowing) and massive injections of money into the banking system, American banks have continued to tighten lending to consumers, corporations and other banks . The loss of confidence in Bear Stearns thus took place for a fundamental economic reason, not a simply psychological one: Bear’s actual assets, particularly those tied to real estate loans, had been losing massive amounts of value for months. In fact, in June of 2007 two of the bank’s hedge funds, which were deeply invested in sub-prime mortgages, effectively collapsed.
From Housing Bubble to…
And it is there, in the housing sector, that we find a key link between the financial crisis and material assets in the wider economy. For, central to this crisis is the collapse of a manic bubble in US house prices.
For a hundred years after 1895, as Dean Baker has noted, US house prices increased at the rate of inflation. Then, as a result of speculative mania in housing, from 1995 to 2007 they rose 70 per cent more than the cost of everything else. That created an extra $8 trillion in paper wealth for US homeowners. And, with that ostensible wealth in their sights, American consumers ran to the stores, often after taking out loans against the increased value of their homes. At the same time, banks started to loosen up mortgage lending, often far beyond the real capacity of borrowers to pay, and then turned around and sold the debt to all kinds of investors. As a result, huge amounts of fictitious capital from the US mortgage sector built up throughout the financial system.
That bubble started to burst last summer, with a rise in the number of mortgage holders in default. Many of the mortgages that US buyers had taken out were designed with very low payments in the first year or two. But as they “reset” at higher levels, large numbers of borrowers could not keep up. And it just kept getting worse. US housing prices dropped about 13 per cent last year, and have continued tumbling this year. As the houses on which they have taken mortgages fall in value, the cost of buying them has risen for millions of Americans. Huge numbers are just putting the keys in the mail and sending them back to the mortgage lender. Others, unable to make payments, are suffering foreclosure. In March of this year, foreclosures jumped 57 per cent in the US, while house repossessions by banks more than doubled compared to a year earlier. In May, despite claims that the worst was over, foreclosures rose another 48 percent over a year earlier . Many analysts now expect US house prices to decline by another 10 to 20 per cent over the next year. Some believe prices will fall for the next five years.
Meanwhile, the meltdown in the value of their paper assets is calamitous for those who bought those mortgages – through a variety of schemes known as mortgage-backed securities. The borrowers cannot pay and the underlying assets are in freefall. The fictitious character of their assets has been thrown into sharp relief. Buyers for these toxic debts cannot be found, unless it is at staggering low prices.
This is why the asset-backed commercial paper (ACPB) market has been frozen in Canada for the last six months. And now the same thing has happened to the $300 billion auction rate note market in the US. There are simply no buyers of these “assets” to be found.
Yet housing is just part of the problem. Equally dubious junk is now turning up in commercial paper tied to credit card loans, commercial (not just residential) real estate, auction rate notes, leveraged buyout loans and much more. Indeed, growing numbers of analysts are also raising warnings about corporate debt .
Not surprisingly, estimates of the total damage of the crisis to the financial system keep rising. Initial predictions had the figure between $50 and $100 billion. Then as bank after bank wrote off billions more, estimates in the range of $400 billion and even $600 billion emerged. In April, the International Monetary Fund calculated that the meltdown will result in losses of nearly $1 trillion. One analyst writing in the Wall Street Journal suggests the global damage will hit $1.4 trillion.
Whatever the ultimate figure – and it is likely to be at the higher end of the predictions – it represents a very large hit for the system. It also means that there are huge losses still to be recorded before the financial system recovers. Nouriel Roubini, among that very small minority of economists who saw the sub-prime meltdown coming and one of the few who have consistently warned that its consequences would be extremely serious, has argued that “the worst is still to come” for the US and global economies. Indeed, in May of this year the number of companies at risk of receiving a credit rating downgrade – i.e. as being more financially precarious than before – rose to record levels, indicating that much more turmoil lies ahead .
Just how deep and prolonged the slowdown in the global economy will be remains to be seen. But in recent years as much as half of all US economic growth has been housing-driven. Borrowing against rising home values, American consumers fed the engine of the world economy, particularly in their enormous purchases of manufactured goods from around the world. During this round of credit-driven growth, US household debt more than doubled, increasing from $6.4 trillion in 1999 $13.8 trillion in 2006.
Between 1980 and 2000 US imports increased 40 per cent, accounting for 19 per cent of world imports and roughly four per cent of world GDP. Now, as the housing bubble bursts, as consumers hold off on big purchases and try to pay down debt, world exports to the US will decline, and global growth will taper off. In fact, imports into the US dropped by over $6 billion in March, a clear sign that the global slowdown is spreading. Moreover, even a modest move by US consumers to rebuild their savings will knock about 1.5 per cent off US economic growth per annum. And with US consumer confidence now at a 28 year low, it is clear that consumption spending in the US will no longer be driving global growth.
Across the US, construction spending, industrial production, private employment and manufacturing output are all falling. The US economy is clearly in recession. It remains to be seen just how significant the accompanying global slowdown will be.
The Dollar, World Money and the Current Crisis
Alongside the turmoil in financial markets, the current crisis also poses major challenges to the US dollar as the dominant form of world money today.
World money is necessary to the measuring and allocating of value – prices, profits, wages, etc. – within and between regions and nations. It is also essential as a store of value, as a stable asset in which wealth can be stored. In order to do this efficiently, global money must be effectively “as good as gold” – something that everyone will accept because it is a stable and universally recognized means of payment. This is what it means for money to play the role of a genuinely universal equivalent.
For most of the history of capitalism, gold anchored the system of world money, either through an actual gold standard (in which international payments were made in gold) or a gold convertibility standard, under which the leading currency could be converted into gold by the world’s central banks.
Since 1971, however, when US President Nixon broke the dollar’s tie to gold, the US dollar has operated as inconvertible world money. This has produced two tendencies: first, a significant long-term decline in the value of the dollar relative to other major currencies; and, secondly, a new volatility in world currency markets, as investors try to avoid holding on to currencies whose value may plummet. In fact, much of the proliferation of those complex financial instruments called derivatives is a product of the new instabilities in prices, currencies and profits that monetary instability creates. But in the absence of any other viable candidates for world money status, the dollar continued its reign.
Indeed, throughout the last decade or more, the status of the dollar seemed to be rising. Despite huge deficits in the US current account – the balance between what economic actors based in the US owe the rest of the world and what the rest of the world owes these US actors – the dollar kept riding high. This led some pundits to argue that current account deficits (i.e. debts to the rest of the world) are irrelevant where the dominant imperial power is concerned. Even as the US economy started to run deficits of $500 billion per year and more with the rest of the world – deficits that are essentially paid for by printing and shipping off dollars – these commentators insisted that there would be no meaningful consequences for the economy of the United States.
The reality is much more complex. It is true that the world money-issuing state can get away with deficits that would not be tolerated in the case of any other nation-state. But it is not true that it can do so infinitely. Sooner or later, as more and more of the currency floods into world markets to cover these deficits, a point must be reached at which some of those holding dollars become tempted to unload them in favour of other currencies or assets. And at that point, an inevitable decline in the dollar’s value would set in, increasing the pressure on others to dump it as a depreciating financial asset.
Flight from the Dollar?
In fact, precisely this process has been underway for some time now. Beginning in 2001, private investors began to dump dollars. As a result, the greenback has lost 40 per cent of its value relative to other currencies since 2002. And the decline would have been much worse were it not for the fact that central banks in Asia, particularly China and Japan, stepped into the breach and invested massively in the US.
These Asian central banks have been effectively returning to the US the dollars it ships overseas to pay for its current account deficit. (This is done by making foreign investments in the US, be it in US treasury bills or the stocks of banks and corporations.) Some commentators have held that this process could continue for decades, dubbing it “Bretton Woods II,” after the original Bretton Woods agreement that created the post-World War 2 dollar-gold regime.
But there have always been three inherent flaws in this arrangement. First, this massive recycling of dollars back to the US only fuels speculative bubbles, as US financial institutions try to make profits by finding borrowers for this money, be it investors in dotcom stocks, or low income home buyers. Yet, when these bubbles burst, as has the most recent one in housing, it makes the US national economy a less attractive place for investment (since investments have become highly risky and unprofitable). Secondly, as the Federal Reserve lowers interest rates to prevent the bursting bubble from becoming a full-fledged crisis (as it has been doing in recent months), it makes dollar-denominated assets less and less attractive, since higher interest rates are available elsewhere. Finally, as low US interest rates provoke a flight from the dollar, investors holding the US buck have a greater and greater incentive to get out of it.
And even foreign central banks are doing so, albeit incrementally, under the byword of “diversifying” their holdings – i.e. reducing the percentage of international reserves they keep in dollars. In recent years, China, Russia and South Korea have all reduced the proportion of international reserves they hold in dollars. Russia, for instance, has gone from 30 per cent to 50 per cent of its reserves in currencies other than the dollar. More recently, a number of Middle East oil-exporting states have done the same. So worried are US officials by these moves that, when the United Arab Emirates was musing about dropping its currency peg to the dollar, US officials visited the UAE central bank governor to lobby against the move.
Why does the US government care about countries reducing their dollar holdings? Put simply, the ability to print dollars to pay debts is a huge imperial privilege. It is, in the words of the Economist magazine, as if you could “write cheques that were accepted as payment but never cashed” . This privilege, known as seigniorage, allows the state that issues world money to appropriate a disproportionate share of global value and surplus value just by virtue of its role in the world monetary system. This has allowed the US great flexibility in financing imperial wars and it has provided an enormous boost to the US national economy, which has paid for goods with paper.
But now private investors and central banks are becoming increasingly reticent about taking ever-growing amounts of these blank cheques. Furthermore, for the fist time in several generations they now have a meaningful alternative to the dollar: the euro. And many signs indicate that the euro is starting to play a larger world money role.
When it was first introduced in 1999, for instance, the euro comprised 18 per cent of all global reserves. Today it represents 25 per cent of international reserves. As a means of payment for cross-border operations, the euro now figures in 39 per cent of all such transactions, versus 43 per cent for the dollar. And in international bond markets, 49 per cent of all debt was denominated in euros in 2006, compared to 37 per cent for the dollar.
None of this is meant to suggest that the euro will simply displace the dollar. The European Union economy is not large and dynamic enough for that to happen and the dollar is still the world’s dominant currency by a considerable measure. But these trends do suggest that the dollar’s role is diminishing now that there is a viable alternative. With this in mind, Deutsche Bank predicts that the euro will constitute between 30 and 40 per cent of world reserves by 2010.
What these developments indicate is a genuine contradiction between regionally based accumulation projects. Capitals based primarily in Europe are using the European Union and its central bank to strengthen their global standing relative to American-based capitals. To be sure, capitals share convergent interests. But they are equally divided by divergent ones. Indeed, one of the keys to understanding the patterns of regional rivalry in the age of the new imperialism is to grasp the complex ways in which convergence and divergence of interests interact. The long-term conflict between the world-money capacities of the euro and the dollar figures centrally here. Without a doubt, this is not the territorially-based rivalry that was at the core of early 20th century competition among imperialist powers. But it does nevertheless involve new patterns of competition between regional political-economic projects for the appropriation of larger shares of world value.
And at the moment, the capacities of the American state look to be constrained by a declining global appetite for the dollar among investors. In 2007, for instance foreign residents borrowed $596 billion in long-term stocks and bonds in the US, down from $722 billion the year before . This relative decline in the appetite for the dollar poses a real dilemma for the US state. In order to prop up the dollar, and retain the seigniorage privileges that boost its national economy and underwrite the financing of imperial militarism, it would have to raise US interest rates. But interest rate hikes would deepen the recession in the US (making it harder to borrow and pushing many indebted Americans into bankruptcy and default), and they might topple more indebted corporations and banks.
For the moment, the US state has chosen to try to offset the recession by keeping interest rates low. But this only depresses the value of the dollar and weakens its world money status. And this gives the US state less financial means to maneuver on the world stage. As a result, the chairman of the Federal Reserve Bank, Ben Bernanke has taken to talking up the dollar, though so far to mixed results .
And so, the US state confronts a dilemma: to prevent a deep slump it must pursue policies that weaken the world standing of the dollar. In the medium to longer term, however, a diminished dollar will create tighter constraints on the financial capacities of US imperial operations. This is a real and abiding contradiction and the US state is not able to wish it away.
If the current financial crisis illustrates anything, then, it is the persistence of fundamental contradictions of neoliberal capitalism. With an enormous “dollar overhang” sloughing through the world economy, asset bubbles regularly form – in Japanese real estate, in East Asian stock markets, in dot-com, or in US real estate. And each time, central banks intervene to monetize debt obligations, i.e. to give legal tender for junk. And the end result is to flood the financial system with money that will flow into yet another speculative bubble, as seems to be happening at the moment in commodities such as oil, gold and foodstuffs. Meanwhile, global dollar surpluses will continue to exert downward pressure on the value of the greenback.
Thus far the US Federal Reserve has offered up $500 billion in US treasury bonds, effectively as good as cash, for junk on the books of banks and investment houses. The Bank of England is proceeding along the same lines.
But as they flood the system with money, these central banks also prime the pump of their nemesis – inflation. This has prompted the International Monetary Fund to issue a stern warning about rising inflation. As soon as central banks think they have stabilized the financial system, they are likely to heed the warning by turning to anti-inflation policies that will trigger corporate bankruptcies, job losses and declining living standards. Already the European Central Bank has indicated that fighting inflation is its priority and the Bank of Canada surprised observers by failing to lower interest rates in June 2008, citing worries about inflation.
Of course, capitalist classes the world over will try to make sure that working classes and the global poor bear the brunt of the inflationary hardship. And the weakness of the international left is not promising in this regard, despite important and inspiring movements of resistance, particularly in much of Latin America.
Too often, however, sections of the Left imagine that their role is to offer policies that will avert crises of capitalism. In so doing, they gravitate to a kind of Keynesian politics designed to boost demand and consumption.
It is not the job of the Left to save capitalism from itself, however. To be sure, we have an obligation to advocate and agitate for policies to protect the victims of the crisis, policies that cut against the very market logic of neoliberalism. A case in point would be campaigns for publicly-funded social housing programs at a time when, in the US, millions face foreclosure. Equally important are campaigns to raise social assistance rates in order to protect the most vulnerable.
But equally vital is a Left that names the actual contradictions of capitalism, one that addresses the disasters of the neoliberal model and publicizes the inherent conflict between capital accumulation and the satisfaction of human needs. And this requires a Left that speaks openly of socialism as the alternative.
We now confront a significant crisis of the neoliberal reorganization of capitalism. And every crisis represents an opportunity – for both the old order and the forces of the new. The Marxist Left is not especially well-equipped in this regard. But we must do what we can so that the forces of authentic change are better prepared when the next crisis breaks, as surely it will. To this end, it is incumbent on us to seek to understand this crisis, to agitate to protect its poorest victims, and to do the patient work of socialist education about real alternatives to the logic of the market.
1. Karl Marx, Capital, v. 1, trans Ben Fowkes (Harmondsworth: Penguin Books, 1976), p. 236.
2. See Financial Times, May 6, 2008, and Tony Jackson, “Lack of trust lurks at the heart f banking troubles,” Financial Times, June 2, 2008.
3. “U.S. Foreclosures surge 48% in a year,” Toronto Star, June 14, 2008.
4. Sean Farrell, “The next banking crisis?” _ The Independent_, June 3, 2008.
5. Elena Moya, “Credit woes set May record,” Reuters, June 7, 2008
6. “The disappearing dollar,” The Economist, December 5, 2004.
7. Wall Street Journal, June 15, 2008
8. Barrie McKenna, “Bernanke endorses strong dollar,” Globe and Mail, June 4, 2008.
David McNally is a regular contributor to New Socialist. An earlier and shorter version of this article appeared in Relay. A Korean translation will appear in the journal Marxism 21.
Europe: a competition in misery
By Socialist Appeal
Friday, 29 August 2008
Gordon Brown used to draw attention to other countries' economic performance only in order to show how much better his own policies worked. Not any more. His stewardship of the British capitalist economy has been shown to be a lamentable failure. It's back to boom and bust, despite all the moronic sloganising to the contrary we have heard from him over the past eleven years.
So we're in the Brown stuff, and everybody knows it. It's easy to get caught up with the travails in the USA, where the present recession began. But how about the rest of Europe? They are also facing hard times. And it's no good Gordon gloating. Britain has a trade deficit with more or less everyone, but our biggest trade partner by far, and the biggest black hole in the trade figures, is with Europe. If they catch cold, they sneeze at us and make our problems worse. Europe is by far our biggest export market, and as it goes into recession they'll buy less of our stuff - and that is going to hurt.
Nouriel Roubini is an economic commentator known as Dr Doom. But he's got everything right so far. His latest newsletter predicts that, "Europe is the next leg down in the global housing bubble."
Denmark is already in recession. It's official. The Roskilde bank has had to be bailed out by the government. Earlier the Trelleborg Bank was forced to sell itself to Sydbank. In the second quarter of 2008 Italy's GDP fell by 0.3%. But then, Italy is the sick man of Europe. However France's GDP also fell 0.3%. Sweden has been on a credit binge in the Baltic countries, which are slowing rapidly. Sweden is due to take a hit. The financial crisis has also hit the plans of the right wing government in Sweden. Determined to privatise state assets, they would have to sell them for a song. “We are not going to have a clearance sale here,” says Finance Minister Odell, adding that it would be “political suicide.” In Germany, which a lot of people were hoping would get out Europe out of this pickle, output also dropped by 0.5% last quarter. These are the big players in the EU. The Eurozone as a whole fell by 0.2% in the second quarter of 2008.
Let's take a more detailed look at Spain. The finance minister says, "It's the most complex crisis ever." The Spanish economy has been extraordinarily dependent on the construction industry, responsible for 25% of GDP. The Spanish have been knocking out 600,000 houses a year for the past five years (compared with the pathetic 100,000 generated by the UK building industry this year). Of course it was all based on the house price bubble, and it's all gone pear-shaped. Demand has collapsed, construction giant Martinsa-Fadesa has gone belly up, and several banks are teetering on the brink. 280,000 building workers have lost their jobs and unemployment is up by half a million this year already. Car sales and industrial production are down. It's just like home!
Two quarters of actual economic decline counts as a recession. So here it comes. And this trouble is set to continue till at least 2009.
Kenneth Rogoff, former chief economist at the IMF, promises that "the worst is to come." He continues, "We're not just going to see mid-sized banks go under in the next few months, we're going see a whopper, we're going to see a big one - one of the big investment banks or big banks."
Is there anything they can do about it? The European Central Bank is keeping interest rates at an excruciating 4.25%. This acts as a straitjacket on the economies of the Eurozone. The reason? The ECB thinks inflation is the main enemy. Maginot line economics! No wonder only 5% of Spaniards and 8% of Germans think the ECB is doing a good job.
The Euro has been falling against the dollar for the past six months. We don’t notice that in Britain as sterling is in freefall. The reason for the revival of the dollar is paradoxical. Speculators have realised that the recession may have been born in the USA, but it’s now spread to the rest of the world, so the Euro sinks. The recent fall in oil prices have also been a factor for the now rising dollar, but the price of oil is likely to provide currencies with a switchback ride in the future.
Michael Saunders, writing in the 'Financial Times,' (15.08.08) declares, "It's time to forecast a recession." He continues, "In pretty well all of Europe - the Euro area and the UK - the downturn is going to be longer and deeper than the consensus expects." It's a "competition in misery."
So we'll get poorer because they're getting poorer, and then they'll get poorer because we're poorer. It's a downward spiral with no end in sight. European workers face a gloomy future. They have no alternative but to fight to defend their standard of living and to overthrow the system that is the cause of their problems.
They have a fighting tradition. This year there has been a huge public sector strike of 100,000 in Denmark, a country of 5 million people. The strike was illegal, but that didn’t stop the Danish working class. There have been three general strikes in Greece in three months against the attempted privatisation of education and cutting pension rights, as the bosses attempt to lay the burden of the crisis on the shoulders of the working class.
Belgium has seen an epidemic of wildcat strikes leading up to an effective general strike in June. Portugal has been in a state of continuous ferment for years. The bosses are determined to tear up legislation protective of workers’ rights and casualise employment completely. As in Greece, pensions are in their sights. Even in sleepy Switzerland a railway workshop in Bellinzona, threatened with closure, was occupied by the workforce for two months, leading to a situation of virtual dual power in the town. We must build on the best traditions of the European working class to fight capitalist cutbacks and build a better future.
Meanwhile the Irish referendum on the Lisbon Treaty threw up a ‘no’ vote. So the Treaty, which outlines a new decision-making process for an enlarged EU, is effectively a dead duck. This has in effect paralysed decision-making for the European Union as a whole. But experience of the past fifty years has shown that, if EU integration is not going forward, then it will begin to roll back. Now Europe is on the threshold of recession, nationalist resentment at the EU will be on the rise. As Marx said, “It is one thing to share out profits and quite another to share out losses.” European integration has only proceeded as far as it has because of economic growth and prosperity. That can’t be relied on in the future.
Decisions have to be taken, about EU expansion into Turkey, the Balkans and Eastern Europe, and about harmonisation of standards for services. All of this, of course, is part of the dominant neo-liberal agenda within the councils of the EU. As Europe has been enlarged, each new poor eastern member has been seen as an excuse to tear up social protection for the working class among existing members and push standards down to the bottom. Before a member nation is allowed to join, the World Bank and WTO go in and lay down the law about implementing a full neo-liberal programme.
The revised Working Time Directive, ‘inspired’ behind the scenes by New Labour, has been diluted so as to allow working for 63 hours a week instead of 48. European trade unions should be fighting this change with all their might. Inflation is on the rise all over Europe. The European working class must unite to demand a sliding scale of wages across Europe like the Italian scala mobile (automatic cost of living- related wage increases) which for years protected workers’ living standards against the ravages of inflation.
Here is the programme the International Marxist Tendency put to the European Trade Union Confederation when they demonstrated against European finance ministers at Ljubljana, Slovenia, last April.
· Substantial wage increase to take back what has been lost in the last years!
· For a national minimum wage in each country of at least two thirds of the average wage, as a first step towards a European minimum wage.
· For a sliding scale of wages to defend our living standards!
· Repeal all EU directives that introduce or support casualisation of labour!
· No to the Lisbon Treaty!
· Scrap all racist immigration and asylum policies!
· No to "social partnership"!
· For fighting and democratic trade unions!
· Organise shop stewards' committees (democratically elected and subject to recall) in every branch of industry, coordinated on a European level.
· For the re-nationalisation of what has been privatised for the profit of a few capitalists, and the public ownership under democratic workers' control and management of pension and health systems, transport, telecommunications, the production and distribution of energy, banking, insurance and credit, and of all major industries.
· No to the Bosses' European Union. For a Socialist united states of Europe!
United States Abandoning Capitalism for Socialism / The Cost of Socialism
By: John Browne, Senior Market Strategist, Euro Pacific Capital
The Market Oracle/Financial Sense University
Jul 30, 2008 - 07:15 PM
Over the past few decades, the United States has steadily evolved from a nation of ‘producers' to one of ‘consumers'. The change has been celebrated by politicians and economists as proof of America's arrival at the top of the global economic food chain. In reality, the development has depleted the nation of its hard-earned wealth, and has led us to the brink of ruin.
But rather than encouraging a return of America's productive energy, our government is responding to the growing economic crisis by simply trying to boost consumerism at all costs. Their strategy involves socializing losses among all citizens so that the depletion can't be easily discerned.
Now that the nation has chosen socialism as its economic salvation, it is worthwhile to examine some historic precedents. They are not encouraging. Europe, the former Soviet block and much of Africa and Asia, show vividly that socialism curbs individual freedom and enterprise, and leads inevitably toward economic decline.
America was blessed both with abundant natural resources and individual freedom, the backbone of enterprise. The combination rendered American productivity the envy of the world. Based on the strength of our industry and productivity, the American Treasury became the world's largest.
Why would America swap a history of successful capitalism for a murky future of socialism? The Answer is politics.
When the vast majority of the country's private sector working population is employed in the service sector, then votes tip in favor of consumerism. This is happening in America. Consumer spending now accounts for 72 percent of Gross Domestic Product (GDP), and is viewed as the engine of our continued prosperity.
Over the past decade, when recession threatened to curtail spending, the government pumped hundreds of billions of dollars into the economy. This led to two massive liquidity-driven booms; first in technology, then in housing. During these booms, greed knew few bounds and leverage became a way of life.
But when the merry-go-round stalled, politicians did not, and will not, allow the normally corrective mechanism of a recession to operate. It is trying to take the pain out of capitalism, while leaving only the pleasure. This is impossible.
In the current attempt at a market correction, the government has decided that our bloated financial companies are “too big to fail”. As a result, the government has lent billions of taxpayers' dollars to bail out Wall Street and the mortgage industry. Some investment banks were given privileged access to the ‘Fed Window' to borrow unlimited amounts of money, secured by ‘junk' securities and at the lowest (negative) interest rates, well below the level of inflation. In addition, the shares of the larger financial companies were also given special ‘short-selling' trading protections.
It is important to note that these protections were not given to other industries, and were not even extended to the entire financial industry. Those receiving the public largesse are precisely the large institutions most responsible for the mess. It was the financial and corporate fat cats who made the private profits gleaned from massive, irresponsible lending and borrowing. Yet, when it comes to rescue, the ordinary citizen pays.
Declining corporate earnings, increased government intervention and higher taxes are tell-tale symptoms of socialism. They can now be expected in America, bringing downward pressure on U.S. government paper and equities. Recession in America will likely reverberate around the world, bringing worldwide strain to economies and equities.
Let us hope that the rest of the world will not follow America's example and head down the road toward socialism. Economies adopting a free market approach are likely to far outperform those embracing the discarded doctrines of financial failure.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
By John Browne
Euro Pacific Capital
John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher.
11 reasons America's a new socialist economy: How free market ideology backfired, sabotaging capitalistic democracy
By Paul B. Farrell
Last update: 11:47 a.m. EDT July 22, 2008
ARROYO GRANDE, Calif. (MarketWatch) -- Welcome to the conservative's worst nightmare: The law of unintended consequences. Why? Nobody wants to admit it, folks, but the conservatives' grand ideology is backfiring, actually turning the world's greatest capitalistic democracy into the world's newest socialist economy.
A little history: The core principles of conservative economic ideology are grounded in Nobel economist Milton Friedman's 1962 classic "Capitalism and Freedom." Too late to stop President Lyndon Johnson's Great Society, those principles became the battle cries energizing conservatives since Reagan: Unrestricted free markets, free enterprise and free trade; deregulation, privatization and globalization; trickle-down economics and trickle-up wealth to an elite plutocracy destined to rule the new American capitalist utopia.
So what happened? Are you guys nuts? Hey, I'm talking to all you blind Beltway politicians (in both parties) ... plus the Old Boys Club running Wall Street (into the ground) ... plus all you fat-cat CEOs (with megamillion parachutes) ... and all your buddies scamming everybody else to get on the Forbes 400. You are proof of Lord Acton's warning: "Power corrupts and absolute power corrupts absolutely."
It's backfiring! You folks turned our America from a great capitalistic democracy into a meddling socialist economy. Still you don't get it. You're acting like teen addicts tripping on an overdose of "greed-is-good" testosterone while your caricature of conservative economics would at best make a one-line joke on Jay Leno.
Here are 11 reasons your manipulations are sabotaging the great principles of leaders like Friedman and Reagan:
1. Dumber than a fifth grader with cognitive dissonance
Kids know what it means. They know most adults today can't see past the end of their noses. Liberals tune out candidate McBush for being lost in the past. Conservatives can't hear Obama without seeing that turban.
Cognitive dissonance simply means most brains cannot see past their own narrow ideologies. They dismiss any data that contradicts their old ideologies. Whether you're a conservative Republican or liberal Democrat, you only hear what you already know is "true." All else is tuned out.
2. Where did all the leaders go with their moral character?
Friedman's economics requires leaders of moral character. Did it run into Lord Acton's warning: "Power corrupts, absolute power corrupts absolutely?" Former Ford and Chrysler CEO Lee Iacocca said yes in "Where Have All the Leaders Gone?"
Friedman's great conservative principles have been commandeered by myopic ideologues whose idea of leadership is balancing the demands of self-interest lobbyists with the need for campaign donations. Unfortunately, a new "change" president won't be enough; there are 537 elected officials in Washington controlled by 42,000 special interest lobbyists.
3. Fed and U.S. Treasury adopted Enron accounting tricks
Bad news: Enron failed several years ago because of its off-balance-sheet accounting scam. The Fed's doing the same thing: Dumping Bear's $30 billion liabilities onto the taxpayer's "balance sheet." Next Treasury proposes adding $5.3 trillion more from Fannie Mae and Freddie Mac.
Unfortunately clever accounting tricks by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke aren't going to fool foreign lenders analyzing America's creditworthiness. Worse-case scenario: U.S. Treasury bills with less than a triple-A rating.
With 90 banks on the brink and already too many bail-outs, our so-called leaders are running out of magic bullets. So now the taxpayer's "balance sheet" has become the all-purpose "dumping ground" and it's overcrowding fast as our leaders raise the white flag of socialism.
4. Deregulation creating new socialist housing system
Back in 1999 a Democratic president and Republican Congress were in love with a fantasy called the "new economics." Enthusiastic lobbyists invented the brilliant idea of dismantling the wall between commercial and investment banking: They killed the Glass-Steagall Act that was keeping the sleazy hands of short-term hustlers out of the pockets of long-term lenders.
Flash forward: We lost 85-year-old Bear Sterns and $32 billion IndyMac. Lehman's iffy. And 90 banks. With the virtual takeover of Freddie and Fanny, Wall Street's grand experiment with free-market ideology is backfiring, having socialized the housing market.
They have nobody to blame but their self-centered greed.
5. Trade deficits outsourced more of America's wealth than jobs
One look at Forbes lists of fat cats and you know the 21st Century doesn't just belong to Asia, it belongs to everyone but America. Why? Once again, remember Warren Buffett's famous "Farmer's Story" in Fortune: "We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits ... our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than they produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own."
Friedman was right: Congressional spending is the biggest cause of inflation, and, wow, those conservatives sure did love blank-check deficit spending the past eight years!
6. Banking system in meltdown, minting penny stocks
The Friedman conservatives apparently understand Joseph Schumpeter's "creative destruction." Yet, our free-market ideologues can't seem to accept that America is now on the "destructive" downside leg of the cycle, in the economy, markets, trade, politics and, yes, sadly, even with their conservative ideology.
You don't have to be smarter than a fifth grader to figure out that our leaders are clueless about the reality of our crumbling banking system, with many banks trading as penny stocks, while the Fed still panders to conservative pre-election politics rather than getting serious about inflation.
7. Ideologues preach savings, but still push spending
A core principle of conservatism is frugality, saving for the future. Grandparents raised me, struggled during the Depression, passed on strong ideals.
Somewhere over the past generation conservatives forget frugality. This distortion peaked in 2003 when consumers were told to spend, not sacrifice, and fuel the economy even as government spent excessively on war. That was a clear breach of every conservative leader's position in earlier wars.
As a result, in one brief generation, as the power of conservative ideologues grew,
America's savings rate dropped precipitously from 11% in 1980 to less than zero today.
8. Warning, the market's under 2000 peak, losing money
Imagine you're on Jeff Foxworthy's fabulous show competing to see if you really are smarter than a fifth grader. Question: "If you put $10,000 in the market in March of 2000 when the Dow peaked at 11,722, how much money would you have today if the market's 10% under 11,722?" So you guess $9,000.
But then two fifth graders raise their hands: One asks if the CPI inflation rate should be considered? If so, maybe $5,000 is closer to the right answer. The other kid wants to know if you're buying stuff in Chicago or Singapore.
The truth is, the best answer for most adults is: "You've lost a hell of a lot of money in the market under the grand conservative ideology the past eight years."
9. Inflation and dollars: Is Zimbabwe the new model for the U.S.?
The Los Angeles Times ran a photo of a Zimbabwe $500 million bank note, worth $20 at noon, less at dinner. Why? Inflation's there is running 32 million (yes million!) percent annually. The German company printing their banknotes finally cut them off.
Things may be worse in America, psychologically. Our ideological obsession with "growth" is not working because there is too much collateral damage, namely inflation.
Our dollar has lost substantial value to the euro because our dysfunctional leaders are convinced that a trade policy funded by debt makes sense.
Now we owe China $1.3 trillion, sovereign funds want equity not cheap dollar IOUs, and still our clueless Treasury and the Fed continue debasing our currency, printing money like Zimbabwe.
10. Free-market health care failing 47,000,000 Americans
Big Pharma loves free-market conservatism and no-compete Medicare drug programs. Nobody else is happy. Taxpayers get stuck with the bill.
"The Coming Generational Storm" tells us that without massive reforms and big lifestyle changes for taxpayers (especially retirees), within a couple short decades America's entitlement programs will eat up the entire federal budget. Medicare is the biggest cost item in your future, over $50 trillion in unfunded liabilities.
Conservative ideologues naively believe the answer is more pay-out-of-pocket insurance plans, even with 47 million already uninsured because they can't pay. Here as in so many areas of our economy, free-market junkies really are suffering a severe case of cognitive dissonance, as blind to the facts about the uninsured as they are to their outdated free-market fantasies.
11. Conservative free-market policies inflated oil 300%!
Yep, oil inflated 300% in eight short years under the "leadership of two oil men." But, you can't blame them. We put the foxes in the henhouse, knowing full well "real" oil men love digging holes on the supply side, supporting ethanol subsidies and blaming speculators -- it's in their genes! Talk about cognitive dissonance; real oil men thrive on cowboy images of Marlboro Men in Hummers, Navigators and F-150 trucks.
Net result? Another perfect example of "creative destruction" in action as conservative ideology meets "law of unintended consequences," driving GM, the symbol of America capitalism, closer to bankruptcy ... while turning America into a socialist economy.
London: Sarkozy seeks to moralize capitalism
Commentary by Herbert London
Issue Date: www.insightmag.com - April 22-30, 2008
In a recent Le Figaro report Nicolas Sarkozy said, “At the end of the French presidency, my aim is that [Europe] will have moved towards a common immigration policy, a common defense policy, a common energy policy, and a common environment policy.” He noted, “The citizens of all of Europe demand protection; they want Europe to protect them, not make them vulnerable. They want it to allow them to act, not oblige them to suffer.”
President Sarkozy goes on to contend that this “protective Europe” is incompatible with “the excesses of financial capitalism.” He maintains that France under his guidance will take initiatives “to moralize capitalism.” As part of his vision Europe is to be seen for “community preference” and to make matters perfectly clear President Sarkozy has called on the government backed Caisse des Dépôts et Consignations bank to take the lead in protecting France from the “power of extremely aggressive sovereign funds.”
How does one parse the ambiguous phrases? Is European immigration policy, to cite one example, going down a path taken by France in which more than a quarter of Marseille residents are Muslim and unrest now characterizes urban life in this once peaceful city? What does Sarkozy mean by a common environmental policy? Are European nations about to embrace a common carbon footprint? And if so, will such regulation be enforced by bureaucrats in Brussels?
Perhaps the most interesting and often-heard expression used by Sarkozy is “moralizing capitalism.” For years European leaders have been decrying “the inhuman dimensions of Anglo-Saxon capitalism”—code words for the free market. Sarkozy is merely following the rhetorical lead of his predecessors.
However, in his desire to place strict controls on sovereign investment he may be inhibiting cash-starved industries and corporations and, in the process, restricting innovation Europe needs to be competitive. If moralizing capitalism means protective regulation that keeps union control over the labor market, stagnation is the inevitable result. It has been demonstrated in France and elsewhere in Western Europe that if you cannot fire, you cannot hire, a condition that has led Europeans to envy the relatively low unemployment rate in the United States.
Clearly Europe has benefited from Arab capital that has gravitated north in search of investment opportunity. This condition aimed in part as punishment for American Middle East policy, has bolstered the euro against the dollar and, to a modest degree, has had a salutary influence on European economies.
But in actuality Europe’s industries are largely moribund. They cannot compete against Asian markets and often demand protection against the economic onslaught. The unfunded liability due to cradle to grave security—even with recent modifications in outlook—is daunting.
As a consequence, the Sarkozy proposal to moralize capitalism—which has the ring of human decency to it—is catastrophic for a Europe that suffers from economic sclerosis. If anything, France and Western Europe desperately require a shot of adrenalin in the form of free market initiatives.
Clearly Europeans have a preference for security, long vacations, short work weeks and reduced competition. However, Europeans are not alone in the world. The intrusion of other markets is a reality and the interest of competitiveness will have to be assuaged.
While Sarkozy’s pro-American foreign policy stance is justifiably applauded, his European economic position is hopelessly predictable and doomed to fail. Perhaps as a member of the EU in good standing, he, as the leader of France, is obliged to repeat standard European slogans. But these are empty slogans that if enacted into policies will further weaken Europe economically and make it less likely the continent will assume the defense responsibility to which is so often gives lip-service.
Sarkozy has enjoyed a honeymoon period with American leaders, but his platitudinous economic position should offer a moment of reflection. Are we merely hearing much of the bankrupt moralizing of the recent past—an echo of Chirac? That is the most likely conclusion to be reached from his remarks.
-Herb London is president of the Hudson Institute and a member of Insight's Editorial Advisory Board.
Alan McCombes speaking at the SSP's 'Socialism' event
Imagine a socialist Scotland: A vision for the 21st century
By Alan McCombes
A fully-fledged socialist society could never be achieved within the borders of a small country such as Scotland. The eradication of all social and economic inequality could only be achieved on an all-European, or perhaps even a world scale. Nonetheless, a Scottish socialist government could at least begin to move in the direction of socialism by taking control over key sectors of the economy, by introducing workplace and community democracy, and by implementing radical and popular reforms which would set an example for other countries to follow.
A new socialist economy would be based on a range of different types of enterprises with the emphasis on social ownership. Large-scale industry, oil, gas, electricity, the national railway network could be owned by the people of Scotland as a whole and run by democratically elected boards in which workers, consumers, and the wider socialist government were all represented. These would not be based on the old-style nationalisation projects. Instead of centralised planning by a remote bureaucracy, there could be decentralised democratic planning using the most advanced information technology. Where practically possible, socially owned enterprises could be broken down into smaller sub-units to enable closer scrutiny by the wider public.
Social ownership could also involve community-owned and municipally-owned companies. Municipally-owned building companies could be established to build new homes, schools, community centres, sports centres and other local facilities. Local bus and underground systems too could be taken over and run by the larger councils, or jointly by neighbouring smaller councils.
Another form of social ownership that could be encouraged through the provision of cheap loans and other incentives would be workers' co-operatives. Repeated studies have shown that when employees own and run their own companies, they work harder and more efficiently. Following one of the most in-depth studies ever carried out, based on research in the UK, Greece, Italy, Spain, Cyprus, and Malta, one expert, Dr Godfrey Baldacchino of the University of Malta concluded, 'Worker-owners typically work better, they work harder, they offer competitive services, they distribute their gains more equitably, they enjoy high levels of participation in decision-making and they enjoy high levels of job satisfaction.'3
In a socialist Scotland, some sections of the economy would most likely remain in private hands. It would be absurd for any socialist government to try to take over small shops, ice cream vans, Indian takeaways, taxi-cab firms, car mechanics yards and the multitude of other small-scale enterprises which play a central role in producing goods and delivering services.
In total, there are just under 300,000 businesses in Scotland. Only 1.2 per cent of these employ over 50 people, while at the other end of the spectrum, 93.7 per cent of businesses employ less than ten people. In a socialist Scotland, these hundreds of thousands of small businesses would thrive because they would be competing with each other on a level playing field, rather than competing with big business on similar terms that the Christians competed with the lions in ancient Rome.
Some larger companies, too, may even remain in private hands on the grounds of expediency. For example, there are now almost 40,000 workers employed in Scottish call centres, most of which have been set up by outside companies based in England or abroad. Attempting to take a call centre into public ownership is likely to be a futile gesture: it would literally stop functioning overnight, leaving banks of silent telephones. Similarly, some branch assembly plants, particularly in the electronics sector, are individual links in an international production chain.
In these instances, a socialist government could enforce certain basic standards of wages and conditions, including a minimum wage of at least a £7 an hour (at today's values); trade-union rights; a shorter working week; and workers' control over health, safety, and other workplace conditions.
Companies which refused to meet these conditions would forfeit their assets. They could also be forced by law to provide minimum redundancy payments, perhaps the equivalent of two to three years' wages, to allow a reasonable time for the sacked workers to be retrained and redeployed.
Today in Scotland, each worker employed by a foreign-owned company produces on average an astonishing £184,000 of wealth. By contrast, capital investment in these companies adds up to just £7600 per employee. Even with vastly increased wages, improved conditions, shorter hours, and higher rates of corporation tax, most companies would probably still find it profitable to remain .4
But, within a socialist Scotland, the private sector would be subordinate to the social sector. Profit would no longer be the raison d'etre of all economic activity. Instead of being siphoned off to shareholders, the surpluses produced by workers would be used to increase wages, reduce hours, improve working conditions, develop public services, and boost investment. Social and environmental considerations would take precedence, as would longer-term planning and training.
If the minutes of the board meetings of, for example, Scotland's giant construction companies were publicly available - which they're not - they would no doubt be preoccupied with questions such as: `How can we cut costs? Where can we make redundancies? Where will we advertise? Where can we get cheaper materials? Is there any land up for sale that is likely to increase in value? How much can we increase the cost of a new three-bedroom house without losing market share? Can we work out a strategy for driving some of our rivals out of business?'
Within a socialist economy, the elected board of a socially owned construction firm could have a different agenda. It could discuss such questions as: `What are the latest homelessness figures and how are we tackling the problem? What are the results of the tenants' consultation over the design options for the new council estate in the East End of Glasgow? Are the materials we are using on this project sufficiently durable? Will the houses be properly insulated to save energy? Will they be barrier-free to make them suitable for disabled residents? Can we reduce the price of a new three-bedroom home? Are safety standards on our sites being adhered to? Are we in a position yet to move from a four-day week to a three-and-ahalf-day week?'
There could be total transparency in the workings of all branches of the economy, with minutes of every board meeting of all large enterprises published online. There would be mechanisms to ensure that board members could be removed from their positions at any time by those who elected them. Although there would be the need for managerial and technical specialists, whose salaries would be subject to negotiation, board members themselves would receive no more than the average wage of a skilled worker in that industry.
To survive and thrive, any economy must constantly innovate. Yet the total amount spent on research and development in Scotland in 1999 was just £330 million, less than two per cent of the £18 billion profit bonanza made in Scotland in the same year by just 20 companies.5 Scotland has the skills and technology to develop its own socially owned electronics, information technology, and chemical industries which would not be at the mercy of boards of directors in distant cities.
There are hundreds of thousands of websites devoted to radical environmentalism, anti-capitalism, and socialism. A socialist Scotland could utilise communications technology, not only to generate international political solidarity, but also to open up trade with this potentially massive radical cybermarket.
Such far-reaching change could not be carried through without full political and economic independence. The devolved semiparliament at Holyrood, with its lack of economic muscle, could not even begin to scratch the surface of inequality in Scotland. Nor could the SNP's alternative to devolution - Independence in Europe within a single European currency - offer genuine independence. Control over economic policy would simply shift from Westminster and the Bank of England to Brussels and the European Central Bank. And, like their London-based counterparts, the bankers, bureaucrats, and big-business-oriented politicians who run the European Union will fiercely resist any serious attempt to build a more egalitarian society in Scotland, or in any other European country.
A socialist government in Scotland would require to create its own central bank. It would bring the other major banks and financial institutions into the public sector and establish a network of community banks, building societies, and insurance companies. Based on the same principles on which credit unions operate in many local communities, a new socialist financial system could provide low-interest credit, attractive savings terms, and cheap insurance. It would especially benefit farmers, small businesses, and workers' co-operatives.
For most mainstream politicians, the idea of banks being owned by the people rather than by private shareholders is unthinkable. Banks, after all, are the private property of rich individuals to run as they see fit. You can't just deprive these people of their livelihood as though they were shipyard workers, or miners, or machine operators.
In a socialist Scotland, this culture of deference to the rich and powerful will be dissolved. just as capitalism set out to abolish `the divine right of kings', socialism will set out to abolish the divine right of bankers, shareholders, and stockbrokers. The needs of society as a whole will eventually be elevated above convention, tradition, and sentiment.
Certainly, shareholders would be compensated. A democratically elected compensation board could be established, which was representative of society as a whole. It would try to arrive at a fair settlement with shareholders to ensure that they were not driven into debt, bankruptcy, and poverty. But there would be no question of doling out millions of pounds in compensation to wealthy individuals, as previous Labour government did when they nationalised industries such as coal, rail, and steel.
Publicly owned banks exist even in the most right-wing free-market societies. In the United States, the Federal Reserve is state-owned. The European Central Bank, too, is owned not by private shareholders but by the member states of the European Union. The Bank of France and the Bank of England are publicly owned. Even Russia under Boris Yeltsin, after privatising three quarters of all public enterprises was forced to nationalise some of the country's biggest banks when the Moscow stock exchange went into free fall in the late 1990s.
There are thousands of examples of local, regional, and national banks and financial institutions that are socially owned in one form or another. Most building societies and many insurance companies including one of Scotland's biggest financial institutions, Standard Life - were built, not as profit-making businesses but as mutuals, owned by their customers. In a significant rejection of the smash-and-grab culture of free-market capitalism, Standard Life's two million policy-holders recently voted to retain the company's mutual status, rejecting bribes worth an average of £6000 per person to float it on the stock exchange.
Neither Standard Life nor any of these other institutions are run democratically. None are run remotely in the interests of the wider community. All of them are subservient to the demands of private capital. Nonetheless, the fact that publicly owned banks and mutual insurance companies exist and thrive even in the heartlands of free-market capitalism is an answer to those who argue that public ownership of finance is impractical.
Some politicians, even on the Left of the political spectrum, express fear that radical measures directed against the banks and other capitalist institutions would provoke a `flight of capital'. Naturally, a socialist government would try to counter that with immediate legislation restricting the amount of money that could be shifted out of the country. Before Thatcher rewrote the rules in the early 1980s, even the British government, along every other government in the world, had strict controls on the movement of capital in and out of the country.
In today's hi-tech economy, it is much easier to shift capital around. But a financial system is more than just money. It consists of physical resources: staff, buildings, computers, cash machines. It is built upon expertise. Whether any financial system can function effectively or not depends first and foremost on the skills, the training, the know-how, the experience of the workforce at every level.
Money can be shuffled around from one country to another. But an entire financial system employing 100,000 skilled and trained workers cannot just be dismantled and moved abroad.
In any case, most of the operations of the financial sharks who shift money around are purely parasitical. They are like touts buying up tickets for a big cup final so that they can later sell them at five times their original value. They create nothing and add nothing to the general welfare of society. As things stand today, only a small fraction of the £300 billion controlled by Edinburgh's financial institutions is actually invested in the Scottish economy.
One argument against socialism that has been checkmated by the development of information technology is the claim that democratic planning is impossible in a complex society. `Let the market decide!' is the cry of the profiteers. They rightly denounce the centralised bureaucratic planning of the economy that contributed to the downfall of the Soviet Union.
But the creation of a democratically co-ordinated, harmonious, integrated economy is more viable today than ever before. Information technology can track sales, prices, distribution, and a mass of other relevant data. It can make instantaneous adjustments where necessary. Even now, the big supermarkets operate a system whereby every sale is recorded in a centralised database, which in turn is linked to a series of warehouses. Computerised order books then instantaneously calculate which stocks need to be replenished.
In other words, production is planned. But, under capitalism, such commercial planning is limited and fragmented. It is also highly secretive. Information is jealously hoarded by each individual company and exploited for commercial gain. If an item is selling well, the price will be jacked up to the highest level the market will tolerate. The prices of other goods will be temporarily slashed as a means of undercutting competitors and eventually driving them out of business.
Under capitalism, the flow of information that has been made possible by computer technology is abused for private profit. Under a socialist economy, these information systems would be expanded and integrated across the economy, and they would be geared to the broad needs of society as a whole, rather than to the narrow demands of company shareholders.
It would be foolhardy at this stage to even attempt to set out an exact blueprint of how a socially owned economy in Scotland would function in fine detail. There would be continual improvisation and fine-tuning on the basis of experience.
Moreover, the establishment of an independent socialist Scotland would only be a transitional step towards a wider international socialist confederation. It is an open question whether the battle for socialism across Europe will be pioneered in Scotland or whether the people in Scotland will follow a trail first blazed elsewhere.
There is no arguing with the fact that capitalism ended the 20th century triumphant. But, as the 21s' century progresses and the mists of confusion begin to be dispelled, the idea of socialism will emerge more clearly and powerfully than ever before. Socialism's time may not yet have come, but `it's comin' yet for a' that'.
Copyright Scottish Socialist Party 2008
EUROPEAN PARLIAMENT SPOTLIGHT
“In light of recent market turbulence, we need to lay the foundations for a more stable and secure EU financial market”
by unknown Socialist Group in the European Parliament
What should the EU be doing to improve the global competitiveness of Europe’s financial services and banking sector?
The EU’s first step to improve the global competitiveness of the financial sector must be to complete the internal market for financial services, with measures to encourage market integration matched by new efforts to protect consumer rights. The industry needs to develop more pan-European financial products to meet the demands of the EU’s increasingly mobile citizens. And the EU needs to create an adequate framework of supervision to ensure that these products are portable and recognised by all relevant regulators. Harmonisation on consumer protection must, however, respect the diversity of member states’ traditions and their varied legal systems.
The EU should also eradicate fiscal barriers to cross-border economic activity and prevent tax competition which creates obstacles to cross-border financial services. Further harmonisation of the tax base and more fiscal convergence would be a massive step forward in this regard. The EU’s competitiveness on global financial markets also depends critically on stronger transatlantic dialogue, although cooperation cannot increase at the expense of Europe’s tough regulatory goals, including high prudential standards, transparency and consumer rights.
Certain issues demand urgent attention, notably transparency for investors, markets and regulators, valuation standards and risk management in the financial sector. The EU, therefore, needs to bring forward specific regulatory proposals on hedge funds and private equity groups, rating agencies and supervision. And, in light of recent financial market turbulence, there should be an in-depth review of the problems on the inter-bank money markets and other related credit crises. We need to learn all the necessary lessons and lay the foundations for a more stable and secure EU financial market in future.
The EU has often been criticised for being too distant from its citizens. What would be your plan to bring the EU closer to its citizens?
The low turnout in the recent Romanian elections for the European Parliament – at just 29% of the voters - underlined how important it is to involve people in EU affairs. The EU is big, diverse and complex, which makes pan-European communications a tough nut to crack. All the different EU partners - politicians, governments and the Commission – need to do more to explain how the EU makes a difference to people’s daily lives. Commissioner Margot Wallström recently made an excellent start in improving EU communications with her Plan D − for debate, dialogue and democracy. We also have to find ways to make sure that Europe’s leaders and politicians listen to the people. And we have to stop the endless “blame game” between Brussels and national governments as it confuses everyone.
Many inter-institutional initiatives are underway to help the EU communicate better, which are all welcome. However, dialogue in Europe cannot become a set of institutional arrangements. Communications must be citizen-centred, empowering people and providing them with the information they need to vote meaningfully. MEPs have a critical role in this respect. It is up to each of us to translate the EU into something relevant to the day-to-day experience of our constituents. Here in the Socialist group, we are developing our website (www.socialistgroup.eu) to tell people about our work and to provide an interactive space for them to reach us. We also support the Party of European Socialists’ initiative to consult voters - for the first time ever - about the content of the European election manifesto (http://www.pes.org/).
The EU is the biggest development and humanitarian aid donor in the world. What should Europe be doing to emphasise this?
As you say, the EU is the world's biggest spender on humanitarian and development aid. If you add together the resources provided by the EU and its 27 member states, the sums of money are very large indeed. A genuine common foreign policy would make this contribution even more valuable as well as more recognisable, and an EU High Representative could bring all this humanitarian and development support together into one effective policy.
With 2008 being the European Year of Intercultural Dialogue, what should its concrete aims be and how could they be achieved?
One of the most serious risks to the world right now is the idea that a “clash of civilisations” is inevitable and that the world's big religions and cultures cannot live together. It’s an argument that is being pushed by fundamentalists in the Islamic world and in the west. This kind of claim leads to armed conflict – even though it simply isn’t true. In fact, the opposite is correct. You enrich your own culture by learning from other people's cultures. In order to learn from others, you first have to learn about your own culture and be confident about your own identity. You also have to keep an open mind about other cultures, and be prepared to respect their values, rather than seeing them as a threat. That is the idea behind intercultural dialogue; it is a dialogue that brings peace and enrichment. It is the idea behind our unique European project and it’s an idea that’s worth exporting.
What timeframe do you see for EU enlargement in the Western Balkans? What are the main stumbling blocks and how should they be resolved?
The EU's presence in the western Balkans is significant and is, in part, a military presence. I would prefer not to need to have soldiers there. If Bosnia-Herzegovina, Macedonia and Serbia follow the path to EU integration, then we can start to replace those soldiers with construction workers. It is only a matter of time before countries in the western Balkans join the Union. Individual countries will decide for themselves about the pace of this process and each country’s application will be judged by the EU on its own merits. Croatia is already very close to joining, although at this stage nobody has a firm date. We need to offer all of the former Yugoslavia states the prospect of membership; indeed, the potential for accession has already had a stabilising effect throughout the region. However, it would be highly speculative to discuss a specific time-frame for this at the moment. And, in any case, the existing EU member states need to ratify the Treaty of Lisbon as the Union cannot take in any more new members under the present treaties. We have wasted enough time on institutional reform already.
Martin Schulz email@example.com was interviewed for Europe’s World by journalist Simon Taylor. This section is supported by the Socialist Group (http://www.socialistgroup.eu)
Austrian Bank Scandal: When Socialists Play With Money
By Chris Gillibrand
The Brussels Journal
April 4, 2006
A major banking scandal is rocking the Austrian political elites – left and right. A bank owned by the Socialist trade union (which is close to the Socialist Party SPÖ, currently in opposition) loses billions in shady hedge deals while the union strike fund evaporates in the Caribbean and the bank gets implicated in a corruption case in Israel. Meanwhile the bank is financed by the European Investment Bank (EIB), and an Austrian Finance Ministry official (married to the Socialist ex-chief of the bank) ignores a crucial report and is appointed to the Executive Board of the European Central Bank (ECB). The Conservative Finance Minister claims to know nothing – after just having sold the Government-owned Post Office Savings Bank (PSK) to the socialist bank. Welcome to Austria, presently presiding the European Union council of ministers.
Let me introduce!
The Bank für Arbeit und Wirtschaft AG, BAWAG or in English, ‘Bank for Employment and Commerce’ was founded in 1922 by the Socialist Chancellor Karl Renner. Up until now the majority stakeholder in the Bank has been the Austrian Trades Union Federation, the ÖGB. With the repurchase of the shares of the Bayerische Landesbank in 2004, it is now wholly-owned by the ÖGB. The bank’s original intent, from which it has strayed far, was to extend cheap credits to the needy.
Almost all of the members of the BAWAG Supervisory Board are fully paid up socialists and trade unionists. The two exceptions are Albert Hochleitner, the ex-CEO of Siemens Austria, and Leo Wallner, the chairman of the state-owned monopoly, Casinos Austria. Günter Weninger, chairman of the Supervisory Board, who has now been forced to resign, also has a day job as the Finance Chief of the ÖGB. He started professional life as an electrician which has given rise to suggestions in the Austrian press that he might have to return to his original trade. The Managing Board has eight members, four of whom have now resigned. The CEO, Johann Zwettler had already resigned in October 2005. He and his predecessor, Helmut Elsner, are now under police investigation.
BAWAG opened up operations in the Caribbean in 1995 under the direction of Wolfgang Flöttl, the son of the then CEO, Walter Flöttl. The idea was that these investments should hedge risk. When it was made public that the son received $2 billion from BAWAG without the father seeking the formal approval of the Supervisory Board, the Caribbean business got closed after a year. The extent of Supervisory Board knowledge is still questioned.
After the departure of Flöttl Senior, the business was then reopened by Flöttl’s successor, Helmut Elsner, with Supervisory Board approval after only one year. Elsner was already known as Flöttl’s “man for big business.” Living well, he enjoyed a service penthouse provided on the top of the BAWAG offices in Vienna as had his predecessor, Flöttl. Also provided with a penthouse was the head of the socialist trade union ÖGB, Fritz Verzetnitsch.
This time around, Flöttl Junior invested in high-risk funds and the business clocked up a massive loss of almost €1 billion which threatened the solvency of BAWAG in 2000. The Bank was only saved by a guarantee from the ÖGB (trade union dues amount to 1% of members salaries, so they have accumulated quite a lot of money to play with). The losses themselves were systematically covered up in offshore accounts in the Caribbean and accounts at a US futures broker called REFCO. The union strike fund went walkabouts as collateral in the Caribbean and disappeared.
On 1 December 2000, the Finance Minister (then and now) Karl-Heinz Grasser (from the ÖVP, the conservative Austrian People’s Party) commissioned the National Bank of Austria to do an audit of BAWAG. It was highlighted in the report that the banking system and national banking laws had been violated. There was neither mention of the losses in the Caribbean nor of the ÖGB guarantee. BAWAG received a copy together with the banking oversight authorities in the Finance Ministry. Grasser claims never to have seen a copy of this report.
Why were the Finance Ministry reluctant to expose themselves on this issue highlighted in this report? This could be explained by the fact that BAWAG were finally given clearance by the European Commission to acquire the Austrian Post Office Savings Bank (PSK) from the Austrian Government in November 2000. Not only did this acquisition give BAWAG a new client base (previously many of its banking products had been sold through the network of trade union branches and membership has been declining) but it gave BAWAG a needed liquidity at that time. The Austrian Government (consisting of the People’s Party ÖVP and Jörg Haider’s party) pocketed the money from the privatisation and all were happy behind the scenes. A total merger was finally achieved in 2004.
However, the ignorance and inaction of the Finance Ministry is astounding given that there are two State Commissioners nominated to oversee the affairs of the BAWAG Group; for BAWAG, none other than the Chef de Cabinet of the Finance Ministry and for PSK, the Head of Directorate General III in the Federal Chancery.
No more audits were performed on BAWAG in the following years. Neither the Governor of the National Bank of Austria, Klaus Liebscher who is near to the Austrian People’s Party nor his Deputy, Gertrude Tumpel-Gugerell, who was responsible for financial market oversight thought them necessary. A separate Financial Market Oversight Authority (FMA) was set up in 2002. Finance Ministry staff were transferred to the FMA but not the incriminating report.
Gertrude Tumpel-Gugerell is herself “near” to the Socialist Party; so near in fact that her husband is Herbert Tumpel, President of the Chamber of Workers. Herr Tumpel has a past-life as Chairman of the Supervisory Board of BAWAG when the Flöttls were undertaking transactions under the codeword “Special Business.”
Frau Tumpel was Executive Director responsible for financial markets in the National Bank of Austria from 1997 to 2003 and was appointed Deputy-Governor in 1998. In 2002, she became a member of the Supervisory Board of the FMA on its establishment and Chair of the Banking Advisory Committee of the European Union. Already, a Member of the Banking Supervision Committee of the European Central Bank in 1999, she gave up all these posts to be a Member of the Executive Board of the ECB from 2003 onwards. She and five other members are responsible for the day-to-day running of the Eurozone, reporting to the Governing Council (the Executive Board plus the Governors of the National Central Banks). Why has no sound been heard from this direction?
The scandal breaks
BAWAG Caribbean ventures avoided the news until October 2005 when its former partner REFCO filed for bankruptcy. The 2004 Annual Report of BAWAG records: “The successful cooperation with the REFCO Group will be continued without an equity stake, so that the BAWAG PSK Group will continue to benefit from this access route to international customers in the future.”
In the event, what this really meant was a personal loan of $410 million to the CEO of REFCO, Phillip Bennett, only hours before the company went bankrupt. The collateral for the loan was REFCO shares which became instantly worthless. A warrant has been issued in Austria for Bennett’s arrest. Curiously, an arrest warrant for Flöttl Junior has just been withdrawn by an Austrian judge.
When the extent of the exposure to the Caribbean business was made known in late March 2006 the Supervisory Board Chairman, Weninger resigned. At this stage the use of the strike funds as collateral was also discovered and trade union leader Fritz Verzetnitsch instantly resigned both as ÖGB Chairman and Member of Parliament.
BAWAG itself is so public minded that it has a representative on the Technical Expert Group of the EU’s European Financial Reporting Advisory Group. As the Bible says, you should not ignore the plank in your own eye when trying to remove the specks in other people’s eyes.
BAWAG always had the reputation of being a cutting-edge bank. Via REFCO, they were involved in the PIPE (Private Investment in Public Equity) market which was often used as finance of last resort for near bankrupt companies. They were the first bank in Europe to offer loans over the internet. While, over the years BAWAG showed considerable reluctance to enter the markets of Central Europe, outside the immediate scandal some of their strategic moves, have been what might be called “interesting” not to say “opportunistic.”
In Israel, there has been an extraordinary investment (among others) in a casino in Jericho, jointly funded by among others, the Palestine Authority, Casinos Austria and BAWAG. This was burned out during the Intifada but there appear to have been plans for another casino with the same ownership line-up in Southern Gaza! BAWAG is heavily involved in the still open corruption allegations against members of Sharon’s family.
Stranger still, BAWAG opened a representative office in a hotel in Libya in October 2005, a strange enthusiasm even given the improving relations with the EU and the large number of other countries where BAWAG is not yet represented. The launch was attended by a delegation of twenty-five from Austria including none other than Ewald Nowotny, former socialist politician and vice-President of the European Investment Bank (EIB) from 1999 until 2003. He is now Honorary vice-President of the EIB. At the age of 29, he was appointed Chairman of the Board of Directors of the Austrian Post Office Savings Bank (PSK), a post he held until 1978.
The EIB is the EU’s financing institution. It was created by the Treaty of Rome. The members of the EIB are the EU Member States of the European Union, who have all subscribed to the Bank’s capital. In the EIB’s own words:
· The EIB enjoys its own legal personality and financial autonomy within the Community system. The EIB's mission is to further the objectives of the European Union by providing long-term finance for specific capital projects in keeping with strict banking practice.
· It thereby contributes towards building a closer-knit Europe, particularly in terms of economic integration and greater economic and social cohesion.
· As an institution of the Union, the EIB continuously adapts its activity to developments in Community policies.
· As a Bank, it works in close collaboration with the banking community both when borrowing on the capital markets and when financing capital projects.
· The EIB grants loans mainly from the proceeds of its borrowings, which, together with "own funds" (paid-in capital and reserves), constitute its "own resources".
· Outside the European Union, EIB financing operations are conducted principally from the Bank's own resources but also, under mandate, from Union or Member States' budgetary resources.
The EIB has been extremely active in providing loans to BAWAG and to BAWAG/PSK.
It may be a coincidence but at the time of writing this article, records of the above loans have disappeared from the EIB website.
Of great curiosity value are what seems like two loans signed on 6 October 2005, just a few days before the REFCO scandal broke for €180 million – the first for €100 million for a global loan focusing “on projects of limited scale in the fields of environmental protection and improvement as well as infrastructure, energy, health, education and SMEs situated to more than 70% in regional development areas” and the second for €80 million “for financing for small and medium scale ventures.” It maybe that the second sum is included in the first.
Another loan for €20 million was signed on 17 March 2006 also for “financing for small and medium scale ventures.” It maybe that this loan is also the final tranche of the initial loan. Loans, therefore, of at least €100 million and possibly €200 million were made (depending on how one interprets the descriptions and dates of the transactions.)
A further line of credit for €100 million for “the financing of projects of limited scale in the fields of infrastructure, environmental protection and improvement, rational use of energy, health and education located in regional development areas” was published on 6 March 2006 as being under consideration.
Why such big loans so recently? On what basis did the EIB approve this financing? Did they not ask the Austrian Finance Ministry about the state of BAWAG’s finances? Why did not the Finance Ministry inform them? Surely even just the business in Israel and first news of the Caribbean scandal should have sounded alarm bells.
It can, therefore, be of no surprise that the new Chief Executive of BAWAG is going to be… Ewald Nowotny who declared on 23 March 2006 that “the bank’s balance sheet was now ‘clean and solid.’” He assures everyone that there are no more dead bodies in the cellar.
So cosy are the political relationships in Austria even after the partial collapse of the notorious proporz system that ex-People’s Party politician, Christoph Leitl, now the Head of the Austrian Chamber of Economics and President of Eurochambres declared that he had “respect” for trade union leader Verzetnitsch on his resignation. Short of a complete meltdown of BAWAG, it would have been in his interest to say this if any of his members are owing money to this socialist bank. Here they are together at a “Dialogue of the Social Partners” event organised by the Diocese of Linz in February.
Leitl has now praised the crisis management of the ÖGB und BAWAG! Needless to say, when questioned, he does not support the resignation of Tumpel from the Chamber of Workers.
Cosy indeed; the Austrian President, Prime Minister, Leitl himself and even the left-leaning Bishop of Linz were honoured guests among the 500 people who attended Verzetnitsch’s 60th birthday party in May 2005 (entitled “60 years for the Socialist Movement”!). The “Social Partners” collected €72000 for the newly established “Verzetnitsch Education Fund for Young People” by the end of the evening. Given the fate of the strike funds, one can only hope that this money is in safe keeping – but it was a BAWAG account. As their advertising runs, “BAWAG saving is safe, easy and lucrative.” Another advert more believably urges “Jet Set with Friends.”
Now the scandal has broken, the Socialist Party SPÖ is distancing itself from its old friends in the fly-by-night banking world. It has have been quick to support the sale of BAWAG, as it is a major embarrassment in the upcoming elections, which it had been predicted to win even under Alfred Gusenbauer, a leader who occupies a charisma free-zone all of his own. After all, if you run a Bank for your own interests and not those of your customers, you will treat the country and her voters in the same way.
Austria in truth has never recovered from the shock of the artillery bombardment of the Karl-Marx-Hof at the centre of “Red Vienna” in 1934 by the Christian Social conservative predecessors of the Austrian People’s Party. The elites now justify to themselves that they have to do everything to avoid such a crisis ever again, but a high price has to be paid in terms of corruption (or at least a good appearance of it) and contempt for a normal democratic process with an effective opposition. And the Austrian state presently has other threats than communists within. The time of the unbreakable “Social Partnership” of the Chamber of Workers (represented by Tumpel), the Trade Unions Federations (represented by Verzetnitsch) and the Chamber of Economics (represented by Leitl) should be long gone. Ironically, it is self-serving and no longer serves the interests of society or of ordinary Austrians outside the elites.
We are Europe
If the BAWAG affair comes to be seen as “business as usual in Austria,” Vienna could loose its place in banking as the mini-Frankfurt-on-the-Danube. Even as the BAWAG scandal broke, it was revealed that the Hypo Adria Alpe Bank has run up €328 million in losses in a mere two weeks of foreign exchange trading, prompting descriptions in the Austrian press of “third-world standards.” Surely this Austria is not the same country as the one holding the Presidency of the EU!
With the slogan “Youth can’t wait – We are Europe,” the ÖGB Youth Movement demonstrated outside the recent EU Youth Minister’s Meeting in Bad Ischl. You bet the Socialists can’t wait – after all Verzetnitsch started his climb to penthouse life within this same youth movement. In reality, Austria is an all too accurate mirror of the “social partnership” model that is also practiced by the European institutions.
Taming Global Capitalism Anew
By Joseph E. Stiglitz, Thea Lee, Will Hutton, James K. Galbraith, Jeff Faux, Joel Rogers, Marcellus Andrews & Jane D'Arista
This article appeared in the April 17, 2006 edition of The Nation
March 30, 2006
One of the greatest achievements of the twentieth century was a social contract that provided far more economic security and prosperity for working Americans than had existed in any previous period. But successive waves of changes in the world economy, together with the ascendancy of a strain of economic philosophy that puts the freedom of capital above the interests of society, have placed enormous strain on the postwar social contracts of all Western countries, resulting in stagnating wages, greater insecurity and levels of income and wealth inequality not seen since the early 1900s. And even more far-reaching challenges arising from the current pattern of globalization, with its emphasis on the outsourcing of service as well as manufacturing jobs, may lie ahead.
Developing a strategy for taming global capitalism anew therefore constitutes the overriding challenge of our time. For that reason, we have invited some of the leading progressive thinkers in this country and a longtime observer of the American economy to offer their ideas on how the United States, as the major capitalist country and the major player in globalization, could reshape both capitalism and globalization in ways that build a new social contract serving the needs of working people everywhere.--The Editors
A Progressive Response to Globalization
JOSEPH E. STIGLITZ
Globalization is often viewed as posing a major threat to "capitalism with a human face." Trade liberalization puts downward pressure on unskilled wages (and increasingly even skilled wages), increasing inequality in more developed countries. Countries trying to compete are repeatedly told to increase labor-market flexibility, code words for lowering the minimum wage and weakening worker protections. Competition for business puts pressure to reduce taxes on corporate income and on capital more generally, decreasing funds available for supporting basic investments in people and the safety net. And international agreements, such as Chapter 11 of NAFTA and the intellectual property provisions of the Uruguay Round of trade talks, have been used to short-circuit national democratic processes.
Yet Sweden and the other Scandinavian countries have shown that there is an alternative way to cope with globalization. These countries are highly integrated into the global economy; but they are highly successful economies that still provide strong social protections and make high levels of investments in people. They have been successful in part because of these policies, not in spite of them. Full employment and strong safety nets enable individuals to undertake more risk (with the commensurate high rewards) without unduly worrying about the downside of failure. These countries have not abandoned the welfare state but have fine-tuned it to meet globalization's new demands.
We should do the same.
At the same time, we must temper globalization itself--not by withdrawing behind protectionist borders and not by trying to enhance the well-being of our citizens at the expense of those abroad who are even poorer. Rather, we should reshape globalization to make it more democratic, and we should moderate its pace to give countries more time to cope. There will still be losers in a reshaped globalization, but the vast majority of citizens in both the North and the South will be better off with the right policies.
Coping with globalization entails recognizing both the consequences of globalization and the limitations in the standard responses. Increased education is important, but it is not enough. At this time we should make taxation more progressive in order to offset the economic forces increasing inequality, not decrease the degree of progressivity as we have done in the past five years. We should strengthen our safety nets, not weaken them.
The United States has one of the worst unemployment insurance programs in the advanced industrial countries. A redesign of our social insurance program to make it more of an integrated lifetime social insurance program, along the lines of the provident funds of Singapore, could provide substantially more complete insurance coverage without weakening economic incentives.
Most important, we should have a true commitment to full employment. The high priests of the financial markets have convinced many of the dangers of even moderate inflation, contending that even slight increases in inflation are very costly, especially to the poor, and that the costs of reversing inflation are extremely high. This is all nonsense, as we demonstrated in successive issues of the Economic Report of the President while I was chair of the Council of Economic Advisers. Today we should be worried not about inflation but about our lackluster growth, which leaves a large "jobs deficit." Full employment is the most important social protection. And even moderate unemployment, even of the disguised kind (discouraged workers, increased numbers on disability and large numbers who work part-time involuntarily), puts downward pressure on wages, exacerbating the problems brought on by globalization.
There are two other elements of a progressive agenda that are sometimes not given sufficient attention. The first is enhancing savings among lower-income individuals, including by matching grants (for example, by cashable tax credits). Some conservatives have embraced the concept of the ownership society--by which they too often mean simply that those who own more get to own still more. But it is important for individuals of modest means to have a cushion to protect themselves against the vagaries of the market.
The second is enhancing investment in research, strengthening our competitive advantages, so necessary if we are to maintain robust growth. Today, a disproportionate amount of our nation's research budget is spent on military objectives; funds for basic science, or even advances in applied technology that would improve living standards and help us protect the environment, are scarce.
Globalization's advocates often portray it as presenting unprecedented opportunities. For those committed to creating a society based on principles of social justice, it is also presenting unprecedented challenges. These are some of the elements of the progressive response to these challenges.
Joseph E. Stiglitz, University Professor at Columbia University, won the Nobel Prize for Economics in 2001 and is the author of The Roaring Nineties.
A New Domestic and Global Strategy
The challenge we face today in the United States is how to engage in the global economy without decimating our own middle class and gutting our social regulatory system. The logic of global capitalism as currently practiced is to drive down workers' wages, weaken their bargaining power and strip away their social protections in both rich and poor countries, while simultaneously encouraging and celebrating the excesses of debt-driven consumerism.
But this system is inherently unstable and unsustainable. The United States is running a current account deficit of more than $700 billion a year to fund consumption we can't afford. This is not financially sustainable. Meanwhile, many workers in developing countries work twelve to sixteen hours a day, in dangerous conditions, without the right to form an independent union, at poverty pay, so that multinational corporations can boost their bottom line. That is not politically sustainable.
Any policy agenda to build a better system must have both a national and an international component. At the national level, we need to fight for workers' rights to form unions and bargain for decent wages and working conditions; we need affordable and equitable healthcare and retirement security systems that do not create competitive disadvantages for domestic companies; and we need to invest in education, technology and infrastructure, especially in manufacturing.
While national reforms are critical to improving workers' daily lives, we must not ignore the global component, because if we don't get that piece right, unregulated global competitive pressures will eventually undermine any domestic reforms and worker gains. Trying to protect the American middle class without changing our interaction with the global economy is like pouring water into a leaky vessel.
For the United States, there are three key components to a new global strategy: taxes, currency and trade rules. In order to bring about real change, we need to work with domestic businesses as well as with our global justice allies. Domestic producers are equally frustrated by US policies that make it virtually impossible for them to compete in the global economy while producing on American soil.
First, our corporate tax system is insanely inefficient and unfair. American taxpayers currently subsidize the offshoring of their own jobs (at a rate of at least $7 billion a year) through policies that exempt income earned offshore from corporate taxes. Very few other countries have similar systems, and most have some form of "border adjustable" tax that exempts exports from sales or value-added taxes. Our current system taxes exports, while subsidizing the offshoring of jobs. We need a complete overhaul of our corporate tax system to address this self-inflicted wound.
Second, the overvalued dollar is killing our domestic manufacturing sector and exacerbating the problems in tradable services (a category that now covers everything not nailed to the floor). While the high dollar policy serves the Wal-Marts of the corporate world very well, it creates almost insurmountable competitive problems for domestic producers. The Bush Administration has clearly decided to cater to the retailers, outsourcers and importers. It is now up to Congress to pass legislation that will force China and Japan to stop manipulating their currencies to gain competitive advantage.
Third, the framework of rules in the global trading system (through the WTO and our own domestic agreements) is severely lopsided in favor of multinational corporate interests--leaving workers, small farmers, the environment and the poor ever more vulnerable and weak. If we understand the central problem of the global economy to be one of an imbalance of power and income distribution, then it becomes clear that global trade rules need to be rewritten to insure that workers have a voice at their workplaces and in national political debates. Linking core workers' rights as defined by the International Labor Organization to market access would do three important things: It would empower workers and give them a fighting chance to bargain for their fair share of the wealth they create; it would help build a middle class, so that workers can buy some of the goods they produce; and it would put a leash on multinational corporations by taking the profit out of exploitation.
No single action will get us out of the hole we're in, but together these tax, currency and trade policy pieces point us in the right direction.
Thea Lee is policy director of the AFL-CIO.
Re-creating Public-Interest Politics
Looked at from Europe and Asia, the US economy has emerged as a formidable global competitor with the leading brands, the leading technologies and a careful strategy of producing low-value-added goods in Asia while nurturing high technology at home. If American blue-collar jobs have been lost in mass-production manufacturing, they have been created in distribution, transportation and services--and also in the high-value-added "knowledge economy."
Thus American blue-collar workers are split into four components: those under direct competition from Asia, those working in the blue-collar service sector, those directly or indirectly benefiting from high-value-added knowledge work and those who work in the public sector. Each component is in very different circumstances--and even in the public sector, the appeal of trade unions and collective action is fading. Democrats have allowed too many of these new categories of workers to be recruited to the Republican cause with their redefinition of the public interest as private. The repercussions for the battle of ideas have been global.
The first task in any rebirth of liberal politics is to recognize contemporary realities--the primacy of a highly individualized culture with a highly segmented working class with very different objective interests--and not hanker to re-create an order that is past. Liberals need to be clear-eyed about the extent to which the current world system benefits the United States; for example, Chinese goods are cheap, boost real incomes and create a disinflationary climate of low interest rates that has provided a massive economic stimulus. Protection might benefit one of the four components of the working class--those in direct competition with Asia--but it would hurt the other three, not to mention poverty-stricken Asian peasants now delighted to have the opportunity for self-improvement.
The second task is to understand that winning the argument at the big political level, as much as detailed policies, is a condition for winning power. In this regard, what has to be done is not to make the case for "government" or "collective" action, which goes against the contemporary grain of American political culture, but to recapture the idea of the public and the importance of the public institutions through which it is delivered. For example, American universities--among the country's great public institutions--are the envy of the world, but they have increasingly become the preserve of the children of a rich elite who can afford the stunning fees, with a consequent alarming reduction in social mobility. They must be reclaimed; even the top private universities recognize the "publicness" of their vocation and the degree to which the "public" is currently being corrupted. Social mobility is a public interest, and its decline is of public concern. The argument needs to be made in those terms.
I would go further still. The United States was colonized by the values of the Enlightenment and its commitment to reason, to checks and balances in government, and to the importance of a lively public sphere. It was these Enlightenment values interacting with the great nineteenth-century egalitarian tradition that gave the United States its dynamism as much as its go-getting capitalism. Now the values of the market and increasingly religion have been allowed to crowd out the vitality of the entire fabric of Enlightenment institutions. The liberal case surely has to be to reassert why these institutions are so important and to remake the case in today's context--hence the instinctive liberal support for open-sourcing, the public dissemination of knowledge and the fair distribution of access to information. I would also add the old progressive case against excessive corporate power and breathe life into the Sherman and Clayton acts. Trustbusting and taking on the creationists are essential parts of the story.
We also need to revive institutions of grassroots altruism and solidarity. Nowhere in the industrialized West has the progressive cause gone far without the support of organized labor; but the conventional trade union no longer captures the imagination or hearts of working people. Only when unions start growing with a much more clearheaded sense of what their members want and what can be delivered will there be a more secure political base.
But it all starts with associating liberals with the idea of the public in its best Enlightenment sense, showing how that has worked for the United States in the past and could work for it in the future.
Will Hutton, a British writer, is the author of A Declaration of Interdependence (Norton) and is completing a new book on China and the United States.
Taming Predatory Capitalism
JAMES K. GALBRAITH
In 1899 Thorstein Veblen described predation as a phase in the evolution of culture, "attained only when the predatory attitude has become the habitual and accredited spiritual attitude...when the fight has become the dominant note in the current theory of life." After an entire century's struggle to escape from this phase, we've suffered a relapse.
The predators are everywhere unleashed; and the institutions built to contain them, from the United Nations to the AFL-CIO to the SEC, are everywhere under siege. Predation has again become the defining feature of economic life. Our first problem is to grasp this reality in full.
Postwar prosperity was built on a vast cut in the cost of security and the achievement of peace in Europe and much of Asia. The American role in the cold war system was to provide security; for this the dollar's role as anchor of the world trading system was our reward. But now, with Iraq, we are seen worldwide as the leading predator state, promoting war as a solution rather than as the ultimate economic and human horror. For this, many would like to see our privileges revoked.
Corporate and financial fraud and political corruption form the second great domain of predatory capitalism. DeLay, Frist and Abramoff are the names in the news, but the tone is set by the leadership--Cheney of Halliburton and Bush of Harken Energy--a large predator and a small scavenger, specialists in cronyism and expert in nothing else. When predation becomes the dominant business and political form, the foundation of capitalism crumbles. Markets lose legitimacy, investors fly to safety in bonds, and authentic innovation and shared growth both become unattainable. The solution must be not just a change of parties but a new political class, including a new media not under corrupt control.
Then there is the predatory attack on unions and labor, in which many economists are complicit. This is far advanced in America and most visible today in Europe, as reflected by the doctrine of flexible labor markets, which claims that the conquest of unemployment requires cutting the pay of the working poor. But there is no history of unemployment ever being conquered this way--certainly not in the United States of the 1940s, 1960s or 1990s. Modern Europe also affords counterexamples of equalizing growth, from Norway and Denmark to recent gains in Spain, as well as object lessons, most recently in France, of the catastrophe of designed exclusion.
The way forward is a program for growth and justice built on the needs of the working population and the middle class. To begin with, in the United States there must be a powerful demolition of the old political order: We need elections where all votes are cast and counted. The campaign against voter repression is the essential civil rights struggle of our time, even though most progressives don't seem to realize it yet. Prevailing will require fundamental reform such as the introduction of nationwide vote-by-mail (the Oregon system). Without that, and also many relentless prosecutions, nothing else will be achieved.
The economic commitment, in turn, must be to full employment here, to egalitarian growth in Europe and Japan, and to a worldwide development strategy favoring civil infrastructure and the poor. Public capital investment, stronger unions and a high minimum wage should frame the domestic agenda. Overseas, crackdowns on tax havens and the arms trade, a stabilizing financial system and an end to the debt peonage of poor countries should be among the priorities of a new structure.
The truths are that egalitarian growth is efficient, that speculation must be regulated, that crime starts at the top and that peace is the primary public good. These truths are poison to predators and are the reason predators have fostered and subsidized an entire cynical intellectual movement devoted to "free" markets made up of a class of professor-courtiers now everywhere in view. Taming predatory capitalism could start with breaking this econo-corporate analytical axis, and reviving the concept of countervailing power, first formulated by John Kenneth Galbraith in 1952.
James K. Galbraith, chair of the board of Economists for Peace and Security, teaches at the University of Texas and is senior scholar with the Levy Economics Institute.
A North American Social Contract
Social justice will come to the global economy only when enough people in enough nation-states are organized across borders to demand it. Yet in a world of 6.5 billion people in more than 200 separate countries--representing wide differences in culture, living standards and political consciousness--the idea of a popular transnational politics effective enough to humanize the relentlessly interconnecting markets seems impossibly utopian.
But if we think of establishing a global social contract as a step-by-step process, in which political solidarity is built first among neighboring societies, region by region, it becomes easier to imagine. The ongoing struggle for a "Social Europe" to match the expanded
European capitalist market offers the best real-world example of the promise of a regional social contract.
We should open up a second front in this global class war in North America. The North American Free Trade Agreement was the template for the neoliberal global project. In its protection of corporate interests and its undermining of democracy, NAFTA is even more reactionary than the World Trade Organization. Not surprisingly, it has reinforced inequality and insecurity in all three countries--most visibly demonstrated by the daily migration of Mexicans across the border, desperately seeking jobs. NAFTA's failure makes North America a microcosm of globalization's Catch-22: Bringing social justice to global markets requires global institutions to regulate global business, but these institutions are dominated by elites who oppose social justice.
After twelve years, integration among the three North American economies has gone too far to reverse. So it is time for progressives in all three countries to mobilize together to promote a social contract on their own continent. This does not mean merging into one country. Rather, it means the creation of a cross-border political movement to challenge the agenda of elites in all three countries, who established NAFTA precisely to escape democratic constraints on their wealth and power.
The problems of developing political solidarity across North America's national borders are different from but not necessarily more difficult than those encountered among the twenty-five countries that now make up the European Union. A cross-border movement could build on the many organizational and personal relationships that already exist.
Early steps to gain experience and trust could include joint actions against corporate abuses that span the continent. A simultaneous strike against a common employer or a protest against a common environmental abuse could dramatize the interests that people in all three countries share. Progressives could develop a common legislative agenda, introducing the same proposals in all three legislatures. This agenda might come to form the basis of a new North American social contract that would include the following elements:
§ A Bill of Rights for citizens of North America, enforceable in all countries, that would reassert the primacy of civil protection of individuals and democratic government over the extraordinary privileges NAFTA gives to corporate investors.
§ A New Continental Deal, in which Canada and the United States commit substantial long-term aid to Mexico in order to nurture higher and sustainable economic growth while Mexico commits to policies (independent trade unions, minimum wages, equitable taxes) that assure a wider distribution of the benefits of growth.
§ A Continental Development Strategy that shifts the economic policy objectives of all three countries from subsidizing pursuit of global profits by corporate investors to support of greater industrial self-sufficiency, resource conservation and increased investment in health and education. Driven by these goals, a progressive North American Customs Union would manage modest levels of balanced trade with the rest of the world.
Creating a politics around such a continental social contract could help inspire progressive activists to develop their own common vision of the future to replace NAFTA's nihilist nightmare of unregulated capitalism. Such a movement would also help reinforce beleaguered progressives in Europe, South America and Southeast Asia (China and India are regions in themselves), who are trying to bring to life regional models of development that respect human life and dignity. Finally, it could help undercut American elites' messianic illusions of their moral right to rule the world--which infects liberals as well as conservatives--and force them to turn to the humbler but more productive task of making their own part of the globe a better place.
Jeff Faux was the founder and is now di stinguished fellow at the Economic Policy Institute. His latest book is The Global Class War.
Build the High Road Here
American progressives have lots of ideas on the alternative international rules and institutions in monetary policy, finance, trade, human rights and development needed to make globalization work better for the North and South. What we lack is the power to implement them. Under the "dictatorship of no alternatives" that defines current policy debates, it is important to propose one to the fraying "Washington Consensus" and seek allies, particularly in this NAFTA hemisphere, in its enactment. But we should not wait on international reform to build democratic power in this economy, starting from where we are right now. We should build a high-road--high-wage, low-waste, democratically accountable--economy right here. Doing so will give focus to domestic efforts, connect them practically to international ones and eventually yield the organization, experience and confident social base we want to contribute to global fights. Building the high road here should be at least half of any international strategy.
Of course, some progressives think internationalization already dooms this enterprise--that capital's mobility will defeat any attempt at increasing democratic control over the economy. But they're mistaken. Economies don't just slide around on a frictionless, flat world. They have gravity and traction. The economic importance of place hasn't been destroyed by internationalization but in many ways has increased. Capital markets are far from perfect, and capital is less mobile than commonly assumed. And some constraints on capital are actually a net gain to it, not a loss.
Around the country, hundreds of largely isolated projects are already showing this. They include worker-training and skill-certification programs that increase productivity while capturing it in income; the use of union pension funds to stabilize and grow distressed local economies while generating returns on investment; "smart growth" policies that reduce commuting times and lower real housing costs while improving the environment; living-wage and allied efforts to raise standards on company performance while increasing productivity; and the Apollo Alliance program for good jobs and energy independence. These efforts are considered by many progressives to be a sidebar to their main show and usually not even as a single class of activities. In fact, they are all examples of the high-road politics we should be pursuing.
This harnesses democracy as a force of production, a source of value, and not just values in the economy. It builds productive infrastructure (in part physical, in larger part institutional) that adds value, reduces waste and captures the benefits of doing both. Such infrastructure attracts capital by increasing its return but also grounds capital by its own immobility. And with capital's exit threats thus reduced, real bargaining can again begin. The essence of that bargaining is demanding more of capital than is now demanded by markets--less pollution, higher wages, better labor relations, more community investment--in exchange for the infrastructure that allows capital to meet the demands profitably under competitive conditions.
None of this is rocket science. We already know how to add value in places by improving education and worker training; increasing research and commercialization capacity; providing the marketing, financial and other business services that are beyond the capacities of individual firms; and helping to cluster firms to realize complementary strengths while enlisting workers in their upgrading. We know how to reduce waste by establishing markets and making direct investment in renewable energy and more resource-efficient--and, with accurate accounting, much cheaper--energy, housing, transportation and consumer durables. We know how to improve government efficiency by democratizing elections, applying the private sector's metrics revolution to its operations and engaging citizen organizations in open-source problem-solving and regulatory enforcement. Doing these things together improves living standards by strengthening democracy. It shows democracy as a solution in organizing daily life, not part of the problem.
This is not a new insight. Markets can't set rules for themselves, solve their collective-action problems or elicit wide voluntary citizen contribution. Democracy's ability to do them all is its signature strength, and there are no limits on their being done better and better--thus producing more wealth, more citizen engagement and wider freedom in future choice. This directly helps immobile workers, even under internationalization. Indeed, even in the "worst case" of perfect competition, with instantaneous capital adjustment to changes in expected after-tax rates of profit, all gains from such place-based democratic efficiency would go to the immobile workers who call those places home.
Neoliberalism declares unfettered business domination our best bet for material well-being. We should declare high-road democracy a better bet, and invite others to place it with us. We will not lack for takers in the United States. Americans are sick to death of "business as usual," and desperate for an alternative that works. And our working class wants more of government than death and taxes, more of life than their irrelevance, more of their "leaders" than fake empathy and real contempt. A role in constructing a better economy, and a society fit to live in, is what paving the high road provides.
Joel Rogers, a Nation contributing editor, teaches at the University of Wisconsin.
The non-college-educated majority of working Americans, and increasingly even some college-educated workers, face two long-term problems. First, the buying power of their wages cannot keep pace with the cost of the things they need, including healthcare, housing and schooling. Second, their path to upward economic mobility is disappearing because stagnant and falling real wages combined with ever more severe economic segregation limit their ability to invest in themselves or their children, whether alone or collectively, because of the weakened tax base of working-class communities.
It is very difficult to find a way to reverse the downward pull of globalization and global labor migration on the wages of modestly educated people. But that does not mean that we are without a way of improving the standard of living of working people. Ironically, the problem may provide its own solution. Let me explain. Contemporary economic trends are pushing the wages of workers down while boosting the returns to financial capital and knowledge capital. That being the case, the best way to promote economic opportunity for low-wage workers and especially their children is to pioneer collective forms of capital ownership and wealth accumulation. In short, we should work to make every American a capital owner.
One way to proceed is for the federal government to reserve a portion of each year's tax receipts--say, 1 percent of GDP--for contributions into a collective capital account that is invested in a set of privately managed and federally supervised index funds. This capital fund, which I will call the Opportunity Fund, would be a trust fund completely free of government interference, subject to the same rules and regulations as other index and mutual funds. With contributions of tax receipts each year, its value would grow as the financial wealth of the country and the economy grows, generating not only capital gains but also interest and dividend income for the American people.
The interest and dividend income generated by the Opportunity Fund could be used in a variety of ways. It could be used to supplement working families' wage income by providing the funds needed for a basic annual income payment, whose size could vary according to such criteria as age, number of children and income level (perhaps with a work requirement to avoid dependency problems). It could also be used to fund a child savings account system that builds up an inheritance for every child on a progressive basis, with a larger share of the funds going to children from poorer families. The child savings account could be used when a person reaches age 18 or soon thereafter to pay for college, buy a home or establish a retirement nest egg, or to pursue some other approved investment purpose.
The Opportunity Fund form of universal capitalism is, in short, a method for redistributing capital income through collective savings. It could put a more sustainable floor on the income of workers than does our collapsing welfare state. It could provide the financial basis for the children of every working family to be able to invest in their own human capital and their own economic future. It could also help correct the problem of economic and wealth inequality by creating a system of public inheritance that would help those who are not lucky enough to have been born into families that can pass on wealth to their children.
The Opportunity Fund is viable, practical and eminently doable right now. It is also the best way--perhaps the only way--to meet all of our country's most pressing economic and social objectives. Not only must we promote fairness within and between generations; we also need to save more and borrow less (subject of course to Keynes's lesson that too much saving too fast can cause recession and unemployment) so our country will have a more sustainable financial future. And we must also rebuild our economy by investing more in order to be able to better compete in today's world economy. The Opportunity Fund form of universal capitalism is an idea whose time has come because it can meet these objectives better than the current collapsing social welfare system.
Marcellus Andrews is the author of The Political Economy of Hope and Fear: Capitalism and the Black Condition in America.
Reform the International Financial System
President Richard Nixon's decision to end the Bretton Woods agreement in 1971 was a milestone in the erosion of the Western social contract. This decision ushered in a new international monetary system--one in which international payments in dollars would be made by private banks rather than exchanges of gold between the Federal Reserve and other central banks, and the value of the dollar would be determined by supply and demand.
This new dollar-centric international monetary system has been a powerful force in shaping the global economy and is, to a great extent, responsible for the current pattern of globalization. For the United States, it has meant that US policy-makers have had to hold real US interest rates higher than those of other strong currencies and have had to accept a higher value of the dollar relative to other major currencies. This has not only led to slower US economic growth but has made US goods less competitive vis-a-vis those of other economies. Thus the cost of American dollar hegemony has been the loss of export markets and, along with it, the loss of relatively good jobs in the tradable-goods sector of the economy.
For developing countries, the consequences have been no less serious. The post-Bretton Woods system has pushed more and more economies toward export-led growth, which tends to suppress domestic wages and regulatory standards. Countries that cannot pay for imports and attract foreign investment in their own currencies must "earn" these external currencies, mainly dollars, by exporting more than they import to one or a few countries that issue the global means of payment. To remain competitive with other nations and insure continued access to these markets, they have adopted policies that maintain downward pressure on wages and exchange rates and have shunned those that stimulate the demand necessary for sustained development.
This export-led growth paradigm created by the current international monetary system appears to have benefited the United States, the key currency country, especially in recent years, enabling us to consume more than we produce. A large share of the dollars that flow out of the United States to pay for imports flows back as investments in US financial assets. This foreign investment expands credit and allows Americans to spend more and save less. It also makes many Americans feel wealthier than they actually are by fueling inflated real estate and equity prices. But the cost of this pattern of growth has been the rapid buildup of both domestic and external debt.
This extraordinary growth in both US domestic and external debt now raises questions about the sustainability of this paradigm. Will highly indebted US households be forced to reduce their spending? If so, will a fall in imports reduce foreign financial investment, raise interest rates and induce or exacerbate a recession? And if the United States does, in fact, falter in its role as buyer of last resort in the global economy, what policies in which countries will insure continued growth?
To build a new global social contract, the underlying logic of the international financial system must be radically altered. What is needed is a new international monetary regime that can open access to international trade and investment for all nations on equal terms by allowing all currencies to be used in cross-border as well as domestic transactions. Keynes's international clearing agency could serve as a basic structure for such a system, reclaiming the public sector's role in global payments through a process of debiting and crediting cross-border payments against reserve accounts held with the clearing agency by member countries, with changes in reserves used to determine periodic adjustments in exchange rates.
An international monetary system based on the idea of an international clearing agency could also be designed to create a true lender of last resort, replacing the current ad hoc facilities, which depend on taxpayer donations. This would provide an effective channel for containing damaging financial crises and maintaining the financial stability needed for balanced growth in the global economy. It would also permit a resumption of the demand-led growth policies that are a necessary support for a new, global social contract.
Jane D'Arista is an author, lecturer and former Congressional staff economist who writes for the Financial Markets Center.
About Joseph E.Stiglitz
Joseph E. Stiglitz is University Professor at Columbia University. He received the Nobel Prize in Economics in 2001 for research on the economics of information. Most recently, he is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict. more...
About Thea M. Lee
Thea M. Lee is policy director of the AFL-CIO. more...
About Will Hutton
Will Hutton's A Declaration of Interdependence: Why America Should Join the World (Norton) was published in May. more...
About James K. Galbraith
James K. Galbraith is author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (Free Press, August 5, 2008). He teaches at The University of Texas at Austin. more...
About Jeff Faux
Jeff Faux was the founder of, and is now distinguished fellow at, the Economic Policy Institute. His latest book is The Global Class War (Wiley). more...
About Joel Rogers
Joel Rogers, a Nation contributing editor, teaches at the University of Wisconsin, Madison. more...
About Marcellus Andrews
Marcellus Andrews is the author of The Political Economy of Hope and Fear: Capitalism and the Black Condition in America. more...
About Jane D'Arista
Jane D'Arista is an author, lecturer and former Congressional staff economist who writes for the Financial Markets Center. more...
The new understanding of the market is essential to comprehend the Network Economy. The Marxist concept of capitalism has long outlived its usefulness, if ever it had any. At most, it was a tool for understanding power relationships in the early Industrial revolution era; as a tool for understanding corporations, it was readily superseded by Coase's theory of the firm. Capitalism is dead. Let us move on to examine the emerging world of the Network Economy and the Network Commonwealth.
John Maynard Keynes
THE END OF LAISSEZ-FAIRE
This essay, which was published as a pamphlet by the Hogarth Press in July 1926, was based on the Sidney Ball Lecture given by Keynes at Oxford in November 1924 and a lecture given by him at the University of Berlin in June 1926.
This essay is worth reading for especially two reasons. First of all, for the wealth of historical information about the origin of the laissez-faire expression and attitudes. Secondly, as a political text full of fallacious reasoning and misleading images.
Unfortunately, no serious thinker intervened to show the emptiness of Keynes' positions; and so Keynesism became the new economic doctrine and protectionism the political recipe, in fashion once again, leading to all sorts of economic and political disasters.
The disposition towards public affairs, which we conveniently sum up as individualism and laissez-faire, drew its sustenance from many different rivulets of thought and springs of feeling. For more than a hundred years our philosophers ruled us because, by a miracle, they nearly all agreed or seem to agree on this one thing. We do not dance even yet to a new tune. But a change is in the air. We hear but indistinctly what were once the clearest and most distinguishable voices which have ever instructed political mankind. The orchestra of diverse instruments, the chorus of articulate sound, is receding at last into the distance.
At the end of the seventeenth century the divine right of monarchs gave place to natural liberty and to the compact, and the divine right of the church to the principle of toleration, and to the view that a church is 'a voluntary society of men’, coming together, in a way which is 'absolutely free and spontaneous' (Locke, A Letter Concerning Toleration). Fifty years later the divine origin and absolute voice of duty gave place to the calculations of utility. In the hands of Locke and Hume these doctrines founded Individualism. The compact presumed rights in the individual; the new ethics, being no more than a scientific study of the consequences of rational self-love, placed the individual at the centre. ‘The sole trouble Virtue demands', said Hume, 'is that of just Calculation, and a steady preference of the greater Happiness.' (An Enquiry Concerning the Principles of Morals, section LX).
These ideas accorded with the practical notions of conservatives and of lawyers. They furnished a satisfactory intellectual foundation to the rights of property and to the liberty of the individual in possession to do what he liked with himself and with his own. This was one of the contributions of the eighteenth century to the air we still breathe.
The purpose of promoting the individual was to depose the monarch and the church; the effect - through the new ethical significance attributed to contract - was to buttress property and prescriptions. But it was not long before the claims of society raised themselves anew against the individual. Paley and Bentham accepted utilitarian hedonism from the hands of Hume and his predecessors, but enlarged it into social utility (‘I omit’ says Archdeacon Paley, 'much usual declamation upon the dignity and capacity of our nature, the superiority of the soul to the body, of the rational to the animal part of our constitution; upon the worthiness, refinement, and delicacy of some satisfactions, and the meanness, grossness, and sensuality of others: because I hold that pleasures differ in nothing but in continuance and intensity' - Principles of Moral and Political Philosophy, Book 1, chap. 6). Rousseau took the Social Contract from Locke and drew out of it the General Will. In each case the transition was made by virtue of the new emphasis laid on equality. 'Locke applies his Social Contract to modify the natural equality of mankind, so far as that phrase implies equality of property or even of privilege, in consideration of general security. In Rousseau's version equality is not only the starting-point but the goal.' (Leslie Stephen, English Thought in the Eighteenth Century, II, 192).
Paley and Bentham reached the same destination, but by different routes. Paley avoided an egoistic conclusion to his hedonism by a God from the machine. 'Virtue', he says, 'is the doing good to mankind, in obedience to the will of God, and for the sake of everlasting happiness' - in this way bringing I and the others to a parity. Bentham reached the same result by pure reason. There is no rational ground, he argued, for preferring the happiness of one individual, even oneself, to that of any other. Hence the greatest happiness of the greatest number is the sole rational object of conduct - taking utility from Hume, but forgetting that sage man's corollary: 'Tis not contrary to reason to prefer the destruction of the whole world to the scratching of my finger.' 'Tis not contrary to reason for me to choose my total ruin to prevent the least uneasiness of an Indian, or person totally unknown to me ... Reason is and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them.'
Rousseau derived equality from the state of nature, Paley from the will of God, Bentham from a mathematical law of indifference. Equality and altruism had thus entered political philosophy, and from Rousseau and Bentham sprang both democracy and utilitarian socialism.
This is the second current - sprang from long-dead controversies, and carried on its way by long-exploded sophistries - which still permeates our atmosphere of thought but it did not drive out the former current. It mixed with it. The early nineteenth century performed the miraculous union. It harmonised the conservative individualism of Locke, Hume, Johnson, and Burke with the socialism and democratic egalitarianism of Rousseau, Paley, Bentham, and Godwin. (Godwin carried laissez-faire so far that he thought all government an evil, in which Bentham almost agreed with him. The doctrine of equality becomes with him one of extreme individualism, verging on anarchy. 'The universal exercise of private judgement’ he says, 'is a doctrine so unspeakably beautiful that the true politician will certainly feel infinite reluctance in admitting the idea of interfering with it' - see Leslie Stephen, op. cit. II, 277).
Nevertheless, that age would have been hard put to it to achieve this harmony of opposites if it had not been for the economists, who sprang into prominence just at the right moment. The idea of a divine harmony between private advantage and the public good is already apparent in Paley. But it was the economists who gave the notion a good scientific basis. Suppose that by the working of natural laws individuals pursuing their own interests with enlightenment in condition of freedom always tend to promote the general interest at the same time! Our philosophical difficulties are resolved-at least for the practical man, who can then concentrate his efforts on securing the necessary conditions of freedom. To the philosophical doctrine that the government has no right to interfere, and the divine that it has no need to interfere, there is added a scientific proof that its interference is inexpedient. This is the third current of thought, just discoverable in Adam Smith, who was ready in the main to allow the public good to rest on 'the natural effort of every individual to better his own condition', but not fully and self-consciously developed until the nineteenth century begins. The principle of laissez-faire had arrived to harmonise individualism and socialism, and to make at one Hume's egoism with the greatest good of the greatest number. The political philosopher could retire in favour of the business man - for the latter could attain the philosopher's summum bonum by just pursuing his own private profit.
Yet some other ingredients were needed to complete the pudding. First the corruption and incompetence of eighteenth-century government, many legacies of which survived into the nineteenth. The individualism of the political philosophers pointed to laissez-faire. The divine or scientific harmony (as the case might be) between private interest and public advantage pointed to laissez-faire. But above all, the ineptitude of public administrators strongly prejudiced the practical man in favour of laissez-faire - a sentiment which has by no means disappeared. Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful.
On the other hand, material progress between 1750 and 1850 came from individual initiative, and owed almost nothing to the directive influence of organised society as a whole. Thus practical experience reinforced a priori reasonings. The philosophers and the economists told us that for sundry deep reasons unfettered private enterprise would promote the greatest good of the whole. What could suit the business man better? And could a practical observer, looking about him, deny that the blessings of improvement which distinguished the age he lived in were traceable to the activities of individuals ‘on the make’?
Thus the ground was fertile for a doctrine that, whether on divine, natural, or scientific grounds, state action should be narrowly confined and economic life left, unregulated so far as may be, to the skill and good sense of individual citizens actuated by the admirable motive of trying to get on in the world.
By the time that the influence of Paley and his like was waning, the innovations of Darwin were shaking the foundations of belief. Nothing could seem more oppose than the old doctrine and the new - the doctrine which looked on the world as the work of the divine watchmaker and the doctrine which seemed to draw all things out of Chance, Chaos, and Old Time. But at this one point the new ideas bolstered up the old. The economists were teaching that wealth, commerce, and machinery were the children of free competition - that free competition built London. But the Darwinians could go one better than that - free competition had built man. The human eye was no longer the demonstration of design, miraculously contriving all things for the best; it was the supreme achievement of chance, operating under conditions of free competition and laissez-faire. The principle of the survival of the fittest could be regarded as a vast generalisation of the Ricardian economics. Socialist interferences became, in the light of this grander synthesis, not merely inexpedient, but impious, as calculated to retard the onward movement of the mighty process by which we ourselves had risen like Aphrodite out of the primeval slime of ocean.
Therefore I trace the peculiar unity of the everyday political philosophy of the nineteenth century to the success with which it harmonised diversified and warring schools and united all good things to a single end. Hume and Paley, Burke and Rousseau, Godwin and Malthus, Cobbett and Huskisson, Bentham and Coleridge, Darwin and the Bishop of Oxford, were all, it was discovered, preaching practically the same thing - individualism and laissez-faire. This was the Church of England and those her apostles, whilst the company of the economists were there to prove that the least deviation into impiety involved financial ruin.
These reasons and this atmosphere are the explanations, we know it or not - and most of us in these degenerate days are largely ignorant in the matter - why we feel such a strong bias in favour of laissez-faire, and why state action to regulate the value of money, or the course of investment, or the population, provokes such passionate suspicions in many upright breasts. We have not read these authors; we should consider their arguments preposterous if they were to fall into our hands. Nevertheless we should not, I fancy, think as we do, if Hobbes, Locke, Hume, Rousseau, Paley, Adam Smith, Bentham, and Miss Martineau had not thought and written as they did. A study of the history of opinion is a necessary preliminary to the emancipation of the mind. I do not know which makes a man more conservative - to know nothing but the present, or nothing but the past.
I have said that it was the economists who furnished the scientific by which the practical man could solve the contradiction between egoism and socialism which emerged out of the philosophising of the eighteenth century and the decay of revealed religion. But having said this for shortness' sake, I hasten to qualify it. This is what the economists are supposed to have said. No such doctrine is really to be found in the writings of the greatest authorities. It is what the popularisers and the vulgarisers said. It is what the Utilitarians, who admitted Hume's egoism and Bentham's egalitarianism at the same time, were driven to believe in, if they were to effect a synthesis.(One can sympathise with the view of Coleridge, as summarised by Leslie Stephen, that ‘the Utilitarians destroyed every element of cohesion, made Society a struggle of selfish interests, and struck at the very roots of all order, patriotism, poetry, and religion').
The language of the economists lent itself to the laissez-faire interpretation. But the popularity of the doctrine must be laid at the door of the political philosophers of the day, whom it happened to suit, rather than of the political economists.
The maxim laissez-nous faire is traditionally attributed to the merchant Legendre addressing Colbert some time towards the end of the seventeenth century. ('Que faut-il faire pour vous aider?' asked Colbert. 'Nous laisser faire' answered Legendre). But there is no doubt the first writer to use the phrase, and to use it in clear association with the doctrine, is the Marquis d'Argenson about 1751. (For the history of the phrase, see Oncken, 'Die Maxime Laissez faire et laissez-passer’ from whom most of the following quotations are taken. The claims of the Marquis d'Argenson were overlooked until Oncken put them forward, partly because the relevant passages published during his lifetime were anonymous - Journal Oeconomique, 1751 - and partly because his works were not published in full - though probably passed privately from hand to hand during his lifetime - until 1858 - Mémoires et Journal inédit du Marquis d'Argenson)
The Marquis was the first man to wax passionate on the economic advantages of governments leaving trade alone. To govern better, he said, one must govern less. ('Pour gouverner mieux, il faudrait gouverner moins.’) The true cause of the decline of our manufactures, he declared, is the protection we have given to them. ('On ne peut dire autant de nos fabriques: la vraie cause de leur déclin, c'est la protection outrée qu'on leur accorde.') 'Laissez faire, telle devrait être la devise de toute puissance publique, depuis que le monde est civilisé.’ ‘Détestable principe que celui de ne vouloir grandeur que par l'abaissement de nos voisins! Il n'y a que la méchanceté et la malignité du coeur de satisfaites dans ce principe, et l’intérêt y est opposé. Laissez faire, morbleu! Laissez faire!!'
Here we have the economic doctrine of laissez-faire, with its most fervent expression in free trade, fully clothed. The phrases and the idea must have passed current in Paris from that time on. But they were slow to establish themselves in literature; and the tradition associating with them the physiocrats, and particularly de Gournay and Quesnay, finds little support in the writings of this school, though they were, of course, proponents of the essential harmony of social and individual interests. The phrase laissez-faire is not to be found in the works of Adam Smith, of Ricardo, or of Malthus. Even the idea is not present in a dogmatic form in any of these authors. Adam Smith, of course, was a Free Trader and an opponent of many eighteenth-century restrictions on trade. But his attitude towards the Navigation Acts and the usury laws shows that he was not dogmatic. Even his famous passage about ‘the invisible hand' reflects the philosophy which we associate with Paley rather than the economic dogma of laissez-faire. As Sidgwick and Cliff Leslie have pointed out, Adam Smith's advocacy of the 'obvious and simple system of natural liberty' is derived from his theistic and optimistic view of the order of the world as set forth in his Theory of Moral Sentiments, rather than any proposition of political economy proper. (Sidgwick, Principles of Political Economy, p. 20).
The phrase laissez-faire was, I think, first brought into popular usage in England by a well-known passage of Dr Franklin's. (Bentham uses the expression 'laissez-nous faire' - Works, p. 440). It is not, until we come to the later works of Bentham - who was not an economist at all - that we discover the rule of laissez-faire, in the shape in which our grandfathers knew it, adapted into the service of the Utilitarian philosophy. For example in A Manual of Political Economy, (Written in 1793, a chapter published in the Bibliothèque Britannique in 1798, and the whole first printed in Bowring's edition of this Works - 1843) he writes: 'The general rule is that nothing ought to be done or attempted by government; the motto or watchword of government, on these occasions, ought to be - Be quiet ... The request which agriculture, manufacturers, and commerce present to governments is as modest and reasonable as that which Diogenes made to: Stand out of my sunshine.'
From this time on it was the political campaign for free trade, the influence of the so-called Manchester School and of the Benthamite Utilitarians, the utterances of secondary economic authorities and the education stories of Miss Martineau and Mrs Marcet, that fixed laissez-faire in the popular mind as the practical conclusion of orthodox political economy ? with this great difference, that the Malthusian view of population having been accepted in the meantime by this same school of thought, the optimistic laissez-faire of the last half of the eighteenth century gives place to the pessimistic laissez-faire of the last half of the nineteenth century. (Cf. Sidgwick, op. cit. p. 22: 'Even those economists, who adhered in the main to Adam Smith's limitations of the sphere of government, enforced these limitations sadly rather than triumphantly; not as admirers of the social order at present resulting from ‘natural liberty’,, but as convinced that it is at least preferable to any artificial order that government might be able to substitute for it.')
In Mrs Marcet's Conversations on Political Economy (1817), Caroline stands out as long as she can in favour of controlling the expenditure of the rich. But by page 418 she has to admit defeat:
CAROLINE. The more I learn upon this subject, the more I feel convinced that the interests of nations, as well as those of individuals, so far from being opposed to each other, are in the most perfect unison.
MRS B. Liberal and enlarged views will always lead to similar conclusions, and teach us to cherish sentiments of universal benevolence towards each other; hence the superiority of science over mere practical knowledge.
By 1850 the Easy Lessons for the Use of Young People, by Archbishop Whately, which the Society for Promoting Christian Knowledge was distributing wholesale, do not admit even of those doubts which Mrs B. allowed Caroline occasionally to entertain. 'More harm than good is likely to be done’ the little book concludes, 'by almost any interference of Government with men's money transactions, whether letting and leasing, or buying and selling of any kind.' True liberty is 'that every man should be left free to dispose of his own property, his own time, and strength, and skill, in whatever way he himself may think fit, provided he does no wrong to his neighbours'.
In short, the dogma had got hold of the educational machine; it had become a copybook maxim. The political philosophy, which the seventeenth and eighteenth centuries had forged in order to throw down kings and prelates, had been made milk for babes, and had literally entered the nursery.
Finally, in the works of Bastiat we reach the most extravagant and rhapsodical expression of the political economist's religion.
In his Harmonies Économiques,
I undertake [he says] to demonstrate the Harmony of those laws of Providence which govern human society. What makes these laws harmonious and not discordant is, that all principles, all motives, all springs of action, all interests, co-operate towards a grand final result … And that result is, the indefinite approximation of all classes towards a level, which is always rising; in other words, the equalisation of individuals in the general amelioration.
And when, like other priests, he drafts his Credo, it runs as follows:
I believe that He who has arranged the material universe has not withheld His regard from the arrangements of the social world. I believe that He has combined and caused to move in harmony free agents as well as inert molecules … I believe that the invincible social tendency is a constant approximation of men towards a common moral, intellectual, and physical level, with at the same time, a progressive and indefinite elevation of that level. I believe that all that is necessary to the gradual and peaceful development of humanity is that its tendencies should not be disturbed, nor have of their movements destroyed.
From the time of John Stuart Mill, economists of authority have been in strong reaction against all such ideas. 'Scarcely a single English economist of repute', as Professor Cannan has expressed it, 'will join in a frontal attack upon Socialism in general,’ though, as he also adds, 'nearly every economist, whether of repute or not, is always ready to pick holes in most socialistic proposals'. (Theories of Production and Distribution, p. 494). Economists no longer have any link with the theological or political philosophies out of which the dogma of social harmony was born, and their scientific analysis leads them to no such conclusions.
Cairnes, in the introductory lecture on 'Political Economy and Laissez-faire', which he delivered at University College, London, in 1870, was perhaps the first orthodox economist to deliver a frontal attack upon laissez-faire in general. ‘The maxim of laissez-faire', he declared, 'has no scientific basis whatever, but is at best a mere handy rule of practice.’ (Cairnes well described the' prevailing notion' in the following passage from the same lecture: 'The prevailing notion is that P.E. undertakes to show that wealth may be most rapidly accumulated and most fairly distributed; that is to say, that human well-being may be most effectually promoted by the simple process of leaving people to themselves; leaving individuals, that is to say, to follow the promptings of self-interest, unrestrained either by State or by the public opinion, so long as they abstain from force and fraud. This is the doctrine commonly known as laissez-faire; and accordingly political economy is, I think, very generally regarded as a sort of scientific rendering of this maxim - a vindication of freedom of individual enterprise and of contract as the one and sufficient solution of all industrial problems.')
This, for fifty years past, has been the view of all leading economists. Some of the most important work of Alfred Marshall - to take one instance - was directed to the elucidation of the leading cases in which private interest and social interest are not harmonious. Nevertheless, the guarded and undogmatic attitude of the best economists has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach.
Economists, like other scientists, have chosen the hypothesis from which they set out, and which they offer to beginners because it is the simplest, and not because it is the nearest to the facts. Partly for this reason, but partly, I admit, because they have been biased by the traditions of the subject, they have begun by assuming a state of affairs where the ideal distribution of productive resources can be brought about through individuals acting independently by the method of trial and error in such a way that those individuals who move in the right direction will destroy by competition those who move in the wrong direction. This implies that there must be no mercy or protection for those who embark their capital or their labour in the wrong direction. It is a method of bringing the most successful profit-makers to the top by a ruthless struggle for survival, which selects the most efficient by the bankruptcy of the less efficient. It does not count the cost of the struggle, but looks only to the benefits of the final result which are assumed to be permanent. The object of life being to crop the leaves off the branches up to the greatest possible height, the likeliest way of achieving this end is to leave the giraffes with the longest necks to starve out those whose necks are shorter.
Corresponding to this method of attaining the ideal distribution of the instruments of production between different purposes, there is a similar assumption as to how to attain the distribution of what is available for consumption. In the first place, each individual will discover what amongst the possible objects of consumption he wants most by the method of trial and error ‘at the margin’, and in this way not only will each consumer come to distribute his consumption most advantageously, but each object of consumption will find its way into the mouth of the consumer whose relish for it is greatest compared with that of the others, because that consumer will outbid the rest. Thus, if only we leave the giraffes to themselves, (1) the maximum quantity of leaves will be cropped because the giraffes with the longest necks will, by dint of starving out the others, get nearest to the trees; (2) each giraffe will make for the leaves which he finds most succulent amongst those in reach; and (3) the giraffes whose relish for a given leaf is greatest will crane most to reach it. In this way more and juicier leaves will be swallowed, and each individual leaf will reach the throat which thinks it deserves most effort.
This assumption, however, of conditions where unhindered natural selection leads to progress, is only one of the two provisional assumptions which, taken as literal truth, have become the twin buttresses of laissez-faire. The other one is the efficacy, and indeed the necessity, of the opportunity for unlimited private money-making as an incentive to maximum effort. Profit accrues, under laissez-faire, to the individual who, whether by skill or good fortune, is found with his productive resources in the right place at the right time. A system which allows the skilful or fortunate individual to reap the whole fruits of this conjuncture evidently offers an immense incentive to the practice of the art of being in the right place at the right time. Thus one of the most powerful of human motives, namely the love of money, is harnessed to the task of distributing economic resources in the way best calculated to increase wealth.
The parallelism between economic laissez-faire and Darwinianism, already briefly noted, is now seen, as Herbert Spencer was foremost to recognise, to be very close indeed. Darwin invoked sexual love, acting through sexual selection, as an adjutant to natural selection by competition, to direct evolution along lines which should be desirable as well as effective, so the individualist invokes the love of money, acting through the pursuit of profit, as an adjutant to natural selection, to bring about the production on the greatest possible scale of what is most strongly desired as measured by exchange value.
The beauty and the simplicity of such a theory are so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity. Apart from other objections to be mentioned later, the conclusion that individuals acting independently for their own advantage will produce the greatest aggregate of wealth, depends on a variety of unreal assumptions to the effect that the processes of production and consumption are in no way organic, that there exists a sufficient foreknowledge of conditions and requirements, and that there are adequate opportunities of obtaining this foreknowledge. For economists generally reserve for a later stage of their argument the complications which arise - (1) when the efficient units of production are large relatively to the units of consumption, (2) when overhead costs or joint costs are present, (3) when internal economies tend to aggregation of production, (4) when the time required for adjustments is long, (5) when ignorance prevails over knowledge and (6) when monopolies and combinations interfere with equality in bargaining - they reserve, that is to say, for a later stage their analysis of the actual facts. Moreover, many of those who recognise that the simplified hypothesis does not accurately correspond to fact conclude nevertheless that it does 'represent what is ‘natural’ and therefore ideal.
They regard the simplified hypothesis as health, and the further complications as disease.
Yet besides this question of fact there are other considerations, familiar enough, which rightly bring into the calculation the cost and character of the competitive struggle itself, and the tendency for wealth to be distributed where it is not appreciated most. If we have the welfare of the giraffes at heart, we must not overlook the sufferings of the shorter necks who are starved out, or the sweet leaves which fall to the ground and are trampled underfoot in the struggle, or the overfeeding of the long-necked ones, or the evil look of anxiety or struggling greediness which overcasts the mild faces of the herd.
But the principles of laissez-faire have had other allies besides economic textbooks. It must be admitted that they have been confirmed in the minds of sound thinkers and the reasonable public by the poor quality of the opponent proposals - protectionism on one hand, and Marxian socialism on the other. Yet these doctrines are both characterised, not only or chiefly by their infringing the general presumption in favour of laissez-faire, but by mere logical fallacy. Both are examples of poor thinking, of inability to analyse a process and follow it out to its conclusion. The arguments against them, though reinforced by the principle of laissez-faire, do not strictly require it. Of the two, protectionism is at least plausible, and the forces making for its popularity are nothing to wonder at. But Marxian socialism must always remain a portent to the historians of opinion - how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men and, through them, the events of history. At any rate, the obvious scientific deficiencies of these two schools greatly contributed to the prestige and authority of nineteenth-century laissez-faire.
Nor has the most notable divergence into centralised social action on a great scale - the conduct of the late war - encouraged reformers or dispelled old-fashioned prejudices. There is much to be said, it is true, on both sides. War experience in the organisation of socialised production has left some near observers optimistically anxious to repeat it in peace conditions. War socialism unquestionably achieved a production of wealth on a scale far greater than we ever knew in peace, for though the goods and services delivered were destined for immediate and fruitless extinction, none the less they were wealth. Nevertheless, the dissipation of effort was also prodigious, and the atmosphere of waste and not counting the cost was disgusting to any thrifty or provident spirit.
Finally, individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day. They gave full scope to our erstwhile heroes, the great business men. “At least one-half of the best ability in the Western world,” Marshall used to say, “is engaged in business.” A great part of ‘the higher imagination' of the age was thus employed. It was on the activities of these men that our hopes of progress were centred.
Men of this class (Marshall wrote in 'The Social Possibilities of Economic Chivalry', Economic Journal, XVII, 1907 - 9) live in constantly shifting visions, fashioned in their own brains, of various routes to their desired end; of the difficulties which Nature will oppose to them on each route, and of the contrivances by which they hope to get the better of her opposition. This imagination gains little credit with the people, because it is not allowed to run riot; its strength is disciplined by a stronger will; and its highest, glory is to have attained great ends by means so simple that no one will know, and none but experts will even guess, how a dozen other expedients, each suggesting as much brilliancy to the hasty observer, were set aside in favour of it. The imagination of such a man is employed, like that of the master chess-player, in forecasting the obstacles which may be opposed to the successful issue of his far-reaching projects, and constantly rejecting brilliant suggestions because he has pictured to himself the counter-strokes to them. His strong nervous force is at the opposite extreme of human nature from that nervous irresponsibility which conceives hasty Utopian schemes, and which is rather to be compared to the bold facility of a weak player, who will speedily solve the most difficult chess problem by taking on himself to move the black men as well as the white.
This is a fine picture of the great captain of industry, the master-individualist, who serves us in serving himself, just, as any other artist does. Yet this one, in his turn, is becoming a tarnished idol. We grow more doubtful whether it is he who will lead us into paradise by the hand.
These many elements have contributed to the current intellectual bias, the mental make-up, the orthodoxy of the day. The compelling force of many of the original reasons has disappeared but, as usual, the vitality of the conclusions outlasts them. To suggest social action for the public good to the City of London is like discussing the Origin of Species with a bishop sixty years ago. The first reaction is not intellectual, but moral. An orthodoxy is in question, and the more persuasive the arguments the graver the offence. Nevertheless, venturing into the den of the lethargic monster, at any rate I have traced his claims and pedigree so as to show that he has ruled over us rather by hereditary right than by personal merit.
Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.
We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed “one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion.” (Quoted by McCulloch in his Principles of Political Economy). We have to discriminate between what Bentham, in his forgotten but useful nomenclature, used to term Agenda and Non-Agenda, and to do this without Bentham's prior presumption that interference is, at the same time, ‘generally needless’ and ‘generally pernicious.’ (Bentham's Manual of Political Economy, published posthumously, in Bowring's edition - 1843). Perhaps the chief task of economists at this hour is to distinguish afresh the Agenda of government from the Non-Agenda; and the companion task of politics is to devise forms of government within a democracy which shall be capable of accomplishing the Agenda. I will illustrate what I have in mind by two examples.
(1) I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State-bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of men's altruism grows wider, to the separate advantage of particular groups, classes, or faculties - bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament.
I propose a return, it may be said, towards medieval conceptions of separate autonomies. But, in England at any rate, corporations are a mode of government which has never ceased to be important and is sympathetic to our institutions. It is easy to give examples, from what already exists, of separate autonomies which have attained or are approaching the mode I designate - the universities, the Bank of England, the Port of London Authority, even perhaps the railway companies. In Germany there are doubtless analogous instances.
But more interesting than these is the trend of joint stock institutions, when they have reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise. One of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialise itself. A point arrives in the growth of a big institution - particularly a big railway or big public utility enterprise, but also a big bank or a big insurance company - at which the owners of the capital, i.e. its shareholders, are almost entirely dissociated from the management, with the result that the direct personal interest of the latter in the making of great profit becomes quite secondary. When this stage is reached, the general stability and reputation of the institution are the more considered by the management than the maximum of profit for the shareholders. The shareholders must be satisfied by conventionally adequate dividends; but once this is secured, the direct interest of the management often consists in avoiding criticism from the public and from the customers of the concern. This is particularly the case if their great size or semi-monopolistic position renders them conspicuous in the public eye and vulnerable to public attack. The extreme instance, perhaps, of this tendency in the case of an institution, theoretically the unrestricted property of private persons, is the Bank of England. It is almost true to say that there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend, have already sunk to the neighbourhood of zero. But the same thing is partly true of many other big institutions. They are, as time goes on, socialising themselves.
Not that this is unmixed gain. The same causes promote conservatism and a waning of enterprise. In fact, we already have in these cases many of the faults as well as the advantages of State Socialism. Nevertheless, we see here, I think, a natural line of evolution. The battle of Socialism against unlimited private profit is being won in detail hour by hour. In these particular fields - it remains acute elsewhere - this is no longer the pressing problem. There is, for instance, no so-called important political question so really unimportant, so irrelevant to the reorganisation of the economic life of Great Britain, as the nationalisation of the railways.
It is true that many big undertakings, particularly public utility enterprises and other business requiring a large fixed capital, still need to be semi-socialised. But we must keep our minds flexible regarding the forms of this semi-socialism. We must take full advantage of the natural tendencies of the day, and we must probably prefer semi-autonomous corporations to organs of the central government for which ministers of State are directly responsible.
I criticise doctrinaire State Socialism, not because it seeks to engage men's altruistic impulses in the service of society, or because it departs from laissez-faire, or because it takes away from man's natural liberty to make a million, or because it has courage for bold experiments. All these things I applaud. I criticise it because it misses the significance of what is actually happening; because it is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago. Nineteenth-century State Socialism sprang from Bentham, free competition, etc., and is in some respects a clearer, in some respects a more muddled version of just the same philosophy as underlies nineteenth-century individualism. Both equally laid all their stress on freedom, the one negatively to avoid limitations on existing freedom, the other positively to destroy natural or acquired monopolies. They are different reactions to the same intellectual atmosphere.
(2) I come next to a criterion of Agenda which is particularly relevant to what it is urgent and desirable to do in the near future. We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.
It is not within the scope of my purpose on this occasion to develop practical policies. I limit myself, therefore, to naming some instances of what I mean from amongst those problems about which I happen to have thought most.
Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of the unemployment of labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production. Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease. I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered. Even if these measures prove insufficient, nevertheless, they will furnish us with better knowledge than we have now for taking the next step.
My second example relates to savings and investment. I believe that some coordinated act of intelligent judgement is required as to the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organisation of the investment market distributes savings along the most nationally productive channels. I do not think that these matters should be left entirely to the chances of private judgement and private profits, as they are at present.
My third example concerns population. The time has already come when each country needs a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.
These reflections have been directed towards possible improvements in the technique of modern capitalism by the agency of collective action. There is nothing in them which is seriously incompatible with what seems to me to be the essential characteristic of capitalism, namely the dependence upon an intense appeal to the money-making and money-loving instincts of individuals as the main motive force of the economic machine. Nor must I, so near to my end, stray towards other fields. Nevertheless, I may do well to remind you, in conclusion, that the fiercest contests and the most deeply felt divisions of opinion are likely to be waged in the coming years not round technical questions, where the arguments on either side are mainly economic, but round those which, for want of better words, may be called psychological or, perhaps, moral.
In Europe, or at least in some parts of Europe - but not, I think, in the United States of America - there is a latent reaction, somewhat widespread, against basing society to the extent that we do upon fostering, encouraging, and protecting the money-motives of individuals. A preference for arranging our affairs in such a way as to appeal to the money-motive as little as possible, rather than as much as possible, need not be entirely a priori, but may be based on the comparison of experiences. Different persons, according to their choice of profession, find the money-motive playing a large or a small part in their daily lives, and historians can tell us about other phases of social organisation in which this motive has played a much smaller part than it does now. Most religions and most philosophies deprecate, to say the least of it, a way of life mainly influenced by considerations of personal money profit. On the other hand, most men today reject ascetic notions and do not doubt the real advantages of wealth. Moreover, it seems obvious to them that one cannot do without the money-motive, and that, apart from certain admitted abuses, it does its job well. In the result the average man averts his attention from the problem, and has no clear idea what he really thinks and feels about the whole confounded matter.
Confusion of thought and feeling leads to confusion of speech. Many people, who are really objecting to capitalism as a way of life, argue as though they were objecting to it on the ground of its inefficiency in attaining its own objects. Contrariwise, devotees of capitalism are often unduly conservative, and reject reforms in its technique, which might really strengthen and preserve it, for fear that they may prove to be first steps away from capitalism itself. Nevertheless, a time may be coming when we shall get clearer than at present as to when we are talking about capitalism as an efficient or inefficient technique, and when we are talking about it as desirable or objectionable in itself. For my part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.
The next step forward must come, not from political agitation or premature experiments, but from thought. We need by an effort of the mind to elucidate our own feelings. At present our sympathy and our judgement are liable to be on different sides, which is a painful and paralysing state of mind. In the field of action reformers will not be successful until they can steadily pursue a clear and definite object with their intellects and their feelings in tune. There is no party in the world at present which appears to me to be pursuing right aims by right methods. Material poverty provides the incentive to change precisely in situations where there is very little margin for experiments. Material prosperity removes the incentive just when it might be safe to take a chance. Europe lacks the means, America the will, to make a move. We need a new set of convictions which spring naturally from a candid examination of our own inner feelings in relation to the outside facts.