In order to understand the
present financial crisis it is important to turn to the economic shifts that
occurred in the U.S.
over the last thirty years. Declining profit margins of mature manufacturing industries
encouraged global outsourcing of production (see Foster & Magdoff, 2009).
Consequently, the U.S.
economy was increasingly driven by consumption-related activities (e.g., retail
and fast-food) and financial services. U.S. financial-sector profits exceeded
those of manufacturing by the mid 1990s; by 2004, financial firms commanded
nearly 40 percent of all U.S. profits, primarily by managing, packaging, and
trading debt and credit instruments (including household debt) and managing
debt-related corporate restructuring (Phillips, 2006). A new economy grew
within the U.S.
at the turn of the twenty-first century, enabled by neoliberal government and shaped
by the aims and operations of financial services, insurance, real-estate and
retail (i.e., the FIRE economy).
The neoliberal financial logic shaping economic life
contributed to a transformation of social identities from producer-oriented to
consumer-oriented (duGay, 1996). Advertising sold an ethos of consumption that
seduced the populace. Media adoration of the increasing wealth and consumer-driven
lifestyle of the top 10 percent of the U.S. population reinforced the
perceived accessibility of the dream by the ubiquitous circulation of images of
excess. Reality television fetishized and (seemingly) democratized celebrity
culture, thereby reassuring all Americans that they too could join the ranks of
societal elites. Low-cost retail stores enabled by a low-wage global assembly
line provided designer look-alike goods, further “democratizing” the signifiers
of elite cultures.
Citizens
were able to participate in the consumption economy due to the incredible
expansion of credit. Credit cards, auto-loans, student-loans, and mortgages
were made widely available to even the lowest income citizens. The expansion of
credit, facilitated in part by extraordinarily low interest rates set by the
Federal Reserve after 2001, seduced many Americans to believe that dream of consumer
prosperity could still be achieved by the vast majority of the population.
The housing boom illustrates the excesses of the new millennium’s
consumer culture. The middle class strived to purchase and fill McMansions
throughout the nation. Additionally, President George W. Bush’s “ownership
society” encouraged home ownership among populations previously excluded from
mortgage lending because of their low income. Option adjustable rate mortgages
with teaser introductory rates enabled lower-income borrowers to participate in
the housing boom and middle-income borrowers to trade up despite booming house
prices. Perhaps the most significant driver of the lending craze was the
expanding securitization of debt.
In
the 1970s investment banks and bundlers, such as Lehman Brothers, began pooling
assets (such as personal loans, mortgages, etc.) and then issuing bonds backed
by these assets (see LiPuma & Lee, 2004). The securities (i.e., bonds) were
rated based on assessments of their risk (of default) and of the value of their
returns (given market conditions). In effect, the securities’ ratings were
distinct from the credit risks for the originating firm. This process of
issuing securities (bonds) from pooled assets is known as securitization. Securitization
of mortgages generated profits for all who participated in the value chain,
from originators to packagers, to distributors. Fraud and predatory lending
behavior grew as loan originators demanded excessive interest rates and fees
for low income buyers and then sold the risky mortgages destined to be
securitized to the financial services industry (Schechter, 2008).
Bundled
securities were sold piecemeal across the globe, dispersing risk but also
fostering new global interdependencies. In order to hedge risks, investors
often purchased a new kind of derivative known as a credit default swap, which
essentially constituted a kind of insurance against debt default of the
underlying security (i.e., bond). Insurance companies such as AIG sold credit
default swaps without reserves, believing that the underlying mortgage-based
securities would be safe from default due to rising house prices. LiPuma and
Lee (2004) reported that by 2005, the value of financial derivatives traded
annually approximated $100 trillion due to the expansion and securitization of
mortgage, auto, credit-card, and student-loan based debt.
Widely
available credit and housing “wealth” masked declining personal income for
approximately 80 percent of the population. At the beginning of the new
millennium, a 30 year old U.S.
man’s earning potential had declined relative to his father’s (Ip, 2007).
Women’s participation in the labor force kept average household income from
deteriorating, but women’s low wages in service and government sector jobs
could not outpace men’s declining wages. The average American household
struggled to realize a fading American dream of prosperity and social security
(Hacker, 2006). The relative decline in household income and opportunity among
lower and middle-income Americans has been well document and was recently
explored in a 2008 OECD report titled “Growing Unequal?” By
November 2006, U.S.
consumers spending exceeded their disposable income by 1% (Whitehouse, 2007).
The
accumulation of debt eventually began to falter as the vast majority of
Americans’ earning potential continued its gradual downward trajectory. Gas
prices that exceeded $4 a gallon played an important triggering role in
precipitating financial distress among sub-prime borrowers. Defaults began among
low-income households struggling to maintain their lifestyles in the face of
stagnating wages, declining health coverage, and skyrocketing gas prices. However,
although sub-prime mortgage defaults precipitated the financial crisis, they
alone did not cause the crisis. Governor Frederic S. Mishkin of the Federal
Reserve Bank explained in a speech at the U.S. Monetary Forum, February 29,
2008 that the U.S.
residential-market mortgage meltdown initially led to credit losses of around
$400 billion, which constituted less than 2 percent of the outstanding $22
trillion in U.S.
equities (Mishkin, 2008). The financial crisis was caused by a torrential
cascade of defaults among the trillions of derivatives based on a comparatively
small pool of underlying debt-based assets.
In
April of 2009 the International Monetary Fund (IMF) stated that the global
losses resulting from the financial meltdown exceeded $4 trillion.
Approximately $2.7 trillion of those losses derived from underlying loans and
assets originating in the U.S.
(Landler & Jolly, 2009). The insurance giant AIG neared collapse as it paid
out on the insurance contracts—credit default swaps—purchased by investors
hedging against default. American investment and commercial banks approached
insolvency as the assets making up their reserves collapsed in value.
Unemployment grew as companies “downsized” in response to shrinking balance
sheets caused by the collapse of value of investment assets and by declining
sales revenue as consumers drew back in horror at the spectacle of the credit
crisis.
The
U.S. Federal Reserve and Treasury responded by bailing the financial and
insurance industries. In 2008 the U.S. Government launched the $700 billion
Troubled Asset Relief Program (TARP), which provided funds to insolvent and
distressed banks and financial corporations, including AIG and Fannie Mae
(“Cash Machine,” 2009). In the spring of 2009, the newly sworn in President
Barack Obama launched the Term Asset-Backed Securities Loan Facility (TALF),
which may expand to $1 trillion (Cho & Irwin, 2009). The U.S. taxpayers
had contributed $163 billion to AIG by March 2 2009. Nouriel
Roubini estimated the bailout will add $7 trillion to public debt (Fallows,
2009). Naomi Klein concluded that "the crisis on Wall Street created by
deregulated capitalism is not actually being solved, it's being moved. A
private sector crisis is being turned into a public sector crisis" (Klein,
2009).
By
framing the solution to the financial crisis in relation to the “problem” of insolvent
financial and insurance institutions, the U.S. Government elected to provide
these institutions with liquidity in a period of significant asset deflation. These
government-advantaged private institutions were therefore able to purchase
assets whose prices had collapsed in a context of little competition because of
the constriction of credit. In particular, investment banks, such as Goldman
Sachs, proceeded to buy up stocks, bonds, and now government insured
mortgage-backed assets. A Goldman Sach’s executive had the audacity to describe
his company’s operations as “God’s work” (quoted in , 2009). In contrast, smaller banks and non-financial
based industries struggled to access credit for basic operations. Smaller banks
and businesses began to fail in significant numbers.
In
principle, the government bailouts of the financial and insurance industries are
inconsistent with neoliberal logics and idealized practices of government in
that bailouts encourage future moral hazard by rewarding a lack of prudential
risk-assessment. However, the U.S.
was unwilling to adopt the neoliberal policy solution, which would have allowed
bankruptcy among failing, risk-seeking institutions. The U.S. also
failed to adopt Keynesian solutions, such as the temporary nationalization of
failing but important institutions and whole scale financial reforms. Instead,
the U.S.
government has effectively acted to reinforce privileged financial agents and
products through bailouts and guarantees. By December 29, 2009 the U.S. had
directly or indirectly underwritten 9 of every 10 new residential mortgages and
the U.S. pledged to cover unlimited losses at Fannie Mae and Freddie Mac, the
mortgage giants (Davis, Solomon, & Hilsenrath, 2009). What does the state’s
willingness to assume financial liability for private losses mean?
Prior
to the crisis, neoliberal financial and insurance authorities, among others,
sought to subordinate the state to the service of neoliberal capital. Instrumentalization
of the state in the service of capital was described by David Harvey in 2005 in
terms of a “neoliberal state” whose mission is to “facilitate conditions for
profitable capital accumulation on the part of both domestic and foreign
capital” (p. 7). In 2008, James Galbraith described a “predator state” as
a
coalition of relentless opponents of the regulatory framework on which public
purpose depends, with enterprises whose
major lines of business compete with or encroach on the principal public
functions of the enduring New Deal. It is a coalition …that seeks to
control the state partly in order to prevent the assertion of public purpose
and partly to poach on the lines of activity that past public purpose
established. They are firms that have no intrinsic loyalty to any country. They
operate as a rule on a transnational basis, and naturally come to view the
goals and objectives of each society…as just another set of business
conditions, more or less inimical to the free pursuit of profit…. (p. 131)
The neoliberal, predatory
state that emerges in the descriptions provided by Harvey and Galbraith
diverges from the frozen, idealized descriptions of the state provided by
founding neoliberal thinkers such as Frederick Hayek and Milton Friedman. Yet, current
U.S. bailout policies and programs point to a predatory neoliberal state whose
mission it is to resolve and remediate (without altering) the problems of
governance stemming from neoliberal de-regulation, privatization, and
financialization.
The neoliberal state’s willingness to “save”
capitalist institutions by assuming responsibility for their risk is not
matched by a willingness to “save” the population. The U.S. federal
government has provided very limited assistance to domestic populations
drowning in debt and threatened by growing unemployment. Likewise, the federal
government has provided only limited assistance to the U.S. states (e.g., California) that are facing bankruptcy. For
instance, the
astonishing sum of bailout money directed at insolvent banks and failing
insurance institutions was not met with a comparable stimulus package.
The
American Investment and Recovery Act authorized $787 billion in stimulus
spending to be divided accordingly: $288 billion in tax cuts and benefits; $224
for education, healthcare, and entitlement spending; $275 billion in contracts,
grants, and loans. As of September 2009, the Wall Street Journal reported that the U.S. Government had spent
$194.5 billion on stimulus spending. Spending included $43.8 billion fiscal
relief to states, $40.4 billion aid to directly affected individuals, $13.4
billion to AMT relief, $13.7 billion to
seniors, $26.1 billion government investment outlays, $25.4 billion in business tax
incentives, $31.8 billion in individual tax cuts (Reddy, 2009, p. A17). The
stimulus’ $194 billion allocation compares unfavorably with the $3.25 trillion
in bailout funds directed at banks and insurance companies (“Cash Machine,” 2009). These stimulus efforts managed
to stabilize the U.S.’s
collapsing Gross Domestic Product, but were insufficient for halting widening
and deepening job losses.
Faced
with dramatically declining tax revenue and increased social spending on
unemployment insurance and health care for the growing ranks of impoverished
Americans, the states within the U.S. began to suffer severe fiscal
crises in 2009:
The
worst recession since the 1930s has caused the steepest decline in state tax
receipts on record. As a result, even after making very deep cuts, states
continue to face large budget gaps. New shortfalls have opened up in the
budgets of over half the states for the current fiscal year (FY 2010, which
began July 1 in most states). In addition, initial indications are that states
will face shortfalls as big as or bigger than they faced this year in the
upcoming 2011 fiscal year. States will continue to struggle to find the revenue
needed to support critical public services for a number of years. (McNichol & Johnson, 2009)
The U.S. Federal Government’s
official response to the states was that no additional rescue money would be
provided beyond the American Recovery and Reinvestment Act. Moreover, President
Barack Obama increasingly warned of coming cuts to social entitlements such
Medicare and Social Security to reign in a federal deficit (Runningen &
Nichols, 2009) that has ballooned from government bailouts and foreign wars.
The
disproportionate rescue of the financial industry, as compared to the
relatively small amount of money spent on the stimulus, led the former IMF
economist Simon Johnson (2009) to argue in The
Atlantic that a quiet coup had occurred by the financial industry, as
evidenced by the industry’s control of the Federal Reserve System and the U.S. Treasury.
While Simon’s charges may appear extreme, it is evident that the governmental
logic emerging from the crisis diverges from the traditional liberal ethos in two
important ways. First, the population no
longer is regarded as the source of wealth. Adam Smith’s classical
formulation of the wealth of nations has been supplanted. The population is no
longer seen as the source of wealth, nor is it viewed as an investment
opportunity. The new source of national wealth remains murky, but it clearly
does not derive from the aggregate productive activities of the populace.
Second, as will become clear, the
traditional liberal principle of self-government seems to be eroding as the
neoliberal state assumes a more authoritarian mantle in the wake of the various
“security” threats exacerbated or caused by the economic crisis.
Financial representations of the wealth of nations
illustrate the shift away from population. As articulated by a column in The Wall Street Journal, the “principle
measure” of a state’s economic success is the “Gross Domestic Product” (GDP) (Grove,
2007, p. A15). The possibility that the majority of the national population
would be denied opportunities to participate in, or enjoy the benefits of, GDP
output lacks salience as a contemporary concern of neoliberal government.
This
lack of concern about the economic contribution of the national populace
derives from the perception that the majority play an insignificant role in
producing (due to automation and globalization) and consuming goods. The
growing marginalization of significant sectors of the population appears to
factor in public policy primarily to the extent that this sector presents
security risks.
The costs associated with pacifying an angry, impoverished
population are represented in “public safety” budgets and special allocations.
Cities, counties, and states must allocate more of their diminishing resources
to police and contain populations no longer viewed as worthy of significant
social-welfare investments.
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