(See also the rest of the five-part series)
What alternatives are there to the corporatist bailout which has been the exclusive finance policy focus of two administrations?
For a prescription to have any chance of success, it must consciously face (1) Peak Oil, and (2) the end of exponential debt and growth. The first guarantees the second, although as we’re now seeing “growth” was unsustainable on its own. A policy which refuses to acknowledge these truths, which on the contrary seeks to defy them, can have only temporary success at best and render the terminal crash worse, as we face it having squandered what little wealth and time we had left.
A growing number of commentators outside the power structure such as Paul Krugman, Nouriel Roubini, Tom Friedman, and Joseph Stiglitz have called for some form of nationalization of the big banks. (This shouldn’t be mistaken for real nationalization; the goal here is rather temporary receivership toward reprivatizing them later.) Everyone has his own variation, but the basic idea is this. The government would take over an insolvent bank, wipe out the shareholders, separate out the good assets from the bad, sell the good to pay off liabilities, warehouse the bad (hopefully to be able to sell them later when they’ll be valuable again), inject capital, and the resell the fresh new bank to the private sector. Frequently cited historical examples include the nationalizations in Sweden in the 90s, Japan at the turn of the century, and America’s own RTC which cleaned up after the S&L debacle.
This is a big improvement over the corporatist bailouts. It starts with accepting that some or even all of these big banks are insolvent and only being propped up with government money. It accepts the finding of the IMF that forbearance (i.e. doing nothing but the minimum necessary ad hoc propping up) is more expensive, complex, and opaque than straightforward nationalization, and doesn’t work anyway, but only prolongs the pain and tension. It is vastly more public-spirited and democratic.
But on the whole it does not confront the fundamental problem. It still takes for granted big banks, big systems, exponential debt, Too Big To Fail (there are exceptions, but I’ve described the general trend). It will still look to reinflate the bubble (the fact that every advocate holds out hope that the bad assets will again command high prices someday reveals their implicit faith in infinite growth). It is still within the dominant theme that we are just in a normal economic downturn; that this is cyclical; growth will eventually be restored; we just have to reflate, get out of the liquidity trap, get credit flowing again, and it’ll be business as usual.
(In nationalization’s defense, the common surface objections to it are idiotic. The government isn’t good at running banks? When you look at how badly the private sector ran them, this becomes risible on its face. The government could hardly do a worse job. In fact, there’s serious doubt whether it’s even possible to safely run huge, horizontally-ramified banks. They’ve never existed long without leading to disaster.
They also say it would be a hard sell politically. I don’t believe this at all. While I haven’t seen focus group results, it seems to me the people already intuitively know they are being plundered and would respond to being told in detail about our predicament and what we must do to confront it. They would not be outraged by the idea of nationalization. On the contrary, what is enraging them is the water torture of obvious confusion, incompetence, and criminality among bankers and officials. They can sense they’re being lied to and stolen from. They voted for “Change”. So I’d be willing to bet they’d respond to change. I think here the people are out ahead of the media and punditry.)
Beyond the systemic insufficiency of the nationalization idea, we also face the necessity for a radical restoration of real regulation. The absolute baseline priority for any sane policy is to break up the big banks and bolster the small. This would be a complete sea change from all past trends and the current Bush/Obama policy. All government handouts and loans should be going to smaller, real banks at the local and regional level, not to the bank “holding companies” (what I call bank-derivative or bank-derived structures). Indeed, we should get rid of holding companies completely. Outlaw them. (These were major contributors to the 1929 crisis as well.) Small banks are on the whole innocent of the crimes which got us into this mess, and on a practical level they can play a constructive role in devolving the economy and society to a sustainable level.
So here’s a by no means exhaustive list of the regulations which can help prevent such crimes and disasters in the future. They should be have broad scope and be severely enforced.
1. If you really insist on trying to continue on with big banks, you must relinquish the idea of reprivatizing them. They must become public utilities.
2. Reinstate the Glass-Steagal separation of commercial banks, investment banks, insurance companies. Better, establish commercial banking as a utility, abolish the casino. Don’t worry that this system may not be sufficient to capitalize megaprojects, multinationals, etc. Those things are being devolved as well.
3. Set the reserve requirement at or near 100%.
4. Prosecute under RICO: anyone involved in setting up a “Too Big To Fail” protection-racket structure, or enabling this as a captured regulator.
5. Enact a Tobin tax on all finance transactions. (For that matter, it’s outrageous that unproductive parasitic rent-seeking is taxed as a “capital gain” at a much lower rate than income from productive, true capitalist work. This must be reversed. There should be confiscatory rent taxes across the economic spectrum.)
6. Apply the precautionary principle to financial instruments. Anything not proven safe is out. Anything not explicitly allowed is forbidden.
7. Credit default swaps can only be purchasable by those who hold the underlying asset.
8. More generally, there should be no such thing as “derivatives”, only securities directly linked to assets: the mortgage, insurance policy, secured loan itself.
9. If securities are to be traded, this must be on public, transparent exchanges.
10. There should be full regulation of all traders and money managers, in any kind of entity (hedge funds, etc.)
11. The CBO reported in January that the more opaque the government is in its financial policy, its purchases, loans, guarantees, etc. the greater the losses to the taxpayer. So we must have much greater transparency in government.
12. Repeal the oppressive bankruptcy law change from 2005. The way this law helped predatory lenders bring the disaster upon us for their profit and amusement, and the way it has punished not just deadbeats but mostly hard-working people who fell on hard times (a medical emergency, a layoff, or such), is a national travesty which hasn’t been remarked upon enough.
I’m sure there are others, but I’ll stop there. Those would be a decent start on eradication of the finance/insurance/real estate cabal. Keynes called for the “euthanasia of the rentier”. Beyond its economic effects, the FIRE trust constitutes an existential and psychological obstruction. In our minds and then on Earth we must simply do away with it and do without it.
So where are we headed? I earlier referred to the dominant theme of normal business cycles, the return of growth, how we just need to restore debt creation and start reinflating bubbles. But if growth returns at all it will be temporary, staggering, volatile, and slamming its head ever harder against an ever lower ceiling. The attempt is not worth doing.
We need to dismantle size and interconnection. We have to take whatever comes of the toxic asset write-offs. We must accept the imminent end of the dollar (whether the government directly defaults or devalues the currency, this debt load, an inverted pyramid so huge it obscures the sky, cannot much longer be sustained; we must steel ourselves for this inevitability). It’s the end of “consumerism” and all the little inverted pyramids of consumer debt as we’ve known them.
A baseline measure of how serious someone is, whether at his core he is responsible or irresponsible, is his recognition that we must call an end to the Global War on Terror. This name-brand imperialist campaign long ago lost any conceivable rationale it may have had. (Can anyone give a coherent account of the objective in Afghanistan?) By now it’s just a vanity project. It is strategically stupid, morally obscene, and by any reality-based measure insolvent America cannot afford it.
Most importantly we must get the oil monkey off our backs. One way or another we are going to have to relocalize the six core areas farming, energy, education, manufacturing, health care, and transport. The measure of a society’s wisdom today would be its will to get to work transforming these six domains now. It’s already too late to do so under conditions of easy debt; those conditions are not likely to have even a brief Indian summer. We do have the temporary respite of low oil prices (though in the past few weeks they’ve been showing signs of life). But given how the depressed credit market has caused widespread mothballing of oil projects, within five years depletion of existing fields will cause global capacity to acutely decline. Leaving aside other elements of price volatility, Peak Oil says one of two things must soon happen.
Either there will in fact be a temporary “growth” recovery, in which case resumed high oil demand will quickly run up against depleted capacity and send prices steeply up, killing the recovery in its cradle. Or, even if there’s no significant recovery, demand has already pretty much reached its minimum (that is, its minimum without radical mass lifestyle changes; all the low-hanging demand destruction fruit has been picked – Jeff Vail has written on that). So even without resumed increasing demand, inevitably demand will encounter diminishing capacity on its way down, and at that point we’ll have the supply crunch and price surge.
So if we are to take relocalization action as a society, this window is probably the last chance we have, already having squandered all the favorable chances on a luxury binge.
Short of that, it’s going to be up to us as individuals, groups, organizations, towns, perhaps regions, to reorder our lives without profligate debt or oil.
IMF paper on forbearance http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
Jeff Vail http://jeffvail.net/
Peak Oil primers http://www.theoildrum.com/ (listed in the left-hand column; the whole site is good, of course)
Two pieces by Dmitri Orlov that I was thinking of while I wrote this piece: