Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century. - book reviews

"The U.S. financial and monetary system is broken and needs to be fixed": so begins the introduction to Transforming the U.S. Financial System (hereafter TUSFS). This book is packed with informative analyses of the immense waste and the outrageous inequalities brought on by the 1980s financial explosion and its aftermath. The main weakness of TUSFS is its non-structural treatment of the financial explosion and attendant malfunctions, which leads to a politically limp position on "what needs to be fixed," not only in the financial and monetary sphere but in the whole economic system. Rather than attempting a chapter by chapter review here, it will be more useful to focus on some common themes in the book's analyses of recent financial problems and in its "broad approach to policy." As the editors indicate, these main themes underpin TUSFS's "consistent set of proposals." (p. 4)

The most documented theme in TUSFS is the extreme divergence between the effects of the 1980s growth of debt and speculative finance on the one hand, and the conditions for efficient and equitable socioeconomic reproduction on the other. While the number of jobs paying even a decent living wage was eroded, an increasing portion of savings and credit was channeled toward leveraged buy outs, commercial real estate, and other socially and economically questionalbe activities. Banks became big players in the money-market capitalism of the 1980s while simultaneously "redlining" many African Americans and other working-class people and communities out of the financial markets--often leaving the latter dependent on pawn shops, check-cashing stores, and other high-cost sources of financial services. The alienation built into speculative finance capital reached its height with the use of workers' pension fund and insurance savings for anti-worker purposes: not only for leveraged buy outs but also for the more general intensification of stockholder and creditor pressures on firms. The buy-out frenzy and increased power of financial capital did not lead to a productive rationalization of corporate capital as the free market apologists argue. Greater debt-servicing burdens and other financial pressures to raise short-run returns operated at the expense of workers and their communities, taking the form of layoffs, plant shutdowns, work speedups, and wage and benefit cuts. These are typically ignored by free market analyses of the "net gains" from buy outs.

The questionable lending practices of banks and savings and loans were ultimately backed by the taxpayers and the Federal Reserve. This fact brings us to a second main theme of TUSFS: that an important cause of increasing financial fragility and bailout fiascos lies in the extension of public protection of financial institutions and markets simultaneous with their deregulation. Sometimes this deregulation has been explicit, as in the cases of banks and thrift institutions. In other instances it has been implicit, as authorities have passively accepted the development and growth of financial instruments (like money market funds), markets (such as the exploding futures and junk bond markets of the 1980s), and instiutions (as in the expanding operations of finance companies) which fall outside the rubric of the existing regulatory regime. Failure to extend the regulatory regime to cover such financial innovations might not have been as much of a problem if government protection were not extended to them. Unfortunately, such a de facto extension of the bailouts was inevitable due to the increasing role in speculative activity not only of these innovations but also of the banks and thrifts themselves.

This perspective show the limitations of mainstream financial policy debates, which often draw a conceptual dichotomy between regulation with government protection versus deregulation and removal of protection (or some combination in which each side of the dichotomy is applied to particular markets and institutions). This is a false dichotomy if government protection is inevitable due to the widespread socioeconomic impacts of large-scale financial failures. The true dichotomy can then be seen as deregulation with protection versus protection with extended regulation. The former approach, illustrated by the proposals of Bush's Treasury Department, would lower the regulatory playing field for banks and thrifts to the level of less regulated institutions while maintaining public protection, especially for large institutions that fall in the "too-big-to-fail" category. In the second (TUSFS) approach, the regulatory field would be raised by extending regulations from banks and thrifts to other institutions while maintaining protection, excluding a "too-big-to-fail" policy which often discriminates against smaller scale, more community-oriented institutions.

Here we reach this book's last important theme: the philosophy behind its regulatory strategy. Even though TUSFS suggests that the erosion of the post-Second World War regulatory system by financial innovations can be reversed by applying regulations across the financial board, this leaves the principles underlying regulatory goals, institutions, and instruments to be specified. The old system combined public protection with stabilizing restrictions on competition. TUSFS maintains this combination but adds that protection should command a quid pro quo of more public control over the priorities served by financial institutions. At the same time, the book "support[s] vigorous private activity in financial markets" which does not encroach upon the boundaries of public priorities. So the preferred policy instruments mostly involve changes in the incentives facing financial institutions rather than direct controls. Under a proposal to transform the Federal Reserve into a public investment bank, for example, reserve requirements and interest rates on Federal loans to banks would be manipulated so as to channel funds toward socially productive investments (especially in environmental conversion) which create more high-wage jobs in lieu of the downsized traditional manufacturing and military-industrial complexes.

If this "social contract" is to have real community content, its administration must be subject to "broad and ongoing institutions of democratic accountability" (p. 6). It is suggested, for example, that the selective credit policies mentioned above could be applied by regional Federal Reserve banks whose directors would be popularly elected. This setup, one hopes, would "redistribute downward Federal Reserve decision making power, creating more effective channels for accountability" (p. 322). TUSFS also argues for representative-democratic oversight of short-term monetary policy, the idea being that the Fed has been overly obsessed with inflation when slow growth, high unemployment, and small-firm credit shortages call for a more expansionary policy.

Overall, TUSFS is an excellent guide to the financial wreckage and associated policy quandaries bequeathed by the go-go decade of the 1980s, and to the likely loci of future financial crises and conflicts. In my opinion the book is less successful as a progressive policy manifesto because of its decidedly liberal-democratic approach.

TUSFS's proposals are not informed by a critical perspective on the long-run development of capital accumulation and capital-labor relationships. Manifestations of this development are mentioned, as when globalization of manufacturing is used to defend selective credit policies to channel funds toward job-creating investments. TUSFS also traces the breakdown of the old financial regime partly to the erosion of the initial conditions ("low inflation and interest rates, high liquidity, and low debt levels") which had made it relatively easier for regulations to restrict financial activity to a more productively accommodative rather than speculatively destabilizing role during the post-Second World War boom (p. 133). But the absence of an overarching historical account of such structural changes hampers the book's explanations of the financial excesses, imbalances, and inequalities of the 1980s, leading in turn to a political crippling of TUSFS's progressive reform strategy.

The first symptom of this lacuna is a tendency to blame financial malfunctions on government policies, and the poor performance of the "real" economy on financial malfunctions, without rooting these problems in the historical development of capital accumulation. TUSFS blames the Fed's tight money policies not only for starting the last recession and for the weakness of the recent cyclical recovery, but also in major part for opening up the U.S. economy to intensified foreign competition and for the long-run decline of net productive investment relative to GDP since the 1970s. The book's section on monetary policy leaves one wondering if there are any U.S. economic evils that the Fed is not responsible for. That the pattern of Fed policy might have been in large part due to the swing in capitalist power toward finance capital, and that the latter may have been due to the movement of funds into unproductive financial areas in response to a relative stagnation of productive and privately profitable investment opportunities, is never seriously considered. Ditto for the possibility that intensified competition (which, like the secular slowdown in net investment and economic growth rates, is a global phenomenon) might be symptomatic of mature capitalism's tendency to accumulate more surplus value and productive capacity than it can profitably invest.

The book's dismissal of the mainstream conception in which leveraged buy outs enforce an efficient reallocation of surplus corporate funds or "free-cash-flow" neglects the possibility that these transactions really did feed upon an excess of surplus over profitable and productive investment outlets. One need not agree with Michael Jensen's apologetic view of junk-bond markets and buy out artists to appreciate the kernel of truth in the free-cash-flow hypothesis. Given that the buy-out wave did not eliminate the excess of corporate surpluses, to simply dismiss Jensen's approach bypasses a structural critique recognizing in corporate "free-cash-flow" the contradiction between social production and private appropriation.(1)

The absence of a distinct critical-historical perspective on capital accumulation leads TUSFS to adopt uncritically some questionable mainstream views; hence a major impression from the book is that increased private investment, productivity, and competitiveness can help solve U.S. socioeconomic problems without fundamentally altering capitalist relationships. Echoing the pre-election Bill Clinton (the one whose agenda was not limited to putting Wall Street first), the book's policy statements paper over the contradiction between industrial capital's competitive priorities and the work and living conditions of the working class. Even the passages with some sensitivity to the long-run systemic problems of U.S. capital accumulation tend to downplay or softwn the contradiction between private profit and social need.

Consider, for example, the proposal to use lower reserve requirements and cheaper Federal Reserve loans to promote flows of credit toward job-creating, ecologically friendly investments. It seems likely that there will be many projects which make good sense from a social point of view but are not privately profitable even if the requisite funds are provided at zero cost, especially if we are talking about a real environmental conversion of the entire production and consumption structure, including the whole built environment, of the sort required to make the U.S. economy ecologically sustainable. Would the Fed actually pay financial institutions to make loans for these priority projects? But then why go through the formalities of "loan" transactions (or private capitalist firms, for that matter) for what are in essence public investments funded at public expense? And what if projects that could not privately "pay off" even at a zero cost of funds are not to be financed by the Fed?(2) What constraint would this place on priority investments, particularly when retained profits and depreciation funds (still the largest sources of investment finance in the United States) are to remain under capitalist control in a policy environment geared toward "enhancing U.S. international competitiveness"? (p. 47)

The problem here is not one of formulating a left policy package capable of immediate passage through Congress, since as even the TUSFS' editors note, their "analyses and.... proposals are at sharp variance with predominant viewpoints on current economic questions." (p. 20) Rather, the difficulty is finding the most practical way to change the latter situation at least with respect to the predominant viewpoints and organized power held by the working-class majority. It seems to me that to be a strategic resource for progressive propaganda and organizing (broadly defined to include community and classroom work), intellectual interventions of the TUSFS type should set out an analysis and vision of the future from an autonomous working-class standpoint, that is, from an overall perspective completely distinct from mainstream capitalist ideology. In a period of long-run capitalist crisis, socioeconomic restructuring, and conservative political reaction, left proposals which limit themselves to what seems feasible or "reasonable" within the current rules of the game are unlikely to provide even defensive popular struggles with an autonomous perspective and agenda to stand upon. History suggests that the left and the working class need a theoretical and programmatic platform distinct from capital's, i.e., one not relying on the technocratic tuning up of capital accumulation to achieve progressive goals at bottom contradicted by the exploitative and competitive priorities of capital. Otherwise, left appeals to non-class concepts of efficiency, equality, and democracy will tend to be overridden by or reshaped to fit capital's priorities, especially during economic crunch periods. Meanwhile, the gains from eschewing an explicit working-class perspective, in terms of respectable-liberal support, are likely to be meager in a time when the entire mainstream-capitalist political spectrum is moving or has already moved right.

Arguably the asymmetry of class organization and power between labor and capital (the absence of an organized working-class force and agenda distinct from capital's) has been a prime barrier confronting "those already committed to greater equality and efficiency in our economic system." (p. 20) Capital has indeed shown no aversion to the practice of class warfare. Yet, after two decades of renewed global economic stagnation and of deregulation, antiunion crackdowns, and regressive tax and government expenditure policies reversing many of the working-class gains of the New Deal period, we still find progressive economists blaming finance capital's speculative frenzies, and the deterioration of working-class and overall socioeconomic conditions, on misguided government policies not organically related to the class struggle or to the contradictions of capital accumulation and its market forms. The problem is not just TUSFS stumbling over itself to reassure us that it is not anti-market or pro-government. The book espouses an artificial dichotomy between political and economic constraints on monetary and other state policies. At the same time it treats the state, markets, and capital accumulation itself not in terms of class relations but as neutral instruments of a generic "democratic will" if capitalism's political and regulatory "playing fields" could only be leveled.

Left structural reform proposals should not leave even a vague impression that "democratic will" and technocratic tinkering alone can ever be enough to reverse the disastrous socioeconomic trends of the 1980s and early 1990s. An autonomous working-class perspective must point out the need for a real change in power relationships, in and against capitalist production, markets, and the state. One way to construct such a mobilizing platform is via proposals which make good sense from the standpoint of social efficiency and equity but which cannot even in principle be rendered consistent with capitalist power relationships. Useful planks of this type include guaranteed employment at a good wage for all willing to work on socially useful tasks, as well as reductions in work-time commensurate with the rising social productivity of labor (with no reduction in total pay).(3) The prospective response of capital to such socially sensible proposals (capital flight and investment strike) can then be used to motivate the necessary strategic instruments of a popular socioeconomic restructuring program, including international capital controls and public takeovers of de facto publicly supported financial institutions. But it never pays to paper over the fact that concrete successes in these spheres can only be achieved if they are part and parcel of a structural transformation of state power by a mass self-conscious movement of the working class.(4)

NOTES

(1.)The U.S. non-financial corporate sector as a whole was, quite unusually, a net lender of surplus during the initial phases of the recent cyclical recovery. This was due not only to the increased flow of internal funds attendant on corporate restructuring efforts (wage and staff cuts, work speedups, etc.), but also to an abundance of excess capacity which dampened corporate investment plans relative to retained profits and depreciation funds. See Robert Giordano, "A Unique and Favorable Financial Consequence of Corporate Restructuring," Economic Research, Goldman Sachs, March/April 1993, pp. 1-9.

(2.)This second procedure seems most likely due to the TUSFS guideline "favor[ing] proposals that would, at most, require insignificant increases in administration as well as low levels of public outlay" (p. 6).

(3.)Paul M. Sweezy and Harry Magdoff, "The Responsibility of the Left," Monthly Review 34, no. 7 (December 1982): 1-9. John Bellamy Foster, "Liberal Practicality and the U.S. Left," Socialist Register 1990, Ralph Miliband and Leo Panitch, editors (London: Merlin, 1990), pp. 265-289.

(4.)Indeed, to a major extent, "the problem is not the project but its shape and the manner in which it is elaborated.... It must spring from below and be discussed publicly in an open debate. There won't be a serious project without a genuine movement. But there will be no coherent movement without a vision. The intellectuals, therefore, have their part to play in this debate as keepers of the collective memory, advisers on the international comparisons, and as providers of some elements of theory. But they can do so only and exclusively as part of the movement, not as outsiders bringing theory or the truth to the working class." Daniel Singer, "The Future of Socialism," Against the Current 9 no. 3 (July/August 1994): 22.

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