Nobel prize winner in economics Joseph Stiglitz’s book Freefall: America, Free Markets, and the Sinking of the World Economy surveys the devastation wrought by finance capital on the nation and the role the George W Bush and Obama Administrations and Fed chairmen Alan Greenspan and Ben Bernanke played in facilitating the plunder. It is an ideological critique of finance capital and free market economic theory. Stiglitz argues that finance capital and Wall Street control the commanding heights of the US economy. He points to the Washington-Wall Street connection, where Wall Street’s class interests consistently trump those of Main Street. In fact, as Simon Johnson shows, a silent coup d’état has occurred and Wall Street controls the White House and other mechanisms of financial and economic decision-making. He further points out that Goldman Sachs has been the dominant player in the Clinton, Bush and Obama Administrations. Democrats and Republicans deregulated finance capital, unleashing the predators of big capital and Wall Street on the people. After plundering the people they were deemed “too big to fail” and bailed out to the tune of $12 trillion.
The Bush and Obama Administrations’ bailouts, consequently, failed to restructure the failed financial system, or to place serious regulations upon the largest banks and investment houses. He declares, “The full consequences are not yet known. But almost surely, the failures of the Obama and Bush administrations will rank among the most costly mistakes of any modern democratic government at any time. In the United States the magnitude of guarantees and bailouts approach 80% of the US GDP, some &12 trillion (110).”
The Great Recession began in December 2007, brought on by the collapse of the financial system. Though the financial system has been stabilized the real economy and working people remain mired in recession. Stiglitz fails to mention that African Americans and many Latinos, the victims of finance capital and structural racism, are in a depression. Stiglitz insists the economic crisis cuts much deeper then the economy. He argues, “the failures in our financial system are emblematic of broader failures in our economic system and the failures of our economic system reflect deeper problems in our society. We began the bailouts without a clear sense of what kind of financial system we wanted at the end, and the same political forces that got us into the mess have shaped the result. We have not changed our political system, so we should perhaps not be surprised by any of this. (295).” We have created, Stiglitz says, “a society in which materialism dominates moral commitment, in which the rapid growth that we achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide. “ The wealth and income divide is the widest in the world. However, African Americans live in a virtual neo-colony in relationship to white folk.
The wealth and income gap between black and white is horrific. Africans Americans are experiencing a transfer of wealth and income from their families and communities to the wealthy on a scale not seen since slavery. We are in the throes of de-development. There is no way to avoid the racist foundations to the economic crisis. Stiglitz, like other progressive economists, is unable to understand and factor racism into their analysis. In historical terms, racism, slavery, Jim Crow and the new forms of black oppression have always distorted the economy and predisposed it to crisis. Among the multiple determinates of the current situation race is a huge factor. Hence, critical to resolving the crisis has to be liberating the masses of black folk from the plunderous combination of white supremacy and finance capitalism.
All of this is symptomatic of national decline. Stiglitz posits this crisis is systemic, meaning it affect the deep structure of the economy and society and have features of a general crisis of American capitalism and the free market model. These symptoms were present in almost exact form in past capitalist hegemons, i.e. Spain in the 17th century, the Netherlands in the 18th century and Britain in the late 19th and early 20th century. Each of these nations was an imperial empire. Each, like the US, experienced imperial overreach, the domination of the nation by bank and finance capital and imperial arrogance, expressed in wars for resources and markets.
Stiglitz’ examination at once forces the reader to think in historical terms and consider the long trajectories of national development and decline. We are drawn to look at systemic causes and solutions, rather than merely policies and Presidents. Lastly, he demands of the reader that we suspend the traditional pragmatic approach to problems and examine the place of ideology and class and race interests in creating the crisis. Stiglitz argues that ideology and policy have actively created conditions and contexts for this crisis. In particular, he shows the ideological role of free market fundamentalism, in shaping economic policy. We can note that Alan Greenspan is a fervent disciple of the reactionary individualism of Ayn Rand.
Twenty-first century capitalism is essentially two economies, a real economy and a virtual, or fictitious economy. The real economy is the economy of goods and services, the virtual or fictitious economy is the economy driven by hedge funds, investment banks and produces nothing except paper and derivatives, like Credit Default Swaps and Credit Debt Obligations. Globally the real economy is about $70 trillion dollars, the fictitious economy is $700 trillion. Wall Street is about the fictitious economy and the White House operates to protect it. The Bush and Obama Administrations socialized the banks’ losses and allowed the banks to privatize profits, and working people are paying for the whole bloody mess. And we will pay for this in closed schools, hospitals, libraries, firehouses, and police protection and so on for generations.
The financial crisis first appeared as a problem of the subprime mortgage market. Yet, risky and unmanageable debt went beyond subprime mortgages. Working people, the middle class and the poor were encouraged to go into deeper and deeper debt. Big banks and Wall Street made unheard of profits from this indebtedness. Realizing from the start that large numbers of people would default on their mortgages and credit card debt, the banks invented ways to spread risk widely. This is known as securitization. At the same time Wall Street invented new ways to make profits at the expensive of the productive, or real economy. These new instruments are called derivatives. Derivative have exotic names like Collateralized Debt Obligations, Credit Default Swaps and are managed by Hedge Funds and special units of investment and commercial banks. The virtual, or fictitious economy traded in debt and leveraging debt and betting on whether debts could be repaid or not. This can also be called a vampire economy, which lives off of and sucks the life from the real economy. The economy in deratives, the fictious economy is at the root of the current crisis and the deeper systemic crisis. Aline van Duyn, writing in the Financial Times (“Financial markets: Derivative dilemmas”,August 11, 2010) points out,”The root cause of the financial crisis involved losses on risky US mortgages. The entire global financial system was exposed to these mortgages after hundreds of billions of dollars of complex securities linked to them were sold to investors from Illinois to Iceland. Derivatives were the building blocks for those securities.” She argues the derivative markets and the players in this market might be too large to regulate. “The cast of characters embraces not only big banks such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, Barclays Capital and Deutsche Bank but exchanges such as CME Group, Nasdaq OMX, NYSE Euronext and Intercontinental Exchange, which want clearing business. It also includes smaller banks and brokers that are trying to expand their derivatives business, for instance Nomura and Jefferies, as well as inter-dealer brokers including Icap, and other financial groups that want to get into clearing or trading, from Tradeweb to State Street to tiny start-up brokerage firms( Financial Times, August 11,2010).”
For Stiglitz, a Keynesian economist and Social Democrat, the way out is a social market economy, where the state plays a central role in managing the economy and regulating finance capital. This is similar to the European model, especially in nations like Sweden and France. It is opposite of the American and British small government, free market approach. What is missing from Stiglitz’ analysis is a definition of the current stage of US capitalism. His analysis, however, closely fits Rudolph Hilferding’s in the book Finance Capital (1909). Hilferding’s is a Marxist analysis of the transformation from competitive and ‘liberal capitalism’ into monopolistic ‘finance capital’. Hilferding contrasted monopolistic finance capitalism to the earlier, “competitive” capitalism. Finance capital creates an oligopolistic finance capitalist system, where the banks and the state operate as one. As a description of the structure of the US economy Hilferding’s analysis and Stiglitz’ agree.
Lenin appropriating Hilferding’s analysis into his own, suggested the capitalist system could not reinvent itself in a progressive way. Finance capitalism could neither go back to earlier forms of capitalism, or forward to a more “progressive” brand of capitalism. It would seek to export its crisis to its colonies, creating a global market. However, Lenin insisted that the crisis of finance capitalism made necessary the movement to a new economic system. The banks, he said, were parasites upon the real economy and working and middle class people, and especially the poor.
Stiglitz’ radical critique is less bold when seeking solutions. He proposes Keynesian and New Deal answers to the economic crisis. However in the eighty years since the New Deal began the capitalist system has evolved and the banks are far more powerful today, debt is much greater and social breakdown is more profound. More is required.
In 1994 Stiglitz published a book titled Whither Socialism. It came in the wake of the failure and collapse of socialism in the Soviet Union and Eastern Europe. He felt that socialism was destined to fail, because it was overly centralized and too much authority was in the hands of the state. He was correct in seeing the crisis of state socialism as a crisis of over centralization and too much decision-making from the center and not enough in regions and local areas. At another level the lack of a market made the system over bureaucratized. Stiglitz wisely opposed the policies of rapid and brutal transition to free market capitalism being proposed by conservatives in the US and Europe. He called for a social democratic regulated market system. Sixteen years later the crisis and failures are now in the heart of global capitalism, the US. He proposes answers to this crisis not unlike those he proposed for Eastern Europe.
However, the social market economy can only be a transition to a socialist market economy and ultimately to advanced forms of 21st century socialism. In this new type of economy, finance capital would be completely eliminated. Banks would exist, but they would either be highly regulated or state owned. There would be planning of industrial, social, cultural, environmental, energy and infrastructure development. Planning should be factored into even Stiglitz’ social market economy. In the social market transitionary economy and the socialist economy the emphasis would be upon the social and cultural development of people and civil society. Education, health care and housing would be social rights. The moral foundation of society would anchor in the welfare of people. In both the transitionary and socialist stages of development the struggle to eliminate institutional and personal racism from social and cultural life would assume utmost significance.
Twenty first century Keynesianism in the social market transitionary stage would occur as what Professor Robert N Rhodes terms a Keynesian-Socialist synthesis. As he puts it, Keynesianism hedged with conditions of going over to socialism.
The Obama team opted to muddle through, rather than adopt bold and purposeful measures to restructure the financial system and the economy. I would suggest that in terms of solutions we must be bolder than Stigliz. To adequately address the now time of US capitalism, we have to imagine and plan for the future of humanity. We are in a crisis, but we are possibly on the cusp of a transition from what is to what is necessary and inevitable.