Breaking Up the Big Banks is Not a Solution
Leo Panitch: Global capitalism needs massive banks, but big private banks have the power to prevent regulation and threaten more crisis; the solution is not breaking them up but making them public
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
Secretary of the Treasury Tim Geithner leaves his position the end of this month. And it’s a good time to talk about the state of the global economy.
Now joining us to do just that is Professor Leo Panitch, who joins us from Toronto. Leo is Canada research chair in comparative political economy and a distinguished research professor of political science at York University in Toronto. He’s the coauthor of Global Capitalism and the American Empire and The Making of Global Capitalism.
Thanks for joining us again, Leo.
PROF. LEO PANITCH, YORK UNIVERSITY: Hi, Paul.
JAY: So if we kind of look at the global economy, it seems to me you’ve got a kind of conundrum here. The globalization, the size of global companies are so massive, they require massive financial institutions in order to ensure the flow of global capital, to provide capital when big companies need it and such. And there’s so much capital sitting in investors’ hands, you know, in the trillions, ridiculous amounts of money that has to go somewhere, they need big institutions to deal with this. On the other hand, when you have such enormous financial institutions, they have an inordinate amount of political power, so that you can’t regulate them. You can’tâ€”you know, they can’t pass legislations or prosecute them when they’re involved in fraud. So if this picture is kind of right, where are we at with this? ‘Cause it seems to be a bit of an impasse in a way.
PANITCH: Well, we’re, you know, at that juncture where it looks like there ought to be more regulation of these massive financial institutions. But the type of regulation that they’ve been operating under for a very long time now is a type that facilitates the kind of role they play in exactly doing what you were describing, that is, greasing the wheels of global capitalism, including, I might say, ensuring that states are able to sell the bonds they need in order to cover their own expenditures, not least the American state. So the type of regulation is of a kind that doesn’t want to hamstring these corporations, these corporate banks, and the role they play, and the innovative role they play in developing all types of new financial instruments and credit instruments that allow corporations and states to access the capital sloshing around in the market, that allows those countries that have trade surpluses to invest those trade surpluses so that they’re getting returns on them and they’re safe, etc., etc.
Now, if you introduce the kind of regulation in the wake of this chaotic financial system and the crisis it just producedâ€”it’s not the first one, but it’s the biggest oneâ€”if you introduce those types of regulations that would prevent that, which would be what the Treasury called in the 1990s failure prevention, you get in the way of those institutions playing this kind of role in global capitalism.
And for that reason, the main thing that the Treasury and the Fed was doing for 20Â years or more was orienting itself to containing what they saw as the inevitable crises that this necessary but very volatile financial system would produce. And they were walking a tightrope. They knew they were walking a tightrope. They fell off it a number of times but managed to balance themselves. In 2007, 2008, they really fell off.
But the regulation of it that would prevent this happening in the future is simply not possible, for the reasons that you identify. So Geithner’s main mottoâ€”and he told a meeting of bankers from 27 countries this in Atlanta, JuneÂ 2011: our main goal is to learn how to better contain the inevitable crises that this system will produce, recognizing that it’s all the more difficult and complex to do it because you have to coordinate with so many other regulators around the world.
JAY: And containing, for them, means the financial institutions survive, the system survives. It’s not contained in the sense that tens of thousands or millions of people’s lives aren’t destroyed in terms of losing homes and jobs and [crosstalk]
PANITCH: No, no. Well, that’s the fallout. And, you know, they might do and they do do minor things to mitigate the fallout and the way it undermines the legitimacy of these players. But no. The main thing to do is to keep these giant private banks going.
And were they not to do that, they would beâ€”and it would be a disaster, given the way in which everyone in the system, including students who depend on them for loans, workers who find their paycheques deposited there, and the massive corporations, of course, which run their own corporate bonds through the sale of these brokerage houses which are now all banks, they depend on this. So it would be a disaster.
The only way in which one can get out of thisâ€”and, you know, one doesn’t say this in any sense for ideological reasons any longer. It’s quite pragmatic. The only way you can get out of it is to turn these financial institutions into public utilities.
JAY: Before we go there, ’causeâ€”and I do want to go thereâ€”there’s just one other piece to this, which is they’re not only too big to fail, which means, you know, the states have to jump in and make sure the financial institutions, no matter what, are shoveled money to make sure they survive, but they’re too big to prosecute, people have been saying. And, in fact, there’s a PBS film came out just recently [crosstalk]
PANITCH: Yes, I saw that. And, you know, it was a decent show. And I’m sure there was a lot of pressure on the Justice Department not to prosecute. And I don’t know that it would have been impossible to have found a couple of culprits who were CEOs. But, you know, it wouldn’t have changed the dynamics of the thing, and it probably would have undermined bankers’ confidence. And this market, because it’s so chaotic, because the bankers (and it’s very competitive) aren’t sure that one of these banks is not so overleveraged they might go under and bring down much of the system with them, you can’t undermine bankers’ confidence. And this is what’s going on in Europe as well. I mean, having caused this problem, the Europeans find themselves subject to the confidence of these bond markets, and these bond markets are run through these banks.
JAY: Now, the other part of it isâ€”I shouldn’t say other partâ€”one of the solutions that’s being offered is that there should be a breaking up of the big banks. Now, I don’t know how on earth you would ever pass such a thing, given the power the banks have in the parliaments and the congresses and such around the world, and particularly in the United States. But even if you could, is that a solution, breaking up the big banks?
PANITCH: Yeah. I mean, first of all, as you say, politically that’s inconceivable, and not only in the United States, I must say. But even beyond that, given the current political order, even beyond that, the types of functions that these banks perform for, say, the Treasury, for the New York Fed, as it markets Treasury bonds for where I’m sitting, for the Ontario governmentâ€”every provincial government in Canada markets its bonds through the New York banks, not to mention the kinds of functions they perform for, you know, the insurance pension fundsâ€”no, you know, you couldn’t conceive that you could break this up into, you know, banksâ€”what, there are 55,000 banks in the United States. Only 1,000 of them have any significant large assets. So you try to break them down to the level of the 4,500 other banks, and they would immediately have to eat each other up, start concentrating, and play that much larger role, which is not going to happen, because of the dominance, inevitably, of the larger banks in the whole system. In fact, these smaller banks, what do they do if the deposits that they raise, they immediately deposit them in the large banks themselves, who then buy the types of securities that these banks need in order to meet their customers’ demands?
JAY: Okay. So if breaking up the banks isn’t a really viable alternative, then let’s go where you were going. Then what is the alternative?
PANITCH: Well, you know, part of the problem of the American left political culture is that it has thisâ€”you know, like the right, it has this image that capitalism would be fine if it was only made up of small competitors. In fact, small competitors, when you have that, tend to pay their workers a lot less, tend to be more right-wing, very often, than the large capitalists, who are, if anything, a little more knowledgeable with regard to how the system works and how you have to keep the legitimacy of the under class. This has always been an illusion on the American left, and one’s hearing it again, as if the culture of small bankers on Main Street in some Midwest or Texas town is actually more progressive than the culture of Wall Street. It’s not.
But beyond that, the much more pragmatic and possible thing to do is to take these very large banks into the public domain and turn them into public utilities and have them serve the functions that are needed, in terms of a financial market, in a way that is determined by state policy and by a system of democratic planning, so that the decisions they now make about where things will be invested and into what they’ll be invested would be made in relation to democratic public policymaking, that toâ€”of course, I entirely grant, to imagine democratic public policymaking would entail a fundamental change in the American state and the party system.
It’s not just that the banks are too powerful outside the Treasury and Fed. The Treasury and Fed are part of the Wall Street nexus, and they are organized in such a way, and the people who work in them are trained in such a way, as to be reproducing the current system. So one’s talking about when one says this: not just a change on Wall Street, where these banks become public utilities, but a change in Washington. Obviously this is the case. And in order to be able to get that, you have to have a change in a different type of democratic politics you have in the United States, an opening in the political system.
All of this is a very long-term process. It isn’t going to happen quickly. Neither are you going to break up the big banks quickly, if at all. But it does mean that at least one’s educating people to the type of long-run goals and the type of political project, the type of new political institutions we need in order to realistically get beyond a situation in which our state is engaged in what Geithner calls failure containment, recognizing that these crises are inevitable, but that the capitalist system is dependent on them, and all the state can try to do is contain the crises when they happen.
JAY: But even in the short term, if there was will and political will even within the sort of existing corporate culture, you could even imagine, you know, an administration in Washington without this sort of political transformational change taking place saying, you know, when AIG was in such crisis and some of those big banks were in crisis, at the very least passing stuff that, for example, forces loans, that create a kind of stimulus of some sort, with some kind of public interest hooked to itâ€”what I’m saying is it’s within the realm of doable, but you don’t even find that kind of will to do that.
PANITCH: Well, you know, even where you do find the willâ€”and, you know, sometimes they have no choice but to take AIG into the public domain, or, for that matter, General Motorsâ€”or the British Labour government took a number of the largest banks in Britain into the public domain, as we know. But the balance of political forces, the political culture, the orientation of these people at the head of these parties, and indeed at the head of the civil service, is such that they immediately promise that they will not interfere in the commercial decisions of these corporations, that they will not stick their noses into their investment decisions, that they want to be equivalent of investors who get the highest return for the taxpayer. That’s exactly what was argued with regard to General Motors and with regard to the banks that the Labour government took over in 2008, 2009. So in a sense, you know, it’s not the Treasury socializing these private corporations; it’s rather the private corporations incorporating the government departments.
Now, this has a lot to do, of course, with what’s happened even in the Democratic Party and social democratic parties over the last 30, 40 years. It has a lot to do with the fact that the type of radical people who would have an image of democratic economic planning, once they state that, if they get a job inside a department of finance or a central bank, are sent to clean the toilets rather than use their knowledge in a way that would be useful for democratic planning.
JAY: Alright. Thanks for joining us, Leo.
PANITCH: It’s great to talk to you, Paul.
JAY: And thank you for joining us on The Real News Network.
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