The Legacy of the Crash

by Terrence Casey

  If the shock of the crisis produced dramatic change in policies favored by the ruling elites, its impact on the general public could have been expected to be equally dramatic, not only as they observed the behavior of political elites, but because of the direct impact of the crisis on their lives. Millions of families lost their homes in mortgage foreclosures and unemployment reached disturbing heights. Long-term unemployment in the US as well as in Europe was particularly disturbingly high, while the cutbacks in the US’s modest welfare state made in recent decades increased the degree of suffering the crash brought. Even those citizens – the vast majority of course – who had kept their homes and their jobs faced unpleasant consequences of a crisis they had done nothing to bring about. In both the UK and the US, risk has been privatized or more accurately personalized; fixed benefit retirement schemes have been replaced for most employees by schemes in which they and their employer invest money in stocks which can go up in value, but can equally well go down (Hacker, 2002, 2006). In consequence, those who retired or who planned to retire after 2008 found themselves dramatically poorer than those who retired in, for example, 2007 as the value of their pension funds collapsed. As the well-worn joke had it, 401K retirement accounts had become 201K in value. In contrast, the price of economic failure for major economic institutions had been socialized. Citizens of every age group could contemplate the cost to them as taxpayers of the bailouts of financial institutions or other enterprises such as auto companies regarded as ‘too big to big to fail’. The leaders of many of these firms saw no problem in paying themselves and their top officials large bonuses even as they begged for taxpayer support. In extreme cases such as Iceland and Ireland, citizens were obliged to adopt massive financial obligations because of the malfeasance of banks over which they had no control and had no prior legal responsibility. The collapse of its recently deregulated banks left Iceland’s citizens accountable for their vast debts equivalent to about $175,000 per citizen and in aggregate equal to over 75% of gross domestic product (GDP) (McKinsey Global Institute, 2010). Thus the crisis witnessed the personalization of risk for citizens and the socialization of not merely of risk but of the costs of failure for major capitalist enterprises.

  It was not unreasonable, therefore, to expect that a wave of anti-capitalist anger would sweep the world. Voters could see their leaders abandoning the almost unfettered commitment to neoliberal, market-oriented policies that had characterized the previous three decades. They could see ordinary people paying a price in numerous ways for the misdeeds and miscalculations of major financial institutions. There was increasing attention to the massive increase in inequality that had occurred in the United States, the UK and, to some degree, in more or less all advanced countries. Hacker and Pierson provide a compelling argument that, at least in the US, this increase in inequality was the product of public policies that advantaged the affluent, not merely economic trends (Hacker and Pierson, 2010). The realization that social mobility had declined sharply in the US and UK might have been confined to academic and informed elites; however, the rising proportion of respondents telling opinion pollsters that they expected that their children would not be as well off as themselves suggests some recognition of the trend (Bradbury and Katz, 2009; CBS Poll, 2009). The stage seemed set for a radical revival.

  The political context

  The historically minded might point out that the Great Depression produced an interesting contrast between the politics of the UK and the politics of the US. In the US, the great economic catastrophe of the 1930s produced the pattern we might have expected; the Democrats established a formidable hold on all the elected components of the US political system and implemented the great reforms of the New Deal that continue to have a profound effect on American life. In the UK in contrast, a Conservative-dominated Coalition government ruled throughout the 1930s and while its policy innovations were greater than is commonly appreciated, there was no British ‘New Deal’ and major period of radical reform came after the Second World War (Rodgers, 1998). The most obvious explanation for the contrast is the political context of the Depression: in the UK, the crisis overwhelmed and divided a Labour government, whereas in the US the Republicans were in power when the crisis struck and bore the ignominy of being unable to solve it. Arguably a similar dynamic occurred in the most recent crisis. The Republicans were once again in power in the US when the crisis struck and paid a political price for it. In the UK, Labour was in power and as its leader, Gordon Brown, had previously exulted in the success of his economic policies as Chancellor of the Exchequer in producing steady economic growth and an end to ‘stop–go’ (alternating periods of economic growth and stagnation), it found it hard to evade responsibility. The 2010 election result was one of the worst for Labour in modern times, rivaling the calamitous result in 1983 when Labour was led by Michael Foot into a near catastrophe (Wilson, 2011).

  The apparently sharp contrast between UK and US politics was limited, however, by the 2010 midterm elections in the US and characteristics of the 2010 general election in the UK. As is well known, the Democrats suffered massive reverses, losing not only many seats in Congress but, because of that, control of the House of Representatives. In a massive reversal of fortunes, the Republicans were triumphant whereas two years previously they had been routed. The most energetic political force came from the far right (the Tea Party movement) whose success has been much exaggerated but certainly became a major force in internal Republican Party politics. Arguably the Republicans would have captured control of the Senate as well as the House had they not been stuck with unelectable candidates favored by the Tea Party in Delaware and Arizona, while in Alaska the establishment Republican, Lisa Murkowski, pulled off the almost unprecedented feat of triumphing as a write-in candidate over the Tea Party-backed candidate who had won the Republican nomination. In all events, the midterm election was seen as a triumph of conservatism. The obvious fact is that the Democrats lost on a massive scale; their midterm election losses were the heaviest a party has suffered numerically since 1938 and the heaviest in percentage terms since 1922 (Campbell et al., 2011).

  While it is often suggested by journalists that all parties that control the White House lose seats in midterm elections, the fact is that there is considerable variation between midterm elections, and while some (for example, 1946, 1958, 1974, and now 2010) have hurt the president’s party badly, in others, midterms losses have been modest. An amendment of the claim to say that the party controlling the White House does badly in midterm elections when the economy is bad makes more sense, although even here the record is mixed; the Republicans lost only 26 seats in 1982 and the Democrats actually gained seats in 1934. The objective economic record (if there is such a thing) has to be weighted by perceptions of whether the economy is improving or is sensed to be improving; both President Reagan and Prime Minister Thatcher were able to construct plausible stories (or ‘frames’) about how, given time, their policies would work and that it was therefore important to ‘stay the course’ until that happened. Contrary to conventional wisdom, therefore, there was nothing inevitable about the extent of Democratic losses in 2010; a more adroit performance by President Obama and the Democrats more generally in explaining that they had inherited a disastrous economic crisis and yet had a viable strategy for solving the crisis could have mitigated substantially the scale of their losses. Observers of British politics will know that Labour emphasized the Conservatives’ economic failures of 1992 in the general election campaigns of 2001 and 2005 as well as 1997. It seemed reasonable to assume that in the United States the Democrats could make hay with the ‘Republican Crash of 2008’ for several elections to come.

  Superficially, the 2010 election in the UK did seem to have a purely economic explanation; the incumbent party paid the price for the economic downturn. However, the election in the UK can be characterized as the election that everyone lost (Wilson, 2011). Clearly, Labour was crushed, but the Conservatives did not benefit from the p
oor state of the economy nearly as much as could have been expected, winning only 36 percent of the vote and falling short of having a majority in the House of Commons. The attempts by the Conservative leader, David Cameron, to modernize the party and to change its image had enjoyed only limited success. Only by forming a coalition with what had been perceived to be a left-of-center party, the Liberal Democrats, could Cameron gain power. The Conservative’s failure to do better was all the more striking as the election campaign witnessed numerous disasters for Labour. Perhaps the most vivid was ‘Duffygate’ when Labour leader Gordon Brown, appearing to confirm all the worst stories about him, was caught off-camera insulting a long-time Labour supporter (Gillian Duffy) he had just embraced warmly on camera. Thus the Conservatives’ failure to achieve a clear victory was striking given both the economic circumstances and the dynamics of the election campaign. In short, this was not a great result for Conservatives. Once again, economic determinism seems an inadequate explanation for the election. The crisis alone had not doomed the left (Wilson, 2011).

  A deeper problem for the left

  The instinct for Labour and the Democrats is to say that the only problem was that they were in the wrong place at the wrong time. Given the depths of the Republican humiliation in 2008, this story was never convincing for the Democrats in the US; we have argued that it was also unconvincing for Labour in the UK. Instead we shall argue that the center-left was locked into an unpopular obligation to prop up capitalism, was unable to articulate a compelling account of its policies and that public opinion had not reacted with the hostility to financial institutions that might have been expected. We start with the last point: whom did the public blame?

  Whom did the public blame?

  In the 1936 election campaign, Franklin Roosevelt famously attacked business interests:

  We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering … They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob … Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me – and I welcome their hatred.

  It is hard to imagine Barack Obama giving a similar speech. If he had, would it have worked politically? Opinion polls suggest that while the American public saw many to blame for the crisis, its hostility was not focused on business alone. While opinion polls differ in the actual questions asked and how they are structured, a reasonable summary is that while bankers are blamed more than most, blame is widely distributed and the proportion of the public blaming government is surprisingly close to the proportion blaming bankers. A few examples make the point. In an opinion poll in late September 2008, only 20 percent blamed ‘greedy executives’ for the crisis and large numbers also blamed government regulators, Congress, the Bush administration or, most commonly, all of the above (Fox News/Opinion Dynamics). A contemporaneous Associated Press/Gfk Roper poll found that two-thirds of Americans blamed the federal government ‘a lot or quite a bit’ for the crisis because it had failed to regulate the banks adequately. This was almost as high as the percentage of people (78 percent) who blamed bankers for the crisis by making risky loans. An October 2008 Wall Street Journal/NBC poll asked ‘Which of the following do you think is most to blame for the current financial crisis? If you do not know enough about this to have an opinion, just say so … Banks who made loans to people with bad credit, the Bush administration, which did not provide enough oversight of banks and investment companies, homeowners who took out loans they could not afford, investment firms who sold bad loans as investments, Congress, which did not provide enough oversight of banks and investment companies?’ (NBC News/Wall Street Journal Poll, October 2008). Eighteen percent blamed banks making loans to people with bad credit; 14 percent, the Bush administration for not overseeing financial institutions adequately; 13 percent, homeowners taking out loans they could not afford; 11 percent, investment firms who sold bad loans as investments; 11 percent, Congress for not providing enough oversight; 24 percent blamed all of the above, and 8 percent did not know or were unsure.

  In short, the public was likely to blame government officials and politicians for the crash rather than focusing the blame on the failings of financial institutions and their executives. This did not mean that financial institutions were out of the political woods; the opinion polls could be read as supporting a return to more stringent regulation. However, in the absence of a clear political lead, public opinion was inclined to see the crisis as everyone’s fault, not just the bankers. Interestingly the Commission appointed by Congress to inquire into the causes of the crash also subsequently failed to reach unanimity on its causes in its January 2011 report (Financial Crisis Inquiry Commission, 2010). Instead it produced three contending reports: one by the Democratic nominees to the Commission, one by a majority of the Republican nominees and one by a sole Republican who wished to place the blame on government because it had pressured bankers to provide mortgages to low income and racial minority Americans. Thus at the end of the day there was neither popular nor elite consensus on the causes of the crash.

  British public opinion seemed also ambivalent with less than enthusiastic support for left-wing policies. The proportion of Britons supporting an increase in welfare payments – 27 percent – was much lower than during the Thatcher years when around 60 percent supported such a policy. The proportion saying that government should redistribute incomes had also fallen from about 45 percent to about 35 percent (British Social Attitudes 27th Report). The Report also concluded that there was less support for ‘Big Government’ in Britain today than at any time since the late 1970s. Alison Park, one of the co-authors of the Report, concluded that although the crisis had made people feel less secure financially, ‘The sight of governments rescuing banks and the stories of bankers’ bonuses does not seem to have made them question their views about the role that government should play in the market place. There certainly has been no renewal of enthusiasm for more active government’ (Curtice and Park, 2010).

  The market as prison

  Charles Lindblom famously argued that markets constrain political choice (Lindblom, 1977). Politicians do not need to be pressured, coerced or bribed into acting in a manner welcome to business because failure to do so would result in economic failure, job losses and harm to society more generally. The ultimate ‘privileged position’ of business is that politicians are forced against their instincts and values to bow to business’s wants (ibid.). This is what center-left leaders such as Obama and Brown were obliged to do. President Obama expressed his frustration at the costs of the bank rescue in a 13 December 2009 interview for CBS’s program, Sixty Minutes:

  I did not run for office to be helping out a bunch of fat cat bankers on Wall Street. Nothing has been more frustrating to me this year than to salvage a financial system at great expense to taxpayers that was precipitated, that was caused in part by completely irresponsible action on Wall Street.

  Similarly, in his 2010 State of the Union address, Obama explained why he had taken action to rescue banks that he and others found distasteful.

  Our most urgent task upon taking office was to shore up the same banks that helped cause this crisis. It was not easy to do. And if there’s one thing that has unified Democrats and Republicans, it’s that we all hated the bank bailout. I hated it. You hated it. It was about as popular as a root canal … But when I ran for President, I promised I wouldn’t just do what was popular – I would do what was necessary. And if we had allowed the meltdown of the financial system, unemployment might be double what it is today. More businesses would certainly have closed. More homes would have surely been lost … So I supported the last administration’s efforts to create the financial rescue program. And when we took the program over, we
made it more transparent and accountable. As a result, the markets are now stabilized, and we have recovered most of the money we spent on the banks.

  Gordon Brown faced similar pressures. Announcing a scheme that involved government providing aid to the banks equivalent to £2,000 per person living in the UK, the then prime minister argued that ‘for every family in the country, the stability of the banking system matters’ (Daily Telegraph, 8 October 2008). Brown argued that his rescue of the banks was undertaken ‘not to save the bankers but to ensure that ordinary people’s savings, jobs and mortgages and the businesses on which jobs depend were secure’ (Hansard House of Commons Debates, Volume 497, Column 910).

  The inevitable consequence of these policies was, as Obama hinted, unpopularity. Obliged to bail out the bankers whose recklessness had caused the crisis and who continued to reward themselves with massive bonuses, the center-left incurred opprobrium for helping those who were its natural opponents politically. An admittedly somewhat oddly phrased question asked by Democracy Corps in November 2010 found 85 percent of Americans agreeing with the idea that ‘middle class families and small businesses’ played by the rules while big banks, CEOs and Wall Street did not, but received a bailout denied ordinary Americans. Sixty percent agreed with these comments strongly. The Troubled Asset Relief Program (TARP) that Obama had inherited from President Bush was seen by more Americans (43 percent) as having hurt the economy; 36 percent thought it would help (Allstate/National Journal Heartland Monitor Poll, 3–7 January 2010.) By July 2010, a clear majority (58 percent) thought TARP was an ‘un-needed bailout’ while only 28 percent agreed that TARP ‘was necessary to prevent the financial industry from failing and drastically hurting the US economy’ (Bloomberg Poll, 9–12 July 2010) Ironically, TARP was never fully implemented and was quietly restructured into a different plan which instead of buying ‘toxic assets’ put capital into the banks directly. TARP was therefore both provocative to public opinion and technically misconceived. Unfortunately for Obama, many more Americans believed erroneously that TARP was one of his policies rather than correctly identifying it as one of Bush’s. Meanwhile, the administration was chastised by business groups for any rhetoric critical of business on the grounds that it not only evinced evidence of Obama’s ‘socialism’ but also damaged the prospects for economic recovery. Thus center-left politicians suffered from the economic crisis twice over: first, simply because economic conditions were bad; second, because structurally imperative policies needed to rescue the banks and forestall a depression brought added unpopularity. In the aftermath of the midterm election, Obama moved sharply to the right. Remarkably, after the crisis had shown the weakness of financial regulations, the administration launched a drive for deregulation in January 2011, accepting business arguments that corporations were beset by torrents of unnecessary and costly regulations. A new White House Chief of Staff with a business background, William Daley, was appointed in part to prove that the administration was not ‘anti-business’.