Notes on Greenspan, Rubin and the Party of Davos :
Neoliberalism and Bottom-line morality
Edward S. Herman
From the Reagan era onward I have been impressed with how regularly
liberal and left-leaning economists I knew, who went to work in industry
and finance, very soon became pro-business, anti-labour, and politically
right wing.
I think that what got to them was not only the impact of association
with business people, but the fact that business profitability became
central to their own performance. As business economists, wage increases
would seem bad-as encroaching on that profitability and threatening
inflation and business growth (and stock prices).
Tough environmental rules would also hamper profitability; their
relaxation by law or friendly (non-) enforcement would enhance it. It
was therefore easy to slide into what we may call “bottom-line
morality,” with positions on key issues dictated by prospective bottom
line effects, but of course rationalised with an ideology that made this
all benevolent-in the long run-and made these bottom-line moralists into
Good Samaritans as they collected their fat salaries and bonuses while
the vast majority waited for trickle-down.
With the steady increase in business’ economic and political power
over the past 30 years and the parallel decline of organized labour,
neoliberal (market-can-do-it-all) ideology has become even more firmly
entrenched in establishment thought and practice.
The novelist Ayn Rand, most famously the author of Atlas Shrugged,
was an extreme proponent of individualist, free enterprise,
anti-government ideology, and it is no coincidence that one of her cult
admirers and associates, Alan Greenspan, became a leading member of the
policy-making elite in the 1980s and into 2006.
Greenspan’s “Superlatively Moral System”
Greenspan contributed three chapters to Rand’s 1966 book Capitalism:
The Unknown Ideal, all of them reflecting her-and Greenspan’s-ultra
laissez-faire ideology. In one, Greenspan castigates antitrust law and
practice as not merely harmful, but with the “hidden intent” of injuring
the “productive and efficient members of our society”. In another, he
claims that all government regulation represented “force and fraud” as
the means of consumer protection, whereas it is “profit-seeking which is
the unexcelled protector of the consumer.”
He argues that the market system itself is a “superlatively moral
system that the welfare statists propose to improve upon by means of
preventive law, snooping bureaucrats, and the chronic goad of fear.”
Greenspan contributed to the workings of this “superlatively moral
system” at the micro-level back in 1985, writing to the savings and loan
authorities on behalf of Charles Keating, head of Lincoln Savings and
Loan. In that letter the authorities were urged to exempt Keating from
restrictions on risky loans, given his exceptional character and the
soundness of his operation, with “no foreseeable risk to the Federal
Savings and Loan Corporation.”
Greenspan was a paid consultant to Lincoln, which failed in 1989 at
enormous expense to the FSLIC and taxpayer. Keating ended up in prison.
This is the same Charles Keating with whom John McCain had a close
relationship and on whose behalf McCain also did some lobbying.
Neither Greenspan nor McCain suffered significant damage from this
relationship and, despite his extremist ideology, Greenspan became a
powerful figure in the U.S. political economy, leading the Fed for many
years (1987-2006) and through two major bubbles that he did nothing to
constrain.
One important manifestation of Greenspan’s world view can be seen in
his congressional testimony of July 22, 1997, where he explained that
inflation was not increasing despite the lowering unemployment rate
because of “a heightened sense of job insecurity,” which he described
elsewhere as reflecting the “traumatized worker,” helpful in keeping
wages down. He didn’t suggest that job insecurity and the traumatisation
of workers involved any immoral “goad of fear” or had any negative
implications for welfare.
Actually, in this regard Greenspan’s view wasn’t much different from
that of a great many mainstream economists, who were slow to recognize
greater job insecurity as a key factor altering the
unemployment/inflation relationship, and who were not troubled when they
did recognize it.
Liberal economist Janet Yellen, co-author with Alan Blinder of a book
on the 1990s entitled The Fabulous Decade, told the Federal Reserve Open
Market Committee in 1996 that “while the labour market is tight, job
insecurity is alive and well.
Wage aspirations
Real wage aspirations seem modest, and the bargaining power of
workers is surprisingly low” (quoted in Robert Pollin’s Contours of
Descent). Robert Pollin points out that Yellen and Blinder didn’t let
this interfere with their conclusion that the 1990s were “fabulous.”
Apparently these economists, like Clinton, don’t really “feel pain” as
long as only workers suffer.
In fact, they are all a throwback to 17th and 18th century
mercantilists who, according to historian Edgar S. Furniss, argued that
“high wages would prove destructive of national well-being because they
would reduce England’s competing power by raising production costs. The
prevalent doctrine held that wages should be kept at the level of the
cost of physical subsistence.
Hence the apparent anomaly of the labourer’s position: whereas his
theoretical social importance was large, his actual economic reward was
miserably small.... [Under mercantilism] the dominant class will attempt
to bind the burdens upon the shoulders of those groups whose political
power is too slight to defend them from exploitation and will find
justification for its policies in the plea of national necessity” (Furniss,
Position of the Labourer in a System of Nationalism, 1920).
Does this ancient view on how burdens should be distributed have some
possible application to the bailouts now being put in place to deal with
the current financial crisis?
Getting back to Greenspan morality, it is clear from both his Ayn
Rand contributions and his writings and public pronouncements of the
past 20 years that he views untrammeled capitalism as a “superlatively
moral system” not because of business people’s benevolence but because
market operations in business’ self-interest will protect
consumers-business will not take on undue risk because that would
eventually harm their own welfare.
Bureaucratic bungling
Regulation is thus unnecessary and positively damaging by its
arbitrariness and bureaucratic bungling. Greenspan fought long and
strenuously for across-the-board deregulation, and against the
regulation of derivatives as they grew rapidly in the 1990s, even
arguing in 2004 that the innovations like derivatives had contributed to
a new stability in the financial system: “Not only have individual
financial actors become less vulnerable to shocks from underlying risk
factors, but also the financial system as a whole has become more
resilient.”
Now that the financial system has collapsed and its leaders have
demanded and gotten a huge bailout, what does Greenspan say? Apart from
an admitted bafflement, he has stated that business has been too greedy
and behaved dishonourably. He is “distressed at how far we [sic] have
let concerns for reputation slip in recent years.” But this is hogwash.
It was rational profit-making that was supposed to control risk, not
honourable behaviour. Also, if the actual behaviour was systemic, and
greed can overcome honourable behaviour, the Greenspan model has failed
on its own terms. But beyond that it was idiotic, as it has long been
known that the force of competition, the pressure (and fiduciary
obligation) for profits, and regular business myopia in buoyant markets,
have repeatedly produced unsustainable excesses. Greenspan’s moral model
reflects straightforward ideology and bottom line morality.
Greenspan, Rubin, Summers, et al
It is also part of a class war perspective where, as noted, labour
(and the majority) are viewed in the mercantilist tradition-as a cost to
be contained, not as a very large group whose welfare we are trying to
maximize. It also helped cause him to misperceive economic reality and
make a major and disastrous economic forecasting error.
Both the New York Times and Washington Post had substantial articles
on Greenspan’s heavy responsibility for the ongoing crisis, in a way
beating a dead horse after both papers had treated him with great
deference as “the Oracle” for many years (Peter Goodman, “The Reckoning:
Taking a Closer Look at a Greenspan Legacy,” NYT, Oct. 9, 2008; Anthony
Faiola, Ellen Nakashima, and Jill Drew, “What Went Wrong,” WP, October
15, 2008).
The articles feature the struggle for and against derivatives
regulation in the 1990s, with Brooksley E. Born, the head of the
Commodity Futures Trading Commission (CFTC) as the pro-regulation
protagonist and heroine, and Greenspan as principal villain.
But both articles also call attention to the support given Greenspan
in his anti-regulation fight with Born by the leading financial
officials of the Clinton administration: Robert Rubin, Larry Summers,
and Arthur Levitt, Jr., the first two heading the U.S. Treasury, Levitt
the SEC.
Rubin looks particularly disingenuous in these articles, claiming to
have favoured regulating derivatives in 1998, but believing that this
was politically unfeasible because of industry opposition and because
“there was no potential for mobilising public opinion.” The Times
article then paraphrases a former CFTC official that “the political
climate would have been different had Mr. Rubin called for regulation.”
It should also be recognised that Rubin and Summers are no slouches
when it comes to supporting the bailout of fat-cat investors. In his
superb book The Global Class War, Jeff Faux features the fact that the
corporate establishment which dominates both U.S. political parties is
part of the “Party of Davos,” that gets together periodically at lush
facilities in Davos, Switzerland to party, hob-nob, and plan in the
interest of the global business elite.
The book focuses heavily on the character and passage of the North
American Free Trade Agreement (NAFTA) and then the immediately following
Mexican crisis and bailout.
NAFTA was a corporate project, strongly opposed by a great majority
of Democratic Party voters and by a majority of Democratic legislators.
Rubin had a serious conflict of interest in pushing NAFTA and the
subsequent bailout of investors in Mexican securities.
He had been a high-ranking official of Goldman Sachs, which did
substantial Mexican business, and he had-and even continued to
maintain-a number of Mexican clients. NAFTA served only the Party of
Davos in the United States and a tiny elite of wealthy people who
dominated a famously corrupt political system in Mexico.
It was opposed by a U.S. majority and by aware and uncorrupted
Mexicans; in Mexico the majority would eventually be seriously damaged
by this instrument of the global class war.
Its central feature was privileging foreign investors in Mexico,
providing also for the gradual elimination of tariffs on agricultural
goods and therefore for economic disaster for several million Mexican
farmers and their families. (One of Clinton’s most notable lies was his
claim that NAFTA would serve to slow down Mexican immigration into the
United States by spurring investment and development in Mexico.)
The analogy with the current U.S. crisis and bailout is more dramatic
when we consider the Mexican crisis of 1994-1995. Shortly after the
enactment of NAFTA in 1994, the Mexican government, which for political
reasons had tried to peg the peso, suffered a crisis of investor
confidence and an unsustainable drain on its foreign reserves.
As economist David Felix described it, in the Fall of 1994 “Mexican
tesobono holders began cashing in and exiting to dollars [this bond was
payable in pesos but with pesos indexed to the dollar], followed
belatedly by foreign holders, who were still stuck with 29 billion
dollars worth of tesobonos when in December 1994 the Mexican Central
Bank, its dollar reserves nearly exhausted, let the exchange rate float
and helplessly watched it sink.
U.S. Treasury and IMF
The U.S. Treasury and IMF hastily cobbled together a $51 billion
bailout fund, and required the Mexican government to use over half to
pay off the $29 billion tesobonos with dollars. Since the government’s
contractual obligation to tesobono holders was merely to pay them more
pesos when the peso price of dollars rose, the bailout obligation
amounted to a forced ex post rewriting of the contract with tesobono
holders to save them from taking a bath” (“Why International Capital
Mobility Should be Curbed, and How It Could Be Done,” ICTFU, Dec. 2001).
In his chapter “Alan, Larry, and Bob Save the Privileged,” Faux
describes how in 1994 Greenspan, Summers, and Rubin helped create a
climate of fear, telling Congress that “the entire world was now at
risk.” Governor George W. Bush of Texas was lauded by Rubin for
“instinctively grasping what was at stake” and giving public support to
the bailout.
Rubin even “called Gingrich, who called Greenspan who called Rush
Limbaugh to promote the bailout to the rightwing listeners of his radio
show.” In fact, the sales claims for the bailout were phony and the IMF
financial contribution to the bailout was illegal. Mexico didn’t suffer
any “debt crisis” as it was only obligated to provide pesos, not
dollars-the payment of dollars was forced on the Mexican government by
U.S. officials, who persuaded the U.S. media that the dollar payments
were required by the tesobono contracts.
U.S. officials told this lie and required this payment of Mexico, not
only to help U.S. investors, but also to dissuade Mexico from resorting
to capital controls, which they could have done in accord with IMF
rules, but which would have set a pattern in violation of the neoliberal
principles being enforced on the Third World by the United States and
IMF.
Article 6 of the IMF Articles of Agreement not only would have
allowed Mexican capital controls, it prohibits IMF emergency funding to
facilitate capital flight-violated in this case in accord with U.S.
demands and higher neoliberal principles (or rather interests).
Forced contraction
Faux points out that the bailout money “was not used to rejuvenate
the Mexican economy. It did not underwrite job creation for the
unemployed or debt relief for the bankrupted small business people or
aid to hospitals and schools that were suddenly broke.
It was used to make whole the Wall Street holders of tesobonos, who
had originally bought the risky Mexican bonds because Salinas was giving
them a high yield.” Instead of capital controls Rubin and Summers
insisted on budget reductions and “reform” of the Mexican financial
system, which was followed by and resulted in the “steepest economic
crash since the Great Depression.”
The Mexican middle class “was decimated” by the forced contraction
and Mexican taxpayers eventually being forced to pay the bills for the
bailout. Rubin claimed that this was all because “Mexico...had made a
serious policy mistake.” But Faux points out that “Mexico” didn’t do
this, but rather Salinas and his successor Zedillo, “both of whom ‘Alan,
Larry and Bob’ had promoted to the American Congress as honest,
competent reformers who had to be supported with NAFTA, even if it meant
thousands of American losing their jobs.”
Faux also points out that as part of NAFTA, and in the wake of the
Mexican forced contraction and budget crisis, privatization of Mexican
public assets was accelerated, and local oligarchs and foreign banks
(and customers of Goldman Sachs) could now buy up assets at bargain
prices. So the Party of Davos and its local comprador allies did very
well at the same time as ordinary Mexicans were put through the wringer.
As Faux says, “The NAFTA financial model-liberalization of trade and
finance leading to a speculative bubble, a subsequent crash, and the
protection of investors from the consequences of their own actions-was
repeated in various forms in the 1990s throughout the global markets in
Thailand, Brazil, Bolivia, South Korea, Indonesia, Russia and
Argentina.”
That was written in 2006. Now that the NAFTA financial model has hit
home in the United States itself, we can see how the Party of Davos,
with Goldman Sachs once again in the lead, is doing its darndest to
continue to socialize risks for investors and pass off costs to ordinary
citizens.
And with Bob Rubin and Larry Summers waiting in the wings, the
Democrats swallowing the latest bailouts, and Wall Street still funding
the Party generously, we may have more of the same in a new Democratic
administration. (Courtesy: Z Magazine)
(Edward S. Herman is an author, economist, political columnist,
and media critic.)
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