Paper Presented at
The SGIR 7TH Pan-European International Relations Conference
When 'No-Alternative' is No Longer an Alternative
Tami Oren
Hebrew University of Jerusalem
[email protected]
Preliminary Draft: Please do not quote
1
Introduction
After almost two years of heightened political and public debate over the role of the state in
the resolution of the financial crisis, it seems that there is no end in sight. As time goes by, not
only that there in no consensual notion about it, but even ideas that managed to mobilize
wide political support at the initial stages of the crisis, mainly the urgent need for the state to
legislate a much tighter regulation of financial institutions, became highly controversial as
well. Taking into account varied theoretical approaches that define necessary pre-conditions1
for the institutionalization of a new role for the state makes this situation even more puzzling.
Although these conditions do exist, the controversy continues. Other studies that identify this
anomaly are quite descriptive about it and do not explain its roots and causes (For example
see Gamble 2009; Hay forthcoming; Crouch 2008).
One of the most salient expressions of current controversy is the political struggle over the
financial regulatory reform in the United States, in particular the debate over consumer's
financial protection legislation. This piece of legislation strived to institutionalize state's
intervention in the Banking industry with the purpose of preventing the recurrence of what
has been described as Bank's "spectacular failure in protecting consumers"2 and consider as a
major source of the financial crisis. Eventually, this legislation was signed into law only after its
main sections have been abolished and state's intervention rolled back. To a large extent this
law has normalized the very same pre-crisis practices it aspired to restrict. In the following I
analyze the political and public debate over the Consumer Financial Protection Agency as a
means of exploring the obstructions for and estimating the feasibility of "a new role for the
State" under current conditions.
My main suggestion will be that the anomaly identified above is the result of an interaction
between two factors: the discursive and institutional construction of the financial crisis as a
crisis in the neoliberal finance-led growth model (Jessop 2009, 349) and the widening
discrepancy between neoliberal practices and the interventionist practices forced on the
United States' government by current events. The result has been a combination of both
politicizing and depoliticizing trends. On one hand, economic policy has experienced
politicization, accompanied by the decline of 'no-alternative' rhetoric. But at the same time,
the contradiction between discourse and praxis obstructs politicization of the crisis itself. This
duality situates policymakers and lawmakers in a difficult position: the claim that there is 'noalternative' is no longer plausible, since the inability of non-interventionists policies to secure
economic stability has become apparent. But the emergence of an alternative understanding
of the crisis which might legitimize interventionist policies is impeded by the very construction
1
For example: the apparent inability of the existing paradigm to resolve its own pathologies (Hall 1993, 280) a
"legitimacy gap" between "…claims to the fairness and rightfulness of policy actions by those governing and the
conferral of these claims evident in the expressive practices of the governed" (Seabrooke 2007, 796); a
"…situation of uncertainty that lack fixed preferences and clear conceptions of self interests" (Blyth 2001, 26).
2
Christopher Dodd, chair of the Senate Banking Committee, 11.6.2009 (http://dodd.senate.gov/ ).
2
of the financial crisis. As a result of this incoherent and unstable situation, both interventionist
and non-interventionist policies considered to be arbitrary and illegitimate.
Underlying these suggestions is the assumption that the way the crisis is framed and the
properties of the existing growth model (e.g. its discursive and material dimensions as well as
its interdependencies) are the main causes of this problematic duality. The analysis will be
based on three theoretical foundations: Cultural Political Economy (CPE) (Jessop 2004; 2009),
economic sociology (Abolafia 2004; Campbell 2010; Schneiberg and Bartley 2009) and Beck's
(1998; 2002) concept of "organized irresponsibility". Although these approaches do not
respond directly to the dynamics outlined above, they nevertheless provide us with the
appropriate tools to do so.
The argument will progress as follows: in the first section I use Jessop's (2004; 2009) concept
of 'economic imaginary' in order to elucidate the properties of the finance-led growth model
and their interdependencies. I then focus on its depoliticization tendencies and the ways by
which it produces and reproduces "organized irresponsibility" and argue that these properties
had influenced deeply on the framing of the financial crisis. In the second section I focus on
the interaction between the framing of the crisis on one hand and the destabilizing effects of
the financial crisis on the other. I suggest that while the first generated policies aiming to
maintain the existing growth model the later has forced government to operate
interventionist policies which contradict it. The result was an incoherent and controversial
policy which failed to gain political and public support. In the third section I focus on the
political debate over the consumer financial protection legislation and urge that the
abandonment of its main goals resulted from the same processes outlined above and
demonstrates their continuity: while the crucial sections of this legislation failed to materialize
for being too interventionist, the operation of varied controversial interventionist policies
keeps on widening. I conclude that this continued anomaly might point to the fact that a
different framing of the crisis that will facilitate and legitimize state intervention is needed if
this unstable situation is to be resolved. However, under current circumstances the state is
unlikely to adopt a new programmatic alternative to the role ascribed to it under the financeled growth model, and what we see instead is a new problem for government. Without
politicization of the crisis itself, no new model of political economy is likely to develop.
The construction of "organized irresponsibility"
"A crisis situation is unbalanced: it is objectively overdetermined but
subjectively undetermined" (Jessop 2004, 8).
The above quotation which implies that crisis is a social construction represents an idea
rooted in CPE (Jessop 2004; 2009), constructivist institutionalism (Blyth 2001; Hay 2001;
2006), Foucauldian analysis of political economy (Rose and Miller 1992; Finlayson 2009;
Langley 2006) and economic sociology (Abolafia 2004; Campbell 2010; Schneiberg and Bartley
3
2009). Basically it means that facts do not speak for themselves but instead mediated by
discourse. More specifically, if a systemic failure is to be understood as a crisis, and if its
causes and solution are to be manageable, it should be constructed and perceived as such. At
the same time, any systemic failure opens a space for "determined strategic interventions to
significantly redirect the course of events" (Jessop 2004, 8). Therefore, one cannot
overestimate the importance of the interpretation of the systemic failure that will eventually
inform and legitimize the political response to the pathologies of the existing economic order.
The most important part of such interpretation is the framing of the crisis either as a crisis in
the existing economic order or as a crisis of the existing order (Jessop 2004, 9). While the first
depoliticizes the crisis and interpret it as a local and temporal problem that could be managed
through re-regulating the existing growth model, the latter politicizes the crisis, problematizes
the growth model itself and strives to transform it (Ibid.). Each of these types manifests
different explanation of the present and its pathologies and provides us with a different
solution for the future (Abolafia 2004, 355). From this point of view, the way by which a crisis
is being problematized will determine the appropriate political response as well as the range
of policies and practices that might be legitimately used in order to rectify it (Rose and Miller
1992). Hence framing "…is a fundamental political act" (Abolafia 2004, 351) and as such
cannot be treated as an independent factor. Rather, it depends on the advantages and
disadvantages inherent to the existing political-economic order and the institutionalideational framework within which it is embedded (Abolafia 2004, 351; Campbell 2004, 69-74;
79-85). Therefore, in order to analyze the political response to the current crisis we should
elucidate the interdependencies between its framing and the selectivity of this order.
I will follow Jesopp's (2004) Cultural Political Economy and conceptualize the existing financeled growth model as an 'economic imaginary'. In accordance with this concept, this growth
model has the "…capacity to link different sets of ideal and material interests" across society
and by so doing, "…provide an overall strategic direction…in a seemingly ungoverned,
runaway world" (Jessop 2004, 10). It is a coherent discursive structure informing all "economic
strategies for all scales from the firm to the wider economy…and for all market forces and
their non-market supporters". At the same time it also "inform and shape state projects and
hegemonic visions on different scales, providing guidance in the face of political and social
uncertainty and providing a means to integrate private, institutional and wider public
narratives about past experience, present difficulties and future prospects" (Jessop 2009,
351).
Hence, the selectivity of this 'economic imaginary' advantages one type of framing and
disadvantages another. In the following I will urge that the current financial crisis was framed
as a crisis in the growth model because the 'economic imaginary' and its interdependencies
didn't allow for politicization of the crisis itself and to a large extent, prioritized its diagnosis as
4
a local, temporal, technical and a-political problem.3 This, in turn, was the main cause for the
anomaly which defused the politicization of economic policy together with the depoliticization
of the crisis itself.
The finance-led growth model is very well theorized (for example Harvey 2005; Crouch 2008;
Finlayson 2009). However, on the backdrop of the financial crisis some of its properties and
their interrelations worth a renew examination. The hierarchical superiority of financial
institutions has been most saliently manifested and secured by the de-regulation of the
financial system through the 1990s' (Boyer 2000, 291). Two basic assumptions underlying this
policy: first, the only role ascribed to the state is setting and securing the legal and
institutional framework within which financial markets could operate freely and efficiently
and hence, guarantee the well being of society (Harvey 2005, 64-65). Second, corporate selfgovernance based on economic knowledge and expertise has been perceived as a necessary
pre-condition for securing growth and efficiently control risk. Simply put, it meant that
financial institutions should voluntarily regulate themselves (Soederberg 2008, 659) while the
mechanisms of the self regulated market will take care of immoral behavior by corporations.
At the eve of the crisis, the financial system operated on the bases of voluntary practices
determined through the discretion of corporations' executives, with no one to question their
appropriateness or the way they redistribute risk across the society. Consequently, the fact
that this mode of markets' regulation has been constituted through political discretion was
easy to neglect (Schneiberg and Bartley 2009, 5) and the covert interface between State and
markets conveniently existed along the lines of de-regulated financial markets.
This neglect was supported by another property of the growth model, what Burnham (2001)
has most accurately defined as "the politics of depoliticization". Following his concept, Flinders
and Buller (2006) identified different types of de-politicization strategies, among them "rulebased" de-politicization which has major relevance for the exploration of the current financial
crisis. Basically, it means the conceptualization of differentiated economic fields as technical
knowledge based spheres. In turn, they are considered to be a-political fields, disconnected
from political interests and political worldviews, that should be subjected to a neutral
knowledge-based regulation (Ibid. 303-304). This differentiation allows for identifying and
defining problems as local, technical and apolitical issues and by so doing, distance politicians
away from responsibility for economic problems. Moreover, being technically orientated
problems of a separated economic field prevents economic problems from challenging the
political economy as a whole.
The financial system is no exception. In cases of financial failures, the problem is usually
defined as a local and technical one (Soederberg 2008, 659-662; De-Goede 2005, 132-142).
3
The notion that the financial crisis has started on mid 2007 is currently widely accepted by politicians,
policymakers and academics. However, this is a retrospective rationalization. In a matter of fact, the word 'crisis'
was hardly been used till the beginning of 2009. In between times, much narrower expressions had been
employed. Among them we can find "credit crunch", banks' failure, "panic", market turbulence" and "market
meltdown", all of which imply for a local problem of the financial system.
5
However, the dominance of financial institutions and their role as an essential infrastructure
for economic growth and hence for the well being of society as a whole, justifies the
employment of solutions which might transcend the local knowledge-based practices and the
resources of this economic field, for example taxpayer money. However, according to the
logic of the financial-led growth model, these resources should be invested in the financial
system as an industry, make it profitable again and by so doing secure economic growth
(Ibid.). In other words, when it comes to the resolution of a financial crisis, financial
institutions are not committed to the well being of society but rather to their own interests.
Their well functioning and profitability as an industry per se is being perceived as a guarantee
for this well being. The bailout of financial institutions during the current crisis demonstrates
this strategy. When Bernanke's asked the Congress to approve the unprecedented bailout he
claimed that "…if financial conditions fail to improve for a protracted period, the implications
for the broader economy could be quite adverse" (Bernanke, Testimony before the Senate
Committee, 23/9/2008). On the other hand, the bailout terms did not demand financial
institutions to use the money in the benefit of the larger economy. When financial institutions
have eventually got the bailout money, they were not supposed to take care of anyone's
interests but their own: the industry was expected to increase its own profits (Schneiberg and
Batley 2009, 5).
The institutionalized practices which incorporated ordinary people into the financial markets
is another foundation of the finance-led growth model with major importance to our analysis.
The spreading consumption of mortgages and credit and the investment of pensions money in
financial markets have redesigned "… the mix of varied interests", rendering ordinary workers
into speculators. This, in turn, brought them to identify their interests with those of the
financial sector because it meant that "…the collapse of financial laisser-faire means hard
times for labor" (Boyer 2010, 351). As a matter of fact, these practices are the institutional
dimension of the neoliberal discourse through which individual responsibility is constantly
produced and reproduced. It takes for granted the ability of these individuals to rationally
calculate their financial choices and assumes a society "composed of responsible yet risktaking, financially independent yet economically ambitious individuals" (Finlayson 2009, 400).
Hence the distributional effects of this institutional system are being perceived as the product
of individual choices and actions and therefore secure the conditions under which "culpability
is passed on to individuals and thus collectively denied" (Elliott 2002, 297-298). This is an
important part of the neoliberal "common-sense"4 and its contradictions. In the name of
individual "freedom", "independence" and the well being produced by "the financialisation of
everything", individuals and society as a whole are being subjected to the interests of the
financial sector (Harvey 2005, 33). As the financial crisis has demonstrated, while ordinary
people depended on the success of dominant interests they were also the ones who suffer the
most from their failure (Soederberg 2008, 664).
4
According to Harvey (2005, 39) "…common sense can…be profoundly misleading, obfuscating real problems
under cultural prejudices".
6
Combining these three characteristics together, I would like to suggest that the major effect of
this 'economic imaginary' is what Beck (1998) had conceptualized as organized irresponsibility.
Normally, used for the exploration of the environmental risks that technological
developments pose to society (Beck 1998; 1996; Elliott 2002; Giddens 1999), this concept
might be very useful for our case. "Organized irresponsibility" describes a situation where risk
is being produced by the social institutional system. However, the rules and institutions for
the regulation of environmental risks pass on responsibility, culpability and guilt to the
individuals subjected to these rules and by so doing deny the responsibility of the system itself
(Beck 1998, 14). This way the exposure to and the avoidance of risks produced by the
institutional system become a matter of individual responsibility (Elliott 2002, 305).
Beck (2002, 11) himself used this concept for describing the implications of the neoliberal
finance-led economics, claiming that the global financial market is a new variant of 'organized
irresponsibility' because it is "…an institutional form so impersonal as to have no
responsibilities, even to itself". The social-economic risks are being produced by the social
institutional system and at the same time, are being denied by the same system which
individualizes the risks through law and (de)regulation. Hence, it is not the breaking of the law
but laws themselves which create the simultaneous existence of symbolic normalization of
social-economic risks and permanent economic threats (Beck 1996, 12), and sometimes, as in
the case of the current crisis, destruction of the lives of ordinary people. These rules, which
are being negotiated between state administrators, politicians and experts are represented as
an objective truth and as such could easily be wrapped in the rhetoric of 'no-alternative'. In
turn, a distance is created between the decision and those who made it through strategies of
rule based depoliticization (Flinders and Buller 2006, 303-304). Bauman's (2007, 29)
suggestion that risks and contradictions are persistently being formed in the social level but
individuals are the ones who must cope with them, is another way to describe the same
phenomenon. While referring to environmental risks, Beck had claimed that "risk society
begins where nature ends" (Beck 1998, 10). Using a Polanyian point of view we could suggest
that the "economic risk society" begins where neoliberal market fundamentalism is perceived
as the law of nature (Polanyi 2001, 46; 117).
Most of the literature of "Risk Society" attributes negative risk to environmental issues (Beck;
Elliott; Giddens 1999). Giddens (1999, 10) emphasizes the difference between an
environmental risk which is negative by its nature and the positive risk which he attributes to
finance. Moreover, he sees economic risk as an "energizing phenomenon" and claims that in
order to "create a more effective welfare state it is important that in some situations people
are psychologically and materially able to take risks albeit in a responsible way". From his
point of view, this risk is "not only closely associated with responsibility, but also with
initiatives and the exploration of new horizons" (Ibid.). Simply put, "risk is good". However, as
the current crisis demonstrates, "organized irresponsibility" in the field of political economy
might be more destructive than its environmental version. Whereas in environmental issues
the declared goal is to minimize risk, in the case of neoliberal economics, and especially in the
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context of the finance-led growth model, the goal is to incorporate as many individuals as
possible into this "positive risk society".
In fact, what Giddens expresses here is the neoliberal concept of the "individual freedom"
which makes individuals "accountable for his or her own action" and prevents risk from
"…being attributed to any systemic property…" (Harvey 2005, 65-66). This concept has two
implications. First, it disguises the political nature of the distributional effects of this
articulation of "freedom", "risk" and "responsibility" while legitimizing these effects and
painting them with a moral color (Bauman 2007, 34). Second, this concept of the "responsible
individual" means that the growth model and its basic assumptions, are to a large extent,
immune to change. As a result, symptoms are been related to as problems while the
distributional effects and the deep contradictions of the growth model and the neoliberal
discourse within which it is embedded are being disguised. For example, according to Pieters
(2010, 204) the crises of 1998 and 2001 were symptoms of deeper contradictions and
problems demonstrating "the downside of neoliberalism, the flipside of de-regulation".
Nevertheless, they were treated as problems that have been created by individuals, let them
be mistaken American Nobel laureates or the villains from Enron and their accounts managers
(Ibid.). The solution to such problems was to protect the system from this type of behavior
and make sure that it won't be possible anymore. In other words, the solution was a
reaffirmation of the growth model. I want to suggest that the properties of the finance-led
growth model outlined above and the organized irresponsibility they produce operated in the
same way in the case of the current crisis as well. They disadvantaged the framing of the
financial crisis as a crisis of the growth model and, to a large extent, determined its diagnosis
as a crisis in that model and by so doing, depoliticized the crisis itself and reaffirmed the
finance-led growth model.
However, the operation of this "organized irresponsibility" was disrupted by the Congress'
approval of the $700 billion bailout package, the Troubled Assets Relief Program, on October
3rd 2008. The next section will analyze the dialectical interaction between the way the crisis
was framed and the operation of interventionist policies which contradicted its logic and
elucidate its problematic outcomes: politicization of economic policy within the framework of
a depoliticized crisis.
This is definitely not a duck: Framing the problem, framing the solution
Greenspan's words5 were still echoing when the "credit tsunami" had hit Wall-Street and
destabilized financial markets. It looked like a crisis of the finance-led growth model and it
acted like such a crisis. The world economy stood on the brink6. However, the distribution of
responsibility across society that had made the growth model immune to change on other
5
In the year of 2005 Greenspan famously claimed that "…increasing complex financial instruments have
contributed to the development of a far more flexible, efficient and hence resilient system than the one that
existed just a quarter century ago" (Greenspan, quoted in "The Economist", 19.3.2008)
6
The Economist (2.10.2008) "World on the Edge" http://www.economist.com/node/12341996
8
occasions (Soederberg 2008; De-Goede 2005) successfully operated once again. The first to be
blamed were self interested greedy bankers who had manipulated the rules and exposed the
system to excessive risk. They were not, however, the only individuals to whom the
responsibility had been passed. Regulators who had fallen asleep on their watch, Credit Rating
Agencies (CRA) which have biased the value of MBS, shareholders who carelessly trusted
corporations' executives, institutional and private investors who didn't use their discretion
and instead counted on CRA and economists that their models have gotten it so wrong7, were
all responsible too in the eyes of the media, politicians, and congressional committees. It
appeared that the only ones who weren't to blame were politicians. The privatization of risk
has been used as a "blame avoidance" strategy (Beland 2005, 10-11) and helped to disguise
the connection between politicians and the "rules of the game" which allowed the crisis to
crystallize in the first place (Harvey 2005; Hay 2009; Crouch 2008; Finlayson 2009), distancing
them from responsibility.
The other side of this coin was the diagnosis of the crisis, its nature and depth. The
responsibility of the system itself was denied, and the crisis was depoliticized and framed as
crisis in the existing growth model. The problematization of specific practices in a specific
economic field prevented the crisis from challenging the growth model itself. The
distributional effects of the crisis, high unemployment, loss of pension funds and foreclosures
were all attributed to mal practices of individuals subverting the de-regulated system that
otherwise would have functioned in the best interests of everybody. Moreover, the framing of
the crisis outlined the political response and the range of policies that will constitute an
appropriate resolution of the crisis. If it was not the system but individuals abusing its rules
who caused the crisis then saving the financial system and re-regulating its institutions
became the consensual resolution for the crisis. Therefore, the political response to the
financial crisis has been shaped by the institutional-ideational framework of the finance-led
growth model.
Given the role ascribed to the state under the existing growth model, there actually was
nothing else in its tool-box that could manage this crisis. At the same time, the devastating
effects of the crisis demanded an immediate political response. In order to justify state
intervention, politicians were still using the rhetoric of 'no-alternative' but this time to justify
state action rather than inaction: If the economy and the well being of society depend on the
financial system, than there is no other alternative but bailing out financial institutions, to free
up credit and restore confidence in financial markets8. Here again, the parallel emphasis on
7
Paul Krugman (NYT, 2.9.2009) "How did economists get it so wrong"
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
8
th
On October 13 2008, Neel Kashkari, Interim Assistant Secretary for Financial Stability in a speech before the
Institution of International Bankers, said that the main cause for the approval of the TARP program was the fact
that "every American depends on the flaw of money through out financial system" (FT 13/10/2008
http://www.ft.com/cms/s/0/53d40cf2-9924-11dd-9d48-000077b07658.html). Similar statements were given by
Bernanke, see for example http://www.federalreserve.gov/newsevents/testimony/bernanke20080923a1.htm
9
finance as a distinct field while identifying the problem and the interdependence between this
field and the larger economy when designing the solution, was the main excuse for the direct
injection of taxpayer money to private financial institutions. Moreover, the bailout did not
oblige financial institutions to act in favor of the public interest, liquidate credit for small
businesses and households and stimulate labor markets9. The basic assumption was that this
is exactly what will necessarily occur, in spite of the apparent contradiction between this basic
assumption and the financial disaster it created. Rescuing the financial sector was represented
as a common interest unifying financial, political and administrative elites together with
ordinary people10 whose wellbeing also depended on the strength of financial institutions
(Boyer 2010).
However, the rhetoric of 'no-alternative' was no longer plausible. The contradiction between
the unprecedented $700 billion bailout and the consensual finance led growth model initiated
a political and public debate that challenged this solution. Using taxpayer money to bailout
the same greedy bankers who caused this crisis and devastated the lives of ordinary American
citizens looked arbitrary and illegitimate. In order to soften public and political opposition to
the bailout the Administration included in the Troubled Assets Relief Program assistance to
homeowners at risk of losing their homes, hence operating another controversial
interventionist policy. Therefore, the approval of this policy was a political decision, bounded
with political responsibility to which a political price tag was attached. Without the shield of
the rhetoric of 'no-alternative', politicians had to persuade voters that they are working in
their best interest. And this is the point where the politicization of economic policy has
started.
The immediate response of Democrats and Republicans right after the approval of the TARP
program was identical as they both stated firmly "never again". But it was not the beginning of
a new consensus as each of them expressed with the same words different ideas. More
specifically, each side interpreted differently three interrelated factors: the role of the
financial system, risk and responsibility. Republicans treated the financial system as an
industry that while pursuing its own interests secures growth and therefore the well being of
society as well. By so doing, it functions as an essential infrastructure for the economy. From
this point of view, the only role the state has is to create conditions that will facilitate
innovation and risk taking and secure profitability (Schneiberg and Bartley 2009, 5). Therefore,
when Republicans' said "never again" they were talking about state intervention itself. This
intervention is the problem and what should be done is to create mechanisms for avoiding the
9
Stiglitz (2008 http://www.cnbc.com/id/34921639 ) response to the bailout, "you socialize the losses and
privatize the gains", accurately describes the practical meaning of this discursive practice.
10
th
Gallup poll from October 7 2008 shows that 50% were in favor of the TARF program and 41% opposed it.
Among those who have supported the bill, the strongest support was among higher income Americans
($75000), with 57% thought it was a good thing. These ordinary people were deeply depended on the financial
system long before the crisis.
10
trap of 'too big to fail'. These mechanisms should replace the state's implicit role as a lender of
last resource and enable 'too big' financial institutions to fail, like any other industry, without
risking the economy as a whole. Hence, the efficient self regulated market is the answer, and
making financial institutions responsible for their own actions is the best regulation of risk. In
other words, not only should the state not be doing more, but actually in order to control risk
and prevent the recurrence of a financial tsunami it should be doing less.
From the Democrats point of view, the financial system is also viewed as an essential
infrastructure on which the whole economy and society both depend. However, the guiding
lines for its operation should be the stability, prudence, and reliability of financial institutions
(Schneiberg and Bartley 2009, 5). Consequently, the role of the state is different as well. Its
job is to regulate risk-taking in order to facilitate responsible behavior of financial institutions.
This is what Democrats meant when, right after supporting the approval of the TARP program,
they declared that "…we are going to be back next year to do some serious surgery on the
financial structure"11. This was also the implicit intention of Obama when he said that the
TARP is just "…the beginning of a long-term rescue plan for our middle class"12. In other
words, because the financial industry is the essential infrastructure of the economy, we can't
treat it like any other industry. In order to prevent another bailout of 'too big to fail' the state
should step in and re-regulate its operation.
The question underlying this controversy was not, however, "what is the appropriate political
economy" but a much simple one: "How can we make the political economy we have work in
a better, safer way, and how can we make sure that another bailout of 'too big to fail' will
never happen again". Both sides ideas were informed by the same economic imaginary,
treating "…the global character of financial institutions, the integration of finance across
different sectors, securitization and a reliance on private, for profit provision" as natural and
necessary facts with which regulatory reform must work (Schneiberg and Bartley 2009, 1). It
was an internal neoliberal conflict between two framings of the finance-led growth model,
and these differences set the ground for the political struggle over the financial regulatory
reform legislation.
Democrats promising to pass a sweeping financial overhaul were much more vulnerable to
the contradicting interests manifested through the media, the political sphere and public
opinion polls. On one hand, they had to persuade middle and lower class voters that they are
operating in their best interest. At the same time, the structure of political institutions made
their position even more complicated, as they had to get a bipartisan consent, at least in the
Senate, in order to pass legislation. Republicans, committed to different voters' interests and
promising 'to kill the bill' made that mission almost impossible.
11
New-York Times (3.10.2008) "Bailout Plan Wins Approval: Democrats Vow
http://www.nytimes.com/2008/10/04/business/economy/04bailout.html
12
http://www.nytimes.com/2008/10/04/business/economy/04bailout.html?ref=bailout_plan
11
Tighter
Rules"
Restoring (not very successfully though)"organized irresponsibility": the political struggle over
the "Consumer Financial Protection Agency"
The commitment to legislate the most comprehensive financial overhaul since the Great
Depression was the continuation of the Democrats' promise given in October 2008 to do all
that is necessary in order to prevent the return of a bailout of financial institutions. A year
after, when the bill has passed in the House, the same voices have been heard with Nancy
Pelosi saying that "…we are sending a clear message to Wall-Street…the party is over…never
again" (Wall Street Journal, 14.12.2009). A month later, Obama's words were a natural
continuity to this promise: "… Never again…will the American taxpayer be held hostage by a
bank that is too big to fail" (NYT 21.1.2010). Practically, as I will demonstrate below, it was a
quite different, if any, scale of change.
From its initial stages, the legislation process turned into a political struggle between
Democrats and Republicans with Wall Street spending $220 million for lobbying against it. The
proposed legislation consisted of some far reaching policies, among them a controversial
regulation of "over the counter" derivatives and the restoration of a 'light' version of the
Glass-Steagle Act. Strangely though, most of this money had been spent on efforts to block
the legislation of a "Consumer Financial Protection Agency". I will suggest that this proposed
agency became the locus of the political debate and an obstacle for bipartisan agreement
because it contradicted the basic logic of the finance led growth model. This is also the reason
why, at the end of the day, it turned into the normalization of the same practices it was
supposed to prevent.
Before getting to the clauses of the proposed legislation, we should notice the arguments of
its two major proponents, President Obama and Professor Elizabeth Warren13 which highlight
the way Democrats framed this piece of legislation. Warren claimed that the regulation of
financial products will enable customers to take the right decision and at the same time will
make the market work (Wall street journal, 20.6.2009). Obama, speaking to Wall Street,
claimed that "…this plan would be the strongest consumer financial protection ever…millions
were, frankly, duped…misled by deceptive terms and conditions…with a dedicated
agency…we will empower consumers with clear and concise information when making
financial decisions" (Wall Street Journal, 22.4.2010). At the same time, he also claimed that
"…it's true that many Americans took on financial obligations they knew, or should have
known, they could not afford…"(Ibid.). These quotations express the main justification for the
institutionalization of new practices that will re-shape the incorporation of ordinary people
into financial markets. At the same time they reaffirm the existing growth model. More
specifically, they re-articulate the boundaries of the terms "risk" and "responsibility",
redistribute them, supposedly in a safer way, across the social-economic system and by so
doing, actually restore "organized irresponsibility". First, they blame individual bankers for the
13
Professor Warren is chair of the Congressional Oversight Panel and the main advocator of the Consumer
Financial Protection Agency.
12
crisis and its distributional effects. Second, they strive to create the conditions that will allow
individual consumers to responsibly participate in the financial markets and third, they
differentiate between responsible and irresponsible individuals, between those who took
excessive risk (sub-prime borrowers) and those who could not evaluate risk properly because
they have been deceived. The latter highlights another thing: since the only problem is a crisis
in the existing growth model, the distributional effects of the model itself (e.g. sub-prime
borrowers) are not consider to be a problem at all. They belong to the realm of individual
responsibility. Obama's claim (Wall St. Journal 22.4.2010), while trying to convince Wall Street
to support him, that the crisis "was born of a failure of responsibility" and that "…these
reforms are designed to respect legitimate activities but prevent reckless risk taking"
exemplifies the same logic. It also exemplifies the Democrats outlook, according to which the
financial system is first of all an indispensable infrastructure, it’s the stability of which is a
necessary pre-condition for wellbeing.
The nature of the proposed agency is inline with the finance-led growth model as well. The
initial intention was to create an independent, stand alone agency that will watch all banks
and non-banks that sell financial products. Christopher Dodd, chair of the Senate Financial
Services Committee declared on his home website14 on November 6th 2009 that any reform
should contain an independent agency because the mess that we are in is the outcome of a
"spectacular failure" in protecting consumers. That's why he is determined to make "this
agency a centerpiece of my efforts…" and transfer the authority to write consumer protection
laws from the Federal Reserve and other regulators which had failed, for the past 14 years, to
protect them. Hence, the legislation itself does not detail consumer protection rules but
rather describes roughly their objectives and authorizes the Agency to write them. Therefore
it is actually a strategy of depoliticization that achieves two political goals: first, politicians are
being distanced from this policy and don't have to "pay the price" for its social effects.
Second, perceived as a body based on knowledge and expertise, the rules it writes are
considered to be rational and technical and therefore could fit the selectivity of the growth
model without being perceived as political, interventionist or arbitrary. Additionally, a
somewhat covert implication of this de-politicization strategy highlights the incoherence of
the Administration's proposal, and cast doubts in its ability (or willingness) to significantly
change the existing practices. The fact that "…expertise in matters relating to how financial
markets and their complicated investment instruments operate lies squarely with the
industry, not the government" and, in turn, "… gives the industry an advantage in shaping
whatever legislation is eventually passed as the government depends on the industry for
advice on how to prevent such crises in the future" (Campbell 2010, 19). Therefore, such depoliticized Agency leads directly to a situation where the monitored are informing the monitor
about the proper way to control them.
14
http://dodd.senate.gov/
13
At the same time, the objectives of the proposed agency15 embody and illustrate the tension
between preserving the finance-led growth model and reforming it in ways that contradict its
basic logic. First, it aims to "prevent a person from committing or engaging in an unfair,
deceptive or abusive act or practices…in connection with any transaction with a consumer for
a product or service". Another purpose is to "ensure that their risks, costs and benefits are
fully and accurately represented to consumers". Third, it defines "standard consumer financial
products or services and allows the Agency to prescribe regulations or guidance concerning
the offering of them at or before the time alternative consumer financial products or services
are offered". The "reasonableness standard" which is reflected by the first two clauses and
the standardized, "plain vanilla", products specified in the third, where at the heart of this
legislation and constituted its main objectives. They have been designed to make sure that
bankers will operate in a responsible way in the best interests of their customers. This was the
main reasons why this Agency was needed in the first place.
The deep meaning of these measures is that they redesign the ways by which individuals are
being incorporated into the financial markets. On one hand, as we could learn from Obama's
and Warren's words, the goal was to restore the "very widespread sharing of risk" (Crouch
2008, 482), incorporate as many individuals as possible into the "economic risk society" and
expend consumption. At the same time, the legislation strives to disconnect ordinary
consumers from the riskier markets, or at least make sure they understand what exactly they
are getting into when they make the decision to participate in these markets. This was the
place where the Administration tried to institutionalize the idea that the financial sector
should be treated first of all as an infrastructure. However, despite the fact that it was
designed to strengthen the finance-led growth model and secure its stability through depoliticized regulation, it also contradicted one of its central elements: the simple fact that
risky behavior by banks and consumers' participation in the riskier markets is a necessary
condition for the empowerment of this level of consumer spending and hence for economic
growth (Crouch 2008, 483). From this point of view, this re-articulation of risk and
responsibility means changing the model and intervening in the operation of financial
markets. And this is the point where the controversy over the agency begun. Republicans
judged these measures in the light of their preferred framing according to which the financial
sector is an industry that should be treated like any other industry where risk and
responsibility are regulated by the free market. From this perspective, the Administration
proposal was incoherent and has potentially damaging effects. It manifested a clear deviation
from the existing model which stood in sharp contradiction to the interests of the financial
industry and hence put the interests of society as a whole in danger. Therefore the inevitable
reaction to this arbitrary and illegitimate initiative was to 'kill the bill'.
A lot of efforts were invested in this mission. During the political debate in the House of
Representatives, a major part of the $220 million spent by the financial industry in order to
15
http://www.opencongress.org/bill/111-h3126/show
14
block the reform was used for lobbying against the Agency. The industry's lobby focused on
the duty of "reasonableness" and the duty to sell standardized products warning that the
arbitrary, interventionist and too wide legislation is risking growth and the well-being of
consumers. Edward Yingling, president and CEO of the American Bankers Association
claimed16 that it contradicts the consumer's best interests because it will limit innovation and
competition, reduce the availability of credit and weaken the banking industry. And since "…a
strong banking industry is indispensible to a strong economy and the best protection for
consumers' access to fair financial services" creating this agency makes no sense. Bill
Himpler17, executive for Governmental Affairs at the American Financial Services Association,
expressed similar ideas when he claimed that the interests of the financial system as an
industry overlaps the interests of ordinary people. This unjustified and arbitrary intervention
will reduce credit and consumers' choice, raise costs and therefore damage them both.
Underlying these critiques was the same familiar assumption according to which de-regulation
is the answer while regulation could only distort the efficient operation of financial markets.
The Wall Street Journal summarized quite clearly the right wing perspective claiming that "it is
true that the distortions…dictated by federal regulators helped to create the credit crisis, but
that doesn't mean that more regulation would be an improvement" and that the best result
will be the abolition of the Agency altogether. Moreover, even with only "ex-facto
enforcement power" it will still lead to more expensive products and less choice, which is
definitely "no way to protect consumers or taxpayers" (25.9.2009).
However, this wasn't just a "language war" (Abolafia 2005, 349) between two framings. The
institutional context within which these strategic framings took place restricted the ability to
re-articulate 'risk' and 'responsibility'. The regulation of consumer protection was spread
between different regulators all of which opposed the intention of the new legislation to
abolish previous laws and pass the entire realm of consumers' protection to the new agency
(Campbell 2010, 19). The most salient opposition came from the Federal Reserve with
Bernanke claiming that the regulation of banks' stability and consumers' protection are
complementary tasks that will be best secured under the responsibility of the unique and
"unparalleled economic and financial expertise" of the Federal Reserve. Moreover, cutting the
Fed's authority is "…very much out of step with the global consensus on the appropriate role
of central banks and will hurt stability and growth"18. Inline with the Republicans and the
industry, Bernanke is presenting the same equation according to which any deviation from the
imperatives of the growth model, in this case limiting Fed's authority, is arbitrary and
16
Yingling testimony before the Senate Committee on Banking, Housing and Urban Affairs, 14.7.2009
http://www.aba.com/Press+Room/071409YinglingTestifiesCFPA.htm
17
Written testimony sent to the House Committee on Financial Services, 30.9.2010
http://www.house.gov/apps/list/hearing/financialsvcs_dem/himpler_testimony.pdf
18
Bernanke (29.11.2009)"The right Reform for the Fed" http://www.washingtonpost.com/wpdyn/content/article/2009/11/27/AR2009112702322.html
15
irrational because it is damages economic growth and therefore contradicts 'common sense'.
However at this point, only a year after the financial tsunami, both Democrats and
Republicans were reluctant to give more powers to the Fed. They were still blaming its
inability to regulate banks for being at least partly the cause for the financial crisis and were
intimidated by the political cost such support might bring. As we shall see below, the Federal
Reserve has lost this battle at the House but eventually, a year later, won the war at the
Senate.
The fact that "…special interest lobbying is built into the very institutional fabric of U.S.
politics…" deeply influenced the process (Campbell 2010, 19). On the one hand, Democrats
had the majority they needed to pass the bill, which reflects the interests of their low and
middle class voters, in the House. On the other, the fact that community's bankers, populating
every district of the Congress were among its loudest opponents, generated disputes between
liberal democrats who insisted on passing the Administration's proposal and moderate
Democrats who wanted to protect their political interests through bipartisan agreement. At
the same time, the political pressure of the right wing "Tea Party" movement pushed
Republicans to the other direction, impeding any possibility for bipartisan agreement.
Eventually, Democrats who were constantly loosing public support of middle-class voters
decided to pass the bill without Republican support. However, and as opposed to the
Democrats' declarations such as "the party is over" and "never again", the House bill reflected
almost entirely the pre-crisis perception of the finance-led growth model.
Both the demand for standardized products and for "reasonableness standard", the very heart
of consumers protection, were rejected by the House Democrats. In addition, the House bill
exempted banks and non-banks with less than $10 billion in assets from the supervision of the
new independent agency. All the amendments reflected "industry concerns", mainly the
American Chamber of Commerce and the Financial Services Association, heavily lobbying
against the bill. All of them also reflected the failure to redistribute differently risk and
responsibility across society. But even after the amendments were made, the bill failed to
mobilize Republican support. The very idea of more regulation contradicted their framing of
the finance-led growth model.
Right after the bill passed the House, the lobbying and the debate moved to the Senate. Here,
the situation was completely different. With Democrats losing their majority, Christopher
Dodd, chair of the Banking Committee, had no choice but compromise with Republicans in
order to pass the Senate bill. It ended with the Democrats' withdrawal from the idea of an
independent agency, and after "…one of the most fiercely debated provisions" it was decided
that "…the bill would create a consumer financial protection bureau under the umbrella of the
Federal Reserve"19. On one hand, the chair of this Bureau is directly nominated by the
President of the United States. The Fed is prevented from interfering in its work, guiding its
19
New York Times (14.3.2010) "Dodd to Unveil
http://www.nytimes.com/2010/03/14/business/14bank.html
16
a
Broad
Financial
Overhaul
Bill"
employees or changing its functions and responsibilities therefore the independence of the
Bureau is protected by law. On the other hand, its recommendations and decisions could be
overridden by a 2/3 majority of a new Council for Financial Stability Oversight chaired by the
Federal Reserve governor, a fact that raises doubts about the extent to which the
independence of the new Bureau does exist.
This agency will be "charged with writing and enforcing new rules that target abusive
practices in business such as mortgage and credit card issuance" (Wall Street Journal
21.5.2010), with powers over banks and non-banks with assets of more than $10 billion.
According to Dodd (The Economist 18.3.2010), this measure is "creating new powers and
authorities to sniff out and squelch the risks that brought on the financial crisis". Given the
fact that "…expertise in matters relating to the intricacies of how the financial
markets….operates lies squarely with the industry, not the government…" (Campbell 2010,
19), one could expect that the industry will have a significant role in shaping whatever rules
the new Bureau will eventually decide on. Against this backdrop, Krugman's claim that the
new legislation "would make it much easier for future regulators to look the other way as
another bubble is inflated"20 sounds somewhat more realistic. In other words, the Senate bill
limits any future congressional oversight in the field of consumer financial protection,
therefore completes its institutional de-politicization. But even after this amendment bankers
were still arguing that "the chairman of CFPB… has too much independence and is not
answerable to a board"21 and therefore "concentrates too much political power which might
distort the operation of financial markets". The very idea of consumer financial protection
agency contradicted the common sense itself.
Needed- A New Economic Imaginary: The collision between Interventionist practices and noninterventionist logic
The Financial Reform bill was signed into law on July 22 2010 but its implications are still
unclear. Two quotes from "The Economist"22 concerning this Act as a whole are very
illuminating:
1. "Much of the text (i.e. of the Act) is little more than a template, which regulators are
expected to flesh out".
2. The bill authors "…outsourced much of the definition of the new order to domestic
regulators…".
20
Paul Krugman (4.4.2010) " Making Financial Reform Full-Resistant"
http://www.nytimes.com/2010/04/05/opinion/05krugman.html
21
Financial Times (17.3.2010) "US Consumer Protection proposals attacked"
http://www.ft.com/cms/s/0/288d717e-321a-11df-b4e2-00144feabdc0.html
22
The Economist (1.7.2010) "A decent start" http://www.economist.com/node/16481494
17
These quotations actually describe a process of de-politicization. The Act has not specified any
rules concerning consumer protection but instead, left this job to the discretion of an
apolitical Bureau composed of experts. Whatever the new rules might be and whatever social
consequences it might have politicians will find themselves once again at a safe distance from
any responsibility. Actually, the responsibility for the new order will be spread between the
Bureau, the Council for Financial Stability Oversight (which means almost all the other
regulatory agencies, headed by the Federal Reserve) supervising its decisions, the financial
institutions subjected to these rules and consumers. The only decision made by lawmakers
was that some consumer financial protection is needed. But its exact nature and scope will be
decided by experts on a supposedly apolitical, technical and rational basis, disguising the
political interests underlying its operation.
Second, as we have already mentioned before, the main goals of the initial proposed bill had
been rejected by lawmakers: standardized products structured to minimize risk and the
"reasonableness" criteria aimed at ensuring bankers' responsibility. The deep meaning of this
rejection is that the attempt to re-articulate "risk" and "responsibility" as well as the
redistribution of risk and responsibility across society failed. In fact, the same financial
products and practices which had created so much damage have been normalized and relegitimized. The establishment of the agency exempted many financial institutions from
regulatory control, thereby restoring deregulation as well. It also means that the financial
system as an industry should have priority over the financial system as a necessary
infrastructure which must be regulated and stabilized as a pre-condition for economic growth
(Schneiberg and Bartley 2010,???). Instead, competition, choice, risk taking and innovation
have all been reaffirmed as the central values underpinning the wellbeing of society (Harvey
2005, 65). We may conclude that the restoration and normalization of 'privatized
Keynesianism' together with the depoliticization of consumer protection and the deregulation
of a significant portion of the banking industry means that the legislation has actually restored
"organized irresponsibility".
Some other practical implications of the Act are significant too. First, it will take at least two
years of research until the regulator will be able to write new rules and activate new
supervision over financial products. Second, the Bureau will operate under the somewhat
remote control of the Federal Reserve and other regulatory agencies, all of which being both
powerful institutional actors and penetrable to the influence of the financial industry
(Campbell 2010, 20). What it actually means is that the institutional context and the ideas of
mainstream economics embedded in it embeds will constrain rulemaking, hence limiting the
scope of change and thereby consumer financial protection. The words of an anonymous
Wall-Street executive quoted in "The Economist" the day the bill passed the Senate might tell
us the whole story: "Frankly, it's an enormous relief to be dealing with regulators again rather
than Congress".
18
I want to suggest that this is not just a case where powerful interests manipulate lawmaking.
As Skocpol (1980) has shown elsewhere, the "New-Deal" reforms succeeded to materialize
within a similar power structure. The causal relation between the finance-led growth model,
the organized irresponsibility it generates and the framing of the financial crisis as a crisis in
the growth model played a crucial role as well. Given the framing of the crisis, the basic logic
of legislation was flawed. The Administration's proposal strived to reaffirm the finance-led
growth model and at the same time change it and by so doing created an incoherent amalgam
of values and practices. It intended to heavily interfere in the operation of financial
institutions in order to control and limit risk. At the same time, the scope of change and the
measures it used were legitimized and justified as promoting the same values that constitute
neoliberal "common-sense": the importance of free markets, competition, risk taking,
innovation, choice and opportunity for everyone to take part in the financial markets. This
framing lacked an organizing principle and therefore instead of being a persuasive renewed
version of the existing 'economic imaginary', it could be politically constructed as arbitrary,
illegitimate and ideological (Jessop 2004, 8). Without the shield of a coherent economic
imaginary that will rationalize the incoherent combination of the consumer protection
legislation together with the finance-led growth model that left it to the market, this
legislation could not be a legitimate resolution for the crisis.
But this is not the whole story. While Republicans and Democrats were struggling in Congress
over yes/no standardized financial products, much more dramatic developments took place in
the "real" world and widen the discrepancy between discourse and praxis. After the approval
of the TARP program the Administration activated different interventionist policies which
sharply contradicted the growth model. With unemployment rising sharply, thousands of
foreclosures each day, small business bankruptcies and collapsing industries, it seemed to be
the only choice. However, policies such as The American Recovery and Reinvestment Act
2009, which manifests Keynesian thinking (Hay, forthcoming), could be accepted and
legitimized only as "emergency" and temporary plans. Even so, all of these "emergency"
policies, from the conservatorship of Fannie Mae and Freddie Mack to the bailout of AIG and
from the second injection of taxpayer money to financial institutions to the "new-Deal" style
policies targeted at unemployment and foreclosures, were highly controversial. As time goes
by and it is becoming more and more apparent that there in no way the government could roll
them back in the near future, the controversy over their operation intensifies. Nevertheless,
looking at recent developments suggests that the government is constantly increasing its
intervention in the market:
- The US Government still owns General Motors and, according to The Economist23, given the
slow pace of economic recovery, the Administration is planning to widen its intervention and
advance a "strategic industries initiative" in order to stimulate the economy, once again.
23
5.8.2010 http://www.economist.com/node/16743343
19
- On the background of approximately 10% unemployment, the Congress had to overturn its
decision to cut unemployment benefits24 and approved their extension for another six
months. According to The Economist25 "…unemployment has seemed too high, leading some
economists to fret that structural barriers to job growth have become a serious problem",
pointing to the possibility that unemployment is a long-term problem and a bigger threat than
thought before.
- The Government continues to control a huge portion of the mortgages market through the
conservatorship of Fannie Mae and Freddie Mac without being able to roll it back until the
losses of these institutions are covered, "…a process expected to drag on for years"26 as
"…having rescued the pair, the federal government lacks any plan to pull out"27. On this
background it is worth noticing the words of Shaun Donovan, the housing secretary, while
speaking at a conference hosted by Timothy Geithner with the purpose of figuring out the
solution for this controversial government's intervention. According to Donovan, the main
objective of government is still to ensure "…broad access to homeownership, including
options for those families who have historically been shut out of these markets". It is striking
that policymaking processes are still being informed by the same pre-crisis ideas and values
and still aiming to achieve the same goals using the same practices.
- Another troubling distributional effect and a possible "contribution" to structural
unemployment is the number of homeowners who are both unemployed and "underwater"
or facing foreclosure. This situation generated another intervention through emergency
programs such as "Hardest Hit Fund" targeted at those people. The latter has been allocated
to States with unemployment rates higher than the general countrywide rate and at least 20%
decrease in home prices. Five states qualified for the program28 with total number of 1730000
people in need, unemployed or part time workers. These numbers point to a much deeper
problem: the operation of the unregulated free market which succeeded to incorporate
ordinary people into the financial markets had actually created a class of immobile and
unemployed workers, stuck in an equity trap. We may conclude that in this case the market
had demonstrated its inefficiency. To a large extent it confirms Boyer's (2000, 314; 291)
suggestion according to which an institutional system, with the financial system at the top of
its institutional hierarchy, couldn't produce constant growth given a society comprised of
wage-earners.
24
Wall Street Journal (2010) "Jobless Bill Dies amid Deficit Fears"
http://online.wsj.com/article/SB10001424052748704227304575327273014747664.html?mod=WSJEUROPE_ne
wsreel_us
25
Ibid.
26
NYT 17.8 http://www.nytimes.com/2010/08/18/business/18fannie.html?_r=1&ref=business
27
The Economist 5.8.2010 http://www.economist.com/node/16743343
28
Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets 3.5.2010
http://www.makinghomeaffordable.gov/docs/HFA%20FAQ%20--%20030510%20FINAL%20(Clean).pdf
20
The overall picture shows a problematic and complex situation where an ever growing
controversial and delegitimized political intervention titled as temporary and excused as being
a necessary "emergency" action, is operated in order to reconstruct the same economic order
that necessitate their operation in the first place. On this backdrop, some recent studies
explicitly cast doubts on the framing of the crisis, suggesting it might be a crisis of the finance
led growth model. The Economist recently reported a study29 suggesting that the US economy
"…was weaker going into the recession than previously believed". Edmund Phelps, in an
article published in the New-York Times on August 7th 201030, claimed that the main cause for
the continuation as well as the deepening of the recession is the mistaken diagnosis of the
crisis and the problematic assumptions underpinning it which directed policymakers to the
wrong solutions. In his words, "…our economy is damaged by deeper structural faults that no
stimulus package will address". Moreover, he points to the fact that since the finance-led
growth model had been institutionalized "…not only were low wage workers largely cut out of
the economic gains of the 1990s and 2000s, much of the middle class was, too". Phelps
suggestions, focusing our attention to the distributional effects of the growth model itself,
coincide with Warren's (2003) study on middle-class bankruptcies during the 1990s and the
beginning of 2000s. The study had found a sharp 66% rise in bankruptcy filing between 1991
and 2001, from 800,000 a year to approximately 1300000 which took place in a period of
economic boom with record high Wall-Street profits. Her findings show that the
"overwhelming majority" of them were families which belong to the middle-class (Warren
2003, 144). The study found two interrelated causes for this phenomenon, both pointing to
the problematic distributional effects of the growth model: first, job difficulties such as
layoffs, cutbacks and business collapses which have "…constituted an important element of
their failure" (Ibid. 145). The second reason is "…changes in lending standards…have
encouraged more middle-class families to take excessive debt loads when they are already in
some financial distress" (Ibid.). Stiglitz's31 recent claim according to which a new economic
paradigm is needed might well summarize the above suggestions.
If the above scholars are right and structural problems started to evolve long before the
eruption of the financial crisis, then politicians and policymakers are situated in a very difficult
position. The finance-led growth model does not have the tools to rectify the problems it
generates. However, under current conditions it is impossible to settle its contradictions by
the operation of interventionist tools. Although these interventionist policies might be
necessary in order to handle the structural problems and the distributional effects of the
growth model, as long as the latter keeps on informing policymaking these policies risk
appearing to be arbitrary, populist and illegitimate. For this situation to change, the crisis
would have to be explicitly framed as a crisis of the finance-led growth model (or, better yet, a
29
The economist (5.8.2010) "A Deeper Hole" http://www.economist.com/node/16743955?story_id=16743955
Phelps (7.8.2010)"the Economy Needs a Bit of Ingenuity"
http://www.nytimes.com/2010/08/07/opinion/07phelps.html?_r=2
31
Joseph stiglitz (2010). "Needed: A New Economic Paradigm" http://www.ft.com/cms/s/0/d5108f90-abc2-11df9f02-00144feabdc0.html
30
21
crisis of neoliberalism) and only then a new state project might evolve. Until then, the financeled growth model and the "organized irresponsibility" produced by it will continue to guide
policymaking in spite of the widening discrepancy between discourse and praxis. Under these
circumstances, the government's interventionist policies will continue to be controversial, and
hence a political problem rather than a legitimate new role for the state.
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