Down Goes Another Bubble: A Conversation With Doug Henwood
Christian Parenti (Rail): About ten years ago we did an interview, and I thought we should revisit some of the same questions because, of course, reality has turned full circle and we’re in the midst of another bust.
Doug Henwood: Bigger bubble, bigger bust.
Rail: And this time a very serious bail out, very serious government intervention. What is your take on the bank bailouts, the TARP? I ask this because you have a position that’s different from many on the left.
Henwood: Some sort of bailout was absolutely necessary. We didn’t want a rerun of the bank collapse of 1929-32 when 10,000 banks failed. The implosion of the financial system led, in large part, to the Great Depression. We had to do something to prevent that from happening, we had to do something to prevent the credit machinery from imploding—to keep a crisis in confidence from getting completely out of control.
Of course, if you’re the kind of person who wants to see the whole system come crashing down, you don’t want a bailout; you want to see everything fall apart and hope that you can pick up the pieces. I’m not that optimistic that “we”—whoever “we” are—can do that. I was not willing to risk throwing scores of millions of people out of work on a political bet, a very long political bet. And so I thought that some kind of bailout was absolutely necessary.
However, what we’ve seen—first in the Bush administration and now from the Obama administration—is that the public is getting nothing in return for the vast amounts of money spent. We don’t know where the money is going—it’s completely opaque. The Fed has admitted that they either don’t know, or they’re not telling. There was an amazing exchange in Congress a few weeks ago between the Fed’s Inspector General, or whatever her title was, and a Republican congressman who was asking her where the money has gone. She was either incapable of giving an honest answer or didn’t know the answer but she just couldn’t even lie effectively. It was remarkable. We don’t know where all this money is going.
And we’re not getting any significant institutional change out of it. The Obama administration seems to want to recreate the status quo before the bust. They occasionally talk about creating a new economy, a new economic model, but they’re not really doing it. They really seem to be in awe of Wall Street power and unwilling to challenge it in any significant way.
Rail: Did you expect such problems with the bailout even if it was necessary? And why do you think the Obama administration has pushed the same old agenda?
Henwood: I didn’t expect a massive transformation from Obama. I knew he had a lot of support in Wall Street and is not the kind of guy to rock the boat. He’s not going to expropriate the expropriators. But, with Wall Street in such disgrace, people around the world and across the political spectrum think that Wall Street and its allies in other countries had a lot to do with wrecking the economy. Obama could have moved aggressively to re-regulate and create a more stable, public-spirited financial sector. Take a look, for example, at Larry Summers: ten years ago, he was very critical of finance, very critical of speculation, wondered about what kind of securities markets we really needed. He asked some very interesting questions. Now here he is ten years later, and he’s made a lot of money on Wall Street. He made five million dollars in 2007-2008 working one day a week for a hedge fund. So the bankers walked all over Obama. I didn’t expect much, but I did expect a little more.
Rail: Why do you think the bankers won?
Henwood: There are two parts to that. The longer term structural issue is that Wall Street, the financial system, is basically a mechanism for the creation and exercise of ruling class power. It is the heart of the capitalist economic and social system. So taking on Wall Street is very, very complicated.
But, there is also the sense in which these guys represent a social interest that has done very, very badly and they could have had their toes stepped on a bit—and they haven’t. If you go back and compare when Roosevelt gave that speech to the Democratic Convention in October 1936, he said: “Never have the rich and powerful been so lined up in their hatred of a political candidate and I welcome their hatred.”
You cannot imagine Obama saying anything remotely similar. That’s partly because the bust has been less dramatic than it was in the 1930s, but also because Roosevelt came from the aristocracy and thus had more personal confidence in stepping on their toes. Obama is a guy who has been created by the meritocracy and it has treated him very well. He’s kind of in awe of wealth and power and much less willing, for personal reasons, to challenge such interests.
The political environment is also totally different now. Going into the 1930s—there was a whole radical tradition: the populist tradition, the progressive tradition—there were people who had different ways of looking at an economy. The Soviet Union was looking pretty strong in 1930. Now none of those things are true. If you put that combination of politics and personality together you get what we have now—a real unwillingness to challenge the existing financial order. Instead, there is a kind of enthusiasm about restoring it.
Rail: Were the sums involved in the TARP required by the scale of the crisis?
Henwood: Yes, the scale of the crisis was huge: trillions of dollars, there is no doubt about it. They might even need more money further on. It’s very strange now to see banks very eager to return TARP funds, trying to pretend that they didn’t really need it in the first place.
Rail: But some of them didn’t. There were banks that took it without really needing it as life support.
Henwood: Yes, that’s true, but the financial system is still very, very sick, and the idea that they’re trying to spread around that we’re out of the woods is, at the very least, quite premature.
Rail: Getting back to the obsequious position of the Obama administration vis-a-vis Wall Street, how much of that is ideological and how much of that is about campaign donations, pure tactical electoral calculus? The fact is the financial sector tends to be more socially liberal. Obama can never really seduce and shakedown Exxon/Mobil or the oil sector, but he can seduce Wall Street for re-election money.
Henwood: I think it’s all of those things. There is a lot of ideology involved, the ideology that still has not yet died is that markets are basically efficient, even if they sometimes get out of control. Obama himself, in an interview in the Wall Street Journal, was saying that he is basically a markets kind of guy. They just need “rules of the road.” That’s one of his favorite expressions—they need guidance, regulation. If you provide that framework, markets tend towards stability, sanity and rationality.
So there is this ideology that has not been shaken, the fundamental belief in the rationality of the market. It really took hold in the 1970s among the ruling elites after a lot of uncertainty, and it has not been shaken. There’s nothing yet that’s challenged it, nothing yet that’s even begun to take its place. But there are also several other things involved—Wall Street is an enormous campaign contributor, they have spent vast amounts of money lobbying and influencing the shape of legislation. Over the last decade or so, Wall Street spent about five billion dollars trying to influence legislation. For Wall Street, that is not a lot of money, but in Washington it makes a big splash. So they had that power: they bought congressmen; they bought legislation; they bought think tanks; they bought the discourse.
There are also a lot of people on Wall Street who are socially liberal. They feel more comfortable with someone like Obama, rather than with a yahoo like Bush. There was a certain Republican branch on Wall Street that was behind Bush. Goldman Sachs for a while became a Republican firm during the Bush years, after having been a Democratic firm. Now, once again, it is very Democratic. There is Steve Schwarzman of Blackstone, who was a big Bush contributor, one of the big private equity guys. There are several others who are very pro-Bush. He did reduce their taxes in a very large way, and that creates a strong degree of personal loyalty. But there’s also a very substantial portion of Wall Street—more than other business sectors in the United States, with the exception of showbiz—that tends to be more Democratic and more liberal, and thus more comfortable with the likes of Obama rather than McCain.
Rail: So, if both parties are going to keep your taxes low, might as well vote for the one that will pave your streets and allow your daughter to have an abortion if she gets knocked up at Sarah Lawrence.
Henwood: [Laughter.] Yeah. It’s also a cultural issue. I think they feel more comfortable with someone who is comfortable with language and thinks complexly and likes the kind of art they do, the kind of culture they do compared with a yahoo like Bush who pronounced “insurance” with an accent on the first syllable.
Rail: Speaking of accents on the first syllable. What about “inflation” versus “stimulus?” There is a burgeoning debate about this in the mainstream media. There are “green shoots” of recovery now so the financial hawks are coming out making arguments for austerity. And even some on the left fear inflation down the line. Why should one take the position of stimulus versus fighting inflation at this point?
Henwood: This is demented and dangerous. The European elites have been much more austere throughout this. There’s much smaller stimulus coming out of Europe, and they’ve been very quick to talk about returning to austerity and fiscal tightness. The Swedish Finance Ministry was saying that we need to raise taxes and cut spending. I think the worst of the financial crisis is probably behind us, but we’re still not anywhere near a return to prosperity. And to talk about raising taxes and cutting spending at this point is crazy and frightening. It’s a good thing that the American situation is not quite so austere, but we’re still a little irresponsible about these things.
I’ve looked at the history of financial crises—the IMF has a database of the financial crises of the past thirty or forty years—and the outcomes of most of those have gone like this: a long period of a very weak economy, declining inflation, very weak job growth, high unemployment, very slow, weak recovery. The last thing you need to worry about in that kind of post-financial crisis environment is inflation. There’s just no historical justification for it. Inflation fears are just a knee-jerk reaction that I don’t even think can be justified by material interests; it’s just an ideological, stupid reaction that really doesn’t have any basis in history or reality.
Rail: And the numbers don’t support it, right? I mean the consumer price index finally sort of inched up but it has been declining, prices have been deflationary for most of the year.
Henwood: Right. I mean, we had the energy price spike, the collapse in oil prices, then a gradual rise. We’re back above 70 dollars a barrel now, so those things kind of cloud the inflation picture, but the fundamentals are this: declining wage pressure—the labor market is very, very weak—to get a really serious inflation going you need tight labor markets, rising wages, and falling productivity. We don’t have any of those things right now.
We had a commodity price boom 2006-2007 that fell apart. We have had a little return to that. But the idea that because of all this bailout money, because of the central banks pumping so hard, because of the government’s deficit spending so much—that this will lead to an inflation is insane.
There’s no private lending going on now, it’s all concentrated in the public sector...
Rail: Which is to say there’s no private investment...
Henwood: There’s been a complete collapse in private investment. Capital spending is very, very weak. I was just looking at the first quarter “flow of funds” figures for the U.S.: borrowing and lending in the private sector has just thoroughly collapsed. The only sector that’s doing any lending is the Federal Reserve. The only sector that’s doing any major borrowing is the federal government. Everyone else is retrenching, and that’s not the kind of environment that generates inflation. It will take years before that could possibly turn around.
Rail: What do you think of the de facto nationalization of large portions of the automobile industry?
Henwood: It’s amazing the hoops the auto industry had to jump through. The humiliation they had to suffer compared to what the financial sector dealt with. The auto industry has been vilified as dinosaur-like or fully incompetent, whereas the financial sector has pretty much gotten a blank check. GM and Chrysler have had to submit all kinds of elaborate plans for restructuring, and they had to argue for their long-term viability. JP Morgan and Goldman Sachs never had to go through that. In this culture there is something about people who make things, they have a much lower prestige than people who trade in fictitious capital.
Rail: What is your take on the role of the green economy, or green technology, green investment, a re-tooling of capitalism within the possibilities and parameters of American and global capitalism?
Henwood: Well if we look at the long sweep of things, to generate growth in capitalism you need some sort of leading sector, you need some sort of transformational technology that spreads throughout the economy. In the second half of the 19th century, there was an industrialization of the United States, there was the growth of steel mills and railroads, the development of an industrial infrastructure. That was really the dynamic sector that drove growth in the end of the 19th century.
In the 1920s we had radio, cars, things like that that really transformed the economy and the nature of daily life. After World War II we had suburbanization, the cars, all the housing developments that really transformed the nature of daily life and generated this long-term economic boom.
That all ran out of steam around the 1970s. We haven’t really had a dynamic, leading industrial sector since. There was an attempt to make technology that leading sector in the 90s. It worked for a little bit, but it really didn’t generate the kind of boom we saw in the 19th century or part of the 20th.
We need one of those now to get out of this. If we don’t have some sort of new leading sector, we have a long period of a very stagnant and troubled economy ahead of us. And I think there’s very good reason to believe that some sort of green technology could do that. It could preserve life on earth, presuming that we want to do that, but it could also generate a long term economic boom that would transform daily life and create whole new dynamic economic sectors, dynamic technologies that would lead to long-term growth in incomes and employment. Without that, I don’t see what’s going to do that, and it’s going to take a dynamic public sector to encourage that.
Rail: To initiate another long wave of accumulation with a new sector based on new technologies, there has to be the de-valuation, the write-off, the euthanasia of old sectors. That is sometimes produced organically by the market—creative destruction. Some sectors are over-valued and nobody is going to buy anymore and they die. But to some extent, such a change is political, right? Because some of these sectors are themselves artificially produced: they are the product policy, like armaments or fossil fuels, so there really has to be a shift in policy to kick-start the next wave. Or am I misunderstanding?
Henwood: No, you’re right about that. And for the sake of life on earth we have to snuff out the oil sector, and the oil sector is deeply embedded in the Republican Party. You’d think the Democrats could at least think of doing that, but they’re not doing that. And you also need to have a lot of government subsidies to create the new sector. You need basic R&D subsidies—the private sectors aren’t going to provide those. Look at computers and the Internet—in the 50s, 60s, and 70s that was developed and built with Pentagon subsidies.
Rail: Or conversely, high end automobiles and aircraft in the 30s and 40s, leading up the war.
Henwood: Right, the aircraft industry in the U.S.—Boeing is deeply subsidized by Pentagon contracts. McDonald Douglas depends on Pentagon contracts. Or the U.S. pharmaceutical sector. If you look at any of the sectors where the U.S. is still very competitive internationally—aero-space, airplanes, pharmaceuticals, computers, software, and that sort of thing—all of these things have very deep government involvement. To get some kind of new transformational energy sectors, clean technology is going to require deep government involvement, expenditure of large sums of money.
What we have now is subsidies that attempt to restore the Old Order. The government is going to own GM, and a large chunk of Chrysler. What are they going to do with this? Are they really going to force them to create electric vehicles? I doubt it.
Rail: Anticipating your next book, let’s discuss the American ruling class: What was it, and what is it?
Henwood: [Laughter.] Well, you know it was once the WASP elite, but there ain’t none of that now. I think one of the problems of the United States is that there is a great deal of incoherence at the upper level, that unlike the WASP ruling class, there is no social formation that can think in the truly long-term, that can think beyond the short-term concerns about the accumulation of money, the most amount of money in the quickest possible time.
I thought for a while there was a possibility that the Obama administration would represent some kind of a post-gilded-age, capital P progressive era reconstruction of the American elite. That has not happened yet. It seems they’re still the same old gang, stumbling onwards. But if the economy still stays weak, which I think it will over the coming years, that may change. They may realize, perhaps, that they need to pull their shit together and come up with a longer-term strategy for accumulation and growth.
Rail: And what caused that decomposition of the American ruling class? Was it the cultural wars and the invasion of the institutions through which they held their power, not just by other races and genders, but by other classes, the post-war meritocratic structure that undermined the old coherence? Or was it an economic shift? Was this old WASP elite connected to certain sectors of the economy that went into decline?
Henwood: Well, it’s a very insular formation. They were able to incorporate new elites, they were very snobby, anti-Semitic, very racist, and often that was part of the problem. There was also the rise, especially in the 1970s and 80s of the sunbelt elites based on different industries than had been dominant in the previous decades. So that, and then there was a general dissipation in a kind of sociological sense of the WASP elite that had gotten too decadent and too lazy sliced their fortunes too thin by inheritance and inflation. There was a rise of a whole new set of fortunes, new money, you know, the enormous creation of new fortunes in the 80s and 90s meant that all that old WASP money looked like pocket change after awhile.
I think all those things put together led to the decline of the old WASP elite. But what took its place was nothing terribly coherent, the WASPs went to the same prep schools, went to the same colleges, married each other, and it was very coherent social formation. The competing elites that succeed them were not at all a coherent social formation, very disparate geographically, socially, and economically. I think they need some sort of reconstruction, some sort of new coherence if they’re going to reinvent themselves for a new period of accumulation and world domination.
It’s quite possible they could. The American ruling class has reinvented itself many, many, many times over the centuries, so that’s always possible, but right now it still seems like a very incoherent formation.