Beyond Mainstream Explanations of this Recession: A Marxian Analysis


By Ismael Hossein-zadeh






Abstract: While it is now generally agreed that the main source of the 2008 financial implosion was the accumulation of too much toxic debt, there is little agreement on the factors that precipitated the build up of all that unsustainable debt. Whereas neoclassical/neoliberal economists blame the “irrational behavior of the agents” (both lenders and borrowers), Keynesian economists blame financial deregulation and insufficient public policy. Following the Marxian analysis of “finance capital,” as Rudolf Hilferding put it, this study looks beyond the incidental or instrumental roles played by agents or market players – whether lenders and borrowers or government regulatory agencies and institutions. Instead, it focuses on the built-in dynamics of the accumulation of “finance capital as self-expanding value” (Marx) that transcends the traditional constraints of the production/reproduction processes and fosters such “irrational” behavior of the agents or the corrupt and unsavory policies of the government.

I. MAINSTREAM EXPLANATIONS

Mainstream views of the 2008 financial meltdown that precipitated the current economic recession can be divided into two major traditions: neoclassical/neoliberal and Keynesian.

A. The Neoclassical Explanation

The neoclassical school of economic thought does not provide an explanation for major economic contractions of the magnitude of the current recession. Instead, it explains away such recessions by blaming them on external factors such as human nature, natural disasters, wars, revolutions, “supply shocks,” or government intervention. Barring such “exogenous” factors, the “self-adjusting power” of the market mechanism is said to be capable of fending off major financial instabilities and/or economic crises. The mechanism may not preclude “regular” business cycles, or small fluctuations, but such fluctuations are easily contained or regulated around a fundamentally smooth trajectory of economic growth (Shaikh 1978).

Not surprisingly, in the face of the financial meltdown that triggered the current crisis, the most frequently-expressed reaction of the economists of this persuasion has been: “We are shocked”! Why? Because this was not supposed to happen; market mechanism was not supposed to allow such cataclysmic disturbances. Unregulated “efficient capital markets,” where “rationally behaving agents know all the information about securities pricing,” were supposed to price securities or financial assets “correctly,” that is, according to the risks and rewards to the underlying real values. In other words, the sum total of fictitious capital was not supposed to deviate much from the sum total of real (productive/industrial) capital. This canonical faith in their theory of “efficient asset markets” blinded the neoclassical economists to the obvious ballooning of the fictitious capital that started in mid-2002 and reached a multiple of the industrial capital by mid-2008, when it finally burst.

True to their blind faith in market mechanism, neoclassical economists attribute the disastrous 2008 financial meltdown to the “irrational behavior of the financial players.” This sentiment was famously and enigmatically reflected in (the former head of the Fed) Alan Greenspan’s cryptic statement of “irrational exuberance” of financial markets.

Do the neoclassicals offer a solution to the cataclysmic 2008 financial meltdown and the resulting broader economic recession? They seem to be split on this question. The more faithful or consistent of these folks favor non-intervention, that is, allowing bankruptcies, liquidations, and “market cleansing.” The more cautious but less faithful of them, however, have basically kept quiet – implicitly favoring the scandalous bailout of the giant Wall Street gamblers without admitting or acknowledging their complicity.

B. The Keynesian Explanation

Contrary to the neoclassical economists who view major financial instabilites as unusual or exceptional occurrences, Keynesians view them as integral parts of relatively advanced market economies. Whereas the neoclassicals perceive financial instability as an expression of the agents’ “irrational” behavior, Keynesians see such financial volatilities as manifestations of rational agents’ inventiveness to take advantage of moneymaking opportunities to maximize their profits, or optimize their bets. There is nothing unusual, irrational, or abnormal to the dynamics of this market-driven behavior – and its logical outcome: financial instability.

A most rigorous analysis within the Keynesian tradition of financial instability of a mature market economy was carried out by the late Hyman Minsky (of the Washington University in St. Louis). Based on Minsky’s “financial fragility hypothesis” of relatively advanced capitalist economies, during expanding economic/financial cycles both lenders and borrowers tend to base their lending/borrowing decisions more on positive expectations of the upswing of the cycle than on realistic calculations of returns on investment against which they accumulate debt claims, or debt burdens. Under the “boom psychology” of such expanding cycles even the less secured and less competitive businesses embark on a borrowing binge in an effort to expand their market share. Partly due to this boom psychology, partly due to competitive pressure, banks and other financial institutions discard their hesitations to extend loans to less and less secured borrowers. Eventually as the expansionary cycle reaches its peak and a fall in sales and/or profits occurs, businesses in weaker financial positions fail to meet their payment commitments. The lenders then retreat from extending additional credit. The credit crunch that replaces the prior period of credit boom subsequently leads to a crisis of illiquidity and indebtedness (Minsky, 1978 and 1982).

Keynesian economists argue that instead of blaming the agents’ “irrational” behavior (as the neoclassicals do) for financial instability, and doing nothing about it, such behavior must be monitored, disciplined or guided through “appropriate” public policy. Financial instability is, therefore, to be blamed more on insufficient or inappropriate public policy than on the agents’ behavior. Properly managed or regulated, wild financial gyrations can be tempered into no more than small fluctuations.

A major flaw of the Keynesian tradition is that, in the face of financial instability, it advocates rescue plans for the bailing out of the financial institutions that caused the instability in the first place. Not only would this solution unfairly – indeed, perversely – reward the perpetrators, and nurture a culture of moral hazard but, perhaps more importantly, it would also pave the way for yet another, more severe, financial bubble. It is therefore safe to argue that not only does the radical view of nationalizing the major financial intermediaries make more sense than the Keynesian view of bailing them out, but also the neoclassical view of “market cleansing” or liquidation of the destabilizing financial gamblers is preferable to the Keynesian rescue prescription.

The market cleansing alternative will have at least four advantages over the bailing-out solution. For one thing, it will do away with the moral hazard problem. Second, it will allow the smaller financial agents and/or institutions that played by market rules to take advantage of the booty that would be made available by the liquidation of the failed speculators. Third, it will not burden the taxpayers with a mountain of debt. And fourth, it will shorten the pain of financial/economic turbulence, instead of turning it into a chronic depression for the overwhelming majority of the people.

In the absence of a revolutionary alternative, market cleansing consequences of a severe financial/economic crisis can serve as a temporary solution to the contradictory developments of a capitalist economy. But if, due to its political power, the powerful financial interests succeed in blocking such a market cleansing outcome of a severe crisis, the result would be protracted unemployment and chronic recession.

This criticism of the Keynesian rescue prescription is, of course, not new. Keynes’ critics, largely hailing from the neoclassical camp, pounced on this flaw in his view as soon as he promulgated it in response to the Great Depression of the 1930s. His clever, oft-repeated response was that “in the long-run we are all dead”; implying that his prescription was tantamount to a fire-fighting effort to quell the flames of the Depression, and that this was no time to worry about long-term considerations. In a similarly smart statement, Hyman Minsky has argued, “A financial crisis is not the time to teach markets a lesson by allowing a generalized debt deflation to ‘simplify’ the system” (as quoted in Wray 2008: 6). While both Keynes and Minsky’s responses are obviously clever and elegant, they are nonetheless less than convincing; indeed, they seem to be designed to rationalize their support for the unfair and costly rescue plans of the financial gamblers – and, of course, of the capitalist system.

II. THE MARXIAN EXPLANATION

The Marxian view of financial instability (and of economic crises in general) goes beyond simply blaming either the agents’ behavior (the neoclassical tradition) or the government’s policies (the Keynesian tradition). Instead, it focuses on the built-in dynamics of the capitalist system that fosters such behavior of the agents or such policies of governments. It views, for example, the 2008 financial meltdown as the logical outcome of the over-accumulation of the fictitious finance capital relative to the magnitude of the industrial or productive capital, or more precisely, relative to the amount of surplus value produced by labor in the process of production.

Instead of simply blaming “evil” Republicans or “neoliberal capitalism,” as many left/liberal economists do, it focuses on the dynamics of “finance capital as self-expanding value” (Marx) that not only created the huge financial bubble that exploded in 2008, but also subverted public policy in the face of such an obviously unsustainable bubble. In other words, it views public policy not simply as an administrative or technical matter but, more importantly, as a deeply political matter that is organically intertwined with the class nature of the capitalist state, which has increasingly become dominated by powerful financial interests.

While blaming policies or strategies of deregulation, securitization, and other financial innovations as factors that facilitated the financial bubble is not false, it masks the fact that these factors are essentially instruments or vehicles of the accumulation of fictitious finance capital. No matter how subtle or complex, they are basically clever tools or strategies of transferring surplus value generated elsewhere by labor, or of creating fictitious value out of thin air. Marx characterized this subtle transfer of (real/labor) value from productive to fictitious capital as “an extreme form of the fetishism of commodities” in which the real, but submerged, source of surplus-value is concealed.

Most critics of the increasing “financialization” of our economy lament the disproportionate growth of money or finance capital relative to industrial capital as an “abnormal” growth, an unfortunate expansion of finance capital beyond its “logical” limits. Finance capital, they argue, is supposed to grease the wheels of production, i.e., to serve as the source of investment in industrial or productive capital. Accordingly, they prescribe containment or control of such destabilizing developments through policies of regulation and discipline.

Yet, the rise to prominence of finance capital in a mature market economy represents no anomalous development. It is a fundamental characteristic of an advanced stage of capitalism, the stage of “finance capital,” as Rudolf Hilferding put it, or of “imperialism,” as Vladimir Lenin put it. Finance capital is the ideal and quintessential form of capital, of capitalist property – independent of physical forms, of real activities, and of production processes. Indeed, as Marx points out, in the circuit of capital (M…C…P… C’…M’), that is, in the process of capitalist production/reproduction, productive or commodity forms of capital are essentially incidental to the goal of accumulating finance capital – or “capital as such,” as he put it. This shows the absurdity of arguments or efforts to establish a “reasonable” proportion between industrial and finance capital, between “virtual wealth” and “real wealth,” as if financial wealth were less real than tangible physical wealth.

Marx prefaces his discussion of the relationship between finance capital, which he calls “loanable money-capital,” and industrial or productive capital by posing this question: “to what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process?”

The answer, he points out, depends on the stage of the development of capitalism. In the earlier stages of capitalist development, that is, before the rise of modern banks and the credit system, growth/accumulation of finance capital was regulated or determined by the growth/accumulation of industrial capital. For, in the absence of, or prior to, modern credit system the dominant form of credit consisted of commercial credit. Under commercial credit system, where one person lent the money to another in the reproduction process (for example, the wholesaler lent to the retailer, or the retailer lent to the consumer), finance capital could not deviate much from industrial capital. Or as Marx put it: “When we examine this credit detached from banker’s credit it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here.”

But at higher stages of capitalist development, where banks scoop up or centralize and control national or people’s savings, the growth of finance capital is no longer limited by the growth of industrial capital. For, under conditions of advanced banking and credit system, “Profit can be made purely from trading in a variety of financial claims existing only on paper. This is an extreme form of the fetishism of commodities in which the underlying source of surplus-value in exploitation of labour power is disguised. Indeed, profit can be made by using only borrowed capital to engage in (speculative) trade, not backed up by any tangible asset” (Marx on “speculation and fictitious capital,” cited in Wikipedia: http://en.wikipedia.org/wiki/Fictitious_capital#Speculation_and_fictitious
_capital).

Marx’s theoretical discussions and projections of the rising influence of “loanable capital” were corroborated by actual developments soon after his death (1883) as the economic and political power of modern banks and other financial intermediaries rose drastically by the end of the 19th century. This led a number of other political economists to further elaborate on the expanding role of finance capital in the early 20th century. A most rigorous and systematic of such studies was carried out by the Austro-German Marxist theoretician Rudolf Hilferding, which culminated in his famous book, Finance Capital.

Hilferding contrasted monopolistic finance capitalism to the earlier competitive capitalism of the liberal era. “With the development of banking…, there is a growing tendency to eliminate competition among the banks…, to concentrate all capital in the form of money capital, and to make it available to producers only through the banks. If this trend were to continue, it would finally result in a single bank or a group of banks establishing control over the entire money capital.”

Hilferding characterized the centralization of national savings in the hands of the bankers as perverse socialization of financial resources in favor of the “knights of credit”:

A fully developed credit system…socializes other people’s money for use by the few. At the outset it suddenly opens up for the knights of credit prodigious vistas: the barriers to capitalist production – private property – seem to have fallen, and the entire productive power of society appears to be placed at the disposal of the individual. The prospect intoxicates him, and in turn he intoxicates and swindles others.

Drawing heavily upon Hilferding’s Finance Capital (and John Hobson’s Imperialism: a Study), Vladimir Lenin further elaborated on the rise of the power of finance capital, and its increasing extension from more to less-developed regions of the world. He called this global extension of finance capital in search of more profitable investment opportunities imperialism – hence, the title of his book on the subject, Imperialism: the Highest Stage of Capitalism (1916). The book represents a classic Marxian analysis of imperialism, as a force of aggression driven worldwide by the imperatives of finance capital:

Imperialism, or the domination of finance capital, is that highest stage of capitalism in which this separation [of money from its rightful owners] reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy…. [It also] means that a small number of financially powerful states stand out among all the rest…. Thus finance capital, literally, one might say, spreads its net over all countries of the world (Chapter 3, available online at: http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch03.htm).

III. A NEW PHASE, NOT JUST ANOTHER CYCLE

It is increasingly becoming clear that the current economic contraction is more than just another recessionary cycle. More importantly, it seems to represent a structural change, a new phase: the phase of the concentration and domination of fictitious/finance capital, similar to the developments of a century ago. Under liberal capitalism of the competitive industrial era, a long wave of economic contraction would usually wipe out not only jobs and production, but also the debt burdens that were accumulated during the long wave of expansion that preceded the long wave of contraction. In the stage of the dominance of finance capital, however, debt overhead is propped up through its monetization, or socialization, even during a most severe financial meltdown such as that occurred in 2008. Indeed, due to the influence of the powerful financial interests, national or taxpayers’ debt burden is further exacerbated by the government’s generous bailout plans of the bankrupt financial giants.

Although the present stage of US economy, dominated by finance capital, seems new, it is in fact a throwback (or “retrogression,” as Michael Hudson puts it) to the capitalism of the late 19th and early 20th centuries, that is, the capitalism of monopolistic big business and gigantic financial institutions. The rising economic and political power of big business and financial interests in the early 20th century led a number of political economists (such as John Hobson, Rudolf Hilferding and Vladimir Lenin) to write passionately on the ominous trends of those developments – developments that eventually precipitated the devastating Great Depression of the 1930s by creating an unsustainable asset bubble in the form of overblown stock prices, which burst in 1929. The harrowing socio-economic turbulence of the 1930s generated momentous social upheavals and extensive working class struggles. The ensuing “threat of revolution,” as F.D.R. put it, and the “menacing” pressure from below prompted reform from above – hence, the New Deal reforms in the US and socialist/Social-Democratic reforms in Europe. Combined, these historic developments significantly curtailed the size and the power of big business and/or big finance – alas, only for a while.

As those reforms saved Western capitalism from more radical social changes, they also provided grounds for its expansion. By the 1970s, finance capital, headed by major US banks, had risen, once again, to its pre-Depression levels of concentration, of controlling the major bulk of national resources, and of shaping economic policy. Since then, big finance has created a number of financial instabilities and economic crises – usually through predatory, sub-prime loan pushing, or unsustainable debt bubbles. These include the “Third World debt crisis” of the 1980s and 1990s, the 1997-98 financial crises in Southeast Asia and Russia, the tech or dot.com bubble of the 1990s in the U.S. and other major market economies, and the latest, housing/real estate bubble that burst in 2008.

A number of characteristics distinguish the stage of “finance capital” from lower phases of capitalist development. Top among these are the class character of the State and the nature of government intervention in national economic affairs.

A. Back to Keynes? Not a Matter of Choice

In the wake of the 2008 financial meltdown, many left/liberal economists saw an opportunity: a reversion back to the Keynesian-type policies of economic stimulation and job creation. Indeed, many of these economists were quite excited about the prospects of what they perceived as an almost automatic switching of policy gears from neoliberal to Keynesian economics. One year later, it is increasingly becoming clear that such expectations amounted to no more than wishful thinking, since the economic policies of the Obama administration are no less neoliberal than those of his predecessors – a dawning recognition that, regardless of the resident of the White House, the political system is committed primarily to the interests of the financial oligarchy.

The perception that economic policy would be switched back to the Keynesian paradigm by default stems from the rather naïve supposition that policy making is a simple matter of technical expertise or economic know-how, that is, a matter of choice: economists and/or policy makers who are far-sighted, or smart enough to recognize the potential systemic dangers of critical periods of severe economic crises, would opt for “good” or Keynesian-type capitalism. By contrast, those lacking such admirable qualities, or who are “evil” and blind to the misery of the recession-stricken masses, would oppose such government interventions in economic affairs. Instead, they would foolishly or misguidedly choose “bad” or “neoliberal capitalism” (Kotz 2009).

A major reason for such hopes or illusions is a perception of the State that views its power as above economic or class interests; a perception that fails to see or ignores the fact that national policy-making apparatus is largely dominated by a kleptocratic elite that is guided by the imperatives of big capital, especially finance capital. The perception of a relatively facile alternation between Keynesian and neoliberal economics is, unfortunately, not limited to the mainstream Keynesian economists; it is also shared by many left/radical economists, especially the proponents of the so-called Social Structure of Accumulation (see, for example, McDonough et al. 2009; Wolfson and Kotz 2009; Gordon, Edwards, and Reich 1982).

Historical evidence shows, however, that more than anything else the Keynesian or New Deal reforms were a product of the pressure from the people. Economic policy-making is not independent of politics and/or policy-makers who are, in turn, not independent of the financial interests they are supposed to discipline or regulate. Stabilization, restructuring or regulatory policies are often subtle products of the balance of social forces, or outcome of the class struggle. Policies of economic restructuring in response to major crises can benefit the masses only if there is compelling pressure from below; otherwise, such policies would be crafted on the basis of the neoliberal or supply-side economics.

For example, the success of the Keynesian or New Deal economics in response to the Great Depression was not so much the product of Keynes’ or F.D.R’s genius, or the goodness of their hearts, as it was due to the widespread and sustained pressure from below, from the massive and widespread protest demonstrations by the working people and other grassroots (Terkel 1970). By contrast, both the First Great Depression (1873-97) and the protracted “stagflation” of the 1970s were “remedied” through supply-side restructuring policies largely because there was no popular pressure comparable to what brought about the New Deal reforms of the 1930s. Lack of pressure from labor and other grassroots also explains why the current rescue and restructuring policies of the Obama administration are following the pattern of supply-side solutions. It follows that unless there is another wave of widespread and sustained protest demonstrations, which would threaten the systemic foundation of the status quo, the neoliberal policies of supply-side restructuring will continue to prevail over any other alternative.

A no less-important factor (than the pressure from the grassroots) in the implementation of the New Deal reforms was the then-popular model of the Soviet economic system as an alternative to market economies of the West. While during the 1930s the Capitalist economies of the West were mired in a devastating depression, the centrally-planned Soviet economy remained essentially immune to the ravages of the Depression. This made the idea of a planned economy (as an alternative to the anarchy of market mechanism) quite popular among the ranks of the poor and working people. Not surprisingly, voices in favor of socialism were frequently heard during the anti-Depression protests of the 1930s. There is a consensus among the historians of those turbulent times that the “threat of revolution and socialism” played an important role in the realization of the New Deal reforms (Ibid.). In the absence of another overwhelming pressure from below, or another “socialist threat,” Keynesian or New Deal economic reforms could remain a (fondly-remembered) one-time experience in the history of economic reforms.

B. The Role of the State

A major hallmark of the age of finance capital is domination of the political process by the financial oligarchy. Bank- or finance-friendly policies of the government have been facilitated largely through generous pouring of money into the election of “favorite” policy makers. Extensive deregulations that led to the 2008 financial crisis, the bank-friendly immediate response to the crisis, and the failure to impose meaningful restraints on Wall Street after the crisis can all be traced to Wall Street’s political power. Wall Street spent more than $5 billion on federal campaign contributions and lobbying from 1998 to 2008, and its fervent spending on the purchase of politicians continues unabated. The financial sector spent more than $200 million on lobbying in the first half of 2009 alone (Weissman 2009).

In spring of 2009, the banks defeated a proposal to authorize “cram-downs” of mortgages in bankruptcy. This modest measure would have permitted bankruptcy judges to adjust mortgage principal in bankruptcy, to help people stay in their homes. It would have had relatively limited application and likely would have helped the banks, which are hurt by foreclosures in an environment where they cannot sell houses from which they have evicted borrowers. “But cram-down violates the banks’ ideological commitment to preventing adjustments of principal. They mobilized to defeat it, leading a frustrated Senate Majority Whip Richard Durbin to say the banks ‘own the place’ – meaning the Congress” (Ibid.).

Evidence of kleptocratic, corrupt monetary relationship between the State apparatus and the knights of finance are massive. One of the easiest ways to understand this unholy alliance is to look at how the rich has been steadily appropriating the national economy through the escalating schemes of outsourcing. Scandalous measures of outsourcing are bound to be further accelerated by the rising budget deficits of the states and their need to sell off public property and outsource their traditional public responsibilities in order to finance their budgetary needs.

The outsourcing of public services to private hands pervades all areas of state responsibility. Take, for example, the case of the Pentagon/security contracting. The rapid growth of the Pentagon’s service contracting is reflected (among other indicators) in these statistics: “In 1984, almost two-thirds of the contracting budget went for products rather than services…. By fiscal year 2003, 56 percent of Defense Department contracts paid for services rather than goods” (The Center for Public Integrity 2004). The services outsourced by the Pentagon are not limited to the relatively simple or routine tasks and responsibilities such as food and sanitation services. More importantly, they include “contracts for services that are highly sophisticated [and] strategic in nature,” such as the contracting of security services to corporate private armies, or modern-day mercenaries.

The rise in the Pentagon contracting is, of course, a reflection of an overall philosophy of outsourcing and privatization that has become fashionable over the past several decades. Reporting on some of the effects of this policy, Scott Shane and Ron Nixon (2007) of the New York Times reported, “Without a public debate or formal policy decision, contractors have become a virtual fourth branch of government. On the rise for decades, spending on federal contracts has soared during the Bush administration, to about $400 billion last year from $207 billion in 2000, fueled by the war in Iraq, domestic security and Hurricane Katrina, but also by a philosophy that encourages outsourcing almost everything government does.”

The policy of privatization and outsourcing has led the U.S. Department of Housing and Urban Development (HUD), tasked with expanding the American dream of home ownership and affordable housing free from discrimination to people of modest means, to surreptitiously “move a chunk of that role to Wall Street since 2002,” reports Pam Martens (2009), a freelance investigative reporter. Martens further writes:

From 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman Brothers and Bear Stearns while providing the firms with wide latitude to foreclose, restructure or sell off in bundles to investors. HUD retained a minority interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002 and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005.

What the program effectively did was allow the biggest retail banks in the country to get accelerated payment on their defaulted, FHA-insured, single family mortgage loans while allowing another set of the biggest investment banks to make huge profits in fees for bundling and selling off the loans as securitizations. Once the loans were securitized (sold off to investors) they were no longer the problem of HUD or the Wall Street bankers. The loans conveniently disappeared from the radar screen and the balance sheet. The family’s fate had been sold off by HUD to Wall Street in exchange for a small piece of the action. Wall Street then sold off the family’s fate to thousands of investors around the world for a large piece of the action.

Michael Hudson (1998), Distinguished Research Professor at University of Missouri (Kansas City), aptly calls this ominous process of the buying out of policy-makers by major contributors to their election “privatization of the political process.” Paul Craig Roberts (2009), Assistant Secretary of the Treasury in the Reagan administration, likewise argues that the political system “is monopolized by a few powerful interest groups that…have exercised their power to monopolize the economy for the benefit of themselves.” These and similar sentiments regarding the class nature of the State are vindications of Vladimir Lenin’s characterization of the capitalist state as “the executive committee of the ruling class” (1993). Lenin was often scoffed at by the capitalist ruling elites when he made this statement over ninety years ago; they deviously dismissed him as having overstated his case. Perhaps it is time to dust off and read old copies of his The State and Revolution, if only to better understand the incestuous politico-business relationship between the State and the financial oligarchy of the present time.

C. Supply-Side Restructuring: Recessions as Opportunities to Undermine New Deal Reforms

Under the influence of the powerful financial interests, government intervention in national economic affairs has since the mid-1970s come to essentially mean implementation of supply-side restructuring policies – policies that are devoted to the corporate interests while leaving issues of unemployment, poverty and inequality to the trickledown effects of such policies. Government and business leaders have for the last several decades used severe recessionary cycles as opportunities to escalate application of neoliberal economic measures in order to redistribute national resources in favor of the wealthy and undermine the New Deal and other social safety-net programs that were put into effect in the 1930s, 1940s, 1950s and 1960s. Naomi Klein (2007) has called this strategy of using periods of economic crisis to reverse the gains of the New Deal and other reform programs the “shock doctrine,” a strategy that takes advantage of the overwhelming crisis times to implement supply-side austerity programs and redistribute national resources from the bottom up.

It is generally believed that neoliberal supply-side economic policies began with the arrival of Ronald Reagan in the White House in 1980. Evidence shows, however, that efforts at undermining the New Deal economics in favor of returning to the old-time religion of market fundamentalism, pursued by both Republican and Democratic administrations, began long before the election of Ronald Reagan to presidency. As Alan Nasser (2009), professor emeritus of Political Economy and Philosophy at The Evergreen State College in Olympia (Washington), points out, “The foundations of neoliberalism were established in economic theory by liberal Democrats at the Brookings Institution, and in political practice by the Carter administration.”

Indeed, baby-steps backward to pre-Keynesian neoclassicism were taken as early as during the presidency of John F. Kennedy. For example, in 1962 President Kennedy argued that while “most of us are conditioned for many years to have a political viewpoint – Republican or Democrat, liberal, conservative or moderate,” in reality the most pressing government concerns were “technical problems, administrative problems” that “do not lend themselves to the great sort of passionate movements which have stirred this country so often in the past” (as quoted in Nasser 2009).

As pointed out earlier, institution of the New Deal economic policies would not have been possible without the compelling grassroots pressure in response to the Great Depression. Yet, it is obvious that President Kennedy is here trying to reduce economic policies to purely “technical, administrative problems” that “do not lend themselves to…passionate movements” – in effect, trying to belittle the importance of the politics of “pressure from below.”

Arguments that “policies of economic equity represented costly trade-offs in terms of efficiency” were made by economic advisors of the Democratic administrations long before Reaganomics solemnized such arguments. Arthur Okun and Charles Schultze had each served as chair of the Council of Economic Advisors to Democratic presidents. In his 1975 Equality and Efficiency: The Big Tradeoff, Okun argued that “the interventionist goal of greater equality had inefficiency costs that injured the private economy.” Schultze (1977) likewise claimed that “politically neutral evidence proved that government policies which impact markets in the name of fairness and equality are necessarily inefficient. Schultze was quite explicit that the promotion of social goods as the direct object of government policy was bound to disadvantage the very people policymakers intended to protect, and to destabilize the private economy in the process” (as cited by Nasser 2009). It is worth noting that both Okun’s and Schultze’s books were published by the ostensibly liberal Brookings Institution.

While theoretical turnaround to pre-New Deal economics by the luminaries of the Democratic Party pre-dated President Carter, policy implementation of such theories took place under the Carter administration. It must be acknowledged that, along with the curtailment or slowing down of social spending, President Carter also slowed down military spending – though only during the first half of his term in office. His policy of restraining public spending (both military and non-military) was in line with economic policies of the so-called Trilateral Commission (of which he was a leading member), whose agenda of improving U.S. competitiveness in global markets included “fiscal discipline” on the part of the government. Reagan picked the Democrat’s copy of gradual agenda of neoliberalism and ran with it, replacing the rhetoric of capitalism-with-a-human-face with the imperious, self-righteous rhetoric of rugged individualism that greed and self-interest are virtues to be nurtured.

Neither President Clinton changed the course of neoliberal corporate welfare policies of supply-side economics, nor is President Obama hesitating to carry out those policies. His administration has made available more than $12 trillion in cash infusions, loans and guarantees to the financial industry, but for state governments that are facing massive budget deficits, it has thus far provided only one quarter of 1 percent of that amount in federal stimulus funds – about $30 billion (Eley 2009). The administration has refused to provide emergency aid to the states, including some of the largest in the country, such as California and Pennsylvania, which are on the brink of default. The White House is sitting by while states across the country lay off workers and slash spending on education, health care and other essential social programs.

The left/liberal supporters of President Obama who bemoan the president’s “predicament in the face of brutal Republican challenges” should look past his liberal/populist posturing. Evidence shows that, contrary to Barack Obama’s claims, his presidential campaign was heavily financed by the Wall Street financial titans and their influential lobbyists. Large Wall Street contributions began pouring into his campaign only after he was thoroughly vetted by the powerful Wall Street interests (through rigorous Q & A sessions by the financial oligarchy) and was deemed a viable (indeed, ideal) candidate for presidency (see, e.g., Martens 2008).

On ideological or philosophical grounds President Obama is closer to the neoliberal, supply-side tradition than the New Deal tradition. This is clearly revealed in his The Audacity of Hope, where he shows his disdain for “…those who still champion the old time religion, defending every New Deal and Great Society program from Republican encroachment, achieving ratings of 100% from the liberal interest groups. But these efforts seem exhausted…bereft of energy and new ideas needed to address the changing circumstances of globalization…” (as quoted by Nasser 2009).

In a 2008 interview with the editorial board of the Reno Gazette-Journal, Mr. Obama similarly stated: “He [President Reagan] put us on a fundamentally different path because the country was ready for it. I think they [people] felt like with all the excesses of the 1960s and 1970s and government had grown and grown but there wasn’t much sense of accountability…. [Reagan] just tapped into what people were already feeling, which was we want clarity, we want optimism, we want a return to that sense of dynamism and entrepreneurship that had been missing” (Ibid.).

Not only has the major bulk of the Obama administration’s anti-recession assistance been devoted to the rescue of the Wall Street financial magnates, but also the relatively small stimulus spending is largely funneled to the pockets of the private/financial sector (mainly through tax incentives) in the hope that it would create jobs. This stands in sharp contrast to what F.D.R. did in the earlier years of the Great Depression: creating jobs directly and immediately by the government itself. President Obama says the goal of his administration is to create a job for every American who wants one. But instead of immediately creating millions of jobs through a bold and ambitious plan of public works projects, he wants to have a “jobs summit” to discuss ways to create jobs!

In light of the administration’s track record of “job creations,” or lack thereof, the working people should not hold their breath. The whole purpose of the administration’s (or, shall we say, of the ruling kleptocracy, both Democratic and Republican) strategy of delaying direct job creation is to stall, and keep the hopes of the unemployed alive, until the massive supply-side corporate welfare giveaways would eventually begin to gradually trickledown and slowly create jobs. In the absence of compelling pressure from below, this neoliberal scheme of further weakening the working class may eventually succeed. If successful, however, the jobs thus created would be supply-side jobs, subsistence or below-subsistence jobs, which would be grabbed by desperate workers at any price/wage, not union jobs that would pay decent wages and benefits.

It is worth noting, once again, that the Obama administration’s austerity policies of neoliberalism cannot be blamed on the Republican or “ideological opponents of the president.” As noted above, the president himself has a much stronger ideological affinity with the supply-side economics than with the New Deal economics. It is no accident that he is being surrounded and advised by the neoliberal economic advisors such as Larry Summers, Timothy Geithner, and Paul Volker, head of the Federal Reserve Bank under President Reagan.

The political theatrics within the ruling circles over “how to create jobs” should not mask the fact that delays in job creation are deliberate: they are designed to further subdue American workers and bring down their wages and benefits in line with those of workers in countries that compete with the U.S. in global workers. It is part of the insidious neoliberal race to the bottom, to the lowest common denominator in terms of international labor costs. It is, indeed, an application of the IMF’s notorious Structural Adjustment Program of austerity measures that have been vigorously pursued in many less-developed countries for decades – with disastrous results. It is no accident that President Obama frequently pleads with the unemployed Americans to “be patient,” and “keep hope alive.” What he really means to say is: “Look, we have invested trillions of dollars through supply-side recovery measures. So, please be patient and wait until they come to fruition and benefit you through trickledown effects.” At least, Ronald Reagan had the honesty and integrity to explicitly defend or promote his supply-side philosophy. Perhaps that is why Barack Obama can be called Ronald Reagan in disguise.

IV. CONCLUSION: THE CASE FOR NATIONALIZATION OF FINANCIAL INTERMEDIARIES

It is a well-established fact that profit-driven commercial banks and other financial intermediaries are major sources of financial instability. It is also commonplace that, due to their economic and political power, the financial-corporate interests easily subvert government regulations, thereby periodically reproducing financial instability and economic turbulence. The logical policy implication is unmistakable: nationalize the destabilizing financial intermediaries. This is not necessarily a radical or socialist proposal; it makes sense even within the general framework of a capitalist economy.

It is only logical that the public, not private, authority should manage people’s money, their savings. Since bank money originates from people’s savings, it stands to reason that commercial banks should be public entities. This is, indeed, the reason why commercial banks are publicly-owned and operated in many countries around the world. Rudolf Hilferding (1919/1981) described the perverse system of centralizing people’s savings and placing them at the disposal of profit-driven private banks as follows:

In this sense a fully developed credit system is the antithesis of capitalism, and represents organization and control as opposed to anarchy. It has its source in socialism, but has been adapted to capitalist society; it is a fraudulent kind of socialism, modified to suit the needs of capitalism. It socializes other people’s money for use by the few (Chapter 10).

Nationalization of financial intermediaries also makes sense on grounds of financial stability and economic development. Contrary to profit-driven private banks that create financial bubbles during expansionary cycles and credit crunch during contractionary ones, state-owned banks can provide steady, reliable financial resources as dictated by industrial and/or commercial needs. Many real world examples can be cited in support of this argument. Nineteenth century neighborhood savings banks, Credit Unions, and Savings and Loan associations (S & Ls) in the Unites States, Jusen companies in Japan, Trustee Savings banks in the UK, and the Commonwealth Bank of Australia all served the housing and other credit needs of their communities well. Perhaps a most interesting and instructive example is the case of state-owned Bank of North Dakota – widely credited for the state’s budget surplus and its robust economy in the midst of the harrowing economic woes in other states. Ellen Brown (2009) describes the “miracle” of the Bank of North Dakota as follows:

A total of 49 states and the District of Columbia have all reported net job losses… In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) … Since 2000, the state’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.

In the absence of corrupt Wall Street-government relationship, nationalization of banks and other financial intermediaries is not as complicated or difficult as it sounds, since banking laws already empower regulators to impose extraordinary controls and close supervision over these institutions. It is certainly easier than public ownership and management of manufacturing enterprises that require much more than record keeping and following regulatory or legal guidelines.

The idea of bringing the banking industry under public control is not necessarily socialistic or ideological. It has, indeed, occasionally been used to deliver capitalism from its own systemic crises. For example, in the face of the Great Depression of the 1930s, and following the Hoover administration’s failed policy of trying to bailout the insolvent banks, the F.D.R. administration was compelled to declare a “bank holiday” in 1933, pull the plug on the terminally-ill banks and (temporarily) take control of the entire financial system.

Likewise, in the face of the collapse of its banking system in early 1992, the Swedish state assumed ownership and control of all the insolvent banks in an effort to revive its financial system and prevent it from bringing down its entire economy. While this wiped out the existing shareholders, it turned out to be a good deal for taxpayers: not only did it avoid costly redistributive bailouts in favor of the insolvent banks, it also brought taxpayers some benefits once banks returned to profitability.

Both in Sweden and the United States once profitability was returned to insolvent banks their ownership was returned to private hands! It is perhaps this kind of government commitment to powerful financial-corporate interests that has prompted a number of critics to argue that one definition of capitalism is that it is a system of socializing losses and privatizing profits (Harrington 1962, for example).

It may be argued that, in the context of the current recession, the idea of bank nationalization might have made sense a year or so ago, when most money-center banks were bankrupt or on the verge of bankruptcy, but not anymore as the insolvent banks have now returned to profitability. What such arguments tend to overlook is that the freshly-rescued financial giants that precipitated the 2008 market meltdown have already started paving the way for another cycle of financial bubble, to be followed by yet another burst. Therefore, the only way to end the recurring cycle of financial instability and the resulting economic turbulence is to place control of people’s money under public authority. It is necessary to point out, however, that while nationalization of financial intermediaries could mitigate or do away with financial instabilities that are due to bubbles of fictitious capital accumulation or debt money creation and speculative loan pushing, it will not preclude other systemic crises of capitalism – such as profitability crisis due to an inordinately high level of capitalization (or the rising “organic composition of capital” a la Marx), underconsumption and/or overproduction crisis, and perhaps more. To do away with the systemic crises of capitalism requires more than nationalization of banks; it requires changing the capitalist system itself.


This paper was presented at the Allied Social Science Association meetings in Atlanta, 3-6 January 2010 – under the title: “Making Sense of this Economic Recession.”





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Ismael Hossein-zadeh is Professor Emeritus of Economics, Drake University, Des Moines, Iowa. He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge, 2014), The Political Economy of U.S. Militarism (Palgrave – Macmillan 2007), and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press 2012).




























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