By Ann Pettifor
Director, Policy Research in Macroeconomics (PRIME)
At a Rethinking Economics conference in Oslo last month I pointed out that western politicians and economists are repeating policy errors of the 1930s. The pattern of a global financial crash, followed by austerity in Europe and the UK, led in those years to the rise of populism, authoritarianism and ultimately fascism. The scale of economic and political failures and missteps led in turn to a catastrophic world war.
Today that pattern – of a global financial crash, austerity and a rise in political populism and authoritarianism – is evident in both Europe and the US. And talk of war has risen to the top of the US political agenda. Why have we not learnt lessons from the past?
The “fount and matrix” (to quote Karl Polanyi) of the international financial system prior to its collapse in 1929, was the self-regulating market. The gold standard was the policy by which the private finance sector, backed by economists, central bankers and policy-makers, sought to extend the domestic market system to the international sphere – beyond the reach of regulatory democracy. In the event, the 1929 stock market crash put an end to the delusional aspirations of Haute Finance: namely that financiers could detach their activities from democratic, accountable political oversight. (Polanyi, The Great Transformation 1944).
Between 1929 and 1931 the losses from the US stock market crash were estimated at $50bn. It was the worst economic failure in the history of the international economy. Within three years of the crash millions of Americans were unemployed, and farmers were caught between rising debts and deflating commodity prices. In Germany between 1930 and 1932, Heinrich Brüning, the Chancellor, with the tacit support of Social Democrats, imposed a savage austerity programme that led to high levels of unemployment and cuts in welfare programmes. This in turn led to the demise of social democracy, the rise of fascism and ultimately a global war.
The question that arose during the Rethinking Economics debate was this: could bankers be blamed for the current period of financial crisis, austerity, political polarisation and the rise of fascism? Surely responsibility rests with politicians?
I boldly asserted that bankers (meaning the private finance sector) can be blamed for the Great Financial Crisis and for the economic policies implemented after the crisis. After all, it was bankers (backed by mainstream economists) that lobbied most successfully (both in the UK, the US and the EU) for laissez faire in the 1960s and ‘70s: the deregulation of credit creation, and for the lifting of controls over interest rates and for cross-border capital mobility. (Duncan Needham, 2014). By bribing and intimidating the political class, most notably in the US, financiers achieved, and still enjoy, self-regulating, global markets in finance.
After the Great Financial Crisis of 2007-9, it was the finance sector that lobbied politicians into bailing out the private financial system. The system was on the brink of collapse, with the very real threat that hundreds of millions of deposit-holders would not be able to withdraw funds from their banks in the event of systemic failure. Bailouts of individual banks (and other institutions including insurance companies) were both inevitable and, given the circumstances, right. After the Fed bailout, Wall St. bullied and blackmailed the US Congress and demanded a further $700 billion in bailout funds “to rescue Wall Street from its own chicanery and greed” to quote Matt Taibi. Taibi reports that at
“one meeting to discuss the original bailout bill – at 11 a.m. on September 18th, 2008 – (Henry) Paulson (ex CEO of Goldman Sachs, and 74th US Secretary of the Treasury) actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse “within 24 hours.” “
While Paulson spoke, and politicians deliberated, money markets froze, and stock markets fell like a stone. As Jeremy Warner explained in the London Independent newspaper on 26 September, 2008: the sector had “warned of economic catastrophe if the Administration failed to get its way.” Soon after, politicians agreed to the $700 billion bailout, and markets recovered.
But bankers went further. Not only did they want to be bailed out; they also wanted the systemic nature of the global, self-regulating financial system of laissez faire to be sustained and maintained. After the devastation of the crisis, there was public and political resistance to “business as usual”. The US Congress’s Volcker ‘rule’ – that banks could not use depositors’ funds for speculative bets on their own account, was in the banks’ firing line. With time and large sums of money, Volcker’s and the Dodd-Frank regulatory reforms were to be unwound. (According to Reuters, the financial sector spent $2 billion on political activity from the beginning of 2015 to the end of 2016, including $1.2 billion in campaign contributions – more than twice the amount given by any other business sector, according to the study from Americans for Financial Reform. That works out to $3.7 million per member of Congress and is the most ever tracked by the group, which analysed spending data going back to 1990.)
The most notable successes for the banks came as a new law was enacted: S.2155 – the Economic Growth, Regulatory Relief, and Consumer Protection Act. As the not-for-profit NGO Americans for Financial Reform point out:
“S. 2155 is a bank lobbyist’s dream: it contains over two dozen deregulatory gifts to the financial industry. These include provisions that roll back the rules on some of the biggest banks in the country, increasing the risk of financial disaster and a public bailout. Other provisions would expose home buyers to financial exploitation and predatory lending, as well as enable racial discrimination in mortgage lending…. This bill is a victory for banks and their lobbyists over the interests of virtually everyone else.”
I stand by the point made: the private finance sector can largely be blamed for both the de-regulation (‘liberalisation’), reckless greed and speculation that led to the Great Financial Crisis. They lobbied to ensure self-regulation of the system, and to thwart efforts to restructure the system (as opposed to tinkering at the margins) after the GFC. The austerity policies that were recommended by economists (for more see here) followed as governments tried (unsuccessfully) to reduce the volumes of public debt that had risen both because of falls in economic activity, and because of the bailout of the private sector. Those in turn have led to a rise in populism, and to the renewed popularity of fascist parties in Europe.
As I write, bankers continue to foment anger and resistance. FinReg Alert reports that the US’s “biggest US banks made $2.5 billion from Trump’s Tax Law – in one quarter!”. After the law was passed, Gary D. Cohn, CEO of Goldman Sachs, resigned as adviser to President Trump.
So I repeat my point: global bankers and financiers (including those overseeing trillion-dollar Asset Management Funds) can be blamed for the rise of populist and fascist political parties after the Great Financial Crisis. And given their determination to evade democratic, regulatory oversight and management of the global financial system, we can expect bankers and financiers to be responsible for the next catastrophic, economic failure.