January 26, 2011
The US as a destabilizing threat to the transglobal oligarchy
(For previous posts about the oligarchy, see here.)
The main threat to the transglobal oligarchy does not come from those countries that we normally think of as being unstable but from the US, because of the rapacity of the financial sector of the US economy that, like a swarm of locusts, is consuming everything in sight in satiating its greed, leaving the rest of the economy and the country bare. And their enablers are both the Republican and Democratic parties.
Simon Johnson, the former chief economist with the IMF, in an article (that I referred to before in my 2009 series of posts on the American oligarchy) says that the financial sector has captured the US government and that the US shows a disturbing similarity to those countries that used to be derisively called banana republics. He says the recent financial crisis made visible to everyone the oligarchic control of government.
But there's a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a "buck stops somewhere else" sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.
But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits—such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.
The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry's ascent. Paul Volcker's monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.
Johnson argues that given this diagnosis of the problem, the prescription is straightforward: we need to get rid of the oligarchy, starting with breaking up all the 'too big to fail' banks and financial institutions that now dominate the US economy. But who will bell this particular cat? The government has, at least in theory, the power to do so. But the two major political parties are so beholden to the oligarchy and embedded with them that they are not going to take the initiative. Johnson seems to think that the necessary pressures to change will have to come from outside the system.
The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we'll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe's banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration's current budget are increasingly seen as unrealistic, and the rosy "stress scenario" that the U.S. Treasury is currently using to evaluate banks' balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated… If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.
Columnist and cartoonist Ted Rall says that the situation is already too far gone for any hope of orderly change within the current system and sees a collapse coming unless there is a political revolution.
The prospect of a global economic meltdown or an actual revolution is obviously not a cheery one. If the US economy nosedives, not only will it cause a lot of misery here, it will undoubtedly drag a lot of other nations down with it, at least in the short run, because of the deep interconnections in the world's economies.
Next: An alternative way forward?