“Increasingly it seems, a central lesson of the current global economic crisis is that the giants of the financial industry regard the state as a corporate subsidiary. The prima facie evidence seems overwhelming, from bailouts to austerity plans, that democracy is under assault from the banks.”
freedom: twelve new pair of blue jeans
democracy: pulling levers in the dark
constitution: holy scripture
god: the banks
I wrote the above ‘definitions’ as part of a ‘lexicon for a dying democracy,’ a series of terms I tried to define in political-cultural context, avoiding idealized or abstract definitions. While I wrote these terms in 1981 – the first year of the conservative, neoliberal revival under Ronald Reagan – I think they remain politically and culturally relevant to the current global economic crisis as well. In highly developed countries, for example, consumerism eclipsed citizenship decades ago. Meanwhile, the corporate class has been buying democracy for more than a century. The average consumer votes but he or she hardly knows more than the names of the candidates. For their part, the major candidates typically tender ambiguity, obfuscation, fear, accusation and quiet retraction to voters in the United States. Meanwhile, the biggest banks finance a continuous tsunami of propaganda, facilitating corporate investment, sales agenda and tepid regulation. Voters and potential voters, not generally sophisticated enough to de-mystify the sophistry of politics and state policy, are de-politicized in the muddle of false promises, half-truths and less than salutary governance.
In the wake of the global recession, the largest financial institutions are again banking on the common citizens to strengthen their reserves at a time when investment in private markets is much riskier. More specifically, the banking industry is relying on the public purse, on state-imposed austerity measures to ensure their own bottom lines. The global economic crisis is rooted in banking-corporate strategies that have manipulated private markets while lobbying for lax state regulation. Through the adoption of revolutionary innovations in electronic computing and communications, the financial industry crafted a new language and arcane, deceptive investment instruments to inveigle private individuals and public institutions into bogus loans and dubious stock deals. Ephemeral assets and economic growth were often manufactured out of thin air. The real estate boom was artificially protracted in this manner. Since corporate or personal assets do not need to cover risks – at least not in the light of lax regulation – the speculative frenzy lasted a decade. When the house of cards imploded and the great banks’ fantasies turned to real losses… well, that’s when governments rescued financial institutions to avoid a financial meltdown. Banks apparently operated beyond the pale of law, betting, as they have for decades, on the ability of governments to compel their ‘citizens’ to shoulder the burden of debt.
It’s called austerity, also known in IMF (International Monetary Fund) parlance as structural adjustment. It’s been the banks’ ‘solution’ ever since the 1982 ‘debt crisis’ when the Mexican government owed approximately $80 billion to international banks. From the perspective of Wall Street and the U.S. government the urgency was palpable in 1982 and required state intervention to protect financial markets. Mexico’s $80 billion debt, for example, constituted 44 percent of the combined capital of the nine largest banks in the United States (Cline).  Worse yet, the very next year the debt crisis escalated as many more ‘less developed countries’ teetered on defaulting. In that year (1983) loans by the eight largest American banks to just four Latin American nations – Brazil, Argentina, Venezuela and Mexico – equaled 147 percent of the banks’ total capital and reserves.  Though financial speculation and the finance industry’s overexposure were the direct sources of sovereign debt instability, often blame, and always responsibility, are placed squarely at the feet of ordinary citizens. In 1982 the debt burden fell hardest on the poorest Mexicans.
Contracting state social spending, if not the goal of austerity politics, is certainly one of the results of the measures imposed. When state-funded social programs are cut, moreover, the poor are most affected. Public employment, education and social protections are vulnerable budgetary lines. Thus those with the least means and political power, those already facing the hardships of poverty, encounter less opportunity to escape from their marginalized status. The future of society, its very productive potential, is also significantly compromised as national literacy stagnates and public health declines. The economic and cultural gap between rich and poor classes becomes a moral as well as political issue, fraught with unethical corporate business practices and popular anger, frustration, militancy and disaffection. In countries across all regions of the world, but especially in the poorest countries in Africa, South and Southeast Asia and Central America, state violence, anti-state violence and criminal violence erupt. In the worst cases, society becomes virtually ungovernable and states fail.
The following observations illustrate how structural adjustment (i.e. austerity measures) affected poor societies beginning in the 1980s, compromising the lives of untold millions. These observations further suggest how this economic strategy undermines the vitality of the global economy in the long run.
The debt crisis has a self-reinforcing dynamic. Money that could have been used to build schools or hospitals in developing countries is now going to the advanced industrialized countries. As a consequence, fewer babies will survive their first year; those that do will have fewer opportunities to reach their intellectual potential. To raise foreign exchange, developing countries are forced to sell more of their resources at reduced rates, thereby depleting nonrenewable resources for use by future generations. Capital that could have been used to build factories and provide jobs is now sent abroad; as a result, the problems of unemployment and underemployment will only get worse in poor countries. 
The above description also implies something less obvious but nevertheless condemning of the austerity strategy and, more generally, liberal economics. It suggests that poor countries’ general indebtedness to transnational banks (private and public) helped open opportunities for transnational corporations to invest in an army of ‘third world’ unemployed and underemployed workers at low wages and with very limited taxes. Just as the 1973 oil crisis with its doubling of the price of oil contributed much to the indebtedness of impoverished states in the first place, the 1980s’ debt crisis helped establish the economic and political conditions ripe for moving substantial capital from relatively high-wage societies into low-wage states over the succeeding three decades.
By design, then, the structural adjustment/austerity plans ‘liberalized’ the states and the economies of indebted poor countries. In spite of, or possibly because of the debt crisis, the global economy grew quite impressively during the 1980s, adding $13 trillion to the gross world product – a 50 percent increase. Two other historic developments in the last decade of the 20th century summarily cleared away political obstacles to even further global financial integration: the disintegration of the Soviet bloc and the subsequent liberalization of trade (free trade agreements). A swiftly liberalizing global economy, fueled by advances in electronic communication and computing, was a combustible mixture. In the 1990s the global economy grew by another $13 trillion. Between 2000 and 2008 the global economy expanded even more rapidly, adding another $20 trillion. Altogether, the global economy grew 270 percent between 1980 ($27.19 trillion gross world product) and 2008 ($73.69 trillion gross world product).  Aggressive economic behavior, expanding stock markets and gross financial speculation were significant parts of this torrid economic climate. But, as is abundantly clear today, economic growth alone does not guarantee long-term stability. By 2009, the global economy contracted by a half-trillion dollars, precipitated by the dramatic financial collapse on Wall Street in September 2008.
The ruination of a few financial institutions on Wall Street is a genuine economic seismic event but it is hardly the lesson or lessons to be drawn from this period of liberalized business. While only partial analyses of the 2008 financial collapse are possible at this point, the collapse cannot be understood outside of the global financial history of the last half-century when, throughout much of the world, classic laissez-faire liberalism undermined any semblance of social contract between states and their citizens. Increasingly, it seems, a central lesson of the current global economic crisis is that the giants of the financial industry regard the state as a corporate subsidiary. The prima facie evidence seems overwhelming, from bailouts to austerity plans, that democracy is under assault from the banks.
Nowhere does the evidence of an erosion of democracy seem more compelling than in the records of the U.S. Federal Reserve, the central bank of the Wall Street financial institutions, at the very heart of the global economy. In a 2011 publication of a GAO (Government Accounting Office) audit of the U.S. Federal Reserve and, additionally, through records released in a Freedom of Information Act filing, tens of thousands of pages revealed that the Fed lent at least $16 trillion at very favorable interest rates (as low as .01%) to international corporations and banks beginning in 2008.  These records were kept secret from the public; apparently neither the Fed nor Wall Street insiders wanted the public to know. Moreover, the popular press, typically acquiescing to Fed decisions, takes little interest in the $13 billion income Wall Street’s biggest banks reaped from obtaining lower-than-market interest rates from the Fed.  But the most staggering, revelatory fact is that the U.S. Fed and Treasury Department actually encouraged the nation’s six largest banks to concentrate their control of the financial industry through facilitating and simplifying major takeovers, thereby assuring that the banking industry will have even greater influence over government economic policy into the foreseeable future.
Near the close of the 2008 election year, Bank of America took over Merrill Lynch after acquiring Countrywide Financial, the nation’s largest home mortgage lender. By the end of September 2008, the Fed had lent the two financial giants $85 billion to grease the wheels of the deal. Wells Fargo bought Wachovia, the nation’s fourth largest bank in terms of deposits at the time, but this acquisition was only consummated after the Fed secretly pumped $50 billion into Wachovia. JP Morgan acquired Investment bank Bear Stearns and Washington Mutual, the nation’s largest savings and loan firm. In the case of Bear Stearns the Fed backed up an announced $29 billion loan from the New York Fed branch with a secret $30 billion to keep Bear Stearns afloat long enough for JP Morgan to complete the takeover. In all, the assets of the six largest banks in the U.S. were 39 percent greater in September 2011 than they were in September 2006,  a period in which the median net worth of Americans fell by 40% and the average household income declined from $49,600 to $45,800.  The threat to democracy of such concentrated power in the hands of the very industry responsible for much of Americans’ net worth loss is more than palpable. That banking industry author and former economist at the New York Federal Reserve, David Jones, issued a mild implicit warning concerning the secret loans from the central bank of the United States, suggests how much access and influence the banking industry has in shifting the burden of its debt onto the American public: ‘The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy…Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.’ 
To recap the main elements of the banking industry’s austerity strategy, the biggest financial firms rely on governments for massive historic bailouts and, in turn, impose severe cuts in state social expenditures to ensure payment of the ‘public indebtedness’ to the banks as the latter use unprecedented public treasury support to expand their control over the financial industry and the state itself. The U.S. government justifies this massive assault on democratic governance simply by its ‘too big to fail’ mantra. Either way the public pays. This reality illuminates the power the banks and the Fed possess over the state to set wide-ranging policy. Yet states defer to banks despite the trillions paid in bailouts, the billions lost in interest that might have accrued to the states if the bailout loans were set at even a modest interest rate, and, in Europe, the relative pittance of approximately a single trillion dollars in European central bank reserves for government rescues of European Union states, reserves that states significantly contributed to from public treasuries in the first place and that are issued only when states impose the financial community’s austerity demands on their citizens.
In a highly liberalized economic environment greed becomes almost a normative value. In business, especially in the financial industry, it is considered natural, even desirable. Greed is reflected in Wall Street’s lucrative bonuses and benefits. Corruption, too, becomes expected and apparently tolerated, if not literally encouraged. At the same time, mass media inculcates an ethos of consumerism. Electronic media facilitate more extensive exploitation of global resources, greater connectivity, increased exchange of goods and services, international worker migration and hyper-consumptive values. In recent decades greater mobility of capital forged commodity chains that connected cheap labor to relatively affluent retail markets. Consumerism was most pronounced in the large developed markets where escalating real estate prices increased the net worth of even modest consumers, enabling access to more credit and higher levels of consumption and personal debt. Here the state, at least in the case of the United States, reinforced the trends. President George W. Bush, for example, in a speech in Atlanta, Georgia in 2002 extolled the virtues of an ownership society, exhorting public and private credit institutions to make more home loans available to Americans. 
When the speculative financing and the broadly-held debt nearly shattered the economies of the western states, its financial institutions tended toward conservative positions, manifested in the hoarding of capital transferred from public treasuries to free up credit in the United States and also by the austerity imposed on European states by a coalition of the region’s wealthier states allied with the European Central Bank. As already pointed out, a broad swath of average Americans have suffered losses in net worth; and average Europeans protest the loss of basic social services and vital pensions that preoccupation with debt management instead of the more profound economic crisis inevitably engenders.
Yet this is not the full story. It is imperative to recognize that these financial crises will not go away. They result from the state central banks and the broader financial industry’s efforts to prop up an international market system that is increasingly driven by short-term bets or speculation, simply the movement of stocks like chits on a gaming table in a grand casino. Neoliberal economists argue that speculation and derivatives bring much needed liquidity into the global marketplace, making capital available for investment. ‘Futures’ buying – a standard practice in commodities markets – illustrates the problem with this argument. Investors bet on the price of future contracts for commodities, contracting to buy at a specific date those commodities at a set price. Each investor hopes to get commodities cheap, or, if an investor later fears that the price will be too dear at the contracted date, it may dump the commodities before the contract is due. In this instance dumping the stock minimizes potential losses. In the 21st century this behavior has become so rampant that the value of stocks across the markets is subject to complicated, suspect bets. The average investor rarely knows what constitutes the actual investment. Additionally, the stability of the global economy is increasingly compromised as speculators control more and more commodities without any interest in the products other than simply making money on their potential existence and price from one moment to the next. Eventually, if the global economy continues to evolve in this direction, then more and more producers and processors of commodities would be, in effect if not actually, integrated into the financial industry.
History indeed suggests that organizers of capital (i.e. companies and banks) tend toward consolidation. Concentrated industries and markets subsequently lead to artificially high prices, established not to achieve broader social or ecological goals but simply to aggrandize private or personal wealth. John Connor, economics professor at Purdue University, and Ph.D. candidate Yuliya Bolotova, also of Perdue University, looked at the behavior of corporations in industries or markets controlled by a few corporate giants. They conducted a meta-analysis of 395 instances of cartel overcharges cited in records from the 18th century to 2004. The research found that the average overcharge by cartels during the period studied was 28.88 percent.  The outline of such behavior is clearly reflected today in the array of public suits in U.S. courts currently faced by J.P. Morgan Chase, Citigroup, Bank of America, US Bancorp and nine other of the nation’s largest banks. The objective of these cases is to recover tens of billions, if not hundreds of billions, that the financial services industry allegedly overcharged customers for services from 2004 to the present.  According to J.P. Morgan, the ‘Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.’  Combined with civil damages, the collective vulnerability of the banks for overcharges on fees for consumer credit card usage over eight years and counting may be quite astronomical. A Deutsch Bank analyst recently estimated that the financial giants could be responsible for as much as $200 billion in overcharges .
Malfeasance of various kinds in the financial industry appears rife indeed. Barclays’ recent agreement to pay $450 million to settle accusations that it manipulated rates to bolster its financial profile could make it easier for investigators to move against other industry giants for similar activities, including J.P. Morgan Chase, Citigroup, HSBC and a host of other prominent financial firms. In this instance, the banks stand accused or suspected of literally gaming the system by submitting fraudulent interest rates to the London interbank rate system used to set the lending rates to corporations and consumers.  As the economic recession seriously dampened the income and purchases of the majority in most of the highly developed parts of the world, especially in 2008 and 2009, the largest banks proffered such schemes apparently to benefit their derivatives trading to lift profits artificially. Such malfeasance, if true, gave the banks clear advantages. Misinformed investors and regulators could be thus persuaded that a bank’s financial status is sounder than it actually is. A better profile would presumably help the bank avoid stronger regulatory intervention as well. At least nine agencies, however, including the Justice Department and regulators in Britain and Japan, are involved in investigating these practices and they are now expected to broaden their inquiry. Already U.S. regulators have issued subpoenas to Bank of America, UBS and Citigroup, among others, to determine how rates are established. 
Still, these investigations, settlements and agreements neither identify nor address the systemic economic and political crisis threatening global civil societies. In themselves, fines and regulations do not address the reasons for widespread criminal business behavior. As liberal economists and their political allies often do, these investigations and arranged decisions project white-collar crimes as aberrations, as deviations from the norm of market behavior. The default strategy often places the responsibility for the questionable financial activities on state regulation. To limit the damage from pending civil suits, Barclays is preparing to blame Britain’s bank regulators (Financial Service Authority of Britain) for encouraging it to ‘lowball’ the rates it submitted to Libor (London Interbank Offered Rate), the national banking agency that sets the benchmark for interest rates around the world.  However it may be projected in the media and courts, the fact remains that the present global recession resulted from ordinary investors, traders, advertisers, analysts and bankers applying their business knowledge, skills and access to technology and information to maximize profits, to accumulate personal wealth from astute but often fraudulent manipulation of market conditions.
The growth of the so-called ‘shadow banking system’ (SBS) in recent decades is the clearest indication that the largest, most avaricious financial firms through illicit investment and accounting strategies have aggressively manipulated markets, investors and regulators. Operating beyond the sanction of the state and its regulatory agencies, the shadow banking system is the financial entities, infrastructure and practices that support financial transactions of investment banks. While investment banks regularly conduct business through this system, most are not SBS institutions themselves. The elements of the SBS are regularly mentioned in the daily media but little understood by the public. Hedge funds, money market mutual funds and structured investment vehicles are primary examples of financial entities that permit investment banks to elude government regulators and dupe unsuspecting investors. In the decade leading to the financial crisis, home mortgages were financed through securitization (bundling of high-risk mortgages with low-risk ones, for instance) and the risk involved was hedged or insured through credit default swaps (such as those Goldman Sachs bought from AIG before the financial crash of 2008). These transactions do not show up on conventional balance sheets and are therefore not available to regulators or other monitors. While it is difficult to assess the size of the SBS, some economists estimate it to be a quarter or more of the world financial system, about half the size of the traditional banking system. It’s ‘rapid growth in the years 2002 to 2007 has been seen as a key source of the 2008 crisis…[and]…Regulators feel it remains a major threat to long term stability….’  Moreover, derivatives, or asset-backed commercial instruments, were the very elements of the shadow banking system that generated the tremendous liquidity of the speculative boom that collapsed in 2008, largely because derivatives were virtually unregulated and many of them extremely risky if not actually ‘toxic.’
Appropriately addressing the bourgeoning economic crisis requires developing a new social paradigm, one in which democratic ideals, economic equity, and ecological sustainability inform economic development. Examination of the global economy’s corrupted financial evolution provides insight to developing fresh economic thinking. New voices must be heard in various political forums, advancing critique of the present system of global economy, identifying promising alternatives, and developing a broader, more humane vision of what is possible. Of course in determining the necessary reforms historical and political critique is essential.
Over the last two centuries the phenomenal wealth generated by capitalist interests has facilitated dynamic institutional organization: an international division of labor, transnational corporations and institutions, commercially-supportive states, private transnational stock exchanges, and a host of other institutions, including constitutions, policing agencies and military forces, that provide as much order, security and stability to the capitalist regime as possible. Interestingly, though not often acknowledged in mainstream politics, notably in the United States, social progress in the last two centuries has come at very high cost. Literally millions of human beings have sacrificed their lives to limit capitalist aggression and establish broader social guarantees: higher wages, better living and working conditions, social security, social welfare, universal education, public health care, political asylum, demilitarization, peace, etc.
Historically, the liberal state and private commercial interests have been converging, albeit in fits and starts. Over time the finance industry increasingly benefitted from the conjunction of public policy and investment opportunities. Being in the pivotal position of financier to public and private enterprises, the industry has also assumed the mantle of authority in the realm of economic affairs. In the United States many presidential appointees in key economic positions are drawn from Wall Street. This may help to explain why the financial industry often escapes accountability for ethical corruption and transgressions of the law, even when it leads to sudden economic meltdown as occurred in 2008. Clearly, too much deference is paid to the sultans of finance. J.P. Morgan Chase’s recent report of the billions it lost on ‘bad bets,’ for example, did not provoke broad anger and protest despite the fact that such practices by major financial institutions ignited the global recession of 2008. 
It is instructive to see how deeply capitalist values permeate governing institutions, how profoundly the former’s imprimatur is stamped into governance in liberal states. In the United States, a 2010 Supreme Court decision illustrates the point. In Citizens United v. Federal Elections Commission, the Supreme Court relied on the time-honored American acknowledgement of corporations as individuals, enjoying all the privileges and protections of the Constitution, to give its blessing to unlimited corporate giving to so-called super-Pacs. This decision has resulted in an extraordinary flood of corporate money into the 2012 presidential election campaign, dollars used to distort candidates and issues largely in favor of less government involvement in the marketplace. Again, when the recent Frank-Dodd bill – a relatively mild tightening of regulation of finance practices – was likely to pass in Congress, the financial industry turned its efforts to the federal regulators, initiating an aggressive lobbying campaign of the very government departments that would eventually be charged with enforcing the new regulations.
Returning to the significance of 1982, naturally the U.S. government came to the transnational banks’ rescue. The IMF compelled the Mexican government to cut social spending and privatize public corporations charged with providing essential services to the Mexican population. This scenario seems very familiar in retrospect. In the case of Mexico in 1982, U.S. taxpayers provided the money to secure Mexico’s international creditors by cycling it through the Mexican state treasury to pay back the transnational banks. In the long run, though, the Mexican public was saddled with a government whose domestic social spending and general fiscal policy were, in effect, largely arrogated to the IMF and the international banks it represents. Thirty years ago, then, Mexico’s debt crisis revealed that speculative investment was de rigueur for giant financial institutions and that bankers already counted on the public to rescue them when the speculation threatened the assets they had ‘waged’ in anticipation of big payoffs for risky investments. That the U.S. government was pliable to the interests of the financial industry as early as 1982 confirmed the international financial industry’s confidence in the strategy. While the particular circumstances of the 1982 and 2008 crises differ in their details, their causes appear to be largely the same – aggressive financial speculation and industry overexposure.
Most Mexicans, though, hardly benefitted from the bankers’ austerity plan. By the 1990s and the disintegration of the Soviet Union, the neoliberal financial putsch (Washington Consensus) conferred greater authority to the austerity strategy. Mexico entered a new liberalized North American market through the North American Free Trade Agreement (NAFTA) on January 1, 1994. If austerity led to economic growth through liberalized investment and trade, however, it certainly did not improve Mexico’s fundamental economic character in the subsequent two decades. While ‘the currency and debt crises of the 1980s and 1990s have given way to fiscal stability and steady growth’ in Mexico, according to a New York Times report on July 1, 2012, the gap between the rich and poor has widened with 57 percent of the Mexican labor force earning less than $13.50 a day.  Living standards for the majority have stagnated or declined but those with personal investment in and professional connections to global trade have seen their fortunes improve. With little regulation, Mexico’s small businesses suffered from cheaper imports and its informal economic sector – a third of Mexico’s economy on which a majority of Mexicans depend – was significantly damaged. With the financial crisis, Mexico’s modest economic growth even slipped backward as its national economy contracted 6.1 percent in 2009.  Reeling from widespread corruption, a persistent crime wave and an intractable drug war, the Mexican state and society today are clearly less stable and secure than they were in 1982.
As developed countries now endure similar transnational finance strictures to manage their indebtedness, they can expect a very slow recovery indeed. States are pushed to reduce social benefits and protections and banks are reluctant to loosen credit until regulatory issues and sovereign debt are managed to their favor. Note, too, that the general historical flow of wealth from poor regions to wealthier regions is now more sharply mirrored in the widening gap between the rich and poor classes in virtually every nation in the capitalist world, raising class anxiety even in the United States as its 2012 presidential elections unfold. Thus the states’ fixation on managing indebtedness is being unmasked as a strategy that benefits the financiers and their political allies in government. Yet even in the limpid political environment of the United States the austerity strategy is vulnerable to challenge and direct repudiation.
In contrast to the United States, however, European popular response to state cutbacks and austerity in general has been more forceful. Of course, much of European political life has a significantly broader range of views represented at local and national levels. Broad political and intellectual space, in turn, breathes vitality into the region’s polities, encourages critique and popular engagement in political processes from street demonstrations to elections. In Greece, for example, popular protests and militancy, as well as a strong anti-austerity left movement, have directly challenged the austerity demands of the IMF, the European Central Bank and, in particular, Germany. In part because of the benefits and protections they have gained from the state and their nation’s participation in the European Union, Greeks citizens perceive austerity measures as aggressive challenges not only to their living standards but to their citizenship as well. Thus, for the first time, austerity threatens the very existence of the eurozone and the stability of the European Union, the world’s most highly developed supranational organization.
In early May, rejection of austerity was a major factor in the defeat of former French president Nicolas Sarkozy, a staunch defender of austerity and an ally of German Chancellor Angela Merkel, the most insistent proponent of austerity measures. When the newly-elected socialist president of France, Francois Hollande, broached renegotiation of the terms of the European Union’s constitution, it signaled a strengthening of the political challenge to austerity. As in Greece, when Spain, under pressure from the European Union’s parliament, in mid-July announced cuts of another $80 billion from public spending, thousands demonstrated in Madrid, protests that turned to violent confrontation with riot police.  Meanwhile, as anti-austerity forces ousted Sarkozy and stirred fears of a leftist, anti-bailout movement taking power in Greece, Chancellor Merkel’s party suffered defeats in provincial elections.  With these dramatic political developments in Greece and France and a center-left, anti-austerity coalition in Germany challenging Merkel’s leadership, the politics of anti-austerity is gaining ground.
No one knows for sure which way the political winds will ultimately blow. Conservative nationalists contended with leftists to don the leadership mantel and reverse austerity measures in Greece. For now, it seems that Greeks support a more centrist approach with 42 percent of the votes in the June election going to moderate pro-bailout parties and 27 percent to the anti-bailout Syriza party. While the support for the leftist Syriza party remains strong, the austerity measures accompanying the European Union bailout of Greece have also awakened more xenophobic nationalist forces behind the far-right extremist party Golden Dawn, which received 7 percent of the recent vote.  Hopefully, the European Central Bank and the European Union will relent before neo-fascism gains real momentum. Already as the average European feels the weight of debt on his or her shoulders, many are – and more may soon – blame it on foreign workers instead of a market system that depends on ever-growing consumption pushed and financed by reckless international banking.
Banking on austerity is a direct assault on democracy, a derogation of the public trust in favor of a kind of ‘too big to fail’ financial oligarchy. The financial industry, already quite flush with cash and more concentrated economically than ever in recent history, seeks to extend its political sway over states, to guarantee its earnings and privileges. Through aggressive lobbying to undermine democratic efforts at reform and through campaign contributions, the industry works to maintain its untrammeled position in the global economy. Moreover, the industry counts on deeply embedded capitalist values and its historical authority in economic affairs to keep its power. ‘Trickle down’ and ‘supply-side’ economics, despite arguments to the contrary, are still very much alive. Virtually every economic policy initiative, at least in the U.S., is a top-down strategy aimed at inducing investment to restore the economy’s reputed ‘fundamentals’: increased home construction, greater employment, higher savings rates, and consumer confidence. But these putative improvements will hardly address the moral corrosion and economic contradictions built into the global economy. The logic of capitalist thinking dangerously twists reality. Its proponents contend, despite substantial scholarly evidence to the contrary, that stimulating greater exploitation of people and nature ultimately brings broader public welfare and greater public security not greater concentration of wealth and severe existential crises.
In light of the overwhelming scientific evidence of global warming and the recent Wall Street meltdown, it is quite apparent that unchecked economic growth for the sake of private profit imperils the entire global community of nations. It breeds corruption and buries structural financial imbalances, egregious social inequities, and impending ecological disaster beneath a flurry of anachronistic thinking and spurious economic models. As difficult as it may seem to rein in the power of the financial industry, one immediate step toward a more equitable, more stable global economy is broad and vigilant financial regulation. While it is only the first step in a transition from an economy based on unregulated investment/profit and nonrenewable resources to one based on careful consideration of the social and ecological ramifications of investment and policy, it is an important one nevertheless. Intervening in the marketplace to achieve greater social and ecological goals is what the idea of representative government implies in today’s circumstances. Rejection of austerity is rejection of the classic liberal principle that governments should stay out of the marketplace, thereby reinvesting in government the right to intervene in the economy to advance the welfare of its citizens.
A new, more global paradigm is needed to probe the potential of public policy to lead the world’s nations toward a sustainable future. Part of this new paradigm will emerge when states begin to bring into economic analyses and calculation their total capital assets, their total potential for investment in public welfare and greener technologies and industries. Thus new light can be shed on the specious strategies of debt management and austerity planning. Compared to the value of total U.S. assets, for example, the national debt pales in significance. It constitutes as little as 12 percent of the estimated $188 trillion  total assets of the United States. While the total liabilities against that capital base appears daunting at approximately $57 trillion, according to the Federal Reserve’s June 2012 report , a huge capital base remains free of debt, a base that imaginative, publicly-minded policy-making could use to retool and retrain people. Broadening public policy debates to include the significance of total national assets illuminates fresh ways to mobilize economies in green directions. By comparison, the inherent shortsightedness of fiscal planning related to debt is evident. This new approach to fiscal policy allows room for considering the essential question with which any democracy must contend: how does a government manage society’s total assets – public and private – to transform the economy to the benefit of all the people?
The new strategy must introduce and highlight concepts of social good, social capital and environmental costs. An educated public is more likely to err in the direction of social good than private gain, especially if the former offers greater stability and security for the populace and its families. As an example of a workable initiative, the state could propose to partner with private energy corporations, combine their capital, and use their enhanced position to shift into greener sources of energy, assuming the financial incentives the state provides improve the social good, the general quality of life. In turn, corporations would be compelled to participate in green technologies if regulations were written in such a way as to generate more private gain than might be possible under more heavily taxed investments in nonrenewable energy resources. Such possibilities are only credible if broad macroeconomic planning in the interest of society as a whole is undertaken and all the conventional economic ‘externalities’ in social and ecological costs are factored into the actual cost of doing business.
Despite rabid resistance such new thinking would undoubtedly arouse, the fact remains that banks follow money. If public fiscal and monetary policy – carefully calibrated and supported by popular education through mass media – directs major investments into industries that produce social and ecological benefits, it can induce private investment in those same projects. As recent history continuously demonstrates, the financial industry is deeply dependent on the public treasury and the state, so much so that it strives to control the state. Progressive economic policy would make investment available at the local community level, encouraging, even favoring, local lending institutions and local industry. This could effectively reduce the giant banks’ influence over national policy as the government assumes greater responsibility for directing investment, establishing investment parameters, and stimulating democratic participation in the implementation of actual grassroots redevelopment. When the money is in the hands of the people, the banks will invest in servicing the public. In planning a greener, fairer economy, the public must understand this from the outset. If green technology is where the money is, if higher wage structures ensure better returns on investment, if social and ecological considerations reinforce their bottom lines, then financial institutions will most certainly follow those directions.
The challenge is twofold: first, the construction of macroeconomic plans – national and global in scope – to ensure that social assets and environmental liabilities are weighty factors in economic analysis, clearly articulated and carefully tracked; and educating the public through mass media of the advantages gained through enlightened public investment and strict regulation of the private sphere of investment. Though this strategy seems impractical, perhaps even impossible to most, and extremely threatening to a recalcitrant elite, the essential politics of it drives the current deep resistance to austerity in much of Europe. Even the broad disaffection in American politics offers significant staging ground for new thinking. At the same time, Sweden and other Scandinavian countries whose popular participation in the economy and whose social protections are the most mature in Europe, though certainly affected by the global recession, fared relatively better than most highly developed societies. In the midst of today’s grave global crises, moreover, the clearest, most articulated vision often gains political ground.
Despite dazzling technological and broader material progress, the assumptions that have driven the global economy are no longer appropriate to contemporary social and environmental conditions. Indeed, as argued throughout this essay, the blind application of these principles and the evolution of institutions and practices to preserve them are at the heart of the present financial crisis. Classical and neoliberal economists may see its remedy in purely technical, instrumental terms, but it is in fact a crisis of confidence in the future of the capitalist system, well beyond conventional technical solutions. Individual and corporate investors count on the financial industry to restore confidence in markets, to pare down public services funded by tax dollars and free up capital and markets for renewed private investment. In the meantime, corporations build up cash reserves to weather economic downturns and prepare for a new round of profitable investments and acquisitions. Ordinary citizens, many of them compliant, though often unwitting, accomplices in overconsumption and debt accumulation, are left with only debt. If austerity prevails, moreover, representative government will sacrifice even more of its policy-making to private concerns and the world will move inexorably toward ‘incorporated states’ indebted to and sanctioned by transnational corporations, even less prepared for succeeding and worsening crises that the system engenders.
Those who understand that the system must be reformed according to the needs of people and the natural environment must prepare the ground for new thinking and policy-making. At the same time, new political agencies to challenge the older economic regime with its powerful private and public institutions must be supported. Perhaps the Greeks behind a strident leftist participation in government can initiate a deeper discussion on the austerity strategy and fuel broader counter-austerity movements. Perhaps France may help. Maybe Spain’s financial crisis, or Italy’s, will bring greater urgency to the struggle against austerity. Meanwhile, individual citizens in their daily capacities can adopt greater principled stands, challenging, even undermining institutions and practices that are politically and morally corrupted. Teachers and professors – this author among them – must introduce ideas and develop curricula that highlight and examine the primary contradictions in capitalism and collectively consider what other visions of society are possible. Even if the present economic system is able to achieve periods of stability, even economic growth, it is its logic – the very values and norms of capitalism – that must be held up to the light of history and science. Humanity is at a historic crossroads, one of those intellectually and politically fertile but critically dangerous historical junctures when one regime of economy must give way to another. The broader the public debates range and the deeper the public commitment to social justice and sustainable economies, the more likely the transition will mature sooner than later. Ultimately, only humane vision elicits hope, innovation and popular commitment to a democratic and sustainable global society.
1. William R. Cline, ‘Mexico’s Crisis, The World’s Peril,’ Foreign Policy, Winter 1982-83, 107.
2. Federal Financial Institutions Examination Council (FFIEC), Country Exposure Report, December, 1982; and FDIC, Reports of Condition and Income, December 31, 1982, cited in George Hanc, ed., History of the Eighties – Lessons for the Future, Volume 1 (Timothy Curry, 1997), Chapter 5, 191.
3. Vincent Ferraro and Melissa Rosser, ‘Global Debt and Third World Development,’ in Michael Klare and Daniel Thomas, eds., World Security and Challenges for a New Century (New York: St. Martin’s Press, 1994), 332-355.
4. The Conference Board, 2010, reproduced in Lester R. Brown, World on the Edge: How to Prevent Environmental and Economic Collapse (New York: W.W. Norton and Company, 2010).
5. Tracey Greenstein, ‘The Fed’s $16 Trillion Bailouts Under-reported,’ Forbes, September 20, 2011.
6. Bob Ivry, Bradley Keoun and Phil Kuntz, ‘Secret Fed Loans Gave Banks $13 Billion Undisclosed To Congress,’ Bloomberg Markets Magazine, November 27, 2011.
7. Ivry, et al., ‘Secret Fed Loans’.
8. Binyamin Appelbaum, ‘Family Net Worth Drops to Level of Early ’90s, Fed Says,’ The New York Times, June 11, 2012.
9. Ivry, ‘Secret Fed Loans’.
10. Jo Becker, Cheryl Gay Stolberg and Stephen Labaton, ‘Bush drive for home ownership fueled housing bubble,’ The New York Times, December 21, 2008.
11. John M. Connor and Yuliya Bolotova, ‘Cartel Overcharges: Survey and Meta-Analysis,’ draft of paper presented at the University of Amsterdam, March 10, 2005.
12. Dan Freed, ‘Bank of America, Citigroup Face Billions in Losses in Antitrust Case (Update 1),’ TheStreet.com, January 12, 2012.
13. Felix Salmon, ‘Will US courts take aim at credit-card interchange?’, Reuters, January 12, 2012.
14. Freed, ‘Bank of America’.
15. Ben Protess and Mark Scott, ‘A Victory for Regulators – Barclays Settles Claims That It Tried to Manipulate Rates,’ The New York Times, June 28, 2012, Section B, 1.
16. Protess and Scott, ‘A Victory for Regulators’, Section B, 5.
17. Protess and Scott, ‘Bank Scandal Turns Spotlight To Regulators,’ The New York Times, 1 and B6.
18. Brooke Masters, ‘Shadow Banking surpasses pre-crisis level,’ The Financial Times, October 27, 2011.
19. Jessica Silver-Greenberg and Peter Eavis, ‘JPMorgan Discloses $2 Billion in Trading Losses,’ The New York Times, May 10, 2012.
20. Mimi Marziani, ‘Money in Politics After Citizens United: Troubling Trends and Possible Solutions,’ Brennan Center for Justice, New York University School of Law, April 18, 2012.
21. Damien Cave, ‘Pocketbook Issues Weigh Heavily as Mexicans Cast Their Ballots,’ The New York Times, July 1, 2012, 1 & 8.
22. Cave, ‘Pocketbook Issues’, 8.
23. Ciaran Giles and Daniel Woolls, ‘Spain Imposes More Austerity Amid Protests,’ ABC News, July 11, 2012.
24. Frederik Pleitgen, ‘ Merkel’s party takes a loss in German state vote,’ CNN, May 13, 2012.
25. Demetris Nella and Elena Becatoros, ‘Greek Election Results: New Democracy Wins,’ Huff Post World, June 17, 2012.
26. John Rutledge, ‘Total Assets of the U.S. Economy $188 Trillion, 13.4XGDP,’ Rutledge Capital.
27. Federal Reserve, ‘Flow of Funds Accounts of the United States – Flows and Outstandings First Quarter 2012,’ June 7, 2012.
John Ripton is History Chairperson at Gill St. Bernard's School in Gladstone, NJ and adjunct professor at Rutgers University. He participated in meetings with Israelis and Palestinians in Israel in June 2007. He writes for journals, magazines and newspapers on international affairs. He can be reached at: email@example.com