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Un nuovo new deal. Purché non sia un paracadute d'oro
The current moment would be a remarkable and revealing one for any United States government, and is even more so when the current administration has been so firm in proclaiming its desire to keep out of the economy. The fact that the White House, the treasury and the Federal Reserve want to inject at least $700 billion of taxpayers' money into the economy in order to stabilise a fragile and exposed financial system is a stunning departure from long-held neo-liberal mantras.
But astonishment at this turn of events, far less satisfaction at the belated acknowledgment of the state's proper role in the market, should not lead critics of financial capitalism astray. Rather, they should argue firmly that this plan must not be a golden parachute for a small elite of people and firms paid for by the country's already hard-pressed citizens: rather, it must become a golden opportunity to create a new model of and a new phase in the US economy itself.
The taxpayers' money should not go to bail out a financial sector that has brought the country to the most severe crisis since 1929 - and which will have (like the great-depression era) economic and political reverberations across the world. The US has a strong banking sector, whose regulation and capital requirements have allowed it to survive the crisis of the financial sector. The fact that the two titans of Wall Street, Goldman Sachs and Morgan Stanley, have voted with their feet by joining the banking sector is another indication of a possibility of returning to a financial model centred more on banking - with more regulation, stiffer capital-reserves requirements, and fewer leveraging options.
The early signs of congressional scepticism about the "troubled asset relief program" (Tarp) proposed by Hank Paulson, US treasury secretary, are hopeful in this regard; but they need to go much further, and become part of a coherent counter-proposal to reshape the very direction of economic activity in the United States - to the immediate benefit of tens of millions of people across the land, and of the long-term sustainability of their social and environmental livelihoods.
A plan for life
What would this counter-plan involve? The most important item would be to focus on the kind of work the economy needs desperately but seems unable to perform, work that involves wide sectors of the population and of the economy. A rebuilding of the country's infrastructure is a prime example. There are vast numbers of essential tasks waiting to be done: repairing flood defenses and unsafe bridges, environmental clean-ups, developing alternative-energy sources, introducing suburban train systems, rebuilding devastated inner-cities, creating urban parks and green belts, helping low- and modest-income households to acquire foreclosed properties; and allowing recently foreclosed on households to recover their homes. There is so much more.
These tasks alone would require the creation of huge numbers of jobs and enterprises of all sizes, in almost all economic sectors. This in turn would feed directly into GDP growth and heave a healthy effect eventually on the value of the dollar. At present, actual economic growth is more urgent than lowering the interest-rate so that households can borrow more; households need income and employment, firms need buyers of their goods and services. In this dispensation, banks would do the lending through conventional loans rather than financial firms selling high-risk structured financial instruments.
This would be the equivalent of a FD Roosevelt-era new deal - but with different contents.
If there is $700bn of taxpayers money available to spend, let's spend it in the right way. Let's use this rare chance of the United States's political leaders feeling the political - democratic, from-below - pressure to force them to use such a large intervention in the economy for the benefit of everyday citizens. In recent times, Congress and other branches of government have shown little inclination or determination - even when confronted with shocking levels of social and infrastructural neglect - to act in this direction. This is a once-in-a-lifetime opportunity for them - with the breath of popular, democratic sentiment at their backs - to take a major step towards a new economy that delivers a broad distribution of benefits, and fuels direct economic growth rather than financial growth.
The US can learn here from previous rich-world financial meltdowns such as Sweden and Japan. The US is today facing (according to IMF estimates) an approximately $1 trillion financial debt/loss across its diverse sectors, from consumers to firms. Japan faced equivalent loss in the 1980s when it went into crisis. It decided to launch massive infrastructural development projects that kept GDP growth stable, albeit low. The country remained in this state for a number of years: there was economic activity involving a cross-section of economic sectors and households. This allowed Japanese firms and households to keep paying off their debt, supported by traditional banking, and today Japan has cleared that $1 trillion debt.
A time to pause
The implication of this experience is that there are better ways for the American people to respond than to rescue the particular kind of financial sector that emerged in the 1980s. A further reason lies in this sector has come to be dominated by two processes that impinge on the lives of every citizen.
The first is accelerated boom-and bust-cycles that are followed by regular taxpayer bailouts that serve to feed yet another boom - until the whole cycle is repeated. The massive late-1980s bailout through the Resolution Trust Corporation (RTC, active 1989-96); the stock-market mini-crash of 1987; the debt bailout in Mexico when the $50bn-plus of taxpayers' money destined there went straight to Wall Street; the crisis bailout in southeast Asia in 1997; the Long-Term Capital Management (LCTM) bailout in 1998 - these are only some of the more prominent examples. The massive official disbursements of cash involved were meant to be a lifeline - but in these cases, they only reinforced the existing type of financial sector, while providing the occasion for new regulatory moves (notably the cancellation of the deprtession-era Glass-Steagall Act [1933]).
The second process is that the big winners have been an increasingly small percentage of the US population - not the middle and working classes. In the 1960s the share of national income going to the top 10% was 30%; from the 1980 the figure approached almost 50%.
On 4 November 2008, the United States will elect a new president whose fresh team will seek to guide the country through the inescapably stormy times ahead. So why is it necessary now to rush through a bailout of at least $700bn - taxpayers' money, which Americans will be paying off for years?
The answer is that it is not necessary. Because the plan as it stands is designed to re-consolidate a system that has simply not delivered for vast sectors of the population, and which in addition puts the whole economy at risk every few years. Indeed, the fact that the mere announcement of the decision to ask for a bailout on 19 September sent stock markets into a sharp rise is a symptom of the underlying problem rather than a step towards its solution - for this indicates that a new boom-bust sequence can be triggered at any moment.
What needs to happen instead is that the nature of the systemic predicament needs to be understood and its gravity registered. Only then should the representatives of the people who are to decide on how to spend the people's taxes respond to the request and decide how the funds are to be used. The United States Congress must not spend vast sums of money saving financial firms in order that the country can return to an unstable boom-and-bust cycle that benefits a shrinking sector of the economy and the people.
There is also a fundamental issue of accountability. Section 8 of the Paulson proposal grants the treasury secretary full responsibility over its implementation, something that no other party (legislator, lawsuit, or judge, for example) can contest; in its words, "(decisions) by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." None of the other bailouts has entailed such an immense power-grab. It is another instance of the growing "executisation" of government (see "Globalisation, the state, and the democratic deficit", 19 July 2007).
This is another reason for politicians and citizens alike to take time to consider how to spend public funds. In the current desert of uncertainty, six weeks before the presidential election and four months before the inauguration, it is worth taking a serious look at what kind of financial model the United States (and the world) needs; and deciding as a result to spend taxpayers' money in ways that best deliver it.