By Ben Cohen: When the massive economic crisis hit the US back in 2008, people struggled to understand how everything fell apart so quickly. Up until that point, the American economy was heralded by the media as a miraculous powerhouse embodying the principles of the free market and dynamic entrepreneurialism. The reality was that the economy was incredibly fragile and built on an insane amount of debt, mostly from the fraud ridden real estate bubble. Janitors were sold mortgages on multi million dollar mansions while the same lenders bet against them paying it off - an illogical and highly irrational consequence of extreme deregulation in the finance industry. When the debt was called in and no one was there to cover the losses, the economy fell apart destroying the myth of American capitalism.
My own understanding of economics at the time was not deep enough to fully comprehend what was going on. I had always understood that the system was rigged in order to preserve wealth for the wealthy, but I had not been aware of the enormity of the corruption and the systemic flaws that led to a such a huge recession and the near collapse of the world economy. In order to find out more, I got in contact with Professor Noam Chomsky, one of the clearest and most incisive economic thinkers around. As we approach yet another period of serious economic uncertainty - (this time stemming from the Euro Zone), I thought I'd re-post the interview as Chomsky's analysis of the current economic paradigm and the history behind it is extremely useful in understanding why we continually face such enormous threats:
TDB: What are your thoughts on the current economic crisis and the bail out bill that passed in the Senate?
NC: The crisis is real, it’s not manufactured. Exactly how serious it is, one doesn’t know. Some of the most credible specialists like Nuriel Rabbini who have a very good record of accurate prediction think it’s an extremely serious crisis and that the system might just freeze up. There is also a good deal of controversy about whether the current proposal will do more than put a band aid on a serious problem. Now there are alternatives, constructive alternatives. And they are being proposed, I mean, you can find them in the literature, but they are not on the agenda. It’s interesting, I mean the public is strongly opposed to the bailout, you can see that in the behavior of Congress, the House of Representatives where the Representatives come up for election in November voted it down, despite the enormous pressure. The Senate, which is kind of a millionaires club, where only a third of them come up for election, they passed it overwhelmingly. So the House did respond to a populist revolt. Superficially that looks like a sign of a functioning democracy, but that’s only superficial. I mean even a dictatorship, when the public is rioting, the government will respond. In this case, the public’s reaction was resorting to shouting ‘No’.
In a democracy, in a functioning democracy, what would be happening is that popular organizations, unions, political groupings, others would be developing their programs, putting them forth, insisting that their representatives implement those programs. And there are possible programs that might make a difference, but none of this is happening. And the reason this isn’t happening is because there is no functioning democracy. The role of the public is restricted to shouting ‘No’. The bill passed in the House because the alternative was quite dire, but it doesn’t mean it was a good proposal, or by any means the best proposal.
I mean there are serious problems, and they have deep roots. The immediate problems were caused by the housing bubble that Alan Greenspan had permitted to explode. They could have controlled it on the basis of the kind of lunatic belief in free market fundamentalism. So they allowed this bubble to explode and the houses were way beyond their trend line, the actual realistic price. They’ve been collapsing, but they’ve got a long way to go. The Bush economy, which was like the Reagan economy, is very fragile, and is based on debt – lenders from abroad, and also consumer spending which is debt driven. Consumer spending was largely based on inflated house prices, essentially collateral, and as the house prices collapse, so does the basis for consumer spending, then the economy collapses because its not a well functioning real economy.
All this goes back more deeply to the financial liberalization back in the 1970s. Now financial liberalization is just a catastrophe waiting to happen, and there are very well understood reasons for that. Markets have built in inefficiencies, serious inefficiencies which are well known. One of them is that transactions in a market do not take into account what are called ‘externalities’, so if you and I make some sort of a deal , say you sell me a car, we may make an arrangement that is good for us, but we don’t take into account the costs for others. And there are costs, traffic jams, pollution, the price of gas, and so on. They may seem small, but they’re not. They add up and they can be quite large. In the case of financial institutions, they are very large. A financial institution has the task of taking risks, and if it’s a well run institution, say Goldman Sachs, it tries to cover the potential losses to itself, but only to itself. It does not take into account what is called systemic risk, the effects of its failure on the whole system. So that means risk taking is what’s called ‘under priced’ – you are not really taking into account the risks, the real risks when you look after only yourself, and that means there is a lot more risk taking than an efficient system would permit. And that’s bound to lead to crisis, and it has ever since financial liberalization was initiated back in the 70’s. There has been an increase in both the regularity and the scale of financial crises, and now a major one has hit and come home. So it was predicted and predictable, and it’s now serious.
TDB: Does the nationalization of Fannie Mae and Freddy Mac and the enormous bailout on Wall Street represent an end to Laissez Faire capitalism?
NC: It’s not an end to Laissez Faire capitalism because it never existed! The nationalization is very dramatic right now, its all over the front pages, but the fundamental principle that the public takes the risks and pays the costs while profit is privatized, that principle which we are seeing dramatically right now, that’s a basic principle for the whole economy. I mean, the whole advanced economy is based on that principle. The state sector of the economy, which is dynamic and the source of much of the innovation and development that underlies the advanced economy, that is the system in which the public pays the cost and takes the risks, and profits are ultimately privatized. Take say, computers and the internet. They were pretty much in the state system for decades before they were handed over to a private enterprise to make profit from, and virtually everything you look at in the advanced economy and the cutting edge economy works like that. I mean there is now talk in the press, commentators talk about the socialization of risk and cost and privatization of profit, but they are talking about it as if it is something new, and a blow to laissez faire capitalism. It’s not new. That’s the way the system works, and has worked for centuries.
TDB: What did you think of Ron Paul and his brand of old style Repblican libertarianism? Was his philosophy based on mythology?
NC: It’s based on a myth if it assumes there was ever a free enterprise, or market economy that did not have critical state intervention. I mean there are societies that have real market economies. That’s what we call the Third World. They have it rammed down their throats by force. That’s part of the reason why they are the Third World. But the rich developed countries were always based on substantial intervention. I mean the mythology that is circulating now is mind boggling. I mean there is talk about Ronald Reagan the icon of free market capitalism, where on the congressmen said that ‘this bailout is putting a coffin on Reagan’s coffin”. Reagan was the most protectionist president in post war American history! He doubled protectionist barriers. He called on the Pentagon to initiate programs to teach backwards American managers modern Japanese style production techniques. He carried out one of the largest bailouts in American history, Continental Illinois. He may not have even known what the programs were, but his administration was a strong believer in large scale state intervention