No one can know how the present crisis will play out. It is possible that the United States will continue to benefit from an inflated currency, as money from around the world continues to shelter in what is still the safest investment haven around-U.S. Treasury bills. In that case, it is possible, if unlikely, that the Obama administration will be able to ride the tiger and keep things from falling apart utterly. But it is also possible that some unforeseen event or sequence of events might induce foreign investors to suddenly pull their money out of the United States. If that were to happen, the dollar could become worthless and we might see a replay of the Deutsche Mark in 1923, when ordinary Germans paid for loaves of bread with wheelbarrows of money. Either way, the structural contradictions in the world system are profound, and they are not going to go away any time soon.
Unlike in the 1930s, when the advanced industrialized nations essentially spent themselves out of depression, either through massive state investment in public works, coupled with a new social compact with labor (as in the United States, with the New Deal), or through a massive arms buildup and military expansionism at the direction of a corporatized (fascist) and authoritarian state (as in Germany, Italy, and Japan), the capitalist states have far fewer resources at their command this time around.
First, the state sector already accounts for a large portion of the national economies of the United States, Japan, and Europe. (The United States alone already spends half a trillion dollars per annum on war-making-and that's not counting its wars in Iraq and Afghanistan.) In the 1920s, the U.S. national debt (relative to GDP) was flat and even declined, while GDP per capita grew at an extraordinary rate, ushering in higher wages, improvements in agricultural productivity, and vast improvements in quality of life for millions of Americans, including electricity in the home, increasing availability of rail travel, and the introduction of automobiles into everyday life. During the latest economic expansion, by contrast, debts public and private soared at every level of society. The national deficit grew, banks and corporations assumed mind-boggling amounts of risk (often in the form of obscure financial instruments like derivatives), and ordinary working people piled up trillions of dollars of debt in the form of home and car loans and credit card debt. At the same time, wages and quality of life fell. It is therefore difficult to see how the United States and other nations will be able to spend their way out of the present crisis, when, even before the collapse of Lehman Brothers last year, the population was already tapped out, and government expenditures hovered near record highs.
A second factor likely to confound policymakers this time around is what might be termed the objective natural and political limits of the system. As indicated, capitalism has savaged the earth, leaving billions of people without a decent livelihood, and the ecosystem in tatters. But the social and ecological costs of "doing business" are about to grow exponentially greater. Even without a world financial crisis, we can anticipate more, and more devastating, natural disasters, which in turn will mean disruptions in agricultural production, flooding of cities and entire countries, mass starvation, increasing migration pressures, and so on. All of this will in turn exact an increasing toll on the legitimacy of the liberal nation state. The late sociologist Charles Tilley described the modern nation state as functioning like a "protection racket": the state agrees to protect us from harm (most typically, from real or imaginary threats generated by the state itself), in exchange for our consent and obedience as subjects. However, as economic, political, ecological, and hence social costs mount, the state will become less and less able to protect us from harm.
As a result, the state is at risk of losing its legitimacy in the eyes of its citizens. (Already, polls have shown a steady decline in the rate of democratic participation around the world, increasing cynicism toward government, and greater openness to extreme ideologies, whether in the form of religious fundamentalism or extreme nationalism.) This in turn will compromise the ability of state leaders to muster the broad political mandate they would otherwise need to make meaningful and urgently necessary macro-level changes in the organization of society and economy. This structural problem in part explains the recent authoritarian turn of the United States under the Bush administration. Bush's seeming indifference to the effects of U.S. actions on foreign and domestic opinion grew out of the Neocons' sense that the state no longer needed the consent of the governed, whether at home or abroad. Bush was, of course, wrong-American hegemony cannot survive long without at least the perception of legitimacy, both at home and abroad. It remains to be seen, however, whether Barack Obama will be able to return the ship of state safely to the status quo ante-i.e., to a centrist, liberal, social democratic capitalist order-in the face of a full-blown economic hurricane.
Regrettably, Obama's administration is doing everything in its power to preserve-and strengthen-corporate monopoly capitalism, in spite of that system's moral enormities and its ever-widening structural fissures. Though the political Right has taken to vilifying the president as a "socialist," Obama has in reality surrounded himself with economic advisers groomed from the most elite ranks of capitalist finance.
Nowhere is the new administration's basic ideological harmony with finance capital more evident than in its close links with current and former members of Goldman Sachs, the formerly über-bullish brokerage house. While anti-Semitic websites have had a field day depicting Obama as the public shill for a "Zionist conspiracy" run out of Goldman Sachs's plush New York offices, Sachs's extraordinary influence on government policy in fact began in earnest with President Bush's appointment of Henry Paulson, then Sachs's CEO, to the position of treasury secretary in 2006. (Paulson involved so many former and current employees in managing the financial crisis late last year that insiders began referring to the firm as "Government Sachs.") Nonetheless, the influence of Goldman Sachs has not diminished in the early hours of the Obama presidency, perhaps because Sachs was the single largest private contributor to Obama's 2008 campaign. When the president picked Timothy Geithner (a technocratic capitalist who had originally headed up the flagship of the Federal Reserve system, in New York) to be the new head of the Treasury Department, Geithner naturally chose a former lobbyist and vice president of Goldman Sachs to be his head of staff. But this was only one of the more conspicuous examples-many other former Sachs employees remain involved directly or indirectly at all levels of the Obama administration.
What makes the involvement of Goldman Sachs in cleaning up the current mess surreal is that of all the investment firms in the world, Sachs alone enjoys the dubious historical distinction of having played a key role in bidding up the world stock markets to unsupportable heights not just once, but twice. To be sure the most recent speculative bubble on Wall Street can be traced back to the decisions of lawmakers, beginning with Paul Volcker's decisions at the Fed back in the late 1970s, on through the Congress's repeal of Depression-era laws such as the Glass-Steagall Act in the late-1990s, i.e. in federal laws and monetary policies that collectively had the effect of pouring gasoline on already inflamed markets. Nonetheless, certain players were particularly key in fomenting this madness, and Goldman Sachs stands out even among the many aggressive firms on Wall Street for having promoted "irrational exuberance" ceaselessly for decades. What is doubly ironic is that the firm played much the same role in the 1920s. During the Depression, when Congress held public hearings on the "culture of greed" that had led to national calamity, Goldman Sachs's chairman was one of the first to be brought to the carpet to account for his firm's ignoble role in driving the speculative frenzy. (When similar hearings were held in the Congress in 2008, Goldman Sachs was naturally excused from having to testify.)
In March of this year, Robert Reich, the former Secretary of Labor, asked rhetorically, "could it be, given these tangled webs" between the White House Branch and Goldman Sachs, "that-innocently, unintentionally, perhaps even subconsciously-the entire bailout effort was premised on saving these companies rather than protecting the public? Or that the distinction between the two was lost, and still is?" Indeed, a few weeks after Reich penned these words, we learned that after the U.S. Treasury handed $180 billion over to the insurance giant AIG to keep it from collapsing, the company had turned around and transferred a sizable portion of the public's largesse to the firm's counter-signing parties, the banks that had helped underwrite AIG's risky credit default swap operations. Among these were some of the biggest and richest banks and investment firms in the world, including foreign institutional giants such as Deutsche Bank, Barclays of Britain, and Société Général of France. But topping the list was Goldman Sachs, which received the lion's share, $13 billion, despite the fact that it was already swimming in money ($100 billion in cash alone).
Whatever one makes of the Obama-Sachs connection, it is at least clear that President Obama and his advisers will challenge the underlying prerogatives of financial capital only with great reluctance, and as an absolute last resort. As political theorist Sheldon Wolin observes, the president's plan for rescuing the nation's banks "does not bother with the structure at all." When all is said and done, "the basic systems are going to stay in place." Ironically, however, the administration's essentially conservative handling of the crisis-its unwillingness to take on the power of the banks-may prove to be its own undoing. This spring, the liberal economist and writer Paul Krugman criticized the administration for continuing to "believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic." Citing "the failure of a whole model of banking," Krugman faulted the administration in particular for trying to preserve a model of "securitization"-i.e., the process by which banks have essentially commodified risk by carving up loans and debts and selling them as obscure instruments on the market. "I don't think the Obama administration can bring securitization back to life," Krugman wrote, "and I don't believe it should try."
What Krugman and others fear is that the administration's temporizing maneuvers may only end up creating the conditions for an even bigger economic collapse later on. Obama's administration's failure to grapple with the structural contradictions of capitalism may be sowing the seeds for an even more cataclysmic day of reckoning in the future....
credit: John Sanbonmatsu