Neoliberal Regimes, "A Turnning Back of the Clock"

The end of Capitalism's "Golden Age"

By Prabhat Patnaik

Neoliberal regimes reflect the supremacy of financial interests, are run on the principle that what is good for finance is good for the economy (and conversely that the interests of the economy are best served by serving the interests of finance).

Capitalism enjoyed a boom for nearly two and a half decades from the beginning of the 1950s, the like of which, over a comparable period, it had never experienced in its entire history.

With the unemployment rate down to unprecedentedly low levels, the workers were in a position to gain wage increases in tandem with productivity increases which were steep because of the rapidity of growth.

These wage increases, together with the Welfare State measures through which State expenditure was injected into the system (in addition, of course, to military spending in the U.S.

This was back-door State intervention. American spending on defense meant a significant improvement in the condition of the workers.

This improved state was widely considered at the time to have become a permanent feature of capitalism, a durable phenomenon from which further improvements were possible but there was no going back.

So firmly entrenched was this belief that several distinguished writers (including even John Strachey, at one time a front-ranking British Communist thinker) expressed the opinion that "capitalism had changed".

Two factors brought the so-called "Golden Age of capitalism" to an end.

The first was an inflationary upsurge, triggered by a money wage explosion that occurred all over the metropolitan capitalist world in 1968.

The precise sequence of developments that underlay or preceded this wage explosion need not detain us here, but it brought home the point that capitalism could not operate for long with such low levels of unemployment.

True, the higher wages made possible by such a small size of the reserve army of labour could be accommodated without either hurting the share of profits in the gross value of output.

Neither could it cause inflation (which arises when profit-share in gross value of output is sought to be protected), if the terms of trade could be turned against the primary producers, so that their share in gross value of output could be correspondingly squeezed.

But even if this could be done, as indeed it was and also to some effect since the inflationary upsurge came down proximately because of it, the capacity of this factor to sustain low unemployment had become severely restricted.

This was because the share of primary commodities, other than oil, in the gross value of output in metropolitan capitalism had already become quite minuscule, given the long history of past squeezes on the primary producers.

And oil prices were protected by a cartel, which, far from allowing a price-squeeze, administered to the world on the contrary an oil-shock, the first of its kind, in 1973.

Even the unequal world economic arrangement, spawned by imperialism, in other words, was no longer adequate to sustain for any length of time the levels of unemployment witnessed during the "Golden Age".

Such levels of unemployment achieved through State intervention made the system dysfunctional and presented to it two alternative possibilities:

State intervention had either got to be intensified, with intervention in demand management being supplemented additionally by intervention in the form of a prices and incomes policy; or it had to be reduced.

The initial "improvement" in short had given rise to the possibility of two alternative dialectics.

Given the balance of class forces, the dialectics of subservience to the logic of capital, which meant a retreat from Keynesian demand management and a triumph of "sound finance."

This was the cornerstone advocated by monetarism, with its fall-out in the form a much larger reserve army of labour, a weakening of trade unions, and a significant increase in the share of profits in GDP at the expense of wages, became the order of the day.

Our second "spontaneous" development contributed to the triumph of this dialectics of subservience to the logic of capital. This was the "globalization of finance" brought about through the process of centralization of capital.

The enormous accumulation of finance during the period of Keynesian demand management itself had created pressures for easing cross-border capital flows which had been restricted under the Bretton Woods system.

Keynes himself had been acutely aware that any economic intervention by the nation-State (other than in accordance with the dictates of finance capital) could not be sustained if finance was supra-national.

Advanced capitalist countries eased cross-border capital flows during the decade of the sixties, creating problems for "demand-management regimes", in Britain starting from the days of Harold Wilson's government and in France during the Mitterand Presidency in particular.

The neo-liberal regimes that have followed in the metropolitan capitalist countries since then (it is only very recently that they have been jolted by the world crisis and some intervention has once again come on the agenda).

They have been extended to the world at large, including to the third world, corresponding to the era of ascendancy of international finance capital.

They reflect the supremacy of financial interests, are run on the principle that what is good for finance is ipso facto good for the economy (and conversely that the interests of the economy are best served by serving the interests of finance).

These neoliberal regimes are marked by higher unemployment rates on average (even before the current crisis), a decline in the share of wages in value added (and even an absolute stagnation of late in real wages of workers in advanced countries), and a rolling back, wherever possible, of Welfare State measures.

In short, they represent, in varying degrees, a turning back of the clock, caused by the fact that the "spontaneous" tendency towards centralization of capital has given rise to the phenomenon of hegemony of international finance capital.

The belief that "capitalism has changed" which marked the post-war years of Keynesian demand management has been belied as the "spontaneity" of the system has once again asserted itself.

Goldman Sachs, Sacked

(Above) Lloyd Blankfein, CEO of Goldman Sachs, during testimony before the

Senate Homeland Security and Governmental Affairs Investigations Subcommittee

hearing on Tuesday.

Bu', we didn't do notin'.

By Susan Pulliam and Evan Perez

Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs or its employees committed securities fraud in connection with its mortgage trading. Prosecutors haven't determined whether they will bring charges in the case.

The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission, these people say.

The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group. Goldman and the trader say they have done nothing wrong and are fighting the civil charges.

Prosecutors haven't determined whether they will bring charges in the case, say the people familiar with the matter. Many criminal investigations are launched that never result in any charges.

The criminal probe raises the stakes for Goldman, Wall Street's most powerful firm. The investigation is centered on different evidence than the SEC's civil case, the people say. It couldn't be determined which Goldman deals are being scrutinized in the criminal investigation.

A spokesperson for the Manhattan U.S. Attorney's office declined to comment. Goldman declined to comment.

Goldman shares fell 2.6% in after-hours trading to $156.08 after The Wall Street Journal reported the news of the investigation. At the 4 p.m. market closing, Goldman shares were up 2.1%.

The development comes amid public calls for more Wall Street accountability for the industry's role in the financial crisis.

Though there are multiple ongoing criminal and civil investigations, no Wall Street executives connected with the meltdown have been convicted of criminal charges.

During congressional hearings this week into Goldman's role in the crisis, legislators grilled Goldman executives for nearly 11 hours.

The SEC and Justice Department often coordinate their actions on investigations. The probe underscores heightened efforts by the Manhattan U.S. Attorney's office in prosecuting white-collar and Wall Street crime.

It is in the midst of pursuing the largest insider-trading case in a generation, charging 21 individuals and negotiating 11 guilty pleas in that matter.

But the Goldman probe presents a significant challenge for the government. Prosecutors in the Brooklyn office of the U.S. Attorney last year lost a high-profile fraud case against two former Bear Stearns Cos. executives, in the first major criminal case linked to the financial meltdown.

Prosecutors had accused the Bear Stearns employees of lying to investors in 2007 about the health of two funds that eventually collapsed.

The case centered on what the government viewed as incriminating emails indicating the traders knew the mortgage market would fall but didn't disclose that view to investors.

To bring any criminal charges in the Goldman matter, prosecutors would need to believe they had gathered evidence that showed that the firm or its employees knowingly committed fraud in their mortgage business. Proving such intent to break the law typically is the toughest hurdle for prosecutors to clear.

Another stumbling block: Such financial cases can be highly complex. Few outside of Wall Street understand arcane products such as collateralized debt obligations, the pools of mortgage-related holdings at the heart of the SEC civil case against Goldman.

On April 16, the SEC charged Goldman and an employee, Fabrice Tourre, with securities fraud in a civil suit relating to a mortgage transaction, known as Abacus 2007-AC1, a deal the government said was designed to fail.

The SEC alleged that Goldman duped its clients by failing to disclose that hedge fund Paulson & Co. not only helped select the mortgages included in the deal but also bet against the transaction. Both Goldman and Mr. Tourre have denied wrongdoing.

Even the SEC's case, which is subject to a lesser standard of proof than a criminal case, is viewed as a challenge for regulators. The SEC's commissioners were split 3-2 along party lines on whether the agency should bring a case.

In battling the SEC charges, Goldman says its investors were sophisticated and knew the underlying securities they were buying. Goldman says it wasn't required to disclose who provided input into the deal or the views of its clients in the transaction.

The congressional hearing involved numerous other mortgage deals Goldman arranged in 2006 and 2007. Lawmakers criticized Goldman and its executives for allegedly stacking the deck against clients during the market meltdown in 2007.

Some of the emails released by regulators, lawmakers and Goldman suggest a callous attitude among Goldman employees toward the risks involved in some of the Goldman mortgage deals, including one in which a Goldman employee referred to a mortgage transaction the firm sold to investors as a "sh—y" deal.

Over the years, the government has been reluctant to criminally charge financial firms with wrongdoing because the charge itself can cause a business to implode. Some investing clients can't or won't trade with a firm facing such a taint.

Indeed, in the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges.

Securities firms E.F. Hutton & Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s.

In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court.

In recent years, some financial firms have agreed to "deferred prosecutions," in which they agree to a probationary period for which they won't commit any future wrongdoing.

That's what Prudential Securities Inc. famously did in 1994 when that securities firm faced criminal charges that it misled investors about the risks and rewards of limited-partnership investments.

Prudential agreed to a three-year deferred prosecution, as well as fines and restitution, to end a criminal securities-fraud investigation.

Behind The Goldman Sachs Curtain

"Greed is good" Inc.

By Janet Tavakoli

 

The New York Times published a Christmas Eve expose of Goldman Sachs's so-called "Abacus" synthetic collateralized debt obligations (CDOs). They were created with credit derivatives instead of cash securities. Goldman used credit derivatives to create short bets that gain in value when CDOs lose value. Goldman did this for both protection and profit and marketed the idea to hedge funds.

Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article, I wrote about Goldman's key role in the AIG crisis; it traded or originated $33 billion of AIG's $80 billion CDOs. AIG was long the majority of six of Goldman's Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest "investment grade" rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers.

Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing "profits?"

The answer is that they sold a lot of "hot air" disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.

If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been choked off years earlier. Instead, Wall Street was chiefly responsible for the "financial innovation" that did massive damage to the U.S. economy.

Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn't know the gun was loaded, then it is not in the public interest to rely on Goldman's opinion about the greater risk it now poses to the global markets.

Goldman excuses its participation by saying its counterparties were sophisticated and had the resources to do their own research. This is a fair point if Goldman were defending itself in a lawsuit with a sophisticated investor trying to recover damages. It is not a valid point when discussing public funds that were used to bail out AIG, Goldman, and Goldman's "customers."

Goldman claims the portfolios were fully disclosed to its customers. Yet at the time of the AIG bailout, Goldman did not disclose the nature of its trades with AIG, and Goldman did not disclose these portfolios to the U.S. public. If it had, the public might have balked at the bailout.

The public is an unwilling majority owner in AIG, and public money was funneled directly to Goldman Sachs as a result of suspect activity. The circumstances of AIG's crisis were extraordinary and without precedent. I maintain that the public is owed reparations, and it would be fair to make all of AIG's counterparties buy back the CDOs at full price, and they can keep the discounted value themselves.