The left's response to the crisis

The credit crisis hasn’t just been an embarrassment for apologists for actually-existing capitalism. It’s also highlighted a woeful fact pointed out by Nigel - that the left has for years had little interest in economics. The result has been that lots of lefties have called for  new ideas (or a reassertion of old ones) without actually proposing them.
So, to kick things off, here are some suggestions. These aren’t intended as firm policy proposals, but for directions to think in.
1. Don’t presume that regulation of individual banks is the answer. If Dick Fuld and John Thain didn’t know how to keep Lehmans and Merrills afloat, why should regulators have been able to do so, given that these always know even less than bosses, and face weaker incentives?  Regulation always has unforeseen effects; it might be that one form of regulation helped cause the current crisis.
Regulation of the entire system might be improved. But even this accepts what should be questioned - the existing capitalist structure.
2. This is - in part - a failure of ownership. Dispersed shareholders can’t control chief executives sufficiently, and bosses can’t control trading desks.  The left should therefore ask: in what circumstances is stock market quotation a sensible ownership structure? Mightn’t other modes of ownership - partnerships, mutuals, co-ops, whatever - be more efficient?
3. In nationalizing Fannie, Freddie and AIG, the Bush administration has shown that there are no principles of liberty or justice that rule out nationalization. Efficiency trumps property rights. The left might take the hint.
4. Bosses are chancers and rent-seekers. Multi-million pound salaries are not rewards for rare skill, not the price that must be paid for “good management.” If Thain and Fuld couldn’t even keep their firms alive, might it be that management skill is an illusion? The left should question the legitimacy of the boss class. This doesn’t just mean recognizing that one argument against low taxes on the rich is now weak. It means questioning their right and ability to control big organizations.
5. Recognize that markets have a role. The state cannot - and perhaps (pdf) should not - manage the economy to remove all fluctuations. What it should do is help protect people from the consequences of downturns. And this could well mean adopting Robert Shiller’s proposals for macro markets.
This crisis has been the result of misdirected financial innovation, not of markets inherently.
6. If the state can spend billions bailing out banks, it can spend billions bailing out people too. If a big welfare state is good enough for capitalists, it’s good enough for workers. Standard arguments against welfare states - that they are expensive, dampen incentives and that people should stand on their own two feet - have been gravely undermined.
7. The response of the Bush administration to the crisis show that the capitalist class will pay any price, bear any burden and ditch any principle in order to protect its own. Again, the left should take the hint.
Yes, none of these ideas are immediate solutions. But they're not meant to be. Hasty policy is usually bad policy. And I suspect the immediate material effects of the current troubles - less availablity of credit and an economic slowdown - will now be cured by the passage of time. The longer-lasting, deeper effect of this crisis is that it's undermined capitalist ideology. The left not only should respond to this. It can.

Comments

[Andrew Zalotocky]

On point 3: The actions of the Bush administration do not prove whether any "principles of liberty or justice that rule out nationalization" actually exist. All that's been proved is that the current members of the administration do not hold such principles.

Your first point also suggests a practical argument against nationalisation. If managers and regulatory bodies cannot effectively police a financial institution, what chance do ministers and civil servants have? Doesn't it just create an even bigger gap between principal and agent, and replace principals who understand the business with ones who don't?

Nationalisation also greatly increases moral hazard because it leads to the assumption that an organisation will always be bailed out by the taxpayer no matter how badly it does (cf British Leyland).

On point 6: When the state bails out banks it is protecting the jobs of all the people who work for the banks, so it is also bailing out workers.

On point 7: What evidence do you have that the administration's actions are motivated by class interest, or that they even see the bankers as part of their class? The decision could just as easily be motivated by party politics, because it would be very politically risky for the Republicans to be seen to be doing nothing about a perceived crisis this close to an election. For politicians of all parties, political expediency trumps property rights.

[anotherplanet]

On point 6: Naomi Klein has hit the nail on the head: "During boom times, it's profitable to preach laissez faire, because an absentee government allows speculative bubbles to inflate. When those bubbles burst, the ideology becomes a hindrance, and it goes dormant while big government rides to the rescue. But rest assured: the ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalisation for deep cuts to social programmes, and for a renewed push to privatise what is left of the sector."

It's a double whammy for the taxpayer - forced to bail out profligate bankers (who will no doubt see their bonuses return with the share price) then, to add salt to the wound, being told that the consequent reverse in public finances necessitates cuts in spending - and an invitation to the private sector to run things more efficiently!

[anotherplanet]

Andrew Alotocky writes:
"What evidence do you have that the administration's actions are motivated by class interest, or that they even see the bankers as part of their class? "

Maybe the fact that Hank Paulsen is a former CEO of Goldman Sacks with a personal fortune of $700m?

[Dipper]

its possible to see the demise of American Investment Banks as the end of a logical process.

Twenty years ago retail/commercial banks were lumbering dumb banks that lent money and did little else. Investment banks were full of clever people doing fancy structured deals and doing clever investments (see Liar's Poker).

Over the intervening period two things have happened. Firstly commercial banks have, largely through acquisition, become much better at harvesting their retail and commercial franchises. Secondly, hedge funds have come to be seen as the natural vehicle for proprietory risk taking.

This has left independent Investment banks exposed. They have had to take bigger and bigger risks to justify their independence, and have now run out of road.

It is noticable that UBS and Citi, both of whom lost tens of billions of dollars, have not been threatened in this debacle.

The demise of investment banks such as Lehman is a sideshow compared to the real story of AIG, Freddie and Fannie.

[Dipper]

1. Anyone still think Alastair Darling was being alarmist?

2. Sarbanes-Oxley. How useless was that!

[Adrian]

"If the state can spend billions bailing out banks, it can spend billions bailing out people too."

Er, you don't perhaps mean "instead" rather than "too"? There are only so many billions to go round. Pretty soon, as the man said, you're talking real money.

[dearieme]

The Left, virtually by definition, can have nothing worthwhile to say. What we need to hear from is a Right that isn't in awe of the preposterous impostors who have been in charge of the financial companies, central banks and regulators. One big deal is the absurdity of leaving the state in charge of monopoly fiat currencies. A second is the danger of the State taking on an endless list of self-imposed "duties" while, therefore, being incapable of discharging any of them with even minimal competence. "Regulation" done incompetently may well be worse than no regulation at all, and embarrassingly worse than the quality of regulation that might reasonably be hoped for. A third is the need for the occasional exemplary hanging of a crooked business magnate or dishonest politician. There's quite a good case for starting with my old acquaintance J. G. Brown.

[passer by]

For as longs as we have the social construction of fiat money, for which everyone's trust is needed willing or otherwise, there will always be the state to underwrite and supervise that trust.

We need some sort of currency competition to keep this system honest.

[Luis Enrique]

sorry to harp on about this (and I should emphasise I am in favour of the state spending more money on addressing inequities and poverty) but can you explain to me how you can 'bail-out' a poor person in any comparable fashion to 'bailing-out' a bank? (that is, acquiring its assets at a discount price, with the intention of selling them at a later date, potentially at a profit). Seems to me, the ways in which the state may spend money on bailing out poor people (investment in infrastructure and services, flows of income actually given to poor people - not lent or use to acquire their assets) are fundamentally different to a state-takover of bank assets, and you're "if we can do one why can't we do the other?" argument is misplaced - the arguments for doing either, moral and consequential, are separate questions without the answer to one saying much about the other, apart from the general wisdom of using the state to do helpful things the market cannot do alone, which you only disagreed with in the first place if you are a particularly brand of rightwinger.

(If you believe that the aim of the bailouts is to prevent a global depression, which would doubtless hurt poor people more than it does the wealthy, perhaps these bailout are spending billions on bailing out poor people)

[chris]

Luis - a welfare state is analogous to buying banks' assets with the possibility of making a profit.
Eg, better education for poor kids can make money by equipping the kids to get a good job. An NHS that patches people up well gets them back to work as taxpayers. Paying dole money tides people over until they get a decent job.

[ortega]

Oh my God! Will it be one of the consequences of this crisis that someone will take Klein seriously! The situation is then worst than I thought.

[ad]

"If a big welfare state is good enough for capitalists, it’s good enough for workers."

We do have a big welfare state for workers. And for non-workers, for that matter.

"The response of the Bush administration to the crisis show that the capitalist class will pay any price, bear any burden and ditch any principle in order to protect its own."

May I conclude that you do not think that the collapse of the banking system would have hurt anyone but "the capitalist class"? Who are this class, why do you not care about them - and why would no one else have been hurt?

[dearieme]

"the capitalist class" = widows, orphans and your pension fund.

[Alexander G. Rubio]

I think you wave off the question of regulation too quickly, as well as conflating it a tad with government interference on an arbitrary basis.

De-regulation (the Clinton admin. has to take a big slice of the blame on this) most certainly had a big part to play in the run up to this crisis. And some rather simple regulatory rules updates along the way might have gone a long way towards this being just a down-turn, and not a systemic threat.

Just to give one example - regulators are now frantically trying to levitate the market by not only banning so called "naked" short selling (borrowing and selling stock to buy it back at a later, and hopefully cheaper, date, but without actually borrowing it first..), but banning short selling altogether. The latter being, in my opinion an egregious interference in the free market.

But an earlier ban on "naked" credit default swaps (basically selling and buying insurrance on underlying assets you don't even hold) would, at a stroke, have minimised the systemic risk to very low levels.

But then again, that would have limited the frankly silly profits these companies made by creating these derivatives left and right when times were good, everything went up, and no firms failed...

[Bob B]

Back in 2003, Warren Buffet was warning that derivatives could become a "mega-catastrophic risk" for the economy.
http://news.bbc.co.uk/1/hi/business/2817995.stm

But I'm unconvinced that Warren Buffet is really a closet leftist.

[Luis Enrique]

Chris - your point is well taken, although in another context if you were asked to consider whether an additionaol n-billion expenditure on the welfare state and the NHS could be justified in terms of a net gain to taxpayers, I suspect you'd be very sceptical. Whereas the bailout of the financial sector is justified on the basis of a net gain to taxpayers relative to the counterfactural (no bailout, and a depression).

[Chris Williams]

Chris, my own no-brainer response to all this has been to wonder about anti-trust legislation. If no one financial institution has more than 5% of any one market, then nobody's 'too big to fail' - and thus nobdy would deserve to be bailed out by my taxes. So let's break LTSBHBOS and NR up, for starters. It's what Adam Smith would have wanted.

Or am I missing something here?

Chris Williams

[Mr Eugenides]

I'm not smart enough to know why you're wrong, Chris [D], other than a vague sense that presumably you must be. But it's a very interesting post.

It seems to me, though, that Chris [Williams, above] has a point. If I had to pick one aspect of governmental regulation of the free market that many libertarians are at least partly comfortable with - and in my case, entirely so - it's anti-trust legislation restricting monopolies.

That's not the whole answer, because the domino theory no doubt holds for financial institutions. But if you prevent any one institution from dominating the market to the extent that their travails, or collapse, threaten the whole edifice, then at least some of the current problems might have been avoided.

[pedro]

I suspect the left will take the hints, pity, seeing you're wrong.

1. How is the current problem a failure of capitalism? Individual companies fail all the time and that is part of how the competitive market encourages the most efficient allocation of capital. The current system failure has a lot to do with government interventions and regulations, including cheap money and the government sponsored role of Fannie and Freddie pumping up low cost housing.
2. You’re begging a question here. What is the evidence that stock companies and share markets are inefficient. This is a crises of the financial system. The other modes of ownership already exist and if more efficient would predominate. The stock company is a big part of the growth of wealth in the capitalist era.
3. No they haven’t. They have shown that they will nationalise certain companies if they think the consequence of not doing so are disastrous for everyone. That doesn’t change the fact that nationalisation was disastrous for the British car industry and does not in any way change the ample evidence that nationalising business is bad for everyone.
4. Most people are chancers and rent seekers if given the opportunity, so don’t pick on bosses. My chardonnay-socialist (and part time mum/optometrist) sister wants your government to do pretty much everything and lower taxes. There’s nothing she can’t justify having the government pay for or subsidise, including her luxuries. Next time you spot the geniuses that can organise a business reward system for a country you should send them over to N Korea or Cuba, those guys seem to need the help. Plus, won’t you be replacing the boss “class” with a nomenklatura? Like that’s an improvement for everyone.
5. Exactly about the source of the crises, so how does this defence of the market square with your other hopes?
6. It does. It’s called welfare, plus the NHS, plus public education plus plus plus. Anyway, it makes more sense to say the state should not spend billions bailing out banks unless there is a clear and large benefit to the general public. Those standard arguments are not undermined at all. Two wrongs don’t make a right.
7. No it doesn’t, it shows that politicians will pay any amount of taxpayer money if they think they should.
If the left had an actual good idea about anything to do with the economy then the left would have succeeded years ago. Even now the left is really triumphant and you guys just don’t seem to see it.

[Bob]

A lot has changed since this story. For one AIG has faced unjustified criticism that now targets Goldman Sachs. This article (http://www.nytimes.com/2009/03/25/opinion/25desantis.html) for example shows that. So that leaves me confused. For the financial crisis, who is actually to blame here?

[John Tungston]

You have it right on the money that managerial skill is a myth, it only denotes ownership. Regulation can be successful, merely because it has the ability to see beyond the owners own greed and lust for profit.