Anti-Democratic Nature of US Capitalism is Being
Exposed

   Bretton Woods was the system of global financial
   management set up at the end of the second World War
   to ensure the interests of capital did not smother
   wider social concerns in post-war democracies. It
   was hated by the US neoliberals - the very people
   who created the banking crisis writes Noam Chomsky

By Noam Chomsky
The Irish Times
October 10, 2008

http://www.irishtimes.com/newspaper/opinion/2008/1010/1223560345968.html

The simultaneous unfolding of the US presidential
campaign and unraveling of the financial markets
presents one of those occasions where the political and
economic systems starkly reveal their nature.

Passion about the campaign may not be universally
shared but almost everybody can feel the anxiety from
the foreclosure of a million homes, and concerns about
jobs, savings and healthcare at risk.

The initial Bush proposals to deal with the crisis so
reeked of totalitarianism that they were quickly
modified. Under intense lobbyist pressure, they were
reshaped as "a clear win for the largest institutions
in the system . . . a way of dumping assets without
having to fail or close", as described by James
Rickards, who negotiated the federal bailout for the
hedge fund Long Term Capital Management in 1998,
reminding us that we are treading familiar turf. The
immediate origins of the current meltdown lie in the
collapse of the housing bubble supervised by Federal
Reserve chairman Alan Greenspan, which sustained the
struggling economy through the Bush years by debt-based
consumer spending along with borrowing from abroad. But
the roots are deeper. In part they lie in the triumph
of financial liberalisation in the past 30 years - that
is, freeing the markets as much as possible from
government regulation.

These steps predictably increased the frequency and
depth of severe reversals, which now threaten to bring
about the worst crisis since the Great Depression.

Also predictably, the narrow sectors that reaped
enormous profits from liberalisation are calling for
massive state intervention to rescue collapsing
financial institutions.

Such interventionism is a regular feature of state
capitalism, though the scale today is unusual. A study
by international economists Winfried Ruigrok and Rob
van Tulder 15 years ago found that at least 20
companies in the Fortune 100 would not have survived if
they had not been saved by their respective
governments, and that many of the rest gained
substantially by demanding that governments "socialise
their losses," as in today's taxpayer-financed bailout.
Such government intervention "has been the rule rather
than the exception over the past two centuries", they
conclude.

In a functioning democratic society, a political
campaign would address such fundamental issues, looking
into root causes and cures, and proposing the means by
which people suffering the consequences can take
effective control.

The financial market "underprices risk" and is
"systematically inefficient", as economists John
Eatwell and Lance Taylor wrote a decade ago, warning of
the extreme dangers of financial liberalisation and
reviewing the substantial costs already incurred - and
proposing solutions, which have been ignored. One
factor is failure to calculate the costs to those who
do not participate in transactions. These
"externalities" can be huge. Ignoring systemic risk
leads to more risk-taking than would take place in an
efficient economy, even by the narrowest measures.

The task of financial institutions is to take risks
and, if well-managed, to ensure that potential losses
to themselves will be covered. The emphasis is on "to
themselves". Under state capitalist rules, it is not
their business to consider the cost to others - the
"externalities" of decent survival - if their practices
lead to financial crisis, as they regularly do.

Financial liberalisation has effects well beyond the
economy. It has long been understood that it is a
powerful weapon against democracy. Free capital
movement creates what some have called a "virtual
parliament" of investors and lenders, who closely
monitor government programmes and "vote" against them
if they are considered irrational: for the benefit of
people, rather than concentrated private power.

Investors and lenders can "vote" by capital flight,
attacks on currencies and other devices offered by
financial liberalisation. That is one reason why the
Bretton Woods system established by the United States
and Britain after the second World War instituted
capital controls and regulated currencies.*

The Great Depression and the war had aroused powerful
radical democratic currents, ranging from the anti-
fascist resistance to working class organisation. These
pressures made it necessary to permit social democratic
policies. The Bretton Woods system was designed in part
to create a space for government action responding to
public will - for some measure of democracy.

John Maynard Keynes, the British negotiator, considered
the most important achievement of Bretton Woods to be
the establishment of the right of governments to
restrict capital movement.

In dramatic contrast, in the neoliberal phase after the
breakdown of the Bretton Woods system in the 1970s, the
US treasury now regards free capital mobility as a
"fundamental right", unlike such alleged "rights" as
those guaranteed by the Universal Declaration of Human
Rights: health, education, decent employment, security
and other rights that the Reagan and Bush
administrations have dismissed as "letters to Santa
Claus", "preposterous", mere "myths".

In earlier years, the public had not been much of a
problem. The reasons are reviewed by Barry Eichengreen
in his standard scholarly history of the international
monetary system. He explains that in the 19th century,
governments had not yet been "politicised by universal
male suffrage and the rise of trade unionism and
parliamentary labour parties". Therefore, the severe
costs imposed by the virtual parliament could be
transferred to the general population.

But with the radicalisation of the general public
during the Great Depression and the anti-fascist war,
that luxury was no longer available to private power
and wealth. Hence in the Bretton Woods system, "limits
on capital mobility substituted for limits on democracy
as a source of insulation from market pressures".

The obvious corollary is that after the dismantling of
the postwar system, democracy is restricted. It has
therefore become necessary to control and marginalise
the public in some fashion, processes particularly
evident in the more business-run societies like the
United States. The management of electoral
extravaganzas by the public relations industry is one
illustration.

"Politics is the shadow cast on society by big
business," concluded America's leading 20th century
social philosopher John Dewey, and will remain so as
long as power resides in "business for private profit
through private control of banking, land, industry,
reinforced by command of the press, press agents and
other means of publicity and propaganda".

The United States effectively has a one-party system,
the business party, with two factions, Republicans and
Democrats. There are differences between them. In his
study Unequal Democracy: The Political Economy of the
New Gilded Age, Larry Bartels shows that during the
past six decades "real incomes of middle-class families
have grown twice as fast under Democrats as they have
under Republicans, while the real incomes of working-
poor families have grown six times as fast under
Democrats as they have under Republicans".

Differences can be detected in the current election as
well. Voters should consider them, but without
illusions about the political parties, and with the
recognition that consistently over the centuries,
progressive legislation and social welfare have been
won by popular struggles, not gifts from above.

Those struggles follow a cycle of success and setback.
They must be waged every day, not just once every four
years, always with the goal of creating a genuinely
responsive democratic society, from the voting booth to
the workplace.

  * The Bretton Woods system of global financial
  management was created by 730 delegates from all 44
  Allied second World War nations who attended a UN-
  hosted Monetary and Financial Conference at the Mount
  Washington Hotel in Bretton Woods in New Hampshire in
  1944.

  Bretton Woods, which collapsed in 1971, was the
  system of rules, institutions, and procedures that
  regulated the international monetary system, under
  which were set up the International Bank for
  Reconstruction and Development (IBRD) (now one of
  five institutions in the World Bank Group) and the
  International Monetary Fund (IMF), which came into
  effect in 1945.

  The chief feature of Bretton Woods was an obligation
  for each country to adopt a monetary policy that
  maintained the exchange rate of its currency within a
  fixed value.

  The system collapsed when the US suspended
  convertibility from dollars to gold. This created the
  unique situation whereby the US dollar became the
  "reserve currency" for the other countries within
  Bretton Woods.

(c) 2008 The Irish Times

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