If the left is unable to defeat neoliberalism now, and build some version of social democracy or “leashed capitalism”, then we will never do it.

An Interview With Robert Pollin -

By MIKE WHITNEY /

"We are in the midst of a major historic turning point, equivalent to
the emergence of neoliberalism under Thatcher and Reagan"

– Robert Pollin

Robert Pollin is a Professor of Economics and founding Co-Director of
the Political Economy Research Institute (PERI) at the University of
Massachusetts at Amherst. Among his recent books are Contours of
Descent: U.S. Economic Fractures and the Landscape of the Global
Austerity (Verso, 2003) and (with Stephanie Luce) The Living Wage:
Building a Fair Economy (The New Press, 1998).

Mike Whitney: On Monday, the stock market recorded the biggest one-day
gain in history on news that the G-7 had settled on a plan to
recapitalize the banking system. The Federal Reserve, the European
Central Bank (ECB) and the Bank of England (BOE) all agreed to make
direct capital injections into "systemically important" banks so they
could resume lending and reduce stress in the credit markets. They
also decided to insure deposits and to guarantee interbank lending. Do
you think that these unprecedented steps will be enough to avert a
meltdown of the financial system?

Robert Pollin: Of course, by Tuesday, the Dow fell again by over 733
points. Meanwhile, the Nikkei in Japan fell by 10 per cent on
Wednesday. So, thus far, the answer to whether these steps are
enough, on their own, to avert a meltdown is a resounding “no.” At
the same time, to be fair, these measures have yet to have any real
effect on banks’ balance sheets. Thus far, the stock markets are only
responding to their own guesses as to what benefits, if any, these
measures will have on stabilizing the balance sheets of financial
institutions.

But there is another element that came into play especially over the
past day. That is the reality within financial markets that the
economic crisis has spread beyond Wall Street itself. It is now
clearly becoming a crisis -- a recession or depression, choose your
own term -- spreading into the realm of jobs, incomes, public sector
budgets, and private non-financial profits as well. This means that
averting a meltdown of the financial system will also require a
massive stimulus of the non-financial side of the economy. We haven’t
heard yet about any significant plans along these lines.

How much of the present crisis can be blamed on ideology? Do you think
that the ideas of Milton Friedman or the 30 year-long bias towards
market fundamentalism contributed to the present troubles in the
financial markets? Is this the end of the laissez-faire, free market
"trickle down" era?

Robert Pollin:This is certainly a huge crisis for Friedmanite
economics and neoliberalism more generally—which all along was the
ideology that touted free markets and deregulation to privatize
profits, but to come begging for government bailouts when the
inevitable crises emerged. This is certainly not the first financial
crisis under the neoliberal regime. There have been regular severe
crises since the 1987 Wall Street crash. These crises were all
quelled through Federal Reserve/Treasury bailout operations. Whether
or not this crisis will mean the end of the neoliberal era will depend
on political mobilization — specifically, how successful the left will
be in building coalitions behind an agenda that combines
egalitarianism with a stable financial system. I would say this: if
the left is unable to defeat neoliberalism now, and build some version
of social democracy or “leashed capitalism”, then we will never do it.

Secretary of the Treasury Henry Paulson's $700 billion bailout plan
was opposed by over 200 economists. The vast majority of the
economists supported the idea of capital injections into struggling
banks rather than buying up their toxic mortgage-backed assets. EU
nations settled on the capital injections plan, too. On Monday,
according to the New York Times, Paulson met with a group of CEOs from
the country's largest banks and announced his plans for distributing
the first $250 billion provided by Congress.

Citigroup and JPMorgan Chase were told they would each get $25
billion; Bank of America and Wells Fargo, $20 billion each (plus an
additional $5 billion for their recent acquisitions); Goldman Sachs
and Morgan Stanley, $10 billion each, with Bank of New York Mellon and
State Street each receiving $2 to 3 billion. Wells Fargo will get $5
billion for its acquisition of Wachovia, and Bank of America the same
for amount for its purchase of Merrill Lynch.

Half of the money allocated by Congress is being given to many of the
same Wall Street giants that are directly responsible for the current
implosion of the financial system. Doesn't this confirm our worst
fears about Paulson, that he is merely a banking oligarch who serves
the interests of the financial industry?

Robert Pollin: Paulson is a Wall Street man—and Goldman Sachs man,
more specifically—through and through. There was never any doubt
about that. He will always do his best to serve his Wall Street
constituency. At the same time, this constituency has now been
discredited to an extent unprecedented since the 1930s. So again, it
will be a matter of how well the left mobilizes its forces to push for
a different agenda with the Treasury and other major economic policy-
making institutions. It will not be easy, and it won’t happen
overnight. But now is most emphatically the time to make serious
advances in building a serious alternative agenda.

Many pundits now point to the Lehman Brothers default as the main
cause for last week's turbulence in the stock market. Can you explain
how one bank can have such a dramatic effect on global stocks and
credit markets?

Henry Paulson made the decision for one day—and one day only—to try
free market capitalism during a financial crisis. That is, he and
Federal Reserve Chair Ben Bernanke decided that if Lehman Brothers
can’t make it on its own, then, according to the logic of free market
capitalism, they should be allowed to fail. But once they made that
decision, such deep panic ensued, on Wall Street and financial
markets throughout the globe, that they backed off literally the next
day, when the bailed out AIG Insurance.

Under neoliberalism, financial market players have become accustomed
to do as they wish when the market is going up, but to get bailed out
when the market is going down — privatization of profits and
socialization of losses. The collapse of Lehman sent the signal that
the old rules of neoliberalism may no longer apply — that market
losers may really go down hard, as the true-blue free market model—as
opposed to the neoliberal model—says they must. That’s why Lehman’s
failure caused such vast panic.

Do you find it surprising that foreign investors and central banks
have not sued the various US brokerage houses for selling them complex
securities that were toxic? Why hasn't the ECB or the BOE demanded
that the US buy-back this fraudulent mortgage-backed garbage or
threaten to boycott US financial products?

Robert Pollin: We have to be clear on what we mean by “foreign”
investors. They may well be physically living in other countries, and
their institutions may have business charters outside the U.S. But
they are heavily integrated into the U.S. economy. Neither the
European Central Bank (ECB) nor the Bank of England (BOE) want to see
either Wall Street or the dollar collapse. They themselves would also
go down in the event of a global depression. So they are not about to
call for boycotts of the U.S. economy. The Europeans may have some
harsh words for the US players behind closed doors. On the other
hand, nobody forced the Europeans to buy mortgage-backed securities.
They also would hardly want to claim to be untutored innocents playing
above their heads in financial markets. They, like the Americans, had
every opportunity to think about whether mortgage-backed securities
were good ways to make big-time profits. They all decided to go for
it.

The Obama campaign has reportedly received $10 million from Wall
Street contributors, whereas, the McCain campaign has taken in $7
million. Does this explain why no one in Congress from either party is
demanding that Glass Steagall be restored, or that all derivatives
contracts be put under government regulation, or that all financial
institutions (that pose a danger to the overall system) maintain a
capital cushion of 12 per cent? Has the big money which flows into the
political system made it impossible for congress to do the work of the
people?

Robert Pollin: The big money flowing into Obama, and to Democrats more
generally, certainly will make it more difficult for our elected
officials to do the work of the people. But here again, Wall Street
has now been discredited to a degree unprecedented since the 1930s.
That should give the left serious political leverage, even while fully
recognizing the influence that big money will continue to play with
both the Democrats and Republicans. And we don’t need to go back to
Glass Steagall specifically—the financial regulatory system that came
out of the wreckage of the 1930s Depression. We need to recreate its
basic principles and then some — that is, to create a regulatory
system focused on financial stability and channeling credit to
socially productive activities, like affordable housing, job
expansion, and building a clean energy economy. Does that mean that
the financial system should be state owned? Certainly there is a case
for at least partial ownership. That is hardly an outlandish crazy-
left idea now, since George Bush and Henry Paulson have made this a
cornerstone of the Republican-led bailout plan. But the real issue —
whether it be through public or private ownership or some mix — is to
move financial institutions and markets in the direction of
egalitarianism. That won’t occur automatically by any means even with
publicly owned financial institutions.

So far, foreign flows into US Treasuries (to cover our $700 billion
current account deficit) have not been a big problem. As the Federal
Reserve and the Treasury expand their balance sheets to provide a
backstop for the financial system--as well as emergency fiscal
stimulus for maxed-out consumers--we could be facing a funding crisis
as severe as anytime in history. In July, the purchases of US
Treasuries hit a record low of roughly $6 billion leaving a shortfall
of $50 billion. Now that we are headed into a global recession, do you
think that foreign central banks will begin cutting back on their
purchases of US debt? What effects will this have on the US economy
(and the dollar)? Will interest rates rise sharply?

Robert Pollin: I think U.S. Treasuries are now, and will remain for
some time, the single safest, and most desirable, financial instrument
in the global financial system. I don’t think foreigners will shift
dramatically away from Treasuries, though they may do so modestly. At
the same time, U.S. investors will continue to clamor for Treasuries
as opposed to buying stocks, bonds issued by private companies, and
derivatives. This will push down the interest rates on Treasuries.
However, other interest rates will continue to be very high. The
growing disparity between the low Treasury rates and the high rates on
private bonds, including those of AAA corporations, reflects the very
high level of risk—the “risk premium—that investors are now attaching
to any security that doesn’t have the full backing of the U.S.
government.

In 1967 former Fed chair Alan Greenspan published an essay titled
"Gold and Economic Freedom" which could have been written by a
Libertarian like Ron Paul. The article proves that Greenspan has a
good grasp of how low interest rates and credit expansion lead to
disaster. In fact, he even blames the Great Depression on loose
monetary policies. Here is a particularly revealing excerpt:

"When business in the United States underwent a mild contraction in
1927, the Federal Reserve created more paper reserves in the hope of
forestalling any possible bank reserve shortage. More disastrous,
however, was the Federal Reserve's attempt to assist Great Britain who
had been losing gold to us because the Bank of England refused to
allow interest rates to rise when market forces dictated (it was
politically unpalatable). The reasoning of the authorities involved
was as follows: if the Federal Reserve pumped excessive paper reserves
into American banks, interest rates in the United States would fall to
a level comparable with those in Great Britain; this would act to stop
Britain's gold loss and avoid the political embarrassment of having to
raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed
the economies of the world in the process. The excess credit which the
Fed pumped into the economy spilled over into the stock market --
triggering a fantastic speculative boom. Belatedly, Federal Reserve
officials attempted to sop up the excess reserves and finally
succeeded in braking the boom. But it was too late: by 1929 the
speculative imbalances had become so overwhelming that the attempt
precipitated a sharp retrenching and a consequent demoralizing of
business confidence. As a result, the American economy collapsed....
The world economies plunged into the Great Depression of the
1930's....The abandonment of the gold standard made it possible for
the welfare statists to use the banking system as a means to an
unlimited expansion of credit..." (Gold and Economic Freedom, Alan
Greenspan)

What role did Greenspan play in the current financial crisis and why
did Greenspan leave interest rates below the rate of inflation for 31
months when he knew it would lead to catastrophe?

Robert Pollin: I don’t agree that low interest rates and credit
expansion lead to disaster. They only lead to disaster in an
unregulated financial system, in which credit flows overwhelmingly
support speculation as opposed to investments in productive activities
that create useful things for people, like schools, housing and public
infrastructure. Indeed, I strongly support an extensive system of
government loan guarantees—i.e. credit risk insurance—to support
private investments in retrofitting buildings and affordable housing.
This will maintain low interest rates to finance these activities, and
channel large amounts of cheap credit into these areas.

Greenspan himself is as responsible for this current financial
disaster as anyone. His only competitors on this score are former
Republican Senator and top McCain advisor Phil Gramm and former
Clinton Treasury Secretary Robert Rubin. They all were relentless
cheerleaders for financial deregulation—Democrats and Republicans
alike. They were spouting nonsense about the virtues of unregulated
financial markets at least since the 1980s.

In "Imperialism is the Highest Stage of Capitalism", Vladimir Lenin
says: "The development of capitalism has arrived at a stage when,
although commodity production still "reigns" and continues to be
regarded as the basis of economic life, it has in reality been
undermined and the bulk of the profits go to the "geniuses" of
financial manipulation. At the basis of these manipulations and
swindles lies socialized production; but the immense progress of
mankind, which achieved this socialization, goes to benefit... the
speculators."

Despite the failures of the Soviet Union, is there anything in the
analysis of Marx or Lenin that can help us to better understand this
present phase of American-style capitalism?

Robert Pollin: This is a very keen observation by Lenin—one among
many, many others. As for Marx, he remains, in my view, the single
most insightful thinker in history on the operations of a capitalist
economy. This includes his voluminous writings on the nature of
financial markets, which are full of tremendous insights. And
remember, he was doing this writing 150 years ago, when he had very
little to grab onto as he attempted to discern the nature of
capitalism.

That doesn’t mean that I agree with everything Marx says. I also
don’t see much point in assigning labels—Marxist or otherwise—to
people. This is mostly a barrier to clear, straightforward thinking
that might also someone be politically useful. And finally, in my
opinion, there is a huge amount important thinking in Marx as to what
is wrong with capitalism, but not very much about what to do about
it. As such, in figuring out where we go from here, we are really on
our own. There’s not much point in trying to figure out what Marx
would propose to do in our present situation. We will never know
that; and even if we did know, it would still be up to us to figure
out whether Marx was making any sense. Remember that Marx himself
once said, in exasperation at his dogmatic followers, that “I am not a
Marxist.”

Liberals and progressives in the US seem much more focused on social
issues than economic ones. Only recently, have they become more aware
of the growing polarization between rich and poor and the inherent
shortcomings of this crisis-prone, bubble-generating, wealth-shifting
system. As the financial crisis spreads into the real economy
triggering increasing unemployment, falling demand, tightening credit
and soaring foreclosures; there will probably be many opportunities
for change. Do you foresee a rise in "issue-oriented" populist
movements or, maybe, a third political party? What are the immediate
economic goals that progressives should pursue?

Robert Pollin: I do think we are in the midst of a major historic
turning point, equivalent to the 1930s New Deal, or the emergence in
1979/80 of full-tilt neoliberalism under Thatcher in the UK and Reagan
in the U.S. It seems clear that the economic agenda will rise to the
top of the heap as a focus of concern for the left. This is not to
denigrate other issues, such as the environment, anti-imperialism,
racism, or sexism. But I think we will now be able to start seeing
more clearly the connections between a critique of neoliberal
capitalism and these other arenas of social and political struggle.
For example, with the environment, it was only a year or so ago that
the conventional wisdom held firmly that we could either have a clean
environment, or a growing economy with an abundance of good jobs, but
we couldn’t possibly have both. Trade-offs such as this were
inevitable. You were simply a confused, mushy thinker if you didn’t
understand this. It is now becoming clear that building a clean
energy economy—and by this I mean a zero fossil fuel driven economy,
with no “clean coal” and no nukes—can also be the engine to build a
full employment economy as well as help construct a stable financial
system.

Of course, to put such an agenda in place will mean treading through
multiple political minefields. Should people work within their
communities alone? In unions? Form a left caucus within the
Democratic Party? For environmental justice groups? Keep trying to
build third parties? I think all these approaches have merit, and
that we on the left should try all of them. We should also have
enough humility to acknowledge that none of us really knows what will
work best under any given set of circumstances. Let’s try a lot of
things, keep learning, and stay open-minded. And I would emphasize
one other thing. During the 1968 uprising in France, one of the most
bracing slogans to have emerged out that struggle was “Be Realistic,
Demand the Impossible.” I am more inclined to embrace its mirror
image as a guide for moving forward. That is, “Be Utopian, Demand the
Realistic.

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Mike Whitney lives in Washington state and can be reached at
fergiewhitney@xxxxxxx



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