Noam Chomsky: Anti-Democratic Nature of US Capitalism.

[Thinking Man's Idiot]

Published on Friday, October 10, 2008 by The Irish Times

Anti-Democratic Nature of US Capitalism is Being Exposed

Bretton Woods was the system of global financial management set up at the end of the second World War to ensure the interests of capital did not smother wider social concerns in post-war democracies. It was hated by the US neoliberals - the very people who created the banking crisis writes Noam Chomsky

by Noam Chomsky

THE SIMULTANEOUS unfolding of the US presidential campaign and unraveling of the financial markets presents one of those occasions where the political and economic systems starkly reveal their nature.

Passion about the campaign may not be universally shared but almost everybody can feel the anxiety from the foreclosure of a million homes, and concerns about jobs, savings and healthcare at risk.

The initial Bush proposals to deal with the crisis so reeked of totalitarianism that they were quickly modified. Under intense lobbyist pressure, they were reshaped as "a clear win for the largest institutions in the system . . . a way of dumping assets without having to fail or close", as described by James Rickards, who negotiated the federal bailout for the hedge fund Long Term Capital Management in 1998, reminding us that we are treading familiar turf. The immediate origins of the current meltdown lie in the collapse of the housing bubble supervised by Federal Reserve chairman Alan Greenspan, which sustained the struggling economy through the Bush years by debt-based consumer spending along with borrowing from abroad.

But the roots are deeper. In part they lie in the triumph of financial liberalisation in the past 30 years - that is, freeing the markets as much as possible from government regulation.

These steps predictably increased the frequency and depth of severe reversals, which now threaten to bring about the worst crisis since the Great Depression.

Also predictably, the narrow sectors that reaped enormous profits from liberalisation are calling for massive state intervention to rescue collapsing financial institutions.

Such interventionism is a regular feature of state capitalism, though the scale today is unusual. A study by international economists Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20 companies in the Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments "socialise their losses," as in today's taxpayer-financed bailout. Such government intervention "has been the rule rather than the exception over the past two centuries", they conclude.

In a functioning democratic society, a political campaign would address such fundamental issues, looking into root causes and cures, and proposing the means by which people suffering the consequences can take effective control.

The financial market "underprices risk" and is "systematically inefficient", as economists John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalisation and reviewing the substantial costs already incurred - and proposing solutions, which have been ignored. One factor is failure to calculate the costs to those who do not participate in transactions. These "externalities" can be huge. Ignoring systemic risk leads to more risk-taking than would take place in an efficient economy, even by the narrowest measures.

The task of financial institutions is to take risks and, if well-managed, to ensure that potential losses to themselves will be covered. The emphasis is on "to themselves". Under state capitalist rules, it is not their business to consider the cost to others - the "externalities" of decent survival - if their practices lead to financial crisis, as they regularly do.

Financial liberalisation has effects well beyond the economy. It has long been understood that it is a powerful weapon against democracy. Free capital movement creates what some have called a "virtual parliament" of investors and lenders, who closely monitor government programmes and "vote" against them if they are considered irrational: for the benefit of people, rather than concentrated private power.

Investors and lenders can "vote" by capital flight, attacks on currencies and other devices offered by financial liberalisation. That is one reason why the Bretton Woods system established by the United States and Britain after the second World War instituted capital controls and regulated currencies.*

The Great Depression and the war had aroused powerful radical democratic currents, ranging from the anti-fascist resistance to working class organisation. These pressures made it necessary to permit social democratic policies. The Bretton Woods system was designed in part to create a space for government action responding to public will - for some measure of democracy.

John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement.

In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the US treasury now regards free capital mobility as a "fundamental right", unlike such alleged "rights" as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as "letters to Santa Claus", "preposterous", mere "myths".

In earlier years, the public had not been much of a problem. The reasons are reviewed by Barry Eichengreen in his standard scholarly history of the international monetary system. He explains that in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". Therefore, the severe costs imposed by the virtual parliament could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war, that luxury was no longer available to private power and wealth. Hence in the Bretton Woods system, "limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures".

The obvious corollary is that after the dismantling of the postwar system, democracy is restricted. It has therefore become necessary to control and marginalise the public in some fashion, processes particularly evident in the more business-run societies like the United States. The management of electoral extravaganzas by the public relations industry is one illustration.

"Politics is the shadow cast on society by big business," concluded America's leading 20th century social philosopher John Dewey, and will remain so as long as power resides in "business for private profit through private control of banking, land, industry, reinforced by command of the press, press agents and other means of publicity and propaganda".

The United States effectively has a one-party system, the business party, with two factions, Republicans and Democrats. There are differences between them. In his study Unequal Democracy: The Political Economy of the New Gilded Age, Larry Bartels shows that during the past six decades "real incomes of middle-class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working-poor families have grown six times as fast under Democrats as they have under Republicans".

Differences can be detected in the current election as well. Voters should consider them, but without illusions about the political parties, and with the recognition that consistently over the centuries, progressive legislation and social welfare have been won by popular struggles, not gifts from above.

Those struggles follow a cycle of success and setback. They must be waged every day, not just once every four years, always with the goal of creating a genuinely responsive democratic society, from the voting booth to the workplace.

* The Bretton Woods system of global financial management was created by 730 delegates from all 44 Allied second World War nations who attended a UN-hosted Monetary and Financial Conference at the Mount Washington Hotel in Bretton Woods in New Hampshire in 1944.

Bretton Woods, which collapsed in 1971, was the system of rules, institutions, and procedures that regulated the international monetary system, under which were set up the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF), which came into effect in 1945.

The chief feature of Bretton Woods was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value.

The system collapsed when the US suspended convertibility from dollars to gold. This created the unique situation whereby the US dollar became the "reserve currency" for the other countries within Bretton Woods.

© 2008 The Irish Times
Noam Chomsky is professor emeritus of linguistics at the Massachusetts Institute of Technology. His writings on linguistics and politics have just been collected in The Essential Chomsky [1], edited by Anthony Arnove, from the New Press.

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[Thinking Man's Idiot]

Published on Friday, October 10, 2008 by The Washington Post


The End Of American Capitalism?


by Anthony Faiola


The worst financial crisis since the Great Depression is claiming another casualty: American-style capitalism.

Pedestrians are reflected in an electric stock market board in Tokyo. Punctuating its worst week in history, Japan's main stock index plummeted nearly 10 percent. European indexes followed suit. (Photo: AP)

Since the 1930s, U.S. banks were the flagships of American economic might, and emulation by other nations of the fiercely free-market financial system in the United States was expected and encouraged. But the market turmoil that is draining the nation's wealth and has upended Wall Street now threatens to put the banks at the heart of the U.S. financial system at least partly in the hands of the government.The Bush administration is considering a partial nationalization of some banks, buying up a portion of their shares to shore them up and restore confidence as part of the $700 billion government bailout. The notion of government ownership in the financial sector, even as a minority stakeholder, goes against what market purists say they see as the foundation of the American system.

Yet the administration may feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow. An economy based on the free market cannot function that way.

The government's about-face goes beyond the banking industry. It is reasserting itself in the lives of citizens in ways that were unthinkable in the era of market-knows-best thinking. With the recent takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of AIG, the U.S.
government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans. Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system.

Given that the United States has held itself up as a global economic model, the change could shift the balance of how governments around the globe conduct free enterprise. Over the past three decades, the United States led the crusade to persuade much of the world, especially developing countries, to lift the heavy hand of government from finance and industry.

But the hands-off brand of capitalism in the United States is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.

The government could launch a targeted program in which it takes a minority stake in troubled banks, or a broader program aimed at the larger banking system. In either case, however, the move could be seen as evidence that Washington remains a slave to Wall Street. The plan, for instance, may not compel participating firms to give their chief executives the salary haircuts that some in Congress intended. But if the plan didn't work, the government might have to take bigger stakes.

"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do -- hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us."

In Seoul, many see American excess as a warning. At the same time, anger is mounting over the global spillover effect of the U.S. crisis. The Korean currency, the won, has fallen sharply in recent days as corporations there struggle to find dollars in the heat of a global credit crunch.

"Derivatives and hedge funds are like casino gambling," said South Korean Finance Minister Kang Man-soo. "A lot of Koreans are asking, how can the United States be so weak?"

Other than a few fringe heads of state and quixotic headlines, no one is talking about the death of capitalism. The embrace of free-market theories, particularly in Asia, has helped lift hundreds of millions out of poverty in recent decades. But resentment is growing over America's brand of capitalism, which in contrast to, say, Germany's, spurns regulations and venerates risk.

In South Korea, rising criticism that the government is sticking too close to the U.S. model has roused opposition to privatizing the massive, state-owned Korea Development Bank. South Korea is among those countries that have benefited the most from adopting free-market principles, emerging from the ashes of the Korean War to become one of the world's biggest economies. It has distinguished itself from North Korea, an impoverished country hobbled by an outdated communist system and authoritarian leadership.

But the repercussions of crisis that began in the United States are global. In Britain, where Prime Minister Margaret Thatcher joined with President Ronald Reagan in the 1980s to herald capitalism's promise, the government this week moved to partly nationalize the ailing banking system. Across the English Channel, European leaders who are no strangers to regulation are piling on Washington for gradually pulling the government watchdogs off the world's largest financial sector. Led by French President Nicolas Sarkozy, they are calling for broad new international codes to impose scrutiny on global finance.

To some degree, those calls are even being echoed by the International Monetary Fund, an institution charged with the promotion of free markets overseas and that preached that less government was good government during the economic crises in Asia and Latin America in the 1990s. Now, it is talking about the need for regulation and oversight.

"Obviously the crisis comes from an important regulatory and supervisory failure in advanced countries . . . and a failure in market discipline mechanisms," Dominique Strauss-Kahn, the IMF's managing director, said yesterday before the fund's annual meeting in Washington.

In a slideshow presentation, Strauss-Kahn illustrated the global impact of the financial crisis. Countries in Africa, including many of those with some of the lowest levels of market and financial integration and openness, are now set to weather the crisis with the least amount of turbulence.

Shortly afterward, World Bank President Robert Zoellick was questioned by reporters about the "confusion" in the developing world over whether to continue embracing the free-market model. He replied, "I think people have been confused not only in developing countries, but in developed countries, by these shocking events."

In much of the developing world, financial systems still remain far more governed by the state, despite pressure from the United States for those countries to shift power to the private sector and create freer financial markets. They may stay that way for some time.

China had been resisting calls from Washington and Wall Street to introduce a broad range of exotic investments, including many of the once-red-hot derivatives now being blamed for magnifying the crisis in the West. In recent weeks, Beijing has made that position more clear, saying it would not permit an expansion of complex financial instruments.

With the U.S. government's current push toward intervention and the soul-searching over the role of deregulation in the crisis, the stage appears to be at least temporarily set for a more restrained model of free enterprise, particularly in financial markets.

"If you look around the world, China is doing pretty good right now, and the U.S. isn't," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "You may see a push back from globalization in the financial markets."

Staff writers Blaine Harden in Seoul and Ariana Cha in Washington contributed to this report.

© 2008 The Washington Post

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