‘Free markets’ depend on state intervention
After President Bush signed the controversial bailout bill into law, Senior Editor Paul Jay talked with Leo Panitch to get his analysis of the situation. Leo said it is irresponsible to suggest that the government should have let these banks fail, ultimately advocating for the full nationalization of the troubled banks. Leo then explains the significance of the US treasury bill as the base upon which everything else in the global financial system is valued, as well as explaining the US government’s role as the guarantor of the t-bill’s value. Finally, Leo criticizes the dominant paradigm that states and markets are separate and opposing forces in the modern capitalist system.
PAUL JAY, SENIOR EDITOR, TRNN: With the passing of the bailout bill through Congress, various voices are still debating will it work or will it not. The bill was rationalized through the idea that we are looking into the abyss: without the bill, we’re looking at financial collapse and depression. Other people are saying these are scaremongering tactics; this is just another bubble, another blip; or let it fall, because something okay will take its place. Well, just how okay is it anyway, and how dangerous is it? Joining us now to analyze the situation is Professor Leo Panitch. Teaches political science at York University in Toronto. He’s the author of American Empire and the Political Economy of International Finance. Thanks, Leo, for joining us.
LEO PANITCH, POLITICAL ECONOMY, YORK UNIVERSITY: Glad to be here, Paul.
JAY: So were we looking into the abyss? Are we still, post-bailout bill, looking into the abyss? Or not?
PANITCH: Well, I think it was irresponsible of people to say that there didn’t have to be some means of stabilizing the financial system. I think the—.
JAY: And you’re talking about people who said, "Who cares if the banks fail?"
PANITCH: Yeah, "Who cares if the banks fail?" or, you know, that nothing has to be done, or, "It’s all a scaremongering tactic." This is a very major financial crisis. And you could get a sense of how major it was from the fact that the Russian finance minister, and the head of the European Central Bank, and the German chancellor, and the German finance minister, all of whom are calling for the American state to act after Congress turned down the first bill, because it has global implications. And they expected the American state to exercise its responsibilities for managing the financial system, which is very integrated internationally. And it would have had severe consequences for ordinary people as well, who are tied into the financial system, not only through their savings accounts, but also through their credit cards and through their, of course, pension funds, etcetera.
JAY: One of the arguments that was coming from the left, who said, "Who cares if these institutions fail?" is that the States should introduce direct ways to finance ordinary people.
PANITCH: Well, that would have been even more intervention. Sure, you could have argued that there should have been a nationalization of the banking system. And you can get different kinds of nationalization. You get the kind where it’s done to save bankrupt banks and then sold back to the private private sector, often to the very same people who you saved, which is most common. So you could have had that; by all means you could have had that. And you’ve got that—.
JAY: Or some people are arguing for more direct ways to give consumer liquidity and not worry about who loses on Wall Street.
PANITCH: That wouldn’t have done it. What was happening was that the inter-bank loan market was seizing up. Banks have been afraid to lend to each other by virtue of not knowing what really is in their accounts, because you couldn’t value so much of this debt. This debt could not find a market that are on the bank books.
JAY: "Debt" meaning all the subprime housing debts.
PANITCH: And all of these assets. Not only that, but, yes, a lot of derivatives.
JAY: What they’re calling "toxic debts."
PANITCH: The toxic debt. How much of it’s toxic is unclear, but, you know, those markets in what are called derivatives, assets based on assets, had seized up, and you didn’t know what they were worth. So, you know, this was the problem, that insofar as the inter-bank market seizes up, where banks lend each other money overnight to balance their books, right, that’s what was seizing up. And not only in the United States—it’s happening everywhere, and that had to be dealt with. Sure, a more radical government would have nationalized, would use this as an opportunity to nationalize the banks, put them under public control, and you’d have the banking system, the whole financial system, treated as a public utility, which it ought to be. But given the balance of forces in the United States, or for that matter almost anywhere in the world today, that wasn’t on the cards. But just to say there would be no problem if nothing was done I think was irresponsible.
JAY: So in terms of the global finance system, talk a bit about what is the importance of the American Treasury Bond. What role does it play? And why was everyone so freaked out at this moment?
PANITCH: Well, I mean, what’s happened is that over the last 50 years, especially over the last 30 years, the world’s financial system has revolved around Wall Street and the city of London. And the city of London is really an offshoot of Wall Street, and it’s very renowned, in some ways the biggest financial sector, but it’s dominated by American financial institutions—American banks, American financial institutions. And they sit on, they depend on the guarantee that the American state gives to money, above all gives to the dollar. All calculations of value in the world go back to what value is attributed to US Treasury bills that now serves the function that gold used to serve back in the 19th century. And that’s because the world expects that the American state will be the state that guarantees property. All of the states in the world that will be responsible for guaranteeing property, above all the money that capitalists lend to states, that the United States is the ultimate in that respect.
JAY: But bailing out, and I assume through one form of borrowing or another, whether it’s $700 billion, if it winds up being $1 trillion, or less than that, why was that necessary to do that to defend the American state and American Treasury bonds?
PANITCH: Well, it wasn’t so much defending the American state; it was the American state performing its function.
JAY: I meant the American state’s role in defense of the treasury bond. I mean, why was one necessary for the other? Or was it?
PANITCH: Well, I think the reason that the world sees the Treasury Bond as as stable as it is, as the measure of all value, is that they know the American state or they hope the American state is going to act—
JAY: No, no, that I understand.
PANITCH: —as a manager.
JAY: No, that I understand. But did saving these Wall Street institutions defend the Treasury bond? What’s the connection there?
PANITCH: When you’re defending a Wall Street institution, you’re not just defending that one institution; you’re defending all of the people who expect that their money will get paid back from those Wall Street institutions, which is a much, much wider and larger part of the globe. It’s partly to do with the pension funds that workers have that, you know, need to be met by those institutions; it has to do with all the world’s capital that’s invested through those banks. So you’re not just, you know, dealing with you’re going to save that bank. In fact, for the most part they’ve let the shareholders go under. You know, in that sense, the shareholder’s taking a hit for every one of these corporations. They’ve all taken a hit. But who’s been saved are the people who have assets in these banks. And that’s what’s been saved. That’s a much larger group than these particular Wall Street banks. In that sense the United States, in playing that role, is playing the role of guaranteeing to capital that they will be able to get assets out of New York and, more broadly, out of London.
JAY: So you think they didn’t really have a choice.
PANITCH: They had to act. There’s no question. And in any case, you know, any understanding of the nature of a capitalist state would lead you to know that they would act. It’s the illusion that the state somehow stands apart from capitalism, is not part of capitalism; it stands outside of it. It’s all this misunderstanding when we speak of states versus markets. These markets are full of power, asymmetric power, very unequal power, and those power is founded on the backing that states give them. The free markets that we know have been made by very active state intervention, and people enter into market activities knowing that states will back up property in those markets. So it’s an illusion to think that states are something other than capitalism. When you understand American capitalism, you understand the state is part of it. Federal Reserve and Wall Street, right, need to be seen as part of a whole—sure, in which the Federal Reserve is not acting as a competitor inside the market; it’s acting as an overseer of it; more or less regulation in different periods, it’s true, but it’s an overseer of it.
JAY: Well, in the next segment of our interview, let’s get into the roots of the state and its integration with capital markets and capitalism itself in the United States. And also just how is this going to affect ordinary people? And what should they be demanding for their solutions?
PANITCH: Very good.
JAY: Please join us for the next segment of our interview with Leo Panitch.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.