James Bianco at The Big Picture has all the details, and there’s also coverage at Naked Capitalism.

What’s the big picture here?

On the short term political front, Scott Brown’s win in Massachussetts exemplifies the frustration felt by many with politics as usual. Whether it’s expressed as concern over deficits (and that’s a much more salient touch point with Indendent voters on health care than the rhetoric of the wingnuts), or just as disgust with the jobless recovery’s disjunction with business as usual on Wall Street, there’s no doubt that an election year is starting to focus minds on the politics of financial decision making.

… and that brings us to the bigger picture. The whole entrenchment of the reign of ‘the markets’ and the institutions which serve to reproduce financialised global capital (such as the US Federal Reserve) could not have taken place without the depoliticisation of discussion of decisions about its governance. In Australia, and in the UK, we saw the independence of central banks proclaimed as a touchstone of orthodoxy, while politics in the EU was and still is under the long shadow of first the Bundesbank, and lately the European Central Bank. This depoliticisation is a much more accurate signifier of what neo-liberalism actually is than any concern about the size of the state (which has often increased under right wing governments). In America, Alan Greenspan became something of a fetish for markets.

In the longer term, the fact that the personnel and the policies of the US Federal Reserve are now open to political challenge (at the same time as bankers become a political football in the UK) is undoubtedly the most central ideological and political result of the Global Financial Crisis.

Writing for Crikey today, David Hirst observes:

Luckily for the Republicans, who doubted they had a chance at taking a seat Ted Kennedy had held for 47 years, they nominated a nobody called Scott Brown who drove a truck?—?a fact the Democrats somehow allowed to become an issue. Naturally Brown, equipped with political advisers as the Republicans smelled not blood but a bloodbath, drove at their behest to Wall Street, where he somehow managed to park.

It wasn’t a huge issue but it played well?—?the message presumably was that sophisticated people from places such as Boston were not represented by folks who drove trucks. Kennedy sure didn’t drive a truck.

The shell-shocked mainstream media better get used to it, for there are many shocks to come. That the Republicans had the sense to see “truck” and “Wall Street” and bring the two to one was clever indeed.

His analysis suggests that the result is born of the sentiment of a plague on the US political classes, bailing out banks with abandon, but doing nothing perceptible for ‘Main Street’, and the straightened economic circumstances many Americans face after the GFC. He also suggests the Republicans will be emboldened to escalate their anti-Obama rhetoric, but that they themselves have nothing effective to offer; short of pandering to anti-government sentiments deeply embedded in American political culture.

In truth, the US party system is incapable of doing anything other than slightly tacking in the direction of popular sentiment; something confounded by the hyperbolic checks and balances, whose frustration of a majority in the Senate is precisely what made this special election so important.

Previous discussion on LP: Here.

Update: Nate Silver on the swing.

A social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management. If individuals are to have security of employment, income and wealth, governments must establish the necessary legal and economic framework and enforce its rules. The fact that government is the ultimate risk manager both justifies and necessitates action to mitigate the grotesque inequalities in both opportunities and outcomes that characterise unrestrained capitalism and were increasingly resurgent in the era of economic liberalism.

I might have some differences at the margins, but I wouldn’t dissent from Quiggin’s broad policy approach. Where I would sound a note of caution, however, is his assumption that a restructured economy will necessarily entail a shrunken financial sector. I’m not sure that’s true. As I observed with respect to the recent G20 summit meeting, a note of complacency has crept into discussions of the GFC. There is an apparent assumption that a bit of government prodding to get credit markets moving again, a little more regulation, and a bit of symbolic Wall Street bashing will do the trick. Then business can resume more or less as normal. That assumption, or assumptions like it, are colouring the recent partial revival in equity markets. It’s being driven also by the Obama administration’s actions (and inaction) – controversies over AIG bonuses aside, there’s a distinct sense that whatever Wall Street wants, it will get – including a revival of trading in credit default swaps and other derivatives.

Neo-liberalism may be a rhetorical dead dodo, but the unwillingness of the Obama administration to actually seize the moment of crisis to bring about ‘change we can believe in’ suggests that the practices which led to the current baleful situation may be only in temporary eclipse. In retrospect, the appointments of Tim Geithner and Larry Summers were probably a sign of the times, and more so the thinking that underlay those selections. Gravely disappointing.

Lapham, playing himself, leads his empty vessels through the streets of Manhattan, counterposing up-scale parties with wait staff slaving for tips. It’s a savvy piece of emotional manipulation designed to guilt the young rich into acknowledging the class structure that, above all else, got them to where they are. In one party scene, the hubris is intoxicating as a tipsy Ivy League cohort prepares, like their parents, to ascend to the heights of commerce, industry and influence.

Of course, this constructed ‘choice’ transcends the personal, reading as an obvious allegory for the nation as a whole. If the American working class has nothing to lose but their chains, Lapham clearly hopes a new generation will hand them the bolt cutters — a naive appeal to altruism perhaps, but one that continues to resonate as the economy tanks. Lapham’s choice is now more pressing, in that conditions have got much worse, and much easier in that elite opinion is again extolling the virtues of public service, always a potent (if submerged) strain of America’s DNA.

Two recent events have confused Lapham’s dichotomy — namely, the collapse of the Wall St investment banks that once promised grads an inside track to power and influence (in the doco, Jack must choose between the now-flailing Goldman Sachs and life as a writer) and the election of the Obama Administration. But perhaps the more important wildcard is the ‘West Wing effect’ where Jeb Bartlett’s passion for public policy collides with the burgeoning mythology around President Obama’s inner circle.

Consider the media frenzy over the past week surrounding the inauguration speech allegedly penned by 27-year old staffer John Favreau, the pain felt by Facebook-addicted staffers held hostage by outdated email-free PCs and the plight of press secretaries confronted by electronic doors — the touchy-feely anecdotes could fill a whole Blackberry. Which of Lapham’s formerly Goldman-bound Yalies could now resist taking the social policy reigns under a svelte 47-year old with a penchant for pickup games of two-on-two?

Add this to calls for a ‘new Keynesianism‘, big government and demands for massive tax hikes and a seachange seems unavoidable. Four years after Lapham’s intervention, the US is witnessing a wholesale rejection of the Patrick Bateman era, demanding personal commitments more in tune with the darkening reality of everyday life. For a nation on its knees, self sacrifice has again become sexy.

But perhaps a more difficult question is whether this new public-spiritedness is pointed in the right direction. The levers of government may be so corroded, and the policy making options of earlier eras so passé as to render the renewed enthusiasm null and void.

For a period in the late 90s and early 00s, progressive forces were searching for new modes of public engagement in the tacit recognition that national governments were no longer able to provide the kind of policy guidance beloved by post-WWII welfare states. In the best examples, domestic social movements crafted global networks that went beyond defensive postures towards what Alain Touraine calls “conflictive participation in the global economy”. Those networks have now become clogged as domestic ‘solutions’ again become fashionable.

What remains of welfarism after its trashing under Bush is still tilted away from the genuinely excluded (think The Wire) towards an illusory middle class receding irretrievably from view. US labor unions are mostly a defensive bulwark against the vagaries of global competition and not an assertive force for social change. Obama’s multi-billion dollar car industry bailout will benefit, first and foremost, Hillary’s white workers and not the forgotten of Detroit’s slums. The multitude of stimulus and bailout packages are an attempt to revive a failed settlement between capital and labour that passed its used-by-date decades ago.

The alternative for the legions of Obama fans is to take a good look at the fluidity that has re-made American society and fashion a conflictive social movement that engages directly with issues of cultural diversity and economic fragmentation. For their part, policy wonks should be looking less at off-the-shelf responses and instead at regulations that protect and extend cultural and economic autonomy — the contours of which will inevitably emerge, with or without the input of a new band of Ivy League do-gooders.

However, I think we can now advance a few hypotheses, however tentative, about what’s occurring – in terms of both political economy and the sociology of knowledge.

The first point I wanted to make is that Bernard Keane is probably right about this:

Government is back, and small government types, libertarians, deregulationists, will have to cop it sweet.

Some aspects of the causation of the global financial crisis have in fact been accurately identified by liberal economists, but the harnessing of them to an increasingly desparate ideological noise machine has diminished their force, and distorted such truth as they have. Here, it’s worth having a good read of Dani Rodrik’s analysis of the causes of the crisis [via The Global Sociology Blog]. As Rodrik suggests, they are multiple and complex. That complexity should give pause to anyone who wants to cherry pick causal factors for a grand narrative, but it also suggests that “free markets rule and evil regulation/government/lefties are at fault” is exposed as a ludicrous claim.

Further, it implies that the dogma associated with market neo-liberalism has to give way to reality, and lies exposed as an ideological rather than a scientific discourse. Here, Joseph Stiglitz is spot on:

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith’s conclusions do not hold when there is imperfect information – and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership – the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

One of the main reasons why economic theory – in its purist liberal incarnation – has been discarded so quickly as failing to offer any useful policy prescriptions at a time of unprecedented crisis is that it’s part of the problem, and therefore can’t provide the solution.

What in fact we’re seeing is that there are no “natural” or “perfect” markets, and if any can be found lying around the shop, like the credit derivatives swap market with $62 trillion at stake, they’re the vortex of the madness that has engulfed the system’s various “rationalities”. We need to start thinking much more rigorously about the role of states in the creation of the conditions of possibility for these events, and the economic field as a complex set of vectors and forces. I’ll come back to the role of the state in a subsequent post, but I think we need to underline as a starting point in both understanding and diagnosing the global financial crisis the need to put the “political” back into “political economy”.

In The Guardian, Will Hutton explains why measures to halt the cascading crisis have been ineffectual to date. He might have made more explicit the implication that one of the basic structural problems is that action taken at the level of the nation state can be counter-productive given the disseminations and movements of capital, and that there are real domestic political barriers to coordinated action, as well as all the obvious problems of concertation through institutions such as the EU and the G20.

But he does make this point – harmonising with the note I’ve been sounding repeatedly – very clearly indeed:

There was no effective opposition. The left and organised labour collapsed as intellectual, social and political forces; there was no conviction that any alternative to this shareholder value-driven, financial, ‘securitised’ capitalism existed, or any political muscle to support it even if there were. Mainstream culture moved away from public purpose and fairness; the new priorities were individual self-fulfilment, personal experience and loyalty to self.

Hutton is perhaps more sanguine than I am, though, about the capacity of state action to turn all this around. In essence, he’s making an argument he’s been making for some years – about the virtues of other forms of capitalism than that which has been hegemonic in the neo-liberal Anglosphere. He briefly had some success in influencing Tony Blair in the early days of New Labour – in opposition, to be precise – in pushing ideas about “Stakeholder capitalism”. Whether a reorientation to a capitalism focused on the medium rather than the short term and on the real rather than the financial economy would work now – or whether as John Quiggin seems to think the Gordon Browns of the world are predisposed to be pushed, however much they might kick and scream, in something like the correct direction, is perhaps anyone’s guess as events continue to move at breakneck pace.

Immanuel Wallerstein puts a contrary view. I’m not quite sure if I agree – though he’s right more often than most. It is certain that what is occurring is Schumpeterian “creative destruction”, but whether or not the capacity to begin the cycle of valorisation and capital accumulation anew exists is something I think it’s better to be agnostic about at this stage. While I dare say he’s right about the end of a Krondatieff cycle, beyond that, prognostication seems to have a very short shelf life in these times.

It’s also interesting to observe that some are suggesting that the Canadian Tories’ “steady as she goes” approach is precisely what is leading to their decline in support in the campaign which has reached its final stretches. It may well be that Stephen Harper has more problems than just perceived inaction in the face of the credit crisis, but it probably is significant that voters are demanding state action to propitiate fear. In the Australian context, I wouldn’t be at all surprised if Kevin Rudd and Labor are able to consolidate their support at a time when their momentum may have been sagging. The “cut through” of the opposition really diminishes at times of crisis, and it may be that Rudd has a chance to entrench himself with his response. To some degree that’s dependent on how far Australia is able to resist the global push towards recession, and again, I really would hesitate to place much value in any predictions at this stage.

Iceland right now is apparently in a state of shock and gives a snapshot of what a depression with the Great in it will look like everywhere – “cafes were half-empty, real estate agents sat idle, and retailers reported few sales” says the AP.

This after the government basically took over its banking sector, with Russian money, which as noted in the linked post, has real geopolitical implications.

Meanwhile, the British government is laying out 500 billion pounds to take equity in its banking sector, but basically proposing business as usual. Co-ordinated interest rate cuts are having very little impact on the stock market, and more worryingly, on the liquidity crisis. Paul Krugman writes:

We’re way past the point at which conventional monetary policy has much traction.

In America, in the eye of the economic storm, the Fed has basically become the financial system, but to little avail:

The time for a recession was 2005. At that time simple macroeconomic policy; simply raising interest rates, would have ended the bubbles in credit and housing at the cost of a standard if somewhat nasty recession. Trillions of dollars of intervention would not have been needed. Just standard macro policy. Even in 2006 it might still have worked. The Fed blew it, and they broke the system, and now with the system broken they may have to either buy it all out (and Paulson may be considering that after all) or just become the system. And even if they do that may not work, because, well, who wants to borrow and invest right now?

Bernanke and Greenspan are certainly in the “worst Fed chairman of all time” stakes in a big, big way.

So what does all this mean? It’s not “financial socialism” or the “end of capitalism”. While there are some truly absurd narratives circulating about how the meltdown is all the fault of… you guessed it, regulation, the Left and/or Bill Clinton, this nonsense is not unrelated to the coincidence between the financial meltdown and the American Presidential election, and it can be disposed of very easily:

Although financial institutions were evaluated for compliance with the act, it never required they lose money on mortgages or that they be given to people with slim prospects of repaying them. Even if, as some claim, the legislation ultimately played a part in encouraging excesses, such as the bundling of sub-prime loans into packages that hid their riskiness, that was a failure not of too much but of too little regulation.

[Mike Steketee]

What conservatives can’t point to, ultimately, is any form of regulation that actually caused the crisis. No one put a gun to the head of US bank executives and made them lend to people without the means to repay loans. No one threatened dire retribution to investment bankers unless they packaged sub-prime securities. And no one compelled Standard and Poor’s and Moody’s to inexplicably and wholly irresponsibly rate those securities at AAA levels even when they didn’t understand the packaging mechanisms being used.

[Bernard Keane]

As Keane points out, this sort of thing is a classic example of the moveable feast that is the right wing opinionating machine – an “ownership society” and aspirational citizens were the mark of the success of right wing governments yesterday, and today evil lefties encouraged passive banks to lend money to all sorts of unsuitable poor people.

While it may be difficult at the moment for the Right to point to capitalism as a roaring success story, what’s occurring in response is very far from being socialism, or even nationalisation.

John Quiggin writes:

This kind of instalment-plan nationalisation seems to offer the worst of all worlds. At some point, a more systematic approach will have to be adopted, and given the rate at which markets are plummeting, the sooner that point comes the better. This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.

And his opinion is echoed by a socialist blogging sociologist:

And what about the future of capitalism itself? No one is saying the system itself has collapsed, rather what has gone down the tubes is a particular way of organising capitalism. It is too early to tell what could replace it, though a number of participants flagged up the possibility of a more regulated capitalism, albeit without the welfare and full employment commitments of post-war Keynesian capitalism. It’s also likely that Neoliberalism will continue to cast its shadow.

And in a rather pithy article from Andrew Crook of Business Spectator:

Western economies, with their manufacturing industries gutted and the entrails shipped abroad, are struggling to actually produce anything beyond amorphous “services” and intellectual property. This has mirrored the spread of cancerous and impossible-to-decipher debt instruments, producing the biggest financial bubble in world history. That bubble has just burst.

Sub-prime mortgages may have been the bitter pill, but it’s the yawning distance between these debt vehicles and the bricks-and-mortar of our everyday lives that could prove fatal.

Assuming the current crisis doesn’t result in the second coming of socialism, we’re left with the familiar remedy of ever more-regulated domestic markets. But the genuine policy levers of an earlier era remain out of reach.

Over the last 30 years, the Keynesian social fabric has being steadily eroded by the slavish adherence of Western governments to global market forces (“external harmonisation”) as a non-negotiable pre-cursor to domestic policymaking. Despite the tinkering of Rudd and co, this remains broadly the case. Not that they’d have you believe it.

As I’ve been arguing, the political logics behind neo-liberalism remain well entrenched, despite the recourse had by panicked “free markets” to the “nanny state”. Mark Davis agrees neo-liberalism isn’t finished:

It’s a nice idea, but underestimates just how deeply embedded neoliberal ideas are in the global finance system. My sense is that the bail-out, now passed by the US senate and to be revoted on in Congress tomorrow, will happen, even if it won’t necessarily work because there’s more to this than simply lancing a boil. Regulatory noises are being made and some tightening will take place. But the system will stay relatively unchanged because too much depends on it and because money and power have little respect, in the end, for principle.

We have essentially two problems at the moment from the point of view of the conjuncture of political economy and the alignment of social and economic forces. The first is that social democratic parties have bought into the logic of the dominant paradigm to such an extent that there are very few alternatives on offer. The second is that neo-classical orthodoxy has led to such a mismanagement of the global economy that states appear bamboozled in the face of a liquidity crisis, and few orthodox solutions appear to offer any hope of turning the situation around in the short term. We will probably see some sort of stabilisation, though perhaps not for a while, and we will also see the emergence of a new orthodoxy not too dissimilar to the old one as the superficial lessons of the crisis are absorbed and the wagons of the powers that be circle the camp.

So, if the policy cupboard is bare, and ideologues are trying desparately to readjust themselves to some version of “culture wars as usual”, what is to be done? Andrew Crook, once again, is absolutely on the money:

The broader challenge for the Left, and for politics, is to imagine a radically-different regulatory framework with actual meaning for alienated individuals struggling, in a world of tumult, to carve out a viable identity and a cohesive personal narrative. This won’t come from centre-left policy elites—it requires a new breed of social movements to organise around these faultlines and assert their right to economic and cultural autonomy.

But the outline of such a movement is only just being sketched and echoing Paulson’s doubters on Wall St (the Dow has lost 13 per cent of its value in the last five sessions), there’s little reason to believe conditions on Main St, or anywhere else, will begin to improve any time soon.

Update: New post here. Comments are now closed on this one.

Peter Martin has all the wonky stuff worth reading on the Reserve Bank’s 1% rates cut, which a number of banks and lending institutions have indicated will lead to a .8% cut in their variable mortgage rates. Dennis Atkins, writing at Party Games, thinks that the Reserve has given the Rudd government political breathing space.

No doubt we’ll find out.

Malcolm Turnbull has been playing a dangerous game on interest rates. For a start, finding a single point of differentiation with Labor on the financial turbulence in calling for the banks to deliver the full .5% cut expected from the Reserve tomorrow trashes his “bipartisan” message articulated so recently. With banks falling over all round the world, the government’s argument that conditions have changed is going to find a fair bit of receptivity around the shop. Turnbull realised two weeks ago that bipartisanship was a good message in the midst of perceived chaos, at a time when people don’t really want to hear disagreement from political leaders. That’s gone now. Now, a lot of people might not remember his incoherent critique of the federal budget back in May when he was Shadow Treasurer (and the government’s budget strategy is looking a lot more clever five months down the track than reaction suggested at the time), but with both economic news in the foreground and his leadership itself big news, a lot more voters will be switched in to what he has to say than usual.

He may have figured that he had to go populist to avoid the “merchant banker” thing. That may be short-sighted.

If incidentally, there is no Turnbull bounce, it’ll be interesting to see if the usual suspects attribute that to voters flocking to the government at a time of economic uncertainty. There’d be truth in that, but if the assumption is that politics is not dynamic and there’s an underlying trend to the Liberals being masked by the crisis, that would be quite wrong.

Update: New post on recent developments.

Apparently Obama has been consorting with terrorists, because he once knew a member of the Weathermen (long afterwards and when Bill Ayers had become an educator and a Distinguished Professor at the University of Chicago). All these allegations were aired during the primaries – and no doubt the Rev. Wright stuff is being readied for an encore. Reading this article on the campaign in Florida really does show how much dissemination the loathsome “Muslim sleeper” stuff is getting as well, and Palin’s attack on Obama as some sort of terrorist sympathiser will reinforce that theme among those disposed to believe it, or to have doubts.

The flick to a negative posture on the part of McCain’s campaign is a sign of desperation – with the polls consistently showing Obama with a winning lead. By contrast with John Kerry, Obama has been ahead most of the time, with only the most spectacular “game changers” from McCain giving him temporary momentum (Kerry trailed Bush for most of the campaign). With the economy tanking in the wake of the Wall Street crises – and this piece from Robert Reich [via Terry Flew] really spells out what’s going on – we’re about to see whether culture wars really do trump economic issues. This article in The Guardian from the distinguished sociologist Richard Sennett is an intriguing answer to why the culture wars card can still be played.