Today we are in a fundamentally different situation than we were in during the early modern industrial period. On the horizon we see the emergence of dominant class within the respective nation-states of the industrialized world. This elite class is heavily invested in a globally financialized political economy. By no means has this process of globalization arrived at a fixed form. Nation states still vie for a dominant position in the diplomatic configuration of security and trade arrangements. Whatever military conflicts are to arise out of the competition for ever more scarce natural resources, they are unlikely to involve the major powers in conflict with each other except by proxy. These proxy wars will not be the predominant type of conflict, as the contest for power will remain regional and localized in the process of the dominant class asserting its interests in policing the neoliberal regimes taking root across the so-called "Third World". As Vijay Prashad has explained, the total dominance of the neoliberal agenda globally has resulted in a contest for power involving distinct power brokers seeking a position of long term advantage within this context. As the regimes of control attain ever higher degrees of sophistication and efficiency, the neoliberal aristocracy within each nation-state will base itself in protected city-states from which to excercise their dominion. The possible escalation of violent conflict around the globe will not therefore likely be a World War Three which results in a new world order, but a new world order already in the making playing itself out in the establishment of its global hegemony. The neoliberal aristocracy will depend both on the national and privatized military forces under their control and also the security forces tied to the transnational corporations maintaining the material basis of the global order. The comparison of today's era with that of the New Deal and its inception is meant to expose and elaborate upon the consequences of a single, most important point: that today, crisis is a tool of the neoliberal aristocracy in maintaining domestic order and by extension international hegemony; that it is not the system itself which produces its own crisis, but the neoliberal aristocracy that transforms the system through the use of crisis as a tool.
Since having made the argument that the 2008 crash, the bailout, and quantitative easing have exposed the creation of what should rightly be termed a post-capitalist economic system, several excellent articles have been brought to my attention via posters here and elsewhere which demonstrate just how this system is constructed. A growing number of highly proficient, well-respected and well-known economists and thinkers have come to recognize that the U.S. economy and indeed the world economy is subject to the control of those whose wealth is so vast that they have been able to form a discrete set of interests whose power lies in their ability to control the value of stocks, mortgages, unregulated financial instruments, commodities, and treasury bills. The value of the dollar to the average consumer is only what is allowed under this system of vast wealth discrepancy, while the fact that the U.S. dollar has any value at all is subject to the bureaucratic manipulations of the investor class of the Federal Reserve, the bond ratings agencies, the banks, the commodities market, and the stock market. For example, the investor class has at times decided, through consensus among themselves, that devaluation of the stock market serves both the purpose of making money of derivatives and off of allowing acquisition of stock at favorable prices.
Before exploring the possibility of forming a political alternative to the neoliberal agenda, let's take a look at the similarities and differences between today and the time of Roosevelt. The most important similarity is the degree of complexity and sophistication the modern industrialized nation-state has acheived. This was already true long before the New Deal formulated federal-level regulations and policy proscriptions. In fact, the New Deal agenda was not to enable the industrialized nation state to nurture corporations, trusts, cartels, and so forth. Rather, this agenda was widely embraced by the general public including members of both parties and at times even some of those from the upper echelons of society for a simple reason. The trust in the "captains of industry" to pull the country through the Great Depression had been lost. The ideology of Hoover and laissez-faire capitalism was being inexorably discredited in the eyes of those who saw the betrayal of that trust in the ongoing revelations of corruption which the country had fostered during the boom years. But americans were not yet ready for Italian-style fascism or Russian-style Bolshevism. Instead, they saw that the system of finance and management which had been developed by capitalism could not be swept away and replaced wholesale:
Quote Frederick Lewis Allen, "Since Yesterday, 1929-1939"; pg. 32:
During all this time, many men were earnestly citing the hardships suffered in the depressions of 1857 and 1875 and 1893 as proofs that nothing ailed America but a downswing in the business cycle. The argument looked very reasonable -but these men were wrong. Something far more profound than that was taking place, and not in America alone.
The nineteenth century and the first few years of the twentieth century had witnessed a remarkable combination of changes which could not continue indefinitely. Among these were:-
1. the rapid progress of the industrial revolution-which brought with it steam power, and then gasoline and electric power and all manner of scientific and inventive miracles, brought factory production on a bigger and bigger scale; drew the population off the farms into bigger and bigger cities; transformed large numbers of people from independent economic agents into jobholders; and made them increasingly dependent upon the successful working of an increasingly complex economy.
2. A huge increase in population. According to Henry Pratt Fairchild, if the population of the world had continued to grow at the rate at which it was growing during the first decade of the present century, at the end of 10,000 years it would have reached a figure beginning with 221,848 and followed by no less than 45 zeros.
3. An expansion of the peoples of the Western world into vacant and less civilized parts of the earth, with the British Empire setting the pattern of imperialism, and the United States setting the pattern of domestic pioneering.
4. The opening up and using up of the natural resources of the world-coal, oil, metals, etc.-at an uprecedented rate, not indefinitely continuable.
5. A rapid improvement in communication-which in effect made the world a much smaller place, the various parts of which were far more dependent on one another than before.
6. The rapid development and refinement of capitalism on a bigger and bigger scale, as new corporate and financial devices were invented and put into practice. These new devices (such as, for example, the holding company), coupled with the devices added to mitigate the cruelties of untrammeled capitalism (such as, for example, labor unionism and labor legislation), profoundly altered the working of the national economies, making them more rigid at numerous points and less likely to behave according to the laws of laissez-faire economics.
Which of these phenomena were causes, and which were effects, of the changes in the economic world during the century which preceded 1914, is a matter of opinion. Let us not concern ourselves with which came first, the hen or the egg. The point is that an immense expansion and complication of the world economy had taken place, that it could not have continued indefinitely at such a pace, and that as it reached the point of diminishing returns, all manner of stresses developed. These stresses included both international rivalries over colonies (now that the best ones had been exploited-and were incidentally no longer paying their mother countries so well) and internal social conflicts over the division of the gruits of industry and commerce. The World War of 1914-18, brought about by the international rivalries, had left Europe weakened and embittered, with hitherto strong nations internally divided and staggering under colossal debts.
Debt is a key concept. The functioning of a capitalist system depends upon debt, upon the expectation of future delivery of value vindicating present investment of money issued on credit. The above quote emphasizes debt between nations as the systemic factor mitigating against continued stability. In his last days in office, President Hoover attempted to broker a deal between European nations which would temporarilly alleviate the stresses of such debt. Britain and France did not go along. When we see the importance of the Alsace-Lorraine region to the Germans in World War I, stemming from the coal fields there, we understand the connection between the increased reliance on large scale natural resource extraction and the capitalist system. Today, however, the very post-WWII institution designed by the victorious forces of the U.S. and Britain to stabilize and develop Europe during the last years of the classical-colonial period is being used to shore up a debt system designed to keep a neocolonial hegemony in place, as Vijay Prasad explains in the above mentioned article when relating Ronald Reagan and Margaret Thatcher's reactionary response to the non-aligned movement during the Cold War years. The overlap of national interests within competing global hegemonies is demonstrated by Russia's post-neoliberal regime courting the U.S. traditional ally Saudi Arabia which nation is, along with China, which pegs its currency to the U.S. dollar, heavily invested in U.S. Treasury bills. The point to made while speaking of debt as a consideration of analysis is that the ruling elite of each of these nations is heavily invested in a global finance regime maintained not solely through the IMF and World Bank but under the political auspices of the World Trade Organization, and secured through treaty agreements such as the proposed Trans-Pacific Partnership. The elite jostle for position within this order with, for example, Japan vying for regional influence with China and Saudi Arabia with Qatar (a WTO member) even though their interests are often aligned by the neoliberal agenda.
Certainly there is now as there was then a sense of crisis. Over the last few years however it has become abundantly clear that we are not "all in the same boat" so to speak. The 2008 financial meltdown with its crisis of short-term capital availability was preceded by fallout from the tech-bubble bursting with the result of those loosing their jobs returning to work for lower pay. There was, in 2008, still hope that the burst of the mortgage-backed securities bubble would result in a revaluation of assets followed by bankruptcies and so forth. The hopes of the american populace for some sort of shared pain and true reckoning- however painful it might be- were dashed when the universally despised bailout program (aka "TARP" for Troubled Asset Relief Program) was forced upon Congress after an initial failure resulting from public outcry. For the first time since the street protests against the Iraq War under George Bush Jr. the U.S. population took to the streets in the Occupy movement. They joined citizens from around the world who had already been protesting and fighting against privatization and austerity measures imposed by neoliberal and technocratic governments. The name "Goldman Sachs" for example kept appearing wherever there was talk about a government defaulting on its bond obligations; this firm which had already gained notoriety among those paying more close attention to the post-Cold War era for its role in the libertarian program imposed upon Russia now was exposed to the world population as an instrumental player in over-leveraging the government debt of nations such as Greece. Spain, Ireland, and Italy were among other European nations facing austerity programmes such as those which the so-called "Third World" had long labored under. Egypt struggles to this day to avoid subordinating itself to the prospective creditors of the IMF and Qatar. The IMF under LaGarde forces African nations to abandon fuel subsidies for their citizens. Now, in the U.S., the corporatist class represented by the Republican Party forces its austerity agenda in the form of cuts to food stamps, effecting its agenda with the proven technique of shutting down the government and refusing to raise the debt ceiling until its demands are met. The sizeable portion of the voting population represented by Mitt Romney cloaks their agenda in the rhetoric of self-reliance even as they subsist, one and all, no matter whether employee or business owner, on the very banking system fused to the happily married corporations and state and federal governments.
With such a system in place we can see that the corruption and illegality involved in making fortunes has ensconced the ruling class in a priviliged position in respect to the law. Whereas in the '30s the corruption revealed during Senate investigations strengthened the consensus that government regulation was key to preventing boom-and-bust cycles from disenfranchising the masses and wreaking misery among the poor, the ruling class now openly admits to drug-money laundering and a whole host of other legal and illegal but always ethically dubious schemes of various sorts. Perhaps one auspicious similarity is the move to decriminalize marijuana across the U.S. much like the repeal of Prohibition during the first days of Roosevelt's administration. One well known fact to have been exposed by the journalistic other inquiries into the manipulation of the bublle is that the bond ratings agencies continued to rate mortgage-backed securities at the highest rating even after they knew they were saturated with bad debt. The impending collapse was awaited by the paid propogandists of the right who were quick to blame the poor for the collapse of the entire economy, charging that government mandates to issue subprime mortgages was at the root of the problem. Although this lie was repeated by the media over many years, the revelations about how thorough the grip on the entire productive capacity of the economy had been enabled by the easy credit issued on spurious grounds exposed the true roots of the "crisis" and who benefits from it:
Quote Ellen Brown, August 26, 2013:
Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy. How have they pulled this off, and where have they gotten the money?
In an illuminating series of articles on Seeking Alpha titled “Repoed!”, Colin Lokey argues that the investment arms of large Wall Street banks are using their “excess” deposits – the excess of deposits over loans – as collateral for borrowing in the repo market. Repos, or “repurchase agreements,” are used to raise short-term capital. Securities are sold to investors overnight and repurchased the next day, usually day after day.
Using these excess deposits directly for their own speculative trading would be blatantly illegal, but the banks have been able to avoid the appearance of impropriety by borrowing from the repo market. (See my earlier article here.) The banks’ excess deposits are first used to purchase Treasury bonds, agency securities, and other highly liquid, “safe” securities. These liquid assets are then pledged as collateral in repo transactions, allowing the banks to get “clean” cash to invest as they please. They can channel this laundered money into risky assets such as derivatives, corporate bonds, and equities (stock).
If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.
Small and medium-sized businesses are responsible for creating most of the jobs in the economy, and they are struggling today to get the credit they need to operate. That is one of many reasons that banking needs to be a public utility. Publicly-owned banks can direct credit where it is needed in the local economy; can protect public funds from confiscation through “bail-ins” resulting from bad gambling in by big derivative banks; and can augment public coffers with banking revenues, allowing local governments to cut taxes, add services, and salvage public assets from fire-sale privatization. Publicly-owned banks have a long and successful history, and recent studies have found them to be the safest in the world.
Now, back in the 1930's people were jumping off buildings and shooting themselves after their activities had been exposed:
Quote Frederick Lewis Allen, "Since Yesterday, 1929-1939"; pg. 51:
The effects of the economic dislocation were ubiquitous. Not business alone was distrubed, but churches, museaums, theatres, schools, colleges, charitable organizations, clubs, lodges, sports organizations, and so on clear through the list of human enterprises; one and all they felt the effects of dwindling gifts, declining memberships, decreasing box-office returns, uncollectible bills, revenue insufficient to pay the interest on the mortgage.
Furthermore, as the tide of business receded, it laid bare the evidence of many an unsavory incident of the past. The political scandals which were being investigated in New York City by Samuel Seabury, for instance, came to light only partly as a result of a new crusading spirit among the citizenry, a wave of disgust for machine graft; it was the Depression, bringing failures and defaults and then the examination of corporate records, which had begun the revelations. the same sort of thing was happening in almost every city and town. As banks went under, as corporations got into difficulties, the accountants learned what otherwise might never have been discovered: that the respected family in the big house on the hill had been hand-in-hand with gansters; that the benevolent company president had been living in such style only because he placed company orders at fat prices with an associated company which he personally controlled; that the corporation lawyer who passed the plate at the Presbyterian church had been falsifying his income-tax returns. And with every such disclosure came a new disillusionment.
pg. 58 The spring of 1932 was a bad season for finacial reputations. On that very March 12 when "Jafsie" met Hauptmann and talked with him beside Woodlawn Cemetery, a strange thing happened in Paris: one of the supposed miracle workers of international industry and finance, the Swedish match king, Ivar Dreuger, carefully drew the blinds of the bedroom in his apartment in the Avenue Victor Emmanuel III, smoothed the covers of the unmade bed, lay down, and shot himself an inch below the heart. During the following weeks, out trickled the story behind the suicide: that Kreuger's operations had been fraudulent, and that he had readily deceived with false figures and airy lies the honorable members of one of the most esteemed American financial houses. On April 8 Samuel Insull, builder of a lofty pyramid of public-utility holding companies-that same Insull of whom it had been said, only a few years before, that it was worth a million dollars to anybody to be seen talking with him in front of the Continental Bank-went to Owen D. Young's office in New York, confronted there Mr. Young and a group of New York bankers, was told that the jig was up for him, and said sadly, "I wish my time on earth had already come"; Insull's house of cards, too, had gone down. A Senate investigation was beginning to show up the cold-blooded manipulations by which stocks had been pushed up and down in the stock market by corporate insiders of wealth and prominence and supposed responsibility. The president of Hoover's Reconstruction Finance Corporation, Charles G. Dawes, had to resign and hurry to Chicago in order that the Corporation might authorize the lending of ninety million dollars to save his bank, caught in a Chicago banking panic. Rumors of all sorts of imminient collapses were going about. Of whom and of what could one be sure?
By the middle of 1932 industry was operating at less than half its maximum 1929 volume, according to the Federal Reserve Board's Adjusted Index of Industrial Production: the figure had fallen all the way from 125 to 58. ...
pg 77 Slowly and uncertainly the drama of Presidential frustration proceeded-and then suddenly, about the middle of February, 1933, when Hoover's term of office had less than three weeks to run, it went into double-quick time. The banking system gave way.
Again and again during the preceding year or two there had been local bank panics; the Federal Reserve had come to the rescue, RFC [Reconstruction Finance Corporation] money had been poured in, and a total collapse had been averted. Now a new panic was beginning, and it was beyond the power of these agencies to stop. Perhaps the newspaper publication of the facts about RFC loans was a factor in bringing about this panic-though to say this is to beg the question of whether a banking system dependent upon secret loans from a democratic government is not already in an indefensible position. Probably the banks would have collapsed anyhow, so widely had their funds been invested in questionable bonds and mortgages, so widely had they been mismanaged through holding companies and through affiliation with investment companies, so lax were the standards imposed upon them in many states, and so great was the strain upon the national economy sustaining the weight of obligations which rested in their hands. At any rate, here at the heart of the national debt-and-credit structure a great rift appeared-and quickly widened.
What received far less contention from the left after the '08 scandal was the "stimulus effort". Understandably, though people were still skeptical about the defensibility of the government's position, they wanted to believe that putting money into the productive sectors of the economy would add value to dollars so distributed through the economy before winding up back in the hands of the banks. It has been touted as one of Obama's major accomplishments that what is left of the U.S. auto industry was rescued through such measures as the stimulus package. Many have argued that the stimulus should have been greater, though it had its detractors especially among the right such as the Tea Party. So, as we have seen both before the New Deal, via Hoover's Reconstruction Finance Corporation, and after "stimulus" has played a part in greasing the cogs of the national economy. Today, however, we have a myriad of websites to track much of this activity, such as http://www.recovery.gov/Pages/default.aspx. However, so as not to digress, we should turn our attention back to the mechanics of the financial world. In the '30s the Pecora Commission was one of the main efforts preceeding Roosevelt's restructuring of the banks and making the Federal Reserve under greater control of the federal government. Ferdinand Pecora had made a reputation in part by exposing and prosecuting those behind what were called "bucket shops". Now, without getting into too much detail it is interesting to note that, while they are still illegal, these bucket shops operated in a way similar to the unregulated derivatives market of today except that the scale today is much greater and the mechanism for keeping stock prices high or low in general has allowed a simultaneous correlation of derivatives value to actual asset ownership. In other words, instruments such as "credit default swaps" allow elite investors to make a profit at all times with the only question being the amount of profit relative to the amount of growth in the economy overall.
The highly leveraged use of margins theoretically gave the speculators equally large upside potential. However, if a bucket shop held a large position on a stock, it might sell the stock on the real stock exchange, causing the price on the ticker tape to momentarily move down enough to wipe out its client's margins, and the bucket shop could take 100% of their investments.
They were made illegal after they were cited as a major contributor to the two stock market crashes in the early 1900s.
Since then, the Gramm-Leach-Bliley act, the repeal of the Glass-Steagall act and other measures to deregulate the financial market have turned Wall Street into what is commonly referred to as a "casino"- don't bet against the house.
So, what happens when and if the economy again were to "go kablooey"? I think the key is in this article:
Quote Ellen Brown:
In the US after the Glass-Steagall Act was implemented in 1933, a bank could not gamble with depositor funds for its own account; but in 1999, that barrier was removed. Recent congressional investigations have revealed that in the biggest derivative banks, JPMorgan and Bank of America, massive commingling has occurred between their depository arms and their unregulated and highly vulnerable derivatives arms. Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.
Let's recap by quoting some other articles which should be considered "must read" at this point.
Quote Jeremy Green, 9/27/13:
The way the Fed led the policy response to the financial crisis is important in two ways. First, it reflects the extent to which the Anglo-American economies have become financialised: credit-debt relations are pervasive throughout all facets of contemporary economic activity and there has been a deepening, extension and deregulation of financial markets commensurate with this development. In that context, with the increased competitiveness, scale and global integration of financial markets intensifying the risk of financial instability, the crisis management capacities of central banks have become increasingly important.
Quantitative easing is thus exposed. It’s not merely a technical remedy to a malfunctioning financial system, but rather a deeply political policy programme. There are winners and losers just as with any economic policy that affects the overall distribution of wealth and resources within society. The conventional fixation with GDP obscures these dimensions of the recovery and ignores key questions about the distribution of wealth within society.
Emphasis mine, and noting the "Anglo-American" configuration by extension brings in the world market and currency system via the euro and various trade agreements between Europe, the U.S., South America (esp. Brazil), etc.
Quote Mike Whitney, Oct. 11 2013:
Repo is at the heart of the shadow banking system, that opaque off-balance sheet underworld where maturity transformation and other risky banking activities take place beyond the watchful eye of government regulators. It is where banks exchange collateralized securities for short-term loans from investors, mainly large financial institutions. The banks use these loans to fund their other investments boosting their leverage many times over to maximize their profits. The so called congressional reforms, like Dodd Frank, which were ratified after the crisis, have done nothing to change the basic structure of the market or to reign in excessive risk-taking by undercapitalized speculators. The system is as wobbly and crisis-prone ever, as the debt ceiling fiasco suggests. The situation speaks to the impressive power of the bank cartel and their army of lawyers and lobbyists. They own Capital Hill, the White House, and most of the judges in the country. The system remains the same, because that’s the way the like it.
US Treasuries provide the bulk of collateral the banks use in acquiring their short-term funding. If the US defaults on its debt, the value that collateral would fall precipitously leaving much of the banking system either underwater or dangerously undercapitalized. The wholesale funding market would grind to a halt, and interbank lending would slow to a crawl. The financial system would suffer its second major heart attack in less than a decade. ...
... If the holders of US Treasuries (USTs) begin to doubt that the debt ceiling issue will be resolved, then they’ll sell their bonds prematurely to avoid greater losses. That, in turn, will push up interest rates which will strangle the recovery, slow growth, and throw a wrench in the repo market credit engine. We saw an example of how this works in late May when the Fed announced its decision to scale-back its asset purchase. The fact that the Fed continued to buy the same amount of USTs and mortgage-backed securities (MBS) didn’t stem the selloff. Long-term rates went up anyway. Why? Because expectations changed and the market reset prices. ...
...None of this bodes well for Washington’s imperial aspirations or for the world’s reserve currency, both of which appear to be living on borrowed time.
Today, most of the collateral in use is U.S. Treasuries and “agency securities” — mortgage-backed securities guaranteed by the U.S. government:
Back to Ellen Brown:
The FDIC was set up to ensure the safety of deposits. Now it, it seems, its function will be the confiscation of deposits to save Wall Street. In the only mention of “depositors” in the FDIC-BOE directive as it pertains to US policy, paragraph 47 says that “the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” But protected with what? As with MF Global, the pot will already have been gambled away. From whom will the bank get it back? Not the derivatives claimants, who are first in line to be paid; not the taxpayers, since Congress has sealed the vault; not the FDIC insurance fund, which has a paltry $25 billion in it. As long as the derivatives counterparties have super-priority status, the claims of all other parties are in jeopardy.
Ellen Brown ends with a list worth reviewing of suggestions as to how to fix things. The U.S. will only see reforms if a democratic movement is willing to enact these reforms at great cost to itself, since even the most thorough reforms still leave the elite, neoliberal aristocracy in a position of relative power and immense wealth. Other propositions for a transformation of the nature of the economy itself have been made by David Korten and others. A truly radical approach would incorporate the ideas of anarcho-syndicalism into a bringing democracy to the workplace. This would require a grassroots resurgence in labor and consumer organizing. The populist agenda cannot be the classical liberal one belonging to a bygone era when the promise of a new world brightened the hopes of visionaries who set forth to wipe out poverty and disease across the globe. Moreover, it cannot rely solely on technology and industrialism to restore jobs and wealth. The era of post-colonialism and national independence lost its momentum as the Cold War forced peoples around the globe to tied themselves to the oil-dependent economies of the superpowers. Only the efforts of the global masses to take upon themselves the task of democratizing the globalized economy can be succesful in bringing new models of proseperity and peaceful coexistence to local communities including those currently dependent upon natural resource extraction.
Lastly, to quote James Galbraith:
And we will have to dismantle some banks to make way for them which is not something that gives me a great deal of heartburn. We should of done it when the political opportunity was there and not waiting five years until they are entrenched once again with their bonuses and lobbyists…Roosevelt did not miss that opportunity in March of 1933. We are going to have to build up institutions that will let us do things that need to be done: jobs, the foreclosure crisis, energy, environment and climate change—the challenges we all know we face.