A Little
Problem With Capitalism
The financial crisis gripping the U.S. isn't an anomaly. We
just have short memories
By Thomas Walkom
03/10/08 "
Toronto Star"
- --29/08/08 -- - What's happening now on
Wall Street is seen as a new story. It is not. It is a very
old one.
Karl Marx wrote about it; so did John Maynard Keynes. More
recently, tycoon George Soros has pronounced on it, as has
the redoubtable Economist, a decidedly pro-free market
financial magazine.
This old story is quite simple: Capitalism is unstable. It
is an economic system that can be ruthlessly productive. But
is also one of wheels within wheels – internal
contradictions Marx called them – that can, and regularly
do, spin out of control.
Marx, a German philosopher suffering from boils, saw these
contradictions as opportunities; he figured that
capitalism's self-destruction would lead to a better world.
Keynes, a British economist who liked to speculate in
foreign currency over his morning tea and toast, saw them as
problems that could destroy a world he rather liked. The
welfare state edifice that bears his name was designed in
the post-1945 period to, literally, save capitalism from
itself.
Banks would be regulated to keep financiers from scamming
the economy into the ground. Labour unions would be
encouraged, in order to give workers a stake in the status
quo and inoculate them against radical politics.
The rich would agree to government tax-and-spend policies,
knowing that – in the end – it's always better to feed the
poor than have them slit your throat.
It was a giant, unspoken bargain – forced by the Depression
of the `30s, tempered by war and hammered into shape under
the threat of Communism.
For a long time, it worked.
But the great bargain could never resolve those
inconsistencies inherent in the world economy. Over time,
new forces came into play.
The very foreign investment that allowed U.S.-based firms to
prosper in the post-1945 world encouraged rivals to develop:
first West Germany and Japan, latterly China and the
European Union.
Throughout the industrial West, unionized workers cushioned
by the full-employment policies of the welfare state
demanded and won pay hikes that exceeded their productivity
gains. Which is why, in the `70s, inflation took off.
Meanwhile, the collapse of Communism and the discrediting of
revolutionary politics removed pressure from employers. Why
bother forging a great bargain with your workers if they
don't pose a threat?
And so came phase one of the retrenchment – the destruction
of the welfare state. In England, it began as Thatcherism,
in the U.S. Reaganomics. Both leaders set out to limit trade
union power in their respective countries. Both did so,
Thatcher by facing down the miners, Reagan by firing
unionized air controllers.
Their aim was not traditional fiscal conservatism. Indeed,
under Reagan, U.S. federal finances spiralled into deficit.
Rather it was to alter the balance of forces within society.
Reagan's tax cuts were designed to help the rich; Thatcher's
monetarism focused on squeezing wages.
In Canada, we had Paul Martin and Mike Harris – similar
policies but on a different scale.
As a result, the income gap widened throughout much of the
industrial world. The rich got richer; the middling classes
lagged; the poor got poorer.
Phase two involved the dismantling of the very financial
safeguards erected after the debacle of the `30s. The
specifics varied from country to country, but the aim was
the same: Deregulate financial industries so they would
centralize and focus their tremendous resources into new,
more profitable areas.
In the U.S., financial deregulation involved scrapping laws
that had protected small depositors – which led in the late
`80s to the collapse of so-called savings and loans banks.
This in turn caused the U.S. government to engineer its
first big post-1945 bailout.
In Canada, deregulation led to the scrapping of a system
that had kept various portions of the financial industry
isolated from one another. Under the new regime, insurers,
trust companies and investment dealers merged and melded.
Lending restrictions were eased.
Phase three was sparked, ironically, by the industrial
world's very success in fighting inflation. As inflation
went down so did returns offered through standard investment
channels. Investors seeking higher returns began to search
out riskier – and better-paying – options.
And so came the fascination with so-called new financial
instruments. Many households were satisfied with nothing
more exotic than mutual funds. But for well-heeled
individuals and firms, the new frontier was far more exotic:
derivatives, hedge funds, index funds, collateralized debt
obligations.
All worked on the venerable principle of leverage: Putting
in a little in order to earn a lot. Alas, as we should have
remembered from the `30s, leverage only works when the
economy is going up. When things start to falter, a
leveraged asset can become an intolerable millstone.
In the end, the private equity companies and sub-prime
mortgage buyers were doing much the same thing: borrowing
money they couldn't afford to repay, in the hope that
whatever assets they purchased would keep rising in value.
It was a gigantic ponzi scheme that couldn't possibly last.
And it didn't.
So, now we're back at square one. The system is near
collapse. U.S. Federal Reserve chief Ben Bernanke may
remember his history (he's an authority on the depression of
the `30s). But few others do.
On television, a baffled U.S. President George W. Bush
resembles the proverbial deer caught in the headlights. Here
in Canada, Prime Minister Stephen Harper insists that this
country's fundamentals are fine, a sentiment that, while
true, is largely irrelevant in the context of a potential
world collapse.
American taxpayers are understandably miffed at being asked
to bail out the entire global capitalist system. Right now,
their ire is aimed at Wall Street tycoons. But in their
hearts, they recognize that this isn't much of a deal.
The $700-billion (U.S.) bailout may save the financial
system. But after ordinary people have anted up the cash,
will their reward be nothing more than a return to the way
things were? Even politicians are beginning to recognize
that any lasting solution must deal with more than the
barebones economics of the crisis.
Ironically, what they are groping for is the kind of
solution that we've spent the past 40 years dismantling.
It's time for another grand bargain – not necessarily the
one that gave us the post-war welfare state, but one that
delivers a similar quid pro quo. And it will go something
like this: We'll save your damned old capitalism; we'll let
you have the big houses and big salaries (although not
necessarily quite as big as they were). But in return,
you'll have to give us something back – on jobs, on wages,
on the things that we need to live a civilized life. Nor
will we let you destroy everything we hold dear just so you
can make a buck.
And don't give us all that free-market guff. Because we
know, just as you know, that at times of great stress, the
free market doesn't work. This crisis has reminded us of
that.
Thomas Walkom writes on political economy. His regular
column appears Wednesday and Saturday.
© Copyright Toronto Star 1996-2008
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