This post is a sequel to my previous one on economic faith and doctrines. When reflecting further about the ideological construction of “oppressive state intervention” and some of the comments made on the thread, I kept thinking about the fact that the liberal economy needs an enormous amount of state intervention and support to function, and that a social democratic perspective can be non-statist. One of the easiest elisions to make in thinking about politics and the economy is to equate anti-statism with the right and statism with the left. The two binaries do not map on to each other so simply. In fact, it’s a sure sign of thinking that’s really far too prone to ideology to assume that they do.
So I was happy to find this point rather elegantly made by the Canadian academic Leo Panitch:
First, let’s be clear about capitalism – and with it the character of the state under capitalism. There is a conventional assumption, a leftover of the cold war perhaps, that somehow capitalism is essentially about the market and socialism is essentially about the state. In fact, a central historical feature of the state in capitalist societies is the role it plays as guarantor of private property and, most importantly for the smooth running of the financial markets, that it will always honour its bonds – that is, its borrowing from the private banks.Because of this guarantee – the promise to pay others back from taxation revenue in the future – government bonds, whether issued to finance war or to finance welfare, constitute the least risky form of lending. As such, it forms the foundation of financial markets’ role in sustaining the ability of capitalists generally to accumulate – to continue to invest and make profits. This centrality of the state for capitalist accumulation is most notable with respect to those dominant states, like the USA, whose bonds are the foundation on which all calculations of value in global capitalism are based; states that host and support the main centres of international financial markets, such as New York and the City of London.
Understanding the role of the state in a capitalist society helps us to see why, when a government bails them out with public money, the bankers do not see this as the start of socialism. On the contrary, they see it as the government fulfilling its duty to the financial markets – whose smooth running it both depends on and sustains, by providing the basis of confidence in the credibility of the banking system.
So it is misleading to see government involvement in the banks – whether it be the pure bailout of the original Paulson program in the US, or the subsequent non-controlling equities taken by the US, British and other governments – as per se a move away even from neoliberalism. (It is also misleading to see neoliberalism as being about the withdrawal of the state from the markets – and therefore this current involvement of the state as a defeat of neoliberalism. The state under neoliberalism has been very active in promoting the vast expansion of financial markets and facilitating their volatile growth; and, as this volatility inevitably led to repeated financial crises, in keeping the financial system going from moments of chaos to moments of chaos.)
This is a nice piece, Mark. And believe me, there’s plenty of ‘big government conservatism’ out there — exhibit one for the prosecution: George W Bush. It will be so nice when he’s gone from the White House, really and truly. Now the GOP just has to sit on the so-cons, who want to do to people’s social preferences what socialists wanted to do to people’s economic preferences back in the day (a good point someone made on the other thread).
Hayek also got very cross with people who thought it was possible to have markets without law; much of his work concerns the form that law should take, true, but he never doubted for a moment that laws are essential to making capitalism work.
Thanks, SL.
Believe it or not, Hayek is on my re-read list for this year. I don’t think I’ve read him properly since 1999. So – once a decade at least!
We are making progress now when both Marxism and Libertarianism are both now seen as dead ideological ducks and social-democracy rules. That’s good. Now educating democratic-socialists about the tried and true economics and ideology of libertarian-socialism may get us some more traction.
For us anarchists, the state ( and religion) is the revolutionary subject.
This is because the state always was the weakest point of power. ( As religion is the states internal Achilles heel)
We anarchs threw one shoe at state power in the Ukraine with the Makhnovista revolt and our second in Spain in 1936. Minarchism is a tactical pivot. Solidarity is a strategic pivot, and Anarchism is a brilliant prize just beyond flailing and failing social-democracy. Why settle for representational democracy when you can now have direct democracy? We’re young – they’re old – and that’s life.
That is a really good way of putting it. It’s a lot more credible than cries of “corporate welfare!!!”
Well, yes. Bankers would say that, wouldn’t they?
Yet a bail-out of any other business does provoke cries of “Socialism!”
But perhaps this apparently inconsistent behaviour isn’t mere self-interested hypocrisy after all.
Perhaps it is based on the sincerely-held belief that a bank (which after all is in business to make a profit and to pay dividends to its shareholders) is very different from General Motors (which on the contrary is in business to make a profit and to pay dividends to its shareholders). Individual shareholders are perfectly free to sell Bank shares to buy Automaker shares, and vice versa.
So, it isn’t the capitalist mission of banks that allegedly makes them “special”.
But what is it?
Is it the function that they play in making the state possible? If the US lost all its automakers, constitutional government would survive. On the other hand, if all the US banks collapsed, then credit itself, which is the sinews of war, both foreign and domestic, would disappear. And with it would disappear the ability of the state to attempt to possess the constitutionally sanctioned monopoly of co-optation and if necessary, violence.
Thus, it could be argued, banks do play a “special” role.
But this raises some very interesting questions.
Would it be more economic for investors in banks to expect a higher rate of return on their investments in light of the “special” burdens borne by banks in underwriting the system. Or alternatively should investors in banks expect a lower rate of return on their investments in light of the fact that the banking system, if not individual banks, will be the final citadel defended to the death by the state?
Surely there would be other options for credit and other financial services other than privately owned banks. While our economy may be based on money, our government is based on trust. As long as the collapse of the banks does not erode the trust in the government then the impact would be primarily economic and not political.
For example…?
Nationalised banking for a start.
If it’s the government’s role to assume the risk of the banks, then it was a massive screw up to surrender control of the risk through insufficient regulation.
AKA Fiat credit ultimately backed up by bayonet and martial law.
Don’t misunderstand me. Such systems have worked (for a while) in the past. But they are impossible to square with the US Constitution or for that matter probably with the Australian Constitution.
So if it is to be bank nationalisation, constitutions would have to change.
Unlike that other credit that people always pay back out of the goodness of their hearts?
Well, that’s the choice: credit conditions imposed by governmental fiat that may or may not be honoured according to the contingencies of government, or credit conditions that may or may not be honoured according to the solvency of the private debtor.
What we have at the moment is a puppet show where the government underwrites the debts of selected banks and other selected lending institutions on the pretence that private capital markets are viable.
Again, you mistake me for a defender of market finance. I’m simply pointing out how much has to be torn up and thrown out were the US or Australia to attempt to adopt nationalised finance.
I guess it comes down to whether you use terms in strict theoretical senses or the practical sense. The vast majority of “capitalists” would agree there needs to be a legal framework in which finance is conducted but in the pure sense I guess it has to be conceded that this still represents some sort of govt intervention and if socialism is defined as any level of govt intervention then it equates to some level of socialism.
I think Katz is right to raise the special importance of financial institutions. There maybe alternatve financing means available, private mortgages for instance but clearly if say 90% of banks failed the probabilities of a genuine economic depression are extremely high whilst losing 90% of your auto manufacturers would likely only result in an exacerbated recession. Given the misery of a depression this otherwise fiscal conservative would prefer Govt move to ensure we suffer a recession instead of a full blown depression. Fiscal conservatives do need to remember that financial hardship can cause marriage breakups which may involve children and indeed suicides.
I don’t know if shareholders of financial instituions should ask for any greater or lesser rate of return as any government bailout should really aimed to do little more than preserve the banks survival not preserve some significant level of shareholder equity as well. A bank shareholder should invest in the full knowledge that if the bank is poorly run they stand to own completely worthless shares even if the bank itself survives in some sort of quasi administration form for a period.
One other issue I think needs examination is the issue of moral hazard. Financial rescues are resented and opposed because of moral hazard. That’s fair enough. However I think if the decision makers suffer the apprpriate penalties, personal bankruptcy, etc then I don’t see much incentive for an intelligent CEO to recklessly engage in poor lending practices. Nothing can really be done about the unintelligent ones.
I don’t see much merit in punishing Mr and Mrs Penioner for putting their term deposit with a household name financial instituion with supposed Govt backing.
One other possible option to minimise the need for Govt to bailout financial institutions from time to time is to raise capital adequacy ratios to levels that make financial failure close to impossible and likewise debt to equity ratios that lenders are allowed to adopt for customers. ie a bank can only lend say 60% of the value of a house not 80% or higher with mortgage insurance. That of course does massively de-leverage the economy and until it finds it new equilibrium will be quite “deflationary”. It would be interesting to model these things out as it would mean face value a new homebuyer has to save up a far larger deposit before they can become a home owner yet we would also find with far less credit available that home prices are far more affordable. Once the changes had worked there way through could we get a win/win where overall home affordability is still very achievable but the home owner owns a far larger portion of their home? Interestingly think we would generally describe someone who saves up a 40% deposit for their home as fiscally conservative but laws demanding it maybe described as anti-market and socialist in nature.
Almost universally, the market determines the rate of return on capital, via p/e ratios, etc. Australian banks have usually paid approx 5% dividends. It’ll be interesting to see whether this figure undergoes any major change in the medium term in light of the current crisis.
Kingsley is correct when he says that shareholders in selected banks in the US have been expropriated by the Bush administration. All other things being equal, that risk may attract a premium when investors decide whether or not to invest in US banks.
Moreover, perhaps increased consciousness of the volatility of world finance, in which circumstances even the largest banks may find themselves severely embarrassed by events utterly beyond their control may also result in investors in banks demanding a higher rate of return on their shares.
What does the limited liability of the debtor (or lack of) have to do with who the creditor is?
It is not the role of government to assume the risk of banks, which is why the government-owned banks in Australia were all sold off.
It is instead the role of government to underwrite the soundness of the financial system. This is generally considered to include assuming the risk for depositors although there is debate as to the extent to which this should best occur (first $10,000 of a depositor’s funds, $100,000, unlimited?)
Bank shareholder funds have never been government guaranteed and are subject to diminution or even disappearance, the same as with any other joint stock company.
Financial institutions are supposed to shoulder their own risk of wholesale lending to banks (e.g, buying bank bonds, certificates of deposit, bank-endorsed commercial paper and the like). Each institution maintains an exposure limit to each counter-party, such that if that bank reneges on its debt, the loss is manageable.
What we had last year following the unravelling of sub-prime debt and Lehman Brothers collapse was a systemic failure, where nobody knew anymore what their risks were and market activity essentially froze.
The way this has all been playing out has been by the seat of the pants and very messy. After the shouting dies down there will presumably be better rules developed as to what to do if a large bank or other financial institution becomes insolvent.
Prof Rat – We are making progress now when both Marxism and Libertarianism are both now seen as dead ideological ducks and social-democracy rules.
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Um no, social democracy sropped dead 25 years ago. We’re set free to find a new illusion.
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Why settle for representational democracy when you can now have direct democracy?
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As much as I aspire your ideals I’m inhibited by the apparent facts of mass stupidity and laziness that encumber the flowering of non-coercive society. Perhaps in the future. For now whenever you ask whether or no the world we be a better place if the cops and the army disappeared, well the answer’s no innit.
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Thing is every economic ideology has its weak heel. Greenspan/Friedman’s was that they could ignore bubbles and that all financial innovation was good. The Keynsians didn’t seem to realize that people don’t want to shunt over 90% of their pay to the govt. And if they have to do that they might not bother all that much.
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I think we need a new school of economics. One where the economists take a walk down the street and look at the world occassionally.
Mike M – It is not the role of government to assume the risk of banks, which is why the government-owned banks in Australia were all sold off. It is instead the role of government to underwrite the soundness of the financial system.
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Translation: The government’s role isn’t to run banks only to fish ‘em out when they fuck up.
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Thing is we’re fishin ‘em out and then we’ll have to pay (even more) exorbitant fees because of their bad calls.