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Notice how cleverly the system is structured. In essence everyone has a stake in keeping the investor class, i.e., the wealthy, happy, keeping up their "animal spirits." Because if investors become unhappy, if they "panic," then pretty soon almost everyone is negatively affected--not just the rich, but almost everyone in the private sector, whose jobs are now threatened, lots of people in the public sector, since tax revenues are falling, all those dependent on government social programs--same reason. No one benefits (except a few short-sellers). So the government must intervene. No one says "get the government off our backs" when the financial markets melt.
Now here's something that's never mentioned in polite company: It doesn't have to be this way. We don't have to rely on the animal spirits of the wealthy to keep the economy healthy. Our economy is a capitalist economy. That is to say, we rely on the private savings of private individuals to provide for the investment that any healthy economy needs. But in depending on private savings, we are compelled to keep up the spirits of those with money to invest. This means insuring that they can make a healthy return on their investment, and, above all, not letting too many fail.
But this "solution" is problematic--as we are now finding out. Apart from the ethical question, there's also an economic problem, for bailouts generate what the economists call "moral hazard." If investors are allowed to keep all their gains when times are good, but can be pretty sure that the government will step in if things turn suddenly sour, the temptation to take ever greater risks becomes irresistible. Consider the case of poor James Cayne, former CEO of Bear Sterns. A year before Bear Sterns was taken over--with government assistance--by Morgan Stanley, his Bear Sterns holdings were worth $1.2 billion. By the time of the takeover they were barely one percent of that--a mere $13 million. Think about it. Will this "catastrophe" cure him--and those like him--from ever taking big risks again? I mean, if I'm pretty sure I'll never fall below $10 million or so, but can make really, really big money if I gamble big--am I going to be cautious?
What is to be done? Let's be utopian for a moment. Let us imagine a quick transition from the deeply irrational, ultimately unsustainable economic system we presently inhabit to a democratic, socialist economy, one in which enterprises are run democratically, and economic stability no longer requires keeping our capitalists happy. Suppose we do get a financial meltdown on the scale of the Great Depression. And suppose we had a government newly elected, determined to effect this transition.
The first thing would be to assure everyone, à la Franklin Roosevelt, that there's nothing to fear but fear itself. I mean, we are not talking about a meteor crashing into the earth, or an incurable plague, or a nuclear war. Pieces of paper have suddenly lost their value. Our resources are still intact. Our skill base is still intact. There's no reason for ordinary people to lose their jobs or see their incomes plummet--no material reason, that is.
What next? Well, if the stock market has tanked, let the government step in and buy up those now near-worthless shares of the publicly-traded non-financial corporations. (The price tag may well be less than Paulson's $700b. The government can print the money, if need be. In a depression it's essential to stimulate the economy by pumping money into it.) Suddenly our government has controlling interest in all the major corporations. (Notice, these assets have not been "expropriated" by the government. They have been paid for at full market value.)
Since we (the people) now own these enterprises, let's democratize them. Let's turn them over to the employees, to be run democratically. The employees (now voting members of their enterprise) can keep the existing management--indeed, for six months or so, let's insist that they do, while worker councils are set up to replace the boards of directors that used to represent the shareholders and oversee management. After six months, they can keep their managers or replace them as they see fit. Thus the "commanding heights" of the economy are democratized. (A democratic corporation is not one in which workers decide policy on a daily basis. Sound management is important. But ultimate authority now rests, not with shareholders--who have been bought out--but with the workforce itself, one person, one vote.) These firms will compete with one another and with the remaining capitalist firms in the economy--small businesses and privately held companies. (Not much has changed--yet everything has changed.)
There have been a lot of studies indicating that worker-owned firms are viable, that they tend to be at least as efficient as comparable capitalist firms. Indeed, a lot of existing capitalist firms have set up Employee Stock Ownership Plans to take advantage of the efficiency gains these programs often bring. In our case, the workers won't own the firm. As taxpayers, we'll keep title. But the employees, not government officials, will control it. The firm won't pay dividends to shareholders anymore, for there aren't any. Instead they'll remit a portion of their profits to the government--a leasing fee, if you will.
What about the financial sector? To begin with, let's nationalize all those financial institutions that are "too big to fail." (Indeed, that is what is happening now--with Fannie Mae and Freddie Mac, with AIG.) Let's go further. Let's nationalize all our banks and other financial institutions. As Willem Butier has recently pointed out:
"There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist without a deposit guarantee and/or deposit of last resort facilities, that are ultimately underwritten by the taxpayer. . . . The argument that financial intermediation cannot be entrusted to the private sector can now be extended to include the new, transactions-oriented, capital-market-based forms of financial capitalism. The risk of a sudden vanishing of both market liquidity for systematically important classes of financial assets and funding liquidity for systematically important firms may be too serious to allow private enterprises to play." [opendemocracy.net, 9/17/08]
It should be noted that Buiter is no socialist, but a professor of European political economy at the London School of Economics, the former head of the European Bank of Reconstruction and Development, and--get this!--the author of a blog (Maverecon) on the Financial Times website, which is where this posting first appeared. The fact of the matter is, banks can be nationalized. Indeed the Economist proposed a few years back that Japan follow precisely this road to resolve its crisis.
Let's restructure our banking system, making into something that more closely resembles the system we had in place before deregulation set in some three decades ago. Let's have a network of Savings and Loan associations that will handle home mortgages and other consumer loans. Funds will be deposited by private savers, and loaned out to creditworthy customers.
Let's also have a system of investment banks. These are the institutions responsible for providing credit to the business sector. This is the economically crucial sector. Since businesses typically buy their raw materials and pay their workers before their products are sold, businesses must have access to credit. They also need credit to retool or to expand production. (It's this credit freeze that is so worrying about the present crisis. "The real shock after the feds failed to bail out Lehman Brothers wasn't the plunge in the Dow, it was the reaction of the credit markets. Basically, lenders went on strike . . . ." [Krugman, "Crisis End Game," NYT 9/19/08].)
Let's have a system of investment banks, but let's not generate the funds for these banks by trying to entice private individuals to save. Let's not rely on the "animal spirits" of the wealthy for the liquidity necessary to keep our economy going. There's an easier, more transparent way to raise those funds. Let's raise them the way we now raise funds for infrastructure, for basic research, for all our military hardware, for NASA, etc., i.e. via taxation. Let's have a special tax, all proceeds to be made available as loans to the market sector of the economy (our newly democratic and remaining capitalist enterprises). Let's abolish the corporate income tax. Let's have a simple, flat-rate capital assets tax. Democratic enterprises can consider this their leasing fee for use of public property; capitalist firms may regard them as a replacement for the tax on profits. (Profit taxes used to comprise a significant portion of our national income tax receipts, but they no longer do. Corporations have figured out how to avoid those taxes. A capital assets tax is much simpler to administer and more difficult to avoid.)
Suddenly we don't need to worry about those financial markets anymore, which had become so complex and opaque that no one really understood how they worked. (Paul Krugman reports that when Ben Bernanke became Federal Reserve Chairman, he required a face-to-face refresher course from hedge fund managers to explain the system to him. "How did things get so opaque? The answer is 'financial innovation'--two words that should, from now on, strike fear into investors' hearts" ["Innovating Our Way to Financial Crisis," New York Times, 12/3/07]. Of course some people understood it well enough to make very big bucks at the game. Hedge fund manager John Paulson (no relation to the Treasury Secretary) took home $3.7 billion for his hard work in 2006. (No, that's not a typo. It was $3.7 billion, not $3.7 million.)
There's one more thing we should do. If the markets have crashed, a lot of people have seen their pensions disappear. Let's restore those pensions. We'll pick a date before the crash. Whatever value a person's holdings in a pension fund was at that date will be transferred to that person's social security account, to be paid out as an annuity supplement to that person's basic social security income, when s/he retires. (Please don't say we can't afford this. Whatever the formal source of one's retirement income, whether entirely from social security or from social security plus one's "investments," the goods and services one purchases with that income must be provided by human beings currently working. If there were enough working people and resources to provide these goods and services before the crash, there will be enough after the crash. As I've already noted, we're talking about pieces of paper losing their value. There has not a plague that has decimated our workforce or a volcanic eruption that has ruined our land.)
That's it. The basic structure of our new, democratic socialist economy is in place. Notice what we've done. A capitalist economy is a market economy. "Market economy"- is often used as a synonym for "capitalism,"- but that's wrong. Capitalism is an amalgam of three distinct sorts of markets--markets for goods and services, labor markets and capital markets. Our new democratic socialism is also a market economy. Our enterprises still compete. We've learned from the mistakes of the past that complex modern economies cannot be centrally planned. We embrace the healthy competition that keeps producers efficient and innovative. That is to say, we've kept those markets for goods and services. But we've replaced those labor and capital markets with more democratic institutions.
