Too Big to Fail?

Blaming the U.S. subprime mortgage meltdown for the global financial and economic blowout of 2008 is like blaming the assassination of Archduke Franz Ferdinand for World War I. In each case, a discrete event sparked a wider conflagration—but the tinder was already there.

In the early dawn of the 21st century, American capitalism continues to predominate and set the pace.  But ever-more-frequent disturbances in the world economy undermine the pretended apoliticism of the econometrists who presume to legitimate and fine-tune capitalism in normal times. Acute convulsions invariably force a return to classical political economy rooted in moral philosophy and ethics, as practiced by Adam Smith, David Ricardo, Karl Marx, John Maynard Keynes, and Friedrich von Hayek. Although today’s reigning economists, finance ministers, and central bankers are adept at manipulating interest rates and the money supply, by themselves such monetarist nostrums are of little use: the present disarray demands concerted political intervention.

In the midst of the First World War, French Prime Minister Georges Clemenceau exclaimed that war was too serious a matter to be left to the generals. Similarly, today’s great economic recession is too grave to be entrusted to the likes of Robert Rubin and Henry Paulson, Alan Greenspan and Ben Bernanke, Lawrence Summers and Timothy Geithner. Not that politicians are any less out of their depth. But it is their responsibility to take matters in hand, with mathematical economists and financial wizards on tap, not on top. As they do so, they enlist the hallowed titans and champions of the Wall Street-Washington consensus to stabilize the shaken financial and corporate Establishment, as if to make certain that the foxes should continue to guard the henhouse.

Of course, in the U.S., both Democrats and Republicans retain their unshaken faith in the benign power of the unchained “invisible hand,” though few choose to remember Adam Smith’s constant concern about social and economic inequalities. As sworn free marketeers, they insist that the current crisis is not structural but contingent, and that its roots lie in the failure of the regulatory system—which America’s two major parties, beholden to powerful special interests and lobbies, conspired to dismantle for decades. Predictably, rather than call for the prosecution of wildcat CEOs and negligent governors of the equities markets, the power elite lambastes the evil geniuses of boundless greed: the speculators, gamblers, cheats, and sharks. Like Jesus chasing the moneylenders from the Temple of God, they propose to run today’s transgressors out of Wall Street, the temple of world capitalism. They raise the specter of the Great Depression of 1929 in order to blunt popular social movements of both left and right. And they oppose “Wall Street” to “Main Street” to avoid discussing the vast gulf between the upper ten thousand on the one hand and the salaried middle classes, wage-earning blue collars, and working poor on the other. With the richest 5% of Americans earning more than a third of all personal income and the long-stagnant minimum wage often ignored, it is astounding that political discourse should fixate on the suffering of middle-class families. Even John J. Sweeney, president of the AFL-CIO, stresses the need to “counterbalance corporate power and reverse the decline of the middle class.”  And Gordon Brown, Britain’s New Labour Prime Minister, urges Washington and London to “seize the moment” to bring about “the biggest expansion of middle-class incomes and jobs the world has ever seen.”  Perish the thought that anyone should mention the working and lower-middle classes, let alone the poor: for the moment, in America, the streets are quiet, picket lines thin, sit-ins rare, and town hall meetings calm.

Pace Bernanke and his mentor Milton Friedman, the causes of the crash that brought about the Great Depression bear little resemblance to those that quickened the downturn of 2008. Following World War I and the Russian Revolution, European societies entered a prolonged crisis marked by economic turmoil, political upheaval, and cultural defiance in which the very foundations of capitalism seemed to fall apart. Remarkably, in the face of the gathering storm, John Maynard Keynes, who in 1929-30 was still intensely preoccupied with interest rates, abruptly returned to political economy, which had informed his prophetic The Economic Consequences of the Peace (1919). In The General Theory of Employment, Interest, and Money, published in 1936, he took account of the organic crisis, involving soaring unemployment, labor unrest, ideological discord, and political struggle. Keynes also kept a keen eye on the emerging collective and planned economy in Soviet Russia, the antithesis of the capitalist system he looked to revitalize and preserve.

Indeed, the idea of economic planning gained traction in the West, though it was harnessed to different ends: the advanced countries resorted to it to restabilize their economies, while the beleaguered Soviets embraced it to force Russia’s headlong industrialization and military buildup. Planning was adopted by right-populist regimes as well: in response to the Kremlin’s first two Five-Year Plans, Nazi Germany launched a Four-Year Plan of its own to spur the Third Reich’s economic recovery and preparation for war. In general, however, the concept of planning became a rallying cry of the left’s drive for a progressive-reformist way out of the crisis: the New Deal in the U.S. and the Popular Fronts across Europe. One and all accepted Keynes’ premise that severe and acute capitalist downturns, not being “self-correcting” except at unacceptable costs, compel government and central-bank intervention.

Obviously, the U. S. at present is not undergoing a crisis remotely as deep and broad as that of the 1930s, which was at once economic, political, social, cultural, and ideological. But that does not mean the orthodox academic monetarists are any better equipped to repair the shaky system. Just as their theory and computer models failed to grasp the non-economic dimensions of the Great Depression, they cannot explain the upheavals of a capitalism radically different from that of the inter- and post-war years. Having survived the somber thirties, World War II, and the postwar chaos of 1945-55, capitalism grew ever more concentrated, multinational, and global. And the expanding U. S. empire became its linchpin and powerhouse.

This imperial factor determines America’s present strengths and frailties. Having crested but not yet approaching collapse, the U. S. empire is bound to become economically less profitable and politically less consensual. The cost of maintaining an overstretched imperium at a time of rising great-power rivalries is steep. Besides the gargantuan regular military budget, Washington must fund recurrent wars as well as countless foreign-aid, intelligence, and soft-power missions. These burdens exacerbate budget deficits largely financed by private and public foreign lenders, including sovereign wealth funds, thereby unsteadying the dollar.

The subprime fiasco and cumulative transnational credit crunch would simply constitute a classic burst bubble were they not intrinsic to America’s imperial enterprise and crusade. Whereas the classes reap the benefits of empire, the masses shoulder a disproportionate share of its costs. With wages and employment fragile in a de-industrializing economy, only deceptively cheap and opaque forms of credit—mortgages, home equity loans, charge cards—have kept the lower strata from calling into question the vast sums poured into America’s mission civilisatrice.

Marxist theorists once confidently predicted that capitalism’s accelerating swings of boom and bust signaled its imminent collapse. Today the power elite adapts that prediction to serve its own purpose: CEOs, bankers, economists, politicians, and talking heads warn that unless governments step in forcefully, globalizing capitalism will founder. These alarums are misleading not least because even under capitalism, polity and economy have been intertwined since the beginning. The ostensible separation of these spheres is a myth that shatters whenever the business cycle goes into a tailspin.

As early as 1910 the Social Democratic theorist Rudolf Hilferding published his treatise on the intensifying gyrations of capitalism with the then arresting title: Finance Capital: A Study of the Latest Phase of Capitalist Development. He was not the first Marxist thinker to counterpose unbridled free-market capitalism to its more advanced form, marked by galloping financial, industrial, and commercial concentration—but he may have been the most prescient. Many Socialists and Marxists, including Jean Jaurès, Lenin, and Rosa Luxemburg, postulated that Europe’s ruling classes, challenged by an increasingly militant working class, would press their governments to step up imperialist drives, partly to channel domestic distempers into the international system. Presently much of the European left uneasily hoped that imperialist rivalries would lead to a catastrophic European war fraught with revolutionary uprisings. Without minimizing the likelihood of such a turn, Hilferding emphasized the resilience of the established order, despite infighting in the ruling and governing classes. In his reading, capitalism and its supporting state seemed likely to emerge strengthened from periodic crisis-induced political interventions in the economy. Like Keynes after the Very Great War, he grudgingly conceded the dogged persistence of capitalism, with all its many and recurrent failings. And in fact, both more than weathered not just the Depression but the Thirty Years War of the 20th century, the Cold War, the shock of decolonization, and the rebellion of the wretched of the earth. Especially once Western and Central Europe were restored thanks to America’s pumping in Marshall Aid and brandishing the threat of Communism, capitalism reached unprecedented heights and spread all over the planet. It not only held Communism at bay and finally prevailed over it but also all but engulfed Social Democracy, whose legacy, in the form of the welfare state, is under assault in several European countries.

On one central point Marxists of all denominations have been dead-on: that as long as capitalism survived, consolidation and concentration would gain ground in key sectors of the advanced economies, including the epicentral financial one. As that process continued, business grew more intertwined with the state, reinforced by embattled governments during recurrent downturns. These slumps constituted milestones on the way to various types of state capitalism, including eventually those curious forms in post-Soviet Russia and post-Mao China. The state may not own or control most of the means of production and finance. But even in self-proclaimed laissez-faire America, the military-industrial-congressional complex is merely one arm of a huge octopus of mega-corporate-cum-state interests that reach into the four corners of the empire.

The magnitude of the crisis that struck capitalism in the 1930s is virtually unimaginable even in the midst of the sharpest contraction since then. During the Great Crash of 1929 shares on the New York Stock Exchange fell at amazing speed. At its nadir in 1932 the Dow Jones industrial average had sunk some 75%. By 1933, when Congress passed the Glass-Steagall Act mandating the separation of commercial and investment banks, some 4,000 banks had failed, a quarter of the U.S. work force was jobless, and national income had dropped by 50%.

The tidal wave from the U.S. soon smashed into Europe. At the time of the Wall Street Crash of October 1929, Weimar Germany already counted 1,500,000 unemployed. When Glass-Steagall was adopted that number had risen to over 6 million, or about a quarter of the working population; the National Socialists and Communists had scored respectively 13,400,000 and 3,700,000 votes in a presidential election, and Adolf Hitler was Chancellor. Other European countries were storm-swept as well, though to a lesser degree in most cases. Even assuming the U. S. had rapidly staged a recovery, it is doubtful that its benefits could have raced across the Atlantic in time to steady a Europe buffeted by Fascism and Communism and caught diplomatically between Berlin and Moscow. Nor could they have reached across the Pacific to help calm the waters in Japan and head off the invasion of Manchuria.

Today, the high-income world—the U.S., European Union, and Japan—is free of major ideological conflict, partly because capitalism holds sway over the entire world. Formerly communist nations such as China and Russia, long proto-socialist ones such as India, and even the Islamic nations have all taken the route to state or political capitalism. Globalization has raced ahead, reflected in the growth of multinational corporations, cross-border financial transactions, and high-speed telecommunications. In the advanced economies, the service and knowledge sectors are gaining on manufacture and industry, radically shrinking the number of unionized blue-collar wage-earners, their place taken by salaried white-collar employees in the private sector, struggling to organize. Wages and salaries are depressed by the fast-expanding labor pool in the emerging-market countries, and by migrant labor from these nations all over the world. Indeed, wanton globalization accelerates the emasculation of labor’s countervailing power throughout the so-called developed world.

And yet, despite the sea changes in capitalism, the powers that be insist on drawing close parallels between the Crash of 2008 and the Crash of 1929. Ironically, Federal Reserve Chairman Ben Bernanke is validated by his scholarly research on the Great Depression. He proposes to do all in his power to avoid the missteps that had led from Black Friday to the precipitous economic collapse. Hence his resolve to lose no time bailing out financial institutions that are vastly more sizable, concentrated, and international than they were 80 years ago—in the process making them even more so. In keeping with a socio-economic Darwinism driven by what Joseph Schumpeter called a “gale of creative destruction,” the big are getting bigger and stronger at the expense of the smaller and weaker, most notably in the financial sector in which a handful of large banks rule the roost.  Thanks to state-supported natural selection, Citigroup, Goldman Sachs, Bank of America, J. P. Morgan Chase, and Wells Fargo—which hold over 40% of the nation’s bank assets—win the day. So does American International Group (A.I.G.), the mammoth insurance corporation, which by way of Goldman Sachs is entwined with the entire Western banking system and operates in more than 100 countries. In the industrial sector, as a first step Washington is throwing a lifeline to General Motors and Chrysler. The radical streamlining entailed in such measures, including massive job losses and wage cuts, is treated as a secondary issue. Citigroup is laying off 52,000 of its 300,000 employees worldwide, and job cuts at General Motors are of the same order of magnitude.  Meanwhile gigantic mergers continue throughout the economy, driven by cost savings.

Clearly, what America exalts as democratic capitalism is itself becoming more concentrated and statist as it competes with the rising state-supported and -guided economies of the non-Western world, especially China, India, and resurgent Russia. In the early 1920s, when launching the New Economic Policy privatizing several sectors of the Soviet Union’s embryonic planned collectivist economy, Lenin insisted that its “commanding heights” (heavy industry, banking, foreign trade, and railroads) would continue to be owned and operated by the state. Nowadays ever-fewer gargantuan corporations, most of them with global dimensions, occupy the commanding heights of the U. S. economy. Governments pressed by well-funded and cleverly staffed lobbies further their interests and are primed to bail them out at the eleventh hour.

Nearly the entire political class proposes to contain the global financial crisis by re-regulating allegedly runaway markets and transactions. No one questions the rationale of American-style capitalism, driven by the pursuit of unrestricted profit and creative destruction. During his 18 years as chairman of the Federal Reserve, Alan Greenspan took for granted not only the ultimate self-regulation of the profit motive and of risk-taking markets but also the “evident acceleration of the process of creative destruction which has accompanied these expanding innovations and which has been reflected in the shifting of capital from failing technologies into those technologies at the cutting edge.” Even today the cream of academic economists and their patrons would not dream of questioning the iron imperative of profit- and efficiency-driven capitalist globalization whose end-purpose is to make the world safe for credit-card consumerism.

In the wake of September 11, 2001, President George W. Bush, as he declared war on world terror, bid Americans “go shopping” and “go down to Disney World in Florida.” On March 8, 2009, in the thick of the great recession, President Obama exhorted them not to “suddenly stuff money into their mattresses and pull back completely from spending.” Four days earlier Premier Wen Jiabao, addressing the yearly session of China’s Parliament, encouraged the Chinese to be less frugal and spend more on goods and services so as to boost domestic demand conjointly with a new stimulus package.

Aside from rescuing those mega-corporations fortunate enough to be “too big to fail,” the West has few ideas other than bailouts, tax adjustments, fiscal incentives, public spending, modulated protectionism, regulation of financial markets, and clampdowns on tax havens—all of it, according to President Obama, “entirely consistent with free-market principles.”  Tighter regultory scrutiny hardly seems a fail-safe prescription to repair the present unhingement and prevent future crises. The frequency and magnitude of capitalism’s convulsions are likely to keep growing along with its irreversible globalization, as foreseen by Marx. While it will be fiendishly difficult to police American bankers, traders, hedgers, and insurers, it will be all but impossible to design and enforce a global system of financial regulation for 192 sovereign states at different stages of development, with conflicting economic interests, social priorities, and political agendas.

Nevertheless, the political classes, economists, central bankers, and public intellectuals of virtually all nations cry out for a global response to the worldwide financial and economic breakdown. President Bush hosted a preliminary summit of the leaders of the G-20, or the world’s 20 largest economies, on November 15, 2008, just 10 days after America’s presidential election. Some European leaders grandiloquently called for a fundamental recasting or renewal of capitalism. But behind closed doors the officials focused on questions of control and transparency. For the gallery and the media they took turns excoriating the creatively destructive banking and corporate tycoons whose salaries, bonuses, and golden parachutes they mean to cap, cautiously. In other words, the power elite portrays the efficient causes of capitalism’s spasms to be random, personal, and moral rather than systemic, socio-economic, and political.  Hence the call not for fundamental reform but for purification, exorcism, and rehabilitation by means of a mix of hard national and soft transnational financial and market regulations.  Since Adam and Eve were driven from Eden, such efforts to purge the world of avarice and corruption have amounted to catching the wind in a net.

Globalizing free-market finance capitalism is inherently and increasingly crisis-prone.  But given the absence of a coherent and credible model of an alternative economy, polity, and society, the world seems not to be careening toward a historical crossroads, predictions to that effect notwithstanding. Precious few sober political parties or thinkers articulate a systematic critique of contemporary capitalism or propose a program of broad-based reform. It is preposterous for the pro-business French President Nicolas Sarkozy to claim that since the idea that the “markets are always right” is “crazy, . . . a certain idea of globalization is drawing to a close with the end of a financial capitalism that imposed its logic on the whole economy.” Washington’s prodigious financial, economic, military, cultural, and ideological power is not about to decline overnight in favor of Europe, Japan, China, and Russia, which blame American rampancy for the pandemic. Despite economic rivalries and diplomatic discords, the ruling classes of most “developed” nations fundamentally see eye to eye with their American counterparts. They do not long for a sudden twilight of U. S. power and demise of the dollar as the global reserve currency. Nor does Beijing, given its dire economic interdependence with America, despite its launching the idea of a “super-sovereign reserve currency.” To the rest of the world, the U.S. itself is too big to fail.

To the extent that the Crash of 2008 marks a turning point for capitalism, it lies in the shift from nationally framed microeconomic interventions to broadly coordinated multinational and macroeconomic ones. For the moment the stress is on cross-border policies not just to re-stabilize the world’s principal financial markets and economies but to revive the sputtering economies of lower- and middle-income countries—of the Baltic, Eastern Europe, and the “developing” world.  Ideology is being tossed to the breeze: while the leaders of the European Union, even more than their trans-Atlantic colleagues, readily fustigate authoritarian rule in China, the Gulf States, and Russia, they have few compunctions about pressing them to help bail out democratic capitalism. Before the Washington summit, Gordon Brown and Sarkozy urged autocratic capitalist economies to inject some of their vast hoards of hard currency into international credit arteries. Tellingly, when she stopped in China on her first whirlwind imperial tour, Secretary of State Hillary Clinton urged Beijing to keep buying U. S. Treasury bonds not only because they are a “good investment” but also because “we are in the same boat . . . we are truly going to rise or fall together.” Thanks to its trade surplus, China has a reserve of close to $2 trillion—nearly six times the reserve of the International Monetary Fund—while Russia and the Gulf states have amassed zillions in hard currencies, though these are for the time being cut in half. But if and when they do lend a hand, besides looking for a solid financial return they will exact a political price—above all a greater voice in the inner councils of the post-Bretton Woods global economic-financial order.

As for the U.S., if the crux of the crisis were purely fiscal and economic, it could be defused with relatively little difficulty and pain. Washington piled up a $455 billion budget deficit for the year ending in September 2008. It is expected to hit at least $700 billion in the next fiscal year, aggravated by huge trade deficits and interest payments on a multitrillion-dollar national debt. This overdraft on the future, which drains funds for public health care, education, and social welfare, could be reduced by slashing America’s enormous military expenditures, which continue to nearly equal those of all the other countries of the planet combined. In addition to the Defense Department’s base budget of $440 billion for fiscal 2007-08, the cost of the wars in Iraq and Afghanistan runs to at least $12 billion monthly. Scores of billions are spent on overseas military and economic assistance as well as undercover operations.

It is worth recalling that although in 1929 America was already a creditor nation, its military budget was negligible, and, with no empire to speak of, it faced none of the ancillary expenses either. Even so, it took the planned economy of the Second World War as well as postwar euphoria and imperial thrust for prosperity to kick in. Today the empire is still close to its zenith but beginning its bumpy downward course. Needless to say, though the presidential election of 2008 unfolded in the midst of two costly wars and grave economic hardships, neither of the candidates mentioned the exorbitant expense of imperial overreach. To the contrary: John McCain and Barack Obama squabbled over who would be more unflinching in pursuit of America’s imperial interest, which both invariably referred to as the national interest. The differences between the parties and their supporters are largely tactical and stylistic.  Early in his first term Obama declared that America “will maintain its military dominance” by doing “whatever it takes to sustain [the] technological advantage . . . of the strongest armed forces in the history of the world” so as to be able “to defeat and deter” both “conventional” and “unconventional” enemies.

Clearly the U. S. empire is not about to be sacrificed on the altar of fiscal responsibility.  Instead, the balanced budget will be sacrificed to the empire, especially since, like all such imperial exertions, the empire serves many purposes. Besides being profitable for basic sectors of the economy, it fosters America’s prestige, social cohesion, and cultural clout. Of course, the empire takes a heavy civil toll which cannot be reckoned in dollars: the deepening corruption of the political process by big money, particularly by powerful and lavishly bankrolled lobbies.  When reflecting on this scourge it pays to dip into Machiavelli’s Discourse on Livy and Montesquieu’s Considerations on the Causes of the Greatness of the Romans and Their Decline.

Though the American empire has passed its peak, it remains a hyperpower with enormous military capabilities to compensate for its frayed but still formidable soft or smart power. Empires do not decline, let alone fall, all at once, as Gibbon observed. After completing his magisterial Decline and Fall of the Roman Empire in 1788, he mused that perhaps instead of inquiring why Rome “was destroyed we should rather be surprised that it had subsisted for so long.”

Finally there is the question of whether the American empire, like Rome’s, will suffer rebellions among what Arnold Toynbee called the “internal” and “external” proletariat. Whereas in the U. S., Greater Europe, and Japan such rebellions could well be set off by the frustration of rising expectations, in the “developing” world they more likely will be fired by despair in the face of raw poverty and destitution spiked by a demographic boom, especially in times of galloping unemployment, declining wages, and volatile food prices.  Some 20% of the world’s 6.5 billion people live on $1 a day, 50% on less than $2, most of them in “developing” countries.  This material misery along with ecological blowback, rather than religious or ethnic discords, are the main triggers of popular and regime-threatening violence. .” In March 2009, on the eve of the G-20 meeting in London, Robert Zoellick, the American president of the World Bank, forewarned that faced with the first major shrinkage of the world economy and world trade since 1945, the emerging-market nations of the Third World “need investments in safety nets, infrastructures, and small and medium-size companies to create jobs and to avoid social and political unrest.” Or in the more pointed words of the open letter to the Washington summit by Ban Ki-moon, the confounded U.N. Secretary-General: “If hundreds of millions of people lose their livelihoods, and their hopes for the future are dashed because of a crisis for which they have absolutely no responsibility, the human crisis will not remain just economic.”

Arno J Mayer is emeritus professor of history at Princeton University. He is the author of The Furies: Violence and Terror in the French and Russian Revolutions.and Plowshares Into Swords: From Zionism to Israel (Verso).


Arno Mayer is the Dayton-Stockton Professor of History, Emeritus, at Princeton. He can be reached at