Four ways the recession could change U.S. capitalism

Just as the Great Depression changed the course of American capitalism, the “great recession” promises to nudge it in new directions. Nowhere are the pressures for change greater than in banking. Critics from the right and the left are calling for tough reforms.

For example, without reform in Congress, the nation’s biggest banks could in effect become “public utilities,” warns Henry Kaufman, a veteran Wall Street economist and hardly a leftist. In a new book, “The Road to Financial Reformation,” he suggests that the biggest financial institutions need to shrink by spinning off assets. Otherwise, the 20 largest conglomerates will remain too big to fail and federal regulators would have a huge incentive to, in essence, socialize them and play a role in allocating credit. In 1990, the 20 largest companies controlled 12 percent of US financial assets, he points out. Today, they control more than 70 percent.

Not rescuing the banking giants last year would have led to chaos and a real depression, Mr. Kaufman argues in a phone interview. But he’s concerned that the will to make decisive reforms is diminishing as the financial crisis fades.

Some activists are gearing up to keep the political pressure on.

“While ordinary Americans are still struggling to stay afloat, the bankers are back to business as usual, paying out billions in bonuses, making profits on the backs of taxpayers who bailed them out, and throwing out roadblocks to meaningful regulatory reform,” notes a new study by the Service Employees International Union (SEIU).

Actual and potential costs of the financial rescue put US taxpayers on the hook for $17.8 trillion, more than the annual gross domestic product of the US, that is, its output of goods and services, the SEIU calculates.

So the union, the nation’s largest, is planning dozens of demonstrations across the US to press Congress to reform meaningfully the financial system so that such a disaster can be avoided in the future. These gatherings will culminate at the annual meeting of the American Bankers Association in Chicago in late October when community and farmers groups will join union members in demanding reform, says Stephen Lerner, assistant to SEIU’s president.

There are other ways the great recession could push American capitalism in new directions: deglobalization, for example.

The internationalization of finance and trade could partly reverse course as nations seek greater control of their own economic fate, says Mark Weisbrot, codirector of the Center for Economic and Policy Research, a liberal Washington think tank. He calls it “a return to sanity.”

Another forecast: Wealth and income, which has been increasingly concentrated at the very top of the income ladder in recent decades, will be spread more evenly. Some 85 percent of 2002-07 income growth went to the top 1 percent. But since then, stock market and property losses of the well-to-do have begun to reverse the trend. Mr. Weisbrot maintains that more competition in business and finance could keep that process going and help prevent a revival of greater income being shoved into the hands of the rich. “The right-wing drift has probably reached its peak,” he says.

Mr. Lerner blames the depth of the recession partly on the fact that middle-income and poor Americans had benefited so little from economic growth in recent years.

A final forecast is already widely anticipated: The size of the US government will increase modestly because of antirecession efforts and possible healthcare reform.

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Comments (2)

  1. Submitted by Tim Nelson on 10/13/2009 - 04:25 pm.

    I don’t know why a massive welfare program wasn’t mentioned. Seems certain, not just kinda likely to happen.

    And then there is the moderate income tax rate. Not the one at 94%, or the one at 35%, but the moderate income tax rate increase for the highest earners of around 75%.

    The private sector were very good economic citizens, up until the tax cuts in the 80’s. Since then we have potential capital-building going in all sorts of directions.

    The failure of the tax cuts are the economic bubbles all around us.

    These two things are simply cause and effect, as opposed to cheer-leading on my part. History is not partisan, maybe a harsh mistress, but not very partisan.

  2. Submitted by Richard Schulze on 10/14/2009 - 07:00 am.

    What we’re witnessing here is pretty simple: another bubble in financial assets. All that “liquidity” created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown.

    Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again.

    The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research.

    What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

    It is tricky to balance monetary and fiscal policy. It appears the next stimulus package will include an extension to the inefficient first-time home buyer tax credit which does nothing to eliminate the home inventory that has a three year backlog.

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