The problem that will occupy the next few generations is how to undo the financial knots into which today’s economies have been tied. Clearing away the overgrowth of debt requires countering the neoliberal junk economics crafted to disable society’s defense mechanisms against financialization and unearned income. There have indeed been courageous U.S. officials, such as Sheila Bair and Neil Barofsky, whose sense of fairness was offended by the giveaways to the large banks and their bondholders. Former Wall Streeters Nomi Prins and Yves Smith, the intellectual force behind the Naked Capitalism website, have explained the financial rip-offs at work. UMKC’s Modern Monetary Theory website New Economic Perspectives provides a commentary on how needless today’s financial austerity is, in light of the power of central banks to fund economic growth. But their voices are all but drowned out by the parroting of pro-bank austerity economics across the political spectrum.
Nobody anticipated that democratic societies would vote for policies that would support the One Percent by impoverishing themselves. Political leaders treat interest and economic rent as secondary concerns while welcoming asset-price inflation and privatization. The economic vocabulary has been corrupted to depict exploitation as wealth creation — which it is for the One Percent under the current system, but at the cost of the 99 Percent.
Latvians have repeatedly voted for neoliberals imposing Europe’s most extreme austerity. Most notoriously, Ireland’s politicians paid foreign bondholders and “hot money” arbitrageurs at the cost of imposing domestic poverty. Voters finally replaced its neoliberal politicians, but the new party coalition did not repudiate the debts that were taken on.
In the United States, Britain and France, no major political party or labor organization has challenged the oligarchic principle that tax rules, financial regulations and the legal system should be run for the benefit of the FIRE sector serving the One Percent. Today’s passivity by the 99 Percent in the face of a rentier counter-Enlightenment reflects the degree to which voters have come to accept the neoliberal financial and tax system as part of the natural environment, as if there indeed is no alternative.
What is needed is a perspective enabling people to see the reforms that would counter today’s corrosive FIRE-sector mode of fortune-creation. The difficulty in promoting this understanding is that its logic and implications are radical — as they were in the 19th century, when they were sponsored by a broad range of reformers, from the “Ricardian socialists” around John Stuart Mill urging nationalization of land rent (by outright purchase or rising land taxation) and Christian socialist ideals of communalism to Marxism, based on nationalizing all means of production, factories as well as public infrastructure. It seemed that the residue of feudalism was being swept away at the very least by land taxation and anti-trust legislation, while banking was becoming industrialized.
But this has not occurred. The leading efforts to free economies from the legacy of feudalism were defeated. After World War I the focus of value and price theory on economic rent was replaced by a more trivialized economics curriculum excluding the concept of unearned income and the distinction between productive labor and overhead.
Will financialized economies self-destruct?
Warning against sacrificing the economy to subsidize the financial sector, chief Financial Times commentator Martin Wolf writes that the key policy guide should be: “First ‘do not’: do not pay too much attention to the financial sector’s self-interested bleating. … The financial sector has put the economy into trouble. If the government is forced to take part of the risk of putting the system back together again, it must protect the public interests first.” As a final “do not,” he urges, “do not bail out mortgage lending via government subsidies. By now it should be evident that the British obsession with speculative home ownership is a snare and a delusion. Let the market deflate, as it should.”
If creditors have their way, they will destroy the economy. Citigroup chief economist (and former advisor to Goldman Sachs) Willem Buiter acknowledged in 2012 that: “The most likely insolvent sovereigns — Greece, Portugal, Ireland, Cyprus and possibly Spain, Italy and Slovenia,” cannot grow without debt restructuring. He saw the risk of sovereign default highest for Ireland’s €63 billion of official debt. “Austerity fatigue in the periphery and growing bailout fatigue in the core mean that the ECB/euro system is the only Santa Claus capable of filling the solvency gaps of sovereigns and banks in the euro area.” But German, Dutch and Finnish finance ministers opposed this.
The financial system had become reckless by joining in a rentier consensus with the One Percent to oppose government powers to tax or regulate any form of wealth — and against labor seeking to improve its working conditions, wages and pensions, even though “winning” the war against labor destroys the domestic market and hence the ability to pay debts owed to the financial sector.
It doesn’t have to be this way. It is now two centuries since the Saint-Simonian proposals to subordinate credit to serve industry. Classical tax policy sought to ward off the rentier economy that the post-World War I century has brought about by un-taxing economic rent, privatizing basic utilities, and failing to socialize banking to prevent bank credit being lent against economic rent. Debts cannot be written down as long as people imagine that keeping them in place is necessary to prevent depression by preserving confidence in the financial system. Such “confidence” helps deepen today’s malaise.
Industrial capitalism or finance capitalism?
Lenin said that capitalists would sell Communists the rope to hang them. But capitalists themselves have produced the rope in the form of predatory finance extracting interest, dividends, fees and various forms of rent from industry, real estate, households and also from governments. “Capital gains” are produced by debt pyramiding, which paves the way for debt deflation of the “real” economy.
The question is whether finance capital can survive simply by lending to speculators in search of interest, rent extraction and asset-price gains or gambles as finance capitalism mutates into casino capitalism. Of course there are many necessary functions provided by banks. But the collapse of today’s financialized economies into negative equity is largely the product of a few giant Wall Street institutions, as economist Randy Wray notes: “We have 4500 honest banks. We have a half dozen huge banks that are run as control frauds. Our financial system’s main problems can be found among those SDIs — systemically dangerous institutions. We will not get back our economy or our government until we close them.”
Fiscally, today’s problem is akin to that of 16th-century Spain, whose landed aristocracy taxed labor and incipient industry in the towns while living tax-free in luxury. In 18th -century France a similar tax shift sparked the Great Revolution. That was the only way to break the rentier stranglehold adding to the cost of labor and its products.
Today’s financial counter-revolution against the reform movement of the 19th and early 20th centuries has shifted taxes off the FIRE sector onto labor and industry, much as did medieval Spain. The Republican administrations of Ronald Reagan and George H. W. Bush cut income taxes on the top brackets and capital gains taxes on real estate and finance, while adding a proliferation of sales and value-added taxes and wage withholding set-asides (and quadrupling the U.S. public debt between 1981 and 1992).