The Ascendancy of Finance

Joseph Vogl, Simon Garnett

• Publisher: Polity
• Year: 2017
• Print ISBN: 9781509509300, 9781509509294
• eBook ISBN: 9781509509331
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Commercio e tariffe

The global financial crisis of 2008 ushered in a system of informal decision-making in the grey zone between economics and politics. Legitimized by a rhetoric of emergency, ad hoc bodies have usurped democratically elected governments. In line with the neoliberal credo, the recent crisis has been used to realize the politically impossible and to re-align executive power with the interests of the finance industry. In this important book, Joseph Vogl offers a much longer perspective on these developments, showing how the dynamics of modern finance capitalism have always rested on a complex and constantly evolving relationship between private creditors and the state. Combining historical and theoretical analysis, Vogl argues that over the last three centuries, finance has become a "fourth estate, " marked by the systematic interconnection of treasury and finance, of political and private economic interests. Against this historical background, Vogl explores the latest phase in the financialization of government, namely the dramatic transfer of power from states to markets in the latter half of the 20th century. From the liberalization of credit and capital markets to the privatization of social security, he shows how policy has actively enabled a restructuring of the economy around the financial sector. Political systems are "imprisoned" by the regime of finance, while the corporate model suffuses society, enclosing populations in the production of financial capital. The Ascendancy of Finance provides valuable and unsettling insight into the genesis of modern power and where it truly resides.

1
Functional Dedifferentiation

The Autumn of Finance

America, four days in autumn 2008. On the morning of Friday 12 September, the New York investment bank Lehman Brothers found itself facing bankruptcy, triggering a rapid series of emergency meetings between the American and British governments, the heads of central banks, large international banks and private investors. In March, the investment bank Bear Stearns had been forced to merge with JPMorgan Chase & Co., the deal secured by a state loan of $29 billion. Having bailed out the mortgage banks Fannie Mae and Freddie Mac with $140 billion in the summer, the US treasury secretary Henry Paulson now ruled out freeing up yet more taxpayers’ money for Lehman Brothers. On Friday evening, in the conference rooms of the Federal Reserve Bank of New York, representatives of US and European banks – including Bank of America, Goldman Sachs, Morgan Stanley, Citigroup, Barclays, Credit Suisse, Deutsche Bank and BNP Paribas – were told that a private sector solution would be necessary. Various investors would be involved, the risks shared. Bank of America, based in North Carolina, and Barclays of London both expressed interest. The insurance company American International Group (AIG) was now also reporting liquidity problems, and by the morning of Saturday 13 September it was apparent that, as one bank manager put it, the ‘wellbeing of the global financial system’ was at risk. The equally troubled investment bank Merrill Lynch was also seeking additional capital investment, fearing that a bailout of Lehman would defer the crisis to the next weak point in the system. After short and secret negotiations, Bank of America took over Merrill Lynch in the hope of gaining entry to the international investment sector. A bailout of Lehman Brothers was now off the cards.

Over the course of the Saturday, it emerged that the losses from Lehman were more drastic and the liquidity problems of AIG far greater than had been assumed. Barclays’ efforts to take over Lehman had also run aground. The bank had tabled a plausible finance plan, but before going ahead was required under British law to obtain the consent of its shareholders. Until then, it needed a financial guarantee of up to $60 billion, which no private investor was willing to put up. Time was short before the start of trading on Monday morning. In a series of telephone calls on Sunday 14 September between the US Department of the Treasury, the New York Federal Reserve, Barclays, the British chancellor of the exchequer and the British Financial Services Authority, it emerged that London was insisting on the consent of the Barclays shareholders, and would not approve a deal without a full financial guarantee. While London was pressing for a clear go-ahead from the US side, the Americans felt that they had not yet received a solid and unequivocal offer. At around midday, the Barclays option fell through. The US government and the Federal Reserve ruled out releasing more capital and, hoping that under the circumstances the financial markets would be prepared for the event, allowed Lehman Brothers to go bankrupt in the early hours of Monday 15 September 2008.¹ Banks are always rescued at the weekend. Or not.

Although the 2008 financial crisis began earlier, with the collapse of the American mortgages and property market in 2006 and the repeated liquidity squeezes on the interbank market from 2007, it was only after the ‘Lehman weekend’ that it escalated into a collapse of the global system. What happened next is well known. Measures taken to solve the problems only made matters worse. The Lehman bankruptcy triggered eighty insolvency proceedings in eighteen different countries outside the US. By the end of the year, fifty-three banks had folded or been nationalized. In the US, AIG was propped up with a $182 billion loan from the Federal Reserve. Washington Mutual and Wachovia went bankrupt; Bank of America and Citigroup were bailed out, and an aid programme of $700 billion was launched. After the failure of Bear Stearns, Lehman Brothers and Merrill Lynch, the only two investment banks left on Wall Street were Goldman Sachs and Morgan Stanley. Even these had to undergo a hasty and improvised transformation into bank holding companies under the umbrella of the US government. As events unravelled, international money market funds collapsed, the trade in money market instruments came to a standstill, share prices tanked, the capital and bond markets crashed, interest rates and risk premiums rocketed, and the vicious circle of liquidity crises, credit squeezes, insolvencies, bailout packages and state guarantees spread from the USA to Asia, Europe and Latin America. The collapse of the financial markets brought with it fiscal crises and developed into the notorious global economic crisis, with declining world trade, recession, tax deficits, contracting GDPs, state bankruptcies and growing unemployment. The impact of the autumn weekend of 2008 continued in the upheavals in the Eurozone and – however indirectly – has dictated government action in the form of debt caps, austerity programmes, privatizations, and employment and social policy.²

An Unheard-of Incident

In 2007, experts had still been confident that the worldwide financial system was stable and in robust health. As late as 10 September, representatives of high finance such as the CEO of Deutsche Bank, Josef Ackermann, were convinced that there would be no Lehman collapse. The events of September 2008 were hence inevitably seen as the end of a finance-capitalist belle époque, as an ‘Armageddon’, an ‘epochal catastrophe’, a ‘huge earthquake’, a ‘turning point’, and the ‘greatest melodrama’ of recent economic history.³ Remarkably, however, the fateful decision to let Lehman fail was not a real decision at all. Instead, a law of ‘unintended consequences’ set in, the events between 12 and 15 September 2008 taking on the dynamic of a novella by Heinrich von Kleist. Honest intentions, false hopes, misjudgements, adverse circumstances and inconsistencies, a mass of business interests, and public and political considerations merged with legal concerns and pressure to act, different worldviews, abrupt reversals, misunderstandings and obstinacies to produce a sequence of events in which the protagonists appeared responsible and yet utterly insane. Although the unprecedented events of 2008 were momentous for the global economy, subsequent reconstructions struggle to provide a reliable explanation. At best, it is possible to discern a kind of ‘structural irresponsibility’, action delegated and re-delegated many times over, distributed variously between private companies, central banks and government departments; taken as a whole, these produced an ‘unforeseeable accumulation of effects, a lessening of inhibitions, sudden irreversibility’.⁴ Finally, one is left with the observation that the decision was as unfortunate as it was unavoidable and that its logic found expression only in the subjunctive. As the US Federal Reserve director Ben Bernanke put it: ‘I think if we could have avoided letting [Lehman Brothers] fail, we would have done so.’⁵ At the end of Karl Kraus’ The Last Days of Mankind, a despairing God, referring to the disaster of the First World War, comments: ‘I never wanted this.’ Similarly, one of the protagonists of September 2008 remarked: ‘I don't know how this happened.’⁶

If that week of September 2008 can be seen as a key moment in the course of recent economic events, as a critical conjuncture at which the essential determinants of these events coalesced, then this is because the processes, practices and agencies active in them belong to the factors that impact directly upon the formation of political-economic power. Whether one interprets the events of September 2008 as the result of misfortune, as the cause of the global financial crisis or as its unexpected trigger, they should not be remembered simply as a bizarre episode with unpredictable consequences. What happened needs to be understood as an exemplary endgame, as an illustration of the creation, development and logic of policy-making processes in the financial-economic regime. The consortium of public and private actors, the improvised meetings, the secret deals, the urgency dictated by the movements of the financial markets – the events of 2008 demonstrate how all this determines the actions of government and the fate of contemporary economies and societies. From the hectic negotiations over the bailout of Lehman Brothers to the response to the European debt crisis, it is possible to observe an informalization of policy-making in the grey zone between economics and politics, a deregulation of its procedures and authorities. Expert committees, governmental bodies, commissions, working groups, ‘Troikas’ and ‘Merkozys’ legitimized solely by special circumstances, extraordinary events, exigencies or exceptions, have effectively taken over government.

Emergency

In 2008, the emergency paragraph 13(3) of the US Federal Reserve Act was used for the first time. It allows the Fed, in ‘unusual and exigent circumstances’, to exceed its legal remit and support ‘individuals, partnerships and corporations’ with ‘discounts’, i.e. public loans. The British government declared the bankruptcy of Iceland's banks to be an ‘extraordinary situation’ and used new counter-terrorism ...

Table of contents

• Cover
• Table of Contents
• Title page
• Copyright page
• Preface
• 1: Functional Dedifferentiation
• 2: Economy and Government
• 3: Seigniorial Power
• 4: Apotheosis of Finance
• 5: Fourth Power
• 6: Reserves of Sovereignty
• Index
• End User License Agreement