US state plays role of defending global financial system; it had to act in the crisisLeo Panitch

After President Bush signed the controversial bailout bill into law, Paul Jay, Senior Editor of The Real News Network, talked with Leo Panitch, the Canada Research Chair in Comparative Political Economy and a Distinguished Research Professor of Political Science at York University in Toronto, to get his analysis of the situation.

'Free markets' depend on state intervention Pt1/4

PANITCH: When you're defending a Wall Street institution, you're not just defending that one institution; you're defending all of the people who expect that their money will get paid back from those Wall Street institutions, which is a much, much wider and larger part of the globe. It's partly to do with the pension funds that workers have that, you know, need to be met by those institutions; it has to do with all the world's capital that's invested through those banks. So you're not just, you know, dealing with you're going to save that bank. In fact, for the most part they've let the shareholders go under. You know, in that sense, the shareholder's taking a hit for every one of these corporations. They've all taken a hit. But who's been saved are the people who have assets in these banks. And that's what's been saved. That's a much larger group than these particular Wall Street banks. In that sense the United States, in playing that role, is playing the role of guaranteeing to capital that they will be able to get assets out of New York and, more broadly, out of London.

JAY: So you think they didn't really have a choice.

PANITCH: They had to act. There's no question. And in any case, you know, any understanding of the nature of a capitalist state would lead you to know that they would act. It's the illusion that the state somehow stands apart from capitalism, is not part of capitalism; it stands outside of it. It's all this misunderstanding when we speak of states versus markets. These markets are full of power, asymmetric power, very unequal power, and those power is founded on the backing that states give them. The free markets that we know have been made by very active state intervention, and people enter into market activities knowing that states will back up property in those markets. So it's an illusion to think that states are something other than capitalism. When you understand American capitalism, you understand the state is part of it. Federal Reserve and Wall Street, right, need to be seen as part of a whole—sure, in which the Federal Reserve is not acting as a competitor inside the market; it's acting as an overseer of it; more or less regulation in different periods, it's true, but it's an overseer of it.

The cash-out society Pt2/4

JAY: The entire society's sitting around, waiting to cash out, in theory. Most people don't get a chance, but this cash-out mentality—. I heard this term the other day, which I thought was great: a liquidity event. Everyone's waiting for the liquidity event.

PANITCH: For the liquidity event. That's lovely. Exactly. And everybody had confidence in this growth of this asset bubble that has been going on since the early '80s, with constant crises in it, you know, with constant moments of crises. Then the American state would come in and it would throw an enormous liquidity at the crisis, a helicopter would drop it in, and then the thing would take off again. Well, what happened this time was that it really began to unravel in a serious way, and in such a way that because it hit in the mortgage market and in, above all—it's not surprisingly—that portion of the mortgage market that was trying to integrate African-American communities, and Chicano communities, etcetera—.

JAY: Well, this is one of the points you make in your recent article is that they needed and got sections of not just the middle section of the working class but even a poorer section of the working class to buy into the cash-out mentality: get into a house with cheap money, sell it for a fortune later on, and everyone will live happily ever after.

PANITCH: Well, in order to be fair, in order to sustain your income, re-mortgage your house, which a fair number of people did. And a lot of these subprime mortgages were not only got into—and although it was that, it was also re-mortgage your house. Part of that was, if I re-mortgage my house, I can maybe add a room and then sell it for a hell of a lot more money, and part of it was that people consume through that. So, you know, at root this has to do with the fact that American trade unionism was defeated 30 years ago, that the Great Society programs which were [inaudible] the 1960s—.

The financial crisis at the local level Pt3/4

JAY: So what can be done?

PANITCH: So, well, a very radical move is needed here. One needs to go back to remember that the Great Depression really began with municipalities defaulting on their debt, and closing down relief, etcetera. The only thing that can be done is for the federal state to guarantee the bonds at state and local levels, and to guarantee that it will back up a default in any of those. And that would overcome this problem. This is a very radical step.

JAY: Why? Why is it so radical?

PANITCH: Well, because it means that the federal state is taking on a responsibility for spending that would be done by local aldermen and councilors, many of whom they would see as irresponsible, unconstrained, etcetera, etcetera, in the usual balance-the-budget kind of way. And this has a lot to do with what has really been the populist essence to the neoliberal era, to the Reaganite movement, to the free market ideology. It's never been about getting the state out in the sense of backing up capital; it's been about cutting taxes. That's been oriented, of course, substantively towards the rich, towards capitalists, towards the wealthy, and so on. Very true. But it's had this great appeal to people who come to define politics, democracy, their vote in terms of "Will I pay $100 less a year in taxes or a maximum $1,000 less in taxes?"—the ordinary working person. So if you look at the presidential debates, the vice presidential debates, the Canadian election debate, so much of it was bound up with "I will not increase your taxes." And the irrationality of this is staggering, in the sense of if, you know, municipalities are going to go bankrupt, are people really saying that they will not pay $100 more in taxes? And the mentality of it is irrational. But the notion is democracy's about "I use my vote to pay as little as possible," when they, you know, will pay $100 more to Rogers at the bat of an eye without even fighting it, or a cable company.

JAY: Or Time Warner or Comcast.

PANITCH: Or Time Warner. Yes, exactly.

JAY: But isn't there a point that if the federal state, the American state, is going to defend Treasury bonds, perhaps even if under critical circumstances defend even some state or municipal bonds, at what point does that backing up by the state meaningful if they don't raise taxes?

PANITCH: Sure.

JAY: 'Cause you can't just print money and say, "We're now backing up the bond."

PANITCH: Well, let's remember that during the Second World War you had enormous deficits, the highest in history, and nobody was calling the States' bonds at that moment, because of the enormous deficit, when it came to a major project like that. Moreover, when you have a major recession or a depression, where do capitalists or anybody have to put their money that's safe? In public debt. Right? You know, back in the 1930s, everybody was screaming that Roosevelt was a socialist, all the capitalists, for his union reforms and welfare reforms. They were lending money to the state. They were lending money to all the agencies he'd created to build all the infrastructure, etcetera, etcetera. And that's going to happen again if states are prepared to take this on. That's not to say that there shouldn't be a massive redistribution of wealth through the tax system. Bernie Saunders, the American congressman, in the face of the bailout, was saying you could raise $300 billion by imposing a surtax, a 10 or 20 percent surtax, on all incomes above $500,000, and I totally agree with him, but it doesn't go far enough. They've done away with the estate tax, as they call it in the United States, the wealth tax. We ought to have a wealth tax. I mean, after the enormous inequalities that have grown in wealth over the last 30 years, there ought to be a very major wealth tax.

It's time to make banking a public utility Pt4/4

JAY: And maybe just to get some context, especially for some of the younger people in our audience, there were cities burning in the 1960s. You had the Civil Rights Movement. You had workers demonstrating for their rights and for higher wages. The entire society in North America was at a state of intense conflict.

PANITCH: Yes, and you were sending off young black men, conscripting them and sending them off to the Vietnam War. There was the Black Power movement. And the response more under Lyndon Johnson than under Kennedy was to create the war on poverty, or what was known as the Great Society programs, which involved increasing public expenditure at the same time as you were prosecuting the war in Vietnam at great expense. And that was part of the period of inflationary pressures that public deficits were causing, that workers wage demands were causing, 'cause when workers had full employment, they, you know, felt they could make high wage demands in order to buy everything that they were being told to buy that the good life was all about. And the response in the 1970s—and it was a product of the fact that the United States dollar was the world currency, and on here was the rest of the world holding dollars, and they didn't want their dollars to be devalued by inflation, were demanding of the United States that they cut back on their public expenditure. And they did, and they cut back on it.

JAY: You're talking about the Volcker shock treatment.

PANITCH: They cut back on it even before that, even under Jimmy Carter in 1976-77. And they cut back on public expenditure, but they still had to try to integrate the masses in the cities. They still had the problem of how do you house people. And one of the things they did was to try to integrate them through getting them into the financial system as borrowers. A act which a lot of radicals were pushing—and they didn't mean it in a way that would end up in this crisis that we're now in—was that banks ought to be required to lend to poor people, that they had to lend to those portions of their communities they'd never lent to. Right? And the banks all objected. "What do you mean? We can't lend to poor people. We're not going to be sure we're going to get paid back." They said, "Okay. We'll allow Fannie Mae and Freddie Mac, the government-sponsored mortgage housing corporations, to create this secondary market in mortgages. They'll buy them off you."

JAY: When the Republicans now critique this, they leave out the extent to which there was social unrest that had to be dealt with.

PANITCH: Well, they leave out the fact that this was actually a poor option relative to the Great Society programs, that it was happening because they were cutting back on welfare, on the Great Society programs, on food stamps, on public expenditure in the cities, etcetera. So in a sense they drove people into, "Okay, you want to deal, you want to be able to buy in our society, get it from the banks." And Clinton made it worse: having bought into neoliberalism as all part of the third way, I mean, partly he said, "I'm being driven into this because of some"—and he used a word we can't use on television, blank-blank-blank 28-year-old bond trader. Right? But once he did, he cut back on welfare. He did away with the American welfare system, Clinton, right? And what he then did was he radicalized this community reinvestment act, radicalized it in the sense of push people further into trying to get mortgages through this. Right? And this created it even more. And then Bush came in and let every shyster in the mortgage system into this as a competitor, completely unregulated; removed the reserve requirements on Fannie Mae and Freddie Mac, who—you know, banks have a 10 percent reserve requirement that they have to loan as cash—they only have to have 2.5 percent rather than 10; and you got this mountain of debt. It isn't the poor people's fault; it's the product of not being willing to have public expenditure. It's a scandal that the United States doesn't have a massive program of public housing.

JAY: So they could have had two strategies here. One is state investment in cheap public housing direct. Get people to borrow money, get into debt, to somehow buy their own housing.

PANITCH: Exactly. And they pushed it through the private sector; they pushed it through private finance. And of course it was the biggest portion—.

JAY: And they were making money on both sides here: they make money on the interest on the debt, and they make money through the asset inflation in the real estate market.

PANITCH: Yeah, until it all blows up in their faces. So, you know, in terms of what is to be done, we need to look at it historically. Sure, there needs to be regulation; sure, the Bush administration should not have allowed every shyster in the mortgage industry in.

JAY: I can't resist doing a Sarah Palin, her doggone, do you want to look back again [inaudible]. Go on.

PANITCH: Yeah. Well, we do. I mean, we need to learn the lessons from mistakes of the past. And we need to go back to public expenditure. Now, I think it is true that, you know, this is a capitalist system, and that will itself create contradictions. So down the road you have to be able to think ambitiously about being prepared for what's going to happen if you're doing redistributed taxation in order to raise that money. If you're pushing out the private sector through public expenditure, what's going to happen in the long run? And I think you have to build support during that process of public expenditure for actually taking the banking system into public hands, making that a public utility. You can't do that right now apart from a bailout. But I think there's enough anger around that you could be building towards it, not just as a bailout, but as this will become a way of redistributing what is produced in our society in a more rationable, more equitable way, will have a banking system that serves a different function.