Is This the End of American Capitalism?
As the modern system of capitalism faces the most serious challenge of its existence since Adam Smith, the name of John Maynard Keynes (1883-1946) is being regularly invoked by economists, politicians, bankers, and the media. And with good reason. Born in Cambridge, England, in 1883, the year Karl Marx died, Keynes probably saved capitalism from itself and kept Communists at bay. Keynesian Economics advocates the use of government monetary and fiscal policy to maintain full employment with low inflation.
Keynes described Capitalism in the following words: "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."
A well-known anti-Semite, Keynes once said, "It is not agreeable to see civilization so under the ugly thumbs of its impure Jews who have all the money and the power and brains." As in the past financial crises, powerful Jews on Wall Street and in Washington are being held responsible by many as the culprits of the current economic collapse.
In response to a severe recession or possible depression, Keynes suggested: "The government should pay people to dig holes in the ground and then fill them up." He advocated massive spending by government to stimulate demand when all else fails.
Who was Keynes? Here is how UC Berkeley's Robert Reich described him a few years ago: "A Cambridge University don with a flair for making money, a graduate of England's exclusive Eton prep school, a collector of modern art, the darling of Virginia Woolf and her intellectually avant-garde Bloomsbury Group, the chairman of a life-insurance company, later a director of the Bank of England, married to a ballerina, John Maynard Keynes--tall, charming and self-confident--nonetheless transformed the dismal science into a revolutionary engine of social progress."
Keynes was clearly a very smart man. His ideas of modern Capitalism have created unprecedented wealth and lifted hundreds of millions of people out of poverty. And his ideas may still help save capitalism yet again. At least, that is the hope of the Obama administration and the backers of the massive stimulus package of about $800 billion recently passed by the US Congress. However, what Keynes couldn't have imagined are the new heights of avarice and wickedness of the modern political-industrial elite in America that has threatened the very foundations of the system that brought them wealth and power. During the last decade, the behavior of American capitalists and politicians has been unbelievably self-destructive.
Even Alan Greenspan, the icon of modern US capitalism, was forced to show contrition in October, 2008. The former Federal Reserve Chairman told a House committee that the banking and housing crisis is a "once-in-a-century credit tsunami." When asked if his ideology pushed him to make bad decisions, Greenspan said he found a "flaw" in his governing ideology that has led him to re-examine his thinking. There has, however, been no acceptance of any responsibility for the current crisis by the members of US Congress and powerful finance, banking and appropriations committees responsible for overseeing the US finance and economy.
The American economy continues to deteriorate rapidly with the devastating credit crunch and major loss of confidence by consumers, businesses and investors. At this point, tax cuts or just handing out cash to banks or big infrastructure projects or re-regulation are not likely to help hasten economic recovery. The Obama administration will need to take more drastic measures, including nationalization and recapitalization of major banks to ensure that the much needed credit to businesses and consumers starts flowing again. Ideological aversion to nationalization will only delay recovery and take a much heavier toll on ordinary Americans in terms of job losses, home foreclosures and loss of other basic necessities of life.
The problem that some of the the critics of the Obama economic team and their Congressional overseers, derived mainly from the Clinton administration and the hold-overs from Bush-era, point out is articulated well by Nassim Taleb, the author of Black Swan. “We have the same people in charge, those who did not see the crisis coming,” he said recently on CNBC.
The roots of the current crisis can be traced to the Reagan revolution. Beginning in the early 1980s, Reaganomics transformed the United States in fundamental ways. Since the world saw the fall of the Soviet Union and collapse of Communism, the Conservative Republican ideas of less government and more deregulation have continued to change the economic landscape in America and the rest of the world. This revolution has now lasted almost three decades under various US administrations including Bush 41, Clinton and Bush 43. The Reagan ideas have also been adopted and preached by international financial institutions like the World Bank and the International Monetary Fund.
The continued wave of deregulation engineered and supported by America's predominantly Jewish political-industrial elite has led to the creation and trading of what Warren Buffet describes as "financial weapons of mass destruction". Such newfangled, unregulated financial derivative products as some mortgage-backed securities, credit default swaps and other wildly speculative futures and commodities contracts have produced hundreds of billions of dollars worth of personal gains for the financial industry executives and hundreds of millions of dollars in political contributions for American politicians who are now grand-standing as saviors of the American and the world economy.
The fate of many new-comers from the emerging economies of the world is closely tied to the success or failure of capitalism in America. It appears that some of the countries such as Brazil, Russia, China and India, who embraced the conservative American ideas of "economic reform" and "deregulation", may already be too late for the party. However, the European and Asian nations with substantial population of savers and entrepreneurs will recover rapidly and thrive again, as long as they keep their banks and financial institutions on a tight leash. In particular, the world's top creditor nations such as China , Japan and Germany with high savings rates, massive trade surpluses and large central bank cash reserves are likely to come out ahead at the end of the current crisis. Others may not be so lucky. But all the follower nations that have essentially been copying the US model will have to develop their own original ideas with financial systems and economic models to move forward in uncharted waters. Clearly, any new models will require a deep understanding and introspection of what has worked and where has the American capitalism gone wrong.
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CONAN: And you begin with the question: when, if ever, are such accusations of anti-Semitism fair?
Mr. KINSLEY: Yes. The purpose of this piece I wrote was not to accuse anyone of anti-Semitism. And in fact, I haven't heard anything that I would call anti-Semitic but to help you think through how to recognize it when you hear it and more importantly how not to recognize it when you don't hear it.
Mr. KINSLEY: And - because I think there's a real problem in our politics today of umbrage. People are very quick to take umbrage at things other people say. And politician use this to, I think, make bigger deals of things than they ought to.
Abe Foxman, who is the - he's the head of the B'nai B'rith Anti-Defamation League, says that virtually any reference to Goldman Sachs alone in the context of this scandal smacks of anti-Semitism, because he says, you know, what about Morgan Stanley and other firms that aren't Jewish? I think that goes much too far.
CONAN: And indeed, there can be an inference that just as if some people say, well, we can't make any criticism of Barack Obama without being accused of being a racist, you can't make any criticism of Goldman Sachs without being accused of being an anti-Semite.
Mr. KINSLEY: Right. I think that's true.
CONAN: There is also - you say you haven't read anything that you would take as anti-Semitic. Probably the most controversial thing was a quote in - by Matt Taibbi in a much quoted article about Goldman Sachs...
Mr. KINSLEY: Right.
CONAN: ...where he said that the world's most powerful investment bank is a great vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money - a phrase that set off alarm bells.
Mr. KINSLEY: Well, it's a heck of piece. And it's really written with brio. That passage, which has been widely quoted, comes very close to the line, because, you know, it never uses the word Jewish but it invokes a lot of images that are familiar in classic anti-Semitism: the bloodsucking monster, this -the other. And it's smothering the normal life of normal people. All of that has - Jews have been victimized - and I should add - I should mention that I am Jewish - Jews have been victimized by that kind of imagery for centuries.
That question is now out in the open, exposed anew by an Op-Ed article in The New York Times on Wednesday by Greg Smith of Goldman Sachs. It could reignite public suspicion that the culture of Wall Street has swung so sharply to the short-term side of the ledger that clients have not been coming in first, or even second, but dead last.
Even bankers who disagreed with Mr. Smith’s conclusions said the piece had struck a chord because it stirred up their own doubts, especially in the wake of the financial crisis. It is a sign of this anxiety that since then, one giant firm after another has publicly proclaimed it is putting clients first.
That much-advertised claim stands in sharp contrast to the world Mr. Smith depicted.
At meetings at Goldman, he wrote, “not one single minute is spent asking questions about how we can help clients,” Mr. Smith wrote. “It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”
He warned, “People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.”
risis always brings opportunity. And right now, we are having a crisis of capitalism unlike anything experienced during the last four decades, if not longer. The evidence is everywhere – in rising inequality, in the division of fortunes between companies and workers, and in lethargic economic growth despite unprecedented infusions of monetary stimulus by the world’s governments (a huge $29tn in total since 2008). Eight years on from the financial crisis and great recession, the US, UK and many other countries are still experiencing the longest, slowest economic recoveries in memory.
This has, of course, diametrically shifted the political climate, creating a paradigm of insiders versus outsiders. In the US, Donald Trump and Bernie Sanders are different sides of the same coin; in Britain, Jeremy Corbyn is an equally dramatic response to establishment politics. The challenges to the political and economic status quo are not going away anytime soon. A recent Harvard study shows that only 19% of American millennials call themselves capitalist, and only 30% support the system as a whole. Perhaps more shocking, the numbers are not much better among the over-30 set. A mere half of Americans believe in the system of capitalism as practised today in the US, which is quite something for a nation that brought us the “greed is good” culture.
In some ways that is no surprise because, as I explore in my new book, Makers and Takers: The Rise of Finance and the Fall of American Business, the system of market capitalism as envisioned by Adam Smith is broken – the markets no longer support the economy, as a wealth of academic research shows. Market capitalism was set up to funnel worker savings into new businesses via the financial system. But only 15% of the capital in the financial institutions today goes towards that goal – the rest exists in a closed loop of trading and speculation.
The result is much slower than normal growth, which holds true not just in the US but in most advanced economies and many emerging ones. The politics of the day – populist, angry, divisive – reflect this, in the US, Europe and many parts of the developing world as well.
But the bifurcation of our economy and the resulting fractiousness in politics has become so extreme that we are now at a tipping point. And as a result, we have a rare, second chance to change the economic paradigm – to rewrite the rules of capitalism and create a more inclusive, sustainable economic growth .
Three years ago, your can of Coke suddenly cost a few pennies more. The culprits? The clever bankers at Goldman Sachs. According to a Senate panel, they gamed the global aluminum market, warehousing tens of thousands of tons of the metal in Detroit and delaying delivery to customers like Coca-Cola. The bank was able to ratchet up the price on its supply, netting several billion dollars in the process. The best part: Goldman didn’t do it as a hedge against other investments. The bank did it to make money for itself, at the expense of everyone else.
Maneuvers like this are legal, but they’ve become more distasteful in the wake of the 2008 collapse, giving birth to the coinage of a term. “Our economic illness has a name: financialization,” writes Time business and economics columnist Rana Foroohar in Makers and Takers: The Rise of Finance and the Fall of American Business. The book offers a blistering critique of how Wall Street’s zero-sum thinking came to dominate and then hobble the U.S. economy. She isn’t peddling a vision of neo-socialism, à la Thomas Piketty or Bernie Sanders. Her argument is that finance for the sake of finance is bad for business—and capitalism as a whole.
Traditionally, finance served the needs of business (Foroohar’s “makers”) by providing capital and investing in long-term growth. But starting in the postwar decades and ramping up from the Reagan era onward, finance (the “takers”) began to take care of No. 1 first. Figures like former Defense Secretary Robert McNamara popularized management by statistics, while investors such as Carl Icahn made short-term profits the ultimate goal. Businesses slashed research and development budgets in favor of balance sheet tricks and tax dodges.
In Foroohar’s view, the banks’ primary activity is moving debt around, a risky strategy that hurts the ability of business to grow. As proof, she cites the fate of companies such as General Motors, General Electric, and Xerox, whose myopic thinking led to a decline in innovation and their place at the pinnacle of global business. Instead of serving business, financialization became an end in itself, a closed system unmoored from tangible economic activity.
The message of Makers and Takers isn’t radical or entirely new. (Still, Foroohar’s argument is timeless given the extent to which open-ended anger is fueling populist fervor on the Right and Left.) While she writes with passion, you don’t get a sense of how she intends to fix things beyond the case she makes for a sleepier, simpler capitalism rooted in bread-and-butter businesses such as manufacturing.
If that seems like a simplistic or naive hope, Foroohar notes that our current system wasn’t handed down to us in perfect form from the heavens. Modern capitalism is the product of a messy evolution, driven by natural greed and constrained by the laws we’ve enacted to protect ourselves from it. “We can remake them as we see fit,” she writes, “to better serve our shared prosperity and economic growth.” Those are sunny ideals, no doubt, but there might be enough light just now to prevent Wall Street from ever bilking us out of our Cokes again.