Michael Hudson: Bankers versus democracy

Last week's trillion dollar bail-out of the Greek economy is another step towards the triumph of financial capital over democratic politics. A mere two years after the largest financial crisis since the 1870s, and with only rather superficial responses so far (for example, the countermeasures against tax havens are nothing short of pathetic), the madmen who created this mess now stand to make a financial killing, as will foreign bondholders, buyers of credit default swaps, speculators in Euro-swaps, and other hedge funds. The losers will be taxpayers, in this instance in Greece (if the deal remains intact, which is in question). This means, largely, middle and lower income households -- since the wealthy elites and a huge proportion of the Greek professional and business classes have turned tax evasion into a national sport. (and note our recent Greek blog pointing out a huge blind spot in the economics profession's understanding of what went wrong.

But the Greek story is just the start of a new chapter in over a century of struggle by democrats to wrest control of the economy away from landed and financial elites whose interests were (and are) in direct conflict with those of the public at large and real entrepreneurs. The great political successes of the 20th century were largely driven by struggles to restrain and reduce the overbearing powers of land-owners, usurers and other rent-seeking classes. Progressive taxation, capital controls and market regulation were the tools of choice for most democrats. As American economist Michael Hudson notes in his excellent new article The People v. the Bankers:

Classical political economy was a reform program to tax away the "free lunch" of land rents, monopoly rents and financial interest extraction. John Maynard Keynes celebrated this program in his gentle term, "euthanasia of the rentiers."

For 30 years after 1945 it appeared that this struggle was going against the rentier classes. During the period known by the French as 'les trentes glorieuses', progressive taxation in most OECD countries transferred wealth away from landed elites and financiers, without detriment to economic growth and political stability (quite the contrary, in fact: it was the period of fastest growth in modern history, around the world). Despite massive indebtedness carried forward from World War Two, most European governments were able to create public health, education and pension programmes of astonishing ambition.

The landed and financial elites were never going to give up without a struggle. They funded numerous think-tanks and 'independent' academics to undermine the social contract and denigrate state intervention. Covertly they created offshore tax havens to hide their wealth and circumvent regulatory authorities. As Naomi Klein explains in The Shock Doctrine, her compelling account of the rise of disaster capitalism, they used every trick in the book to brutally regain their political and economic dominance.

Until the energy market crisis in the mid-1970s, political conditions mitigated against direct attacks on the post-war consensus of the mixed market economy. The OPEC-led price rises changed that situation dramatically, providing the crisis that right-wingers could exploit to seize real political power, first in Chile (under Augusto Pinochet), then Britain - under Mrs Thatcher - and then the United States under Reagan. They also gained the upper hand at the World Bank and International Monetary Fund, using these institutions to impose programmes of tax cuts on wealth, privatisation of publicly-owned assets, and the financial market liberalisation programmes which culminated in ever-deepening systemic crisis.

One of the central elements of the rise of Wall Street capitalism was the use of secrecy jurisdictions, and especially the London-focused Eurodollar market, to escape New Deal regulations and grow in its own unregulated space.

The Washington Consensus, which has dominated political economic thinking since the 1980s, dramatically reversed the democratic gains of the previous 30 years. Political and economic power shifted from elected politicians to unelected and unaccountable central bankers and IMF staffers. The tax reforms of the earlier period, which largely succeeded in taxing land and economic rents from unearned price gains on real estate, stocks, and bonds, were reversed. Financial services were largely deregulated. Whereas the post-1945 period yielded political stability and economic growth, the subsequent ascendancy of 'neo-liberalism' has yielded catastrophic financial market instability, rising inequality, collapsing public services, and subordination of public interest to the financial sector. As Hudson puts it:

Instead of the economy's most important sector - finance - being subject to electoral politics, central banks (the designated lobbyists for commercial and investment bankers) have been made independent of political checks and balances. . . Right-wingers in Europe and the United States (such as Fed Chairman Ben Bernanke) call this the "hallmark of democracy." It actually is the stamp of oligarchy, stripping away control over the economy's credit allocation - and hence, forward planning - while giving high finance a stranglehold over public spending programs.

The stakes here are enormous. What is at issue in Greece, Portugal, Spain, Britain, the US, - in fact, pretty much everywhere - is whether states will act to protect public interest against unregulated predatory financial interests and tax evaders, or whether states will concede their power to creditors, thereby abandoning capital investment programmes, public social spending and rising living standards for the majority.

The fight-back by Greek militants shows that financial interests have not totally won their battle for control over democratic states. Elsewhere, according to Hudson, people have lost confidence in their ability to control democratic institutions to shape their own destinies:

America’s Tea Partiers and anti-tax rebels have given up the fight to reform governments. Squeezed by debt from which they see no escape, they demand lower taxes – and are willing to see the highest brackets become the major beneficiaries in an even more regressive tax shift. Faced with the corruption of Congress by lobbyists acting on behalf of the vested interests, they reject government itself and seek safety in local gated communities. They see Congress and parliaments throughout the world losing autonomy to the IMF, the EU and other Washington Consensus organizations seeking to impose austerity and shift the tax burden onto labor and industry, off property and off predatory finance.

This is the grand narrative within which TJN's battle against tax havens must be located. Tax havens have played a major part in freeing banks, hedge funds, private equity firms, and wealthy elites generally from the regulatory controls and progressive tax systems that previously constrained them until the mid-1970s. Having mustered their forces, they used tax havens to roll back progressive tax regimes, promote regional tax wars (or, to use the more traditional but less appropriate term, tax competition), and undermine the ability of democratic states to fund their programmes.

Any attempt to reverse the steady drift towards regressive tax systems and further debt squeeze on governments must begin with comprehensive measures to restrict the use of tax havens. Until such time as this is done, progressive governments will inevitably be held hostage by predatory financiers. It is therefore time to recognise tax havens for what they are: a threat to democracy.

Michael Hudson's article, The People v. the Bankers, is here.

PS Its heartening to see that senior bankers, very few of whom have shown genuine remorse for the appalling mess they created, are now being directly targetted by American activists. This is long overdue: their continued greed, arrogance and sheer incompetence makes them legitimate targets for protest.