This is an abridged version of an essay, “Tyranny of Global Finance,” co-published with the Transnational Institute, appeared in the State of Power 2016 report.
When the ground from under Wall Street opened up in autumn 2008, there was much talk of letting the banks get their just desserts, jailing the “banksters,” and imposing draconian regulation. The newly elected Barack Obama came to power promising banking reform, warning Wall Street, “My administration is the only thing that stands between you and the pitchforks.”
Yet nearly eight years after the outbreak of the global financial crisis, it is evident that those who were responsible for bringing it about have managed to go completely scot-free. Not only that, they have been able to get governments to stick the costs of the crisis and the burden of the recovery on their victims.
How Wall Street Won
How did they succeed? The first line of defense for the banks was to get the government to rescue the banks from the financial mess they had created. The banks flatly refused Washington’s pressure on them to mount a collective defense with their own resources. Using the massive collapse of stock prices triggered by Lehman Brothers going under, finance capital’s representatives were able to blackmail both liberals and the far-right in Congress to approve the $700 billion Troubled Asset Relief Program (TARP). Nationalization of the banks was dismissed as being inconsistent with “American” values.
Then by engaging in the defensive anti-regulatory war that they had mastered in Congress over decades, the banks were able, in 2009 and 2010, to gut the Dodd–Frank Wall Street Reform and Consumer Protection Act of three key items that were seen as necessary for genuine reform: downsizing the banks; institutionally separating commercial from investment banking; and banning most derivatives and effectively regulating the so-called “shadow banking system” that had brought on the crisis.
They did this by using what Cornelia Woll termed finance capital’s “structural power.” One dimension of this power was the $344 million the industry spent lobbying the U.S. Congress in the first nine months of 2009, when legislators were taking up financial reform. Senator Chris Dodd, the chairman of the Senate Banking Committee, alone received $2.8 million in contributions from Wall Street in 2007–2008. But perhaps equally powerful as Wall Street’s entrenched congressional lobby were powerful voices in the new Obama Administration who were sympathetic to the bankers, notably Treasury Secretary Tim Geithner and Council of Economic Advisors’ head Larry Summers, both of whom had served as close associates of Robert Rubin, who had successive incarnations as co-chairman of Goldman Sachs, Bill Clinton’s Treasury chief, and chairman and senior counsellor of Citigroup.
Finally, the finance sector succeeded by wielding their ideological power, or perhaps more accurately, hitching their defense to the dominant neoliberal ideology. Wall Street was able to change the narrative about the causes of the financial crisis, throwing the blame entirely on the state.
This is best illustrated in the case of Europe. As in the U.S., the financial crisis in Europe was a supply-driven crisis, as the big European banks sought high-profit, quick-return substitutes for the low returns on investment in industry and agriculture, such as real-estate lending and speculation in financial derivatives, or placed their surplus funds in high-yield bonds sold by governments. Indeed, in their drive to raise more and more profits from lending to governments, local banks, and property developers, Europe’s banks poured $2.5 trillion into Ireland, Greece, Portugal and Spain.
The result was that Greek’s debt-to-GDP ratio rose to 148% in 2010, bringing the country to the brink of a sovereign debt crisis. Focused on protecting the banks, the European authorities’ approach to stabilizing Greece’s finances was not to penalize the creditors for irresponsible lending but to get citizens to shoulder all the costs of adjustment.
The changed narrative, focusing on the “profligate state” rather than unregulated private finance as the cause of the financial crisis, quickly made its way to the U.S., where it was used not only to derail real banking reform but also to prevent the enactment of an effective stimulus program in 2010. Christina Romer, the head of Barack Obama’s Council of Economic Advisors, estimated that it would take a $1.8 trillion to reverse the recession. Obama approved only less than half, or $787 billion, placating the Republican opposition but preventing an early recovery. Thus the cost of the follies of Wall Street fell not on banks but on ordinary Americans, with the unemployed reaching nearly 10% of the workforce in 2011 and youth unemployment reaching over 20%.
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