Never Let a Serious Crisis Go to Waste
Page 46
From this perspective, the crisis is, in the first instance, an epistemological phenomenon. The beauty of the manufacture of ignorance is that it has proven an ideal short-term response to unanticipated surprises: when disaster hits, and reformers propose to strike while the iron is hot with their nostrums and antidotes, the Neoliberal Thought Collective can stymie them and can buy time by filling the public sphere with fog. Since the orthodox economics profession had ventured quite some distance down the road to being co-opted by the neoliberals prior to the crash, if anything, the latter brand of denial was just easier to gin up in the aftermath of the economic crisis. The newspapers bayed for economists’ blood; and economists spat back all manner of excuses. With enough fog emitted, almost anything becomes possible. Glenn Hubbard, subjected to scathing ridicule in the movie Inside Job, could be rehabilitated as a major economic advisor to the Mitt Romney campaign in 2012. Gary Gorton, inventor of the CDS instruments that sank AIG, could be rehabilitated as one of the primary experts in the economics literature concerning the causes of the crisis. Ben Bernanke, booster of the Great Moderation, could be rehabilitated as the Savior of the American Economy. The busier the economists were in drawing all sorts of red herrings across the landscape, and the more the think-tank tokens stoked the controversy, the better the neoliberals liked it. It didn’t hurt that the fog also rendered them better able to insert their utterly implausible meme (“Fannie and Freddie did it”) into the mix, such that it became one of the top three “explanations” of the crisis among hoi polloi.
The promotion of denialism may have bought time, but only subordinate to the bringing into play of the replacement middle-term policy response of the market-based rescue of the banks covered in chapter 5. In the case of global warming, the medium-term instrumentality was to have the state construct new markets for emissions permits. Interestingly, as described in above, during the crisis a very close analogue was also floated to create new markets to sell off the so-called toxic assets that the government would “temporarily” take off the balance sheets of the faltering banks. Market designers were initially brought in to help concoct boutique auctions to somehow actualize and validate the ramshackle expedient of the TARP. As previously noted, that specific project rapidly turned abortive, but for comparative purposes it is instructive to inquire just how much of the original plan remained as the premier approach to rectifying the financial crisis as the rescue unfolded. True, the market designers were themselves cashiered by fast-moving political events; but the shell of the approach persisted, only now embedded within the rapidly proliferating government asset purchase programs.
In the scramble to quickly implement the TARP, a motley collection of various “programs” with impenetrable acronyms such as TALF, HAMP, and P-PIP were mounted to “leverage” government money with participation of specially induced private investors to vacuum up all manner of distressed assets.31 Of course, in the initial phases, the exact means chosen may have been dictated more by crude political calculus along the lines of a “Paulson Put”—an improvised attempt to stave off the worst of the collapse and bailouts until after the 2008 election—than by any coherent strategy.32 Nevertheless, the obvious prescription of the government taking over the failing banks and forcing their restructuring, deleveraging, and downsizing was ruled permanently out of bounds; but instead, under the proliferation of program acronyms (post-Lehmann), no major stakeholder in the FIRE sector was forced to suffer a write-down of assets or even change of personnel. The template of “market-maker of last resort” began with the Paulson-Geithner improvisation of having the New York Fed assume $30 billion of the worst assets from Bear-Stearns before selling the firm cheaply to JP Morgan, and then hiring Black Rock to supervise and manage the scheme.33 This set the pattern for what became the “market based rescue,” or what might be deemed a newfangled privatization of government rescue of the financial sector. Indeed, many of the programs were not only outsourced, but even designed by private firms such as Black Rock and Trust Company of the West. What happened was that initially the federal government, and later the Federal Reserve, provided “loans” and guarantees and purchased vast amounts of dodgy securities at prices favorable to the insolvent banks and some firms (such as the auto industry), all subordinate to the principle that government should facilitate a “market-based” rescue by having private interests manage and carry out the investments to the greatest extent possible. Under P-IPP, for instance, private firms needed only to put up $1.67 to purchase $100 retail of “toxic assets”; further, the taxpayer provided a promise to cover 93 percent of any potential losses.34 “Shadow” or hidden bailouts were also pursued through the Federal Home Loan Bank system, stepping up Fannie and Freddie purchases, and unconventional expansion of the Fed balance sheet. In effect, the government acted to directly or indirectly provide a price floor for selected investors for all manner of financial assets, no matter how dubious or damaged. In a pinch, the central banks were brought in to do much the same thing under the euphemism of “quantitative easing.” In the few instances when the government was forced to take an equity stake as well, it did so with the proviso that it would not actually “nationalize” the companies in question, and would endeavor to sell off the stake as soon as feasible. This pattern was followed with minor variations in the United Kingdom and throughout the European Union as the financial crisis spread.
It is important to perceive that this middle-term response was the locus of the Schmittian moment of the neoliberal program. In normal times, none of these governmental entities would ever have had the authority or sovereignty to farm out massive government subsidies and waivers to other third-party private firms at the stroke of a pen: in a sense, the “privatization” of a financial rescue was more or less unthinkable. Indeed, Treasury Secretary Paulson and Fed Chairman Bernanke had been known to repeatedly deny that they had the statutory authority to do any number of things during the crisis. Yet, precisely here, in the midst of the collapse, these neoliberal leaders took upon themselves the right to arrogate the power of defining the “exception,” to anoint themselves as the true political sovereigns in time of emergency; and right at that juncture, they imposed the neoliberal prescription that creating more and different “markets” would serve to rescue the economy. Here lay the deep neoliberal provenance of the seeming potpourri of bailouts, rule suspensions, windfalls, forced mergers, and all the rest.
One way to describe this unprecedented array of practices was to gloss it as the prevention of rolling bankruptcy through the instrumentality of the central government and the central banks taking much of the risks and bad paper onto their own balance sheets, either directly or virtually through loans and guarantees to private interests. Rather than create a new market in “carbon-style permits,” the government and central banks jury-rigged a novel market in quasi-public, quasi-private debt. As has often been bemoaned, in practice profits remained privatized while all the downside risk was nationalized. It has been less frequently noticed that most of these activities didn’t actually “solve” the financial crisis in any lasting or definitive way; all they did was shift it onto the balance sheets of governments, who then subsequently found their own public debt ballooning and their central banks becoming market-makers of last resort.35 This ramshackle contraption of the government backstopping corporate failure through disguised asset “purchases” on a grand scale has morphed into a mutant form of capitalism, one that sports its origins in the neoliberal precept that the solution to supposed market failures is more markets.
This mechanism of “market-maker of last resort” as a neoliberal analogue of the carbon-trading schemes has had a felicitous political effect from the perspective of the neoliberals, of shifting attention away from the original insolvency of the banks and firms who securitized the impossible and proliferated the debt in the first place, and displacing it onto the sovereign federal governments, who found their public debt growing perilously out of control. One might regard this innovation as
co-opting the very idea of nationalization of business firms from the history of the left, but turning it on its head, lumbering the state with only the failed assets off the crippled private balance sheets, while leaving the remainder of the firm in private hands, to enjoy revived profitability. As the Manchester CRESC group observed, “Leverage was the driving force behind the privatization of gains and the socialization of losses.”36
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Figure 6.2: European Public and Private Debt, 2000–2010
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Source: Bank for International Settlements
Alternatively, one might discern in its vaulting ambition the financial logic of the Structured Investment Vehicle used to hide crushing liabilities, only now being imposed on the state itself. In the meantime, as bond vigilantes conduct their attacks and government insolvency looms, states are forced by neoliberal parties and international agencies to engage in myriad forms of “austerity,” which include fire sales of viable legacy state assets and crude attempts to lower wages and renege on social insurance schemes. Indeed, this narrative that the crisis is all the fault of the government conforms so faithfully to the standard neoliberal script, trumpeted relentlessly from the think-tank shell of the Russian doll since early in the crisis, that it is hard to imagine that the tactical political economy of market-maker of last resort was not engineered to conjure this outcome. Its provenance dates back to Milton Friedman’s account of the errors of the Great Depression of the 1930s, and its outlines have been implemented by Friedman’s acolyte Ben Bernanke during the current crisis.37 The beauty of the dynamic is that other segments of the NTC could then exercise their hostility toward both the federal government and the Federal Reserve with seeming justification, thus filling up most of the political space churning around reactions to the crisis. For instance, the Tea Party could not have existed without this “market-based” practice of shifting the onus of business-induced leverage onto the state, then having private interests run the bailout, and then, as a consequence, precipitating a crisis of state legitimacy. Once set in motion, it has been a juggernaut that moves of its own accord. In parallel with carbon trading, the medium-term failure of the policy turns into long-term political success for the neoliberals.38
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Figure 6.3: U.S. Public and Private Debt, 1920–2011
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Source: debtdeflation.com/blogs
Just as cap-and-trade in permits exists primarily to thwart serious reduction of carbon emissions, contemporary “last resort” market policies that set up the state as dumping ground for financial detritus, only then to have it managed behind the scenes by private interests, mostly exist to thwart any serious intervention-cum-nationalization and subsequent writedown of insolvent firms in a crash. Hobbled firms may therefore continue to soldier on and make a profit, but the underlying load of unsustainable debt in the society as a whole has not been addressed. In this it resembles nothing so much as the “private equity” model of business predation. Whatever it was about unsustainable levels of private debt and irredeemable backlogs of dubious financial instruments that may have led up to the crisis, government-based market policies have done almost nothing to rectify the elemental flaws in the instruments themselves. Thus, postcrisis, enhanced leverage proceeds apace. This is demonstrated in Figure 6.2 in data for levels of public and private debt as a percentage of GDP for a selection of European countries before and after the crisis, and in Figure 6.3, time series of public and private debt percentages for the United States over the twentieth century. Soon governments, having opted for the privatized market-maker model, are then forced by political shifts to somehow curtail spending. Austerity programs only make most attempts to deleverage less effective, all in the name of restoration of fiscal prudence. If anything, the private sector has managed to resume most of the practices that were acknowledged to have inflated the bubble in the first decade of the 2000s. Although there is no reliable gauge of the world trading volume of over-the-counter credit default swaps, the industry trade group provides data suggesting that gross exposure of such derivatives topped $5 trillion in December 2008, and was around $3 trillion in 2011.39 However, it has been various interest-rate contracts among the various financial derivatives that have expanded to the greatest degree, both before and after the crisis, as revealed in Figure 6.4.
The prospect of the government serving as market-maker of last resort presumably cannot be extended indefinitely, which brings us to the final long-game component of the full-spectrum brace of policies: the crisis analogue of geoengineering for neoliberals is the equally science-fiction prospect of financial innovation as the mode of ultimate deliverance from economic stagnation. Just as with geoengineering, the policy consists more of insubstantial promise than in demonstrated capabilities; but it plays an important pivotal political role nonetheless. The prophets of financial innovation are at pains to portray the invention of new pecuniary instruments, practices, and products as on a par with the science-based innovation of new physical technologies; in other words, it is the very apotheosis of the market coming to terms with an evolving nature. Indeed, one of the first people to promote the notion of financial innovation as a phenomenon commensurate with technological change was the Chicago neoliberal economist Merton Miller, again demonstrating direct affiliations with the thought collective.40 Miller himself admitted that much of the motive for this innovation was to avoid or circumvent prior regulations; but later discussions tended instead to stress purported improvements in general welfare, on the same footing as welfare gains from enhanced solar cells or combustion engines. While the terminology has been percolating around the edges of the economics profession ever since then, it really rose to public consciousness only in the crisis, as revealed in the Google Trends compendium of Google searches (top) and mentions in the news media (bottom), displayed in Figure 6.5. It is the rollout of the concept from discussion internal to the economics profession to its uses in the larger public sphere that is central to its strategic function within the neoliberal full-spectrum policy response.
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Figure 6.4: Total Over-the-Counter Outstanding Derivatives ($trillions)
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Source: Zero Hedge
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Figure 6.5: Google Trends for Term “Financial Innovation”
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The conflation of options pricing with the ophthalmoscope made great semiotic play with the connotations of technological “improvements,” which somehow enhanced efficiency and efficacy; and soon thereafter one began to hear of dedicated “financial engineers” (aka “quants”) tinkering and fine-tuning the machinery of Wall Street and London. One conflation soon spawned another: denizens of “science studies,” accustomed as they were to description of technological artifacts, conceived of the notion that they could just as readily apply their expertise to these financial phenomena, since, after all, they were just another species of technological innovation. Thus appeared a whole series of monographs on the “social studies of finance,” most of which tended to recapitulate the accounts of finance already current among the orthodox economists and practitioners in the area; perhaps inadvertently, they tended to reinforce the cultural Geist that the banking sector sported a teleology of internal scientific logic of development.41 It then comes as no surprise that it was a sociologist of science who came up with a thoroughly internalist and technical account of the causes of the crisis, devoid of all political economy.42
It should be noted that another neoliberal phenomenon came into play to reinforce the equation of physical technology and finance. As described in detail in ScienceMart, the expansion of the patent system to encompass all sorts of previously unpatentable phenomena occurred in the 1980s. One of the major classes of newly minted intellectual property was precisely “business methods,” particularly those which were inscribed within computer programs. Almost immediately, a wave
of financial algorithms were newly patented;43 and this, in turn, rendered financial manipulations conceptually more on a par with technologies that had been previously subject to being reduced to intellectual property. What was posited as a newly valid classification ended up as real in its consequences.
It was one thing to reduce the tortured history of finance to a science-fiction narrative of the technological sublime; it has been quite another to turn it into the ne plus ultra of the full-spectrum neoliberal response to the crisis. As in the case of geoengineering, it has been necessary to recruit scientists who concede that they will never rectify the underlying crisis debility, so they must turn their efforts instead to fashioning Band-Aids to treat the symptoms. As the economist Paul Romer is reported to have said, “Every decade or so, any finite system of financial regulation will lead to a systemic financial crisis.”44 Never mind the history of the agent practices or the neoliberal capture of politics (or economic history, for that matter); the market will always periodically experience indigestion. Options, CDOs-squared, credit default swaps, high-frequency trading, dark pools, repo, rehypothecation, shadow banking, SIVs: you can’t hold back the ocean. Financial complexification is as inevitable as the tides. If nature will never be thoroughly tamed, then it behooves us to at least develop instrumentalities to ride its chaotic complexity. And it follows that the response to apparent market glitches is to double down with even more markets.