11.25.08
Neoliberalism
RG mail
Z Magazine December 2008
Neoliberalism and Bottom-Line Morality, With Notes on Greenspan, Rubin
and the Party of Davos Edward S. Herman
From the Reagan era onward I have been impressed with how regularly
liberal and left-leaning economists I knew, who went to work in
industry and finance, very soon became pro-business, anti-labor, and
politically rightwing. I think that what got to them was not only the
impact of association with businesspeople, but the fact that business
profitability became central to their own performance. As business
economists, wage increases would seem bad as encroaching on that
profitability and threatening inflation and business growth (and stock
prices). Tough environmental rules would also hamper profitability;
their relaxation by law or friendly (non-)enforcement would enhance
it. It was therefore easy to slide into what we may call bottom-line
morality, with positions on key issues dictated by prospective bottom
line effects, but of course rationalized with an ideology that made
this all benevolent–in the long run–and made these bottom-line
moralists into Good Samaritans as they collected their fat salaries
and bonuses while the vast majority waited for trickle-down. (On the
fraudulence of this ideology, see David Harvey, A Brief History of
Neoliberalism, and Ha-Joon Chang, Bad Samaritans).
With the steady increase in businesss economic and political power
over the past 30 years, and the parallel decline of organized labor,
neoliberal (market-can-do-it-all) ideology has become even more firmly
entrenched in establishment thought and practice. The novelist Ayn
Rand, most famously the author of Atlas Shrugged, was an extreme
proponent of individualist, free enterprise, anti-government ideology,
and it is no coincidence that one of her cult admirers and associates,
Alan Greenspan, became a leading member of the policy-making elite in
the 1980s and into 2006.
Greenspans Superlatively Moral System
Greenspan contributed three chapters to Rands 1966 book Capitalism:
The Unknown Ideal, all of them reflecting her–and Greenspans–ultra
laissez-faire ideology. In one, Greenspan castigates antitrust law and
practice as not merely harmful, but with the “hidden intent” of
injuring the “productive and efficient members of our society.” In
another, he claims that all government regulation represented “force
and fraud” as the means of consumer protection, whereas it is
“profit-seeking which is the unexcelled protector of the consumer.” He
argues that the market system itself is a “superlatively moral system
that the welfare statists propose to improve upon by means of
preventive law, snooping bureaucrats, and the chronic goad of fear.”
Greenspan contributed to the workings of this superlatively moral
system at the micro-level back in 1985, writing to the savings and
loan authorities on behalf of Charles Keating, head of Lincoln Savings
and Loan. In that letter the authorities were urged to exempt Keating
from restrictions on risky loans, given his exceptional character and
soundness of his operation, with “no foreseeable risk to the Federal
Savings and Loan Corporation.” Greenspan was a paid consultant to
Lincoln, which failed in 1989 at enormous expense to the FSLIC and
taxpayer. Keating ended up in prison. This is the same Charles Keating
with whom John McCain had a close relationship and on whose behalf
McCain also did some lobbying. Neither Greenspan nor McCain suffered
significant damage from this relationship, and despite his extremist
ideology Greenspan became a powerful figure in the U.S. political
economy, leading the Fed for many years (1987-2006) and through two
major bubbles that he did nothing to constrain.
One important manifestation of Greenspans worldview can be seen in his
congressional testimony of July 22, 1997, where he explained that
inflation was not increasing despite the lowering unemployment rate
because of a heightened sense of job insecurity, which he described
elsewhere as reflecting the traumatized worker, helpful in keeping
wages down. He didnt suggest that job insecurity and the
traumatization of workers involved any immoral goad of fear or had any
negative implications for welfare.
Actually, in this regard Greenspans view wasnt much different from
that of a great many mainstream economists, who were slow to recognize
greater job insecurity as a key factor altering the
unemployment/inflation relationship, and who were not troubled when
they did recognize it. Liberal economist Janet Yellen, co-author with
Alan Blinder of a book on the 1990s entitled The Fabulous Decade, told
the Federal Reserve Open Market Committee in 1996 that while the labor
market is tight, job insecurity is alive and well. Real wage
aspirations seem modest, and the bargaining power of workers is
surprisingly low. (Quoted in Robert Pollin, Contours of Descent, p.
53.) Robert Pollin points out that Yellen and Blinder didnt let this
interfere with their conclusion that the 1990s were fabulous.
Apparently these economists, like Clinton, dont really feel pain as
long as only workers suffer.
In fact, they are all a throwback to 17^th and 18^th century
mercantilists who, according to historian Edgar S. Furniss, argued
that high wages would prove destructive of national well-being because
they would reduce Englands competing power by raising production
costs. The prevalent doctrine held that wages should be kept at the
level of the cost of physical subsistence. Hence the apparent anomaly
of the laborers position: whereas his theoretical social importance
was large, his actual economic reward was miserably small….[Under
mercantilism] the dominant class will attempt to bind the burdens upon
the shoulders of those groups whose political power is too slight to
defend them from exploitation and will find justification for its
policies in the plea of national necessity (Furniss, Position of the
Laborer in a System of Nationalism, 1920, pp. 201, 203). Does this
ancient view on how burdens should be distributed have some possible
application to the bailouts now being put in place to deal with the
current financial crisis?
Getting back to Greenspan morality, it is clear from both his Ayn Rand
contributions and his writings and public pronouncements of the past
20 years that he views untrammeled capitalism as a superlatively moral
system not because of businesspeoples benevolence but because market
operations in businesss self-interest will protect consumers; business
will not take on undue risk because that would eventually harm their
own welfare. Regulation is thus unnecessary and positively damaging by
its arbitrariness and bureaucratic bungling. Greenspan fought long and
strenuously for across-the-board deregulation, and against the
regulation of derivatives as they grew rapidly in the 1990s, even
arguing in 2004 that the innovations like derivatives had contributed
to a new stability in the financial system: Not only have individual
financial actors become less vulnerable to shocks from underlying risk
factors, but also the financial system as a whole has become more
resilient. Such a misunderstanding of reality by a man with great
experience and access to the research resources of the Fed can only be
understood as a result of the intellectual-ideological bubble within
which he worked.
Now that the financial system has collapsed and its leaders have
demanded and gotten a huge bailout, what does Greenspan say? Apart
from an admitted bafflement, he has stated that business has been too
greedy and behaved dishonorably! He is distressed at how far we [sic]
have let concerns for reputation slip in recent years. But this is
hogwash. It was rational profit-making that was supposed to control
risk, not honorable behavior. Also, if the actual behavior was
systemic, and greed can overcome honorable behavior, the Greenspan
model has failed on its own terms. But beyond that it was idiotic, as
it has long been known that the force of competition, the pressure
(and fiduciary obligation) for profits, and regular business myopia in
buoyant markets, have repeatedly produced unsustainable excesses.
Greenspans moral model reflects straightforward ideology and bottom
line morality. It is also part of a class war perspective where, as
noted, labor (and the majority) are viewed in the mercantilist
traditionas a cost to be contained, not as a very large group whose
welfare we are trying to maximize. It also helped cause him to
misperceive economic reality and make a major and disastrous economic
forecasting error.
Greenspan, Rubin, Summers and the Party of Davos
Both the New York Times and Washington Post had substantial articles
on Greenspans heavy responsibility for the ongoing crisis, in a way
beating a dead horse after both papers had treated him with great
deference as the Oracle for many years (Peter Goodman, The Reckoning:
Taking a Closer Look at a Greenspan Legacy, NYT, Oct. 9, 2008; Anthony
Faiola, Ellen Nakashima and Jill Drew, What Went Wrong, WP, Oct. 15,
2008). The articles feature the struggle for and against derivatives
regulation in the 1990s, with Brooksley E. Born, the head of the
Commodity Futures Trading Commission (CFTC) as the pro-regulation
protagonist and heroine, and Greenspan as principal villain.
But both articles also call attention to the support given Greenspan
in his anti-regulation fight with Born by the leading financial
officials of the Clinton administration: Robert Rubin, Larry Summers,
and Arthur Levitt, Jr., the first two heading the U.S. Treasury,
Levitt the SEC. Rubin looks particularly disingenuous in these
articles, claiming to have favored regulating derivatives back in
1998, but believing that this was politically unfeasible because of
industry opposition and because there was no potential for mobilizing
public opinion. The Times article immediately paraphrases a former
CFTC official that the political climate would have been different had
Mr. Rubin called for regulation.
It should also be recognized that Rubin and Summers are no slouches
when it comes to supporting the bailout of fat-cat investors. In his
superb book The Global Class War, Jeff Faux features the fact that the
corporate establishment which dominates both U.S. political parties is
part of the Party of Davos, that gets together periodically at lush
facilities in Davos, Switzerland to party, hob-nob and plan in the
interest of the global business elite. The book focuses heavily on the
character and passage of the North American Free Trade Agreement
(NAFTA), and then the immediately following Mexican crisis and
bailout. The NAFTA was a corporate project, strongly opposed by a
great majority of Democratic Party voters and by a majority of
Democratic legislators. But with Robert Rubins urging, Clinton put
passage of this legislation ahead of health care reform, put a huge
political effort into getting it passed, and thereby set the stage for
both the failure of health care reform and the Democratic Partys
political debacle in 1994. Of course the business community
appreciated Clintons service and here and elsewhere he justified their
earlier vetting of his candidacy, organized by Rubin himself.
Rubin had a serious conflict of interest in pushing NAFTA and the
subsequent bailout of investors in Mexican securities. He had been a
high-ranking official of Goldman Sachs, which did substantial Mexican
business, and he had–and even continued to maintain–a number of
Mexican clients. The NAFTA served only the Party of Davos in the
United States and a tiny elite of wealthy men who dominated a famously
corrupt political system in Mexico. It was opposed by a U.S. majority
and by aware and uncorrupted Mexicans; in Mexico the majority would
eventually be seriously damaged by this instrument of the global class
war. Its central feature was privileging foreign investors in Mexico,
providing also for the gradual elimination of tariffs on agricultural
goods and therefore for economic disaster for several million Mexican
farmers and their families. (One of Clintons most notable lies was his
claim that NAFTA would serve to slow down Mexican immigration into the
United States by spurring investment and development in Mexico.)
The analogy with the current U.S. crisis and bailout is more dramatic
when we consider the Mexican crisis of 1994-1995. Shortly after the
enactment of NAFTA in 1994, the Mexican government, which for
political reasons had tried to peg the peso, suffered a crisis of
investor confidence, and an unsustainable drain on its foreign
reserves. As economist David Felix described it, in the Fall of 1994
Mexican tesobono holders began cashing in and exiting to dollars [this
bond was payable in pesos but with pesos indexed to the dollar],
followed belatedly by foreign holders, who were still stuck with $29
billion worth of tesobonos when in December 1994 the Mexican central
bank, its dollar reserves nearly exhausted, let the exchange rate
float and helplessly watched it sink. The U.S. Treasury and IMF
hastily cobbled together a $51 billion bailout fund, and required the
Mexican government to use over half to pay off the $29 billion
tesobonos with dollars. Since the government’s contractual obligation
to tesobono holders was merely to pay them more pesos when the peso
price of dollars rose, the bailout obligation amounted to a forced ex
post rewriting of the contract with tesobono holders to save them from
taking a bath.” (Why International Capital Mobility Should be Curbed,
and How It Could Be Done, ICTFU, Dec. 2001)
In his chapter Alan, Larry, and Bob Save the Privileged, Jeff Faux
describes how in 1994 Greenspan, Summers and Rubin helped create a
climate of fear, telling congress that the entire world was now at
risk. Governor George W. Bush of Texas was lauded by Rubin, for
instinctively grasping what was at stake and giving public support to
the bailout, and Rubin even called Gingrich, who called Greenspan who
called Rush Limbaugh to promote the bailout to the rightwing listeners
of his radio show. In fact, the sales claims for the bailout were
phony and the IMF financial contribution to the bailout was illegal.
Mexico didnt suffer any debt crisis as it was only obligated to
provide pesos, not dollarsthe payment of dollars was forced on the
Mexican government by U.S. officials, who persuaded the U.S. media
that the dollar payments were required by the tesobono contracts. U.S.
officials told this lie and required this payment of Mexico, not only
to help U.S. investors, but also to dissuade Mexico from resorting to
capital controls, which they could have done in accord with IMF rules,
but which would have set a pattern in violation of the neoliberal
principles being enforced on the Third World by the United States and
IMF. Article 6 of the IMF Articles of Agreement not only would have
allowed Mexican capital controls, it prohibits IMF emergency funding
to facilitate capital flightviolated in this case in accord with U.S.
demands and higher neoliberal principles (or rather interests).
Faux points out that the bailout money was not used to rejuvenate the
Mexican economy. It did not underwrite job creation for the unemployed
or debt relief for the bankrupted small businesspeople or aid to
hospitals and schools that were suddenly broke. It was used to make
whole the Wall Street holders of tesobonos, who had originally bought
the risky Mexican bonds because Salinas was giving them a high yield.
Instead of capital controls Rubin and Summers insisted on budget
reductions and reform of the Mexican financial system, which was
followed and resulted in the steepest economic crash since the Great
Depression. The Mexican middle class was decimated by the forced
contraction and Mexican taxpayers eventually being forced to pay the
bills for the bailout. Rubin claimed that this was all because
Mexicohad made a serious policy mistake. But Faux points out that
Mexico didnt do this, but rather Salinas and his successor Zedillo
both of whom Alan, Larry and Bob had promoted to the American congress
as honest, competent reformers who had to be supported with NAFTA,
even if it meant thousands of American losing their jobs.
Faux also points out that as part of NAFTA, and in the wake of the
Mexican forced contraction and budget crisis, privatization of Mexican
public assets was accelerated, and local oligarchs and foreign banks
(and customers of Goldman Sachs) could now buy up assets at bargain
prices. So the Party of Davos and its local comprador allies did very
well at the same time as ordinary Mexicans were put through the
wringer. As Faux says, The NAFTA financial modelliberalization of
trade and finance leading to a speculative bubble, a subsequent crash,
and the protection of investors from the consequences of their own
actionswas repeated in various forms in the 1990s throughout the
global markets in Thailand, Brazil, Bolivia, South Korea, Indonesia,
Russia and Argentina.
That was written in 2006. Now that the NAFTA financial model has hit
home in the United States itself, we can see how the Party of Davos,
with Goldman Sachs once again in the lead, is doing its darndest to
continue to socialize risks for investors and pass off costs to
ordinary citizens. And with Bob Rubin and Larry Summers waiting in the
wings, the Democrats swallowing the latest bailouts, and Wall Street
still funding the Party generously, we may have more of the same in a
new Democratic administration.
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