London Calling: The Dollar is Falling!

Being in London for a week is instructive, especially during a financial crisis that keeps creeping from its Anglo-American roots to the wider world.  No matter what paper I bought, headlines and front-page stories were full of exotic references to hedge funds, SIVs, CDOs, and the like.  Meanwhile, there was little coverage of the Obama speech except notice of declining support for his candidacy in the wake of the Reverend Wright’s YouTube performances.  (Two Financial Times columnists, Gideon Rachman and Clive Crook, did catch up quickly—but then their different beats converge on the USA.)  As you know, this decline has now been arrested if not reversed.

I went to visit my daughter, who is a student at University College of London for the semester.  It’s an amazing city, full of energy, music, theater, immigrants—and tourists.  Just like Manhattan, except that there are a lot more young people in the central city, real residents, than you’ll find hanging around Midtown or Tribeca.  That difference could be a function of the many universities that congregate in London. 

In any event, the place reminds me of Chicago and Brooklyn rather than Manhattan because it’s so accessible, because its bearing and scale are more horizontal than vertical.  I know, the birthplace of the skyscraper was Chicago, but it’s still a city where three or four stories is the norm—it looks like Brooklyn.  So does London, regardless of the laughable “gherkin” and the other misshapen high-rises downtown, in or near the City. 

For the enormity of the place is latitudinal, a social and architectural urge captured perfectly in the incoherent spread of tombs and chapels in Westminster Abbey, and reiterated in the sprawl of “cities” north and west of the Thames.  London doesn’t go up, it goes out.  And that’s OK, because it got started a thousand years before the elevator was invented, and because the Tube stitches this crazy quilt together—if you’re underground, you can go anywhere.      

It was a bizarre experience because the dollar is such a wreck these days.  Lunch for three cost about 80 bucks, and we’re talking appetizers and a pizza, not high tea at a fancy restaurant.  A tour of Oxford, including transportation to and from the town but not admission to the Bodleian Library, was 700 bucks.  Still, this trip was worth more than all the lunches, because, late in the day, I noticed a lovely memorial to Christopher Hill, the great Marxist historian of the English Revolution, high up on the wall of the chapel at Balliol College, where he was a fellow and later master.  My daughter took a picture of it for me.     

Speaking of Marx, England was a bizarre experience at another remove because the language of class resentment and struggle is so ubiquitous.  Every guide I heard—whether on a tour bus or a river boat or a pub walk, from London to Edinburgh to Oxford—had the same smirking contempt for the toffs who live in the fancy condos and had the same quiet respect for the members of the royal family.  The columnist for the Times of London who called himself a Marxist (!) as his preface to a hilarious critique of Richard Dawkins and Christopher Hitchens couldn’t have been any more class conscious than the working stiffs who identified all those buildings and streets and statues and monuments and bars.  The caste system cuts both ways in the UK—everybody remembers where they come from.  But no, I never made it to Marx’s tomb in Highgate Cemetery.      

This introduction to troubled thoughts on the current financial crisis no doubt seems both perverse and desultory—as if Joseph Pulitzer had asked Henry James, Jr., to comment on the economic crisis of the 1890s from his apartment in London.  After all, the impending meltdown surely originated here, in the good old USA, with the subprime mortgage mess that erupted last August.  But there is method in my madness, gentle reader, yea, perhaps even dividend in my digression.

For the crisis got rolling over there, and its immediate result—the British government now owns Northern Rock—could be read as the future of banking over here.  JP Morgan, not the Bush administration, is buying Bear Stearns, to be sure, but the buyer is still in the market for its rival because the Fed has given it a credit line, effectively assuming the bad debts that Jimmy Cayne’s empire acquired over the last decade (about $30 billion in subprime packages owned by two Bear-related hedge funds). 

Indeed it seems that Ben Bernanke and Henry Paulson called the shots—the original $2 per share offer was designed to avoid the charge of “moral hazard” by demonstrating that the government was not bailing out Bear shareholders.  The new offer of $10 per share was made with the approval of the Fed and the Treasury Department.  JP Morgan is on the hook for the first $1 billion of losses, according to this revised arrangement, but we, the people, are still liable for the remainder.

The “discount window” opened by the Fed for use by Lehman Brothers and Goldman Sachs, two other firms with problematic stakes in the subprime market, again via hedge funds, is also a radical new departure.  In effect the central bank is promising to cover all the losses that derive from the collapse of the housing bubble.  In doing so, it is making itself at least a de facto regulator of, and at most a stakeholder in, the largest investment banking firms—those that will queue up at the window, hoping to avoid the fate of Bear Stearns.

So, long before Barney Frank’s pending legislation is in place (he and Christopher Dodd are pressing for regulation of the “shadow banking system” composed of SIVs and hedge funds), the socialization of an ostensibly private financial sector will be more or less complete.  Wall Street and Main Street will finally merge because the identical source of their revenues—consumer spending—has been revealed by this unfolding crisis (of which more anon).      

But the regulation of banks, whether commercial or investment banks, is not the real issue.  It’s a lullaby sung by and for the best and the brightest.  I know, I know, the Left, from Barney Frank to Paulie (“The Hitman”) Krugman, wants to believe that Alan Greenspan was asleep at the wheel—that he is somehow to blame for the mess we’re in—and to believe as well that closer regulation of the rogues on Wall Street will prevent a reprise of this crisis.  The Left is wrong, or only half-right. 

For the problem we face is structural, and its solution requires that we address the issue of class as well as race.  We need, then, to borrow the language of class resentment and struggle so easily spoken in England, minus the cynicism and the naïve monarchism that accompanies it over there.  We need to be more Marxist, but less dogmatic.  We need to follow the example of Christopher Hill.

Greenspan is not the free market, supply-side zealot who appears in Krugman’s hit list.  Like everyone else except the lunatics at the Club for Growth—oh, and Phil Gramm, McCain’s economic advisor—he treats markets as unnatural devices through which we express and enact our intentions, our social purposes.  As he put it in his remarkable memoir, The Age of Turbulence (2007): “Remember, markets are not ends in themselves.  They are constructs to assist populations in achieving the optimum allocation of resources” (p. 461).

Moreover, he hasn’t endorsed Milton Friedman’s daffy interpretation of the Great Depression—the Fed’s new chief, Ben Bernanke, who is also Krugman’s friend and former colleague at Princeton, has, in fact, done so.  Greenspan did endorse Bush’s tax cuts, on the assumption that, together with lower interest rates, they would reflate an economy staggered by the dot.com debacle.  He hoped that increased investment would flow from the resulting redistribution of income; he was disappointed, of course, as every post-Keynesian, from David Stockman to Peter G. Peterson, has been when confronted with the pathetic results of tax cuts for the rich.  Greenspan put it this way: “intended investment in the United States has been lagging in recent years, judging from the large share of internal corporate cash flow that has been returned to shareholders, presumably for lack of new investment opportunities” (p. 387).

But Greenspan was not asleep at the wheel.  He was trying to avoid the deflationary spiral that plagued Japan throughout the 1990s by promoting greater consumer expenditures rather than increased saving—expenditures that would offset the measurable lag in investment.  He succeeded: lower interest rates let American consumers borrow freely, which in turn fueled an already overheated housing market.  Their increasing debts fed growth worldwide, as it absorbed the savings glut accumulated in developing countries and financed the current account deficit of the USA.

Now Bernanke is trying to avoid the same deflationary spiral by flooding the financial sector with an apparently unlimited volume of liquidity.  He has announced that he stands ready to discount any asset, any collateral—that is, to buy it at a wholesale price, thus providing the client with cash—if that will prevent the collapse of the banking system and restore the confidence of lenders and borrowers alike.  Moral hazard and renewed inflation are clearly unimportant parts of his calculations; indeed the fall of the dollar actually abets the Fed’s reflationary agenda.  And, to repeat, these calculations sketch the lineaments of a new regulatory regime.

But again, new regulations will not solve the problem.  Consider the worst case scenario, the origins and outcomes of the Great Depression—you can be sure that Mr. Bernanke is, for he is the academic who calls a comprehensive explanation of this event the “Holy Grail” of economic theory (he should read chapters 1-4 of my Pragmatism and the Political Economy of Cultural Revolution [1994], where I have not only found this elusive document, I have measured it).
           
The Great Depression was caused by the intersection of three trends.  First, the new industrial blocs that formed the cutting edge of growth in the 1920s all congregated in consumer durables like automobiles.  Second, at the very moment that increasing consumer incomes thus became the key to growth, a substantial shift away from wages and toward profits occurred.  Third, this shift to profits fed the speculative boom in the real estate and stock markets, especially after 1926, largely because there was no place else to put the money—new investment opportunities were lacking, then as now, because economic growth was proceeding as a function of declining net investment.  Output and productivity were increasing throughout the 1920s even though inputs of both capital and labor were declining.  You can look it up.

Recovery from the Great Depression was almost complete by 1937 because the federal government had financed consumer spending out of deficits (there was no capital formation from 1929 to 1939; in fact capital endowment per worker was lower in 1955 than in 1929).  You can look this up, too, preferably in my book, but if that’s too much trouble, take a look at H. W. Arndt’s pathbreaking analysis in Economic Lessons of the 1930s (1944).
           
The fundamental lesson to be learned in this school of hard knocks was that only a reversal of the 1920s shift to profits would permit recovery—that is, only a shift of income shares toward wages, and thus consumption, would allow for growth in an economy that no longer required increasing net investment in productive capacity.  It is the same lesson now being taught in our current straitened circumstances.

Of course we should figure out how to regulate the “shadow banking system” that has grown up in the last 15 to 20 years, under the rubrics of hedge funds, “securitized investment vehicles” (SIVs), “collateralized debt obligations” (CDOs), and so forth, especially since it looks like two-thirds—yes, two-thirds—of existing hedge funds will fail by 2010, leaving their sponsors among the large investment banks holding a very heavy bag of bad debt. 

But we shouldn’t fool ourselves.  The only long-term solution to this so-called credit crisis is the one enacted, willy-nilly, in the 1930s.  That means we need to change the distribution of income in favor of wages and mass consumption, at the expense of profits and high-end profligacy.  No need to close the theaters, mind you—unlike “Waiting for Lefty,” the Puritan Revolution can’t be revived.  But we do need, just for starters, to repeal the Bush tax cuts.

Beyond that baby step, we need to encourage unionization of the service work force, by legislation like the Wagner Act if necessary; we need to subsidize higher education on a much larger scale, making it accessible to ever more teenagers, but also to workers displaced by the rising tides of free trade; we need to refinance Medicare and Social Security, so that the transfer payments it provides will grow; and we need to map a moral universe in which the relation between work and income, effort and reward, becomes more complicated, maybe even mysterious.

We need a dose of class struggle.  London’s calling.  Let’s get all lost in the supermarket, try to see what us consumers can do about the future of capitalism, socialism, and democracy.