Why Save the Bankers?: And Other Essays on Our Economic and Political Crisis
240
Why Save the Bankers?: And Other Essays on Our Economic and Political Crisis
240eBook
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Overview
Thomas Piketty’s work has proved that unfettered markets lead to increasing inequality, and that without meaningful regulation, capitalist economies will concentrate wealth in an ever smaller number of hands, threatening democracy. For years, his newspaper columns have pierced the surface of current events to reveal the economic forces underneath.
Why Save the Bankers? collects these columns from the period between the September 2008 collapse of Lehman Brothers and the November 2015 terrorist attacks in Paris. In crystalline prose, Piketty examines a wide range of topics, and along the way he decodes the European Union’s economic troubles, weighs in on oligarchy in the United States, wonders whether debts actually need to be paid back, and discovers surprising lessons about inequality by examining the career of Steve Jobs. Coursing with insight and flashes of wit, these brief essays offer a view of recent history through the eyes of one of the most influential economic thinkers of our time.
“Easy to follow for readers without much knowledge of economics, especially when [Piketty] picks apart topics that defy classical economic logic; in this he resembles Paul Krugman, who similarly writes clearly on complex topics . . . Helps make sense of recent financial history.” —Kirkus Reviews
“Anyone with an interest in politics, monetary policy, or international diplomacy will get a kick out of Piketty’s clear discussion.” —Shelf Awareness
“If you have been influenced by Piketty’s landmark work on inequality, make sure to read this next.” —Naomi Klein, author of The Shock Doctrine and This Changes Everything
Product Details
| ISBN-13: | 9780544663299 |
|---|---|
| Publisher: | Houghton Mifflin Harcourt |
| Publication date: | 06/01/2018 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 240 |
| Sales rank: | 997,637 |
| File size: | 2 MB |
About the Author
Read an Excerpt
CHAPTER 1
WHY SAVE THE BANKERS? 2008–10
After more than a year of rising financial turmoil beginning in 2007, the crisis reached a climax on September 15, 2008, when Lehman Brothers filed for bankruptcy. This period witnessed a series of unprecedented government interventions aimed at restoring stability to the markets, including the Troubled Asset Relief Program (or TARP, a proposed $700 billion bailout) and billions of dollars in below-market loans and credit guarantees extended by the U.S. Treasury and Federal Reserve to a wide range of nonbank financial institutions that had never benefited from such assistance before. Many asked whether these moves marked the beginning of a new era of interventionist economic policy.
WHY SAVE THE BANKERS?
SEPTEMBER 30, 2008
Will the financial crisis lead to the return of the state on the economic and social scene? It's too early to say. But it's useful to dispel a few misunderstandings and to clarify the terms of debate. The bank rescues and regulatory reforms undertaken by the American government don't in themselves constitute a historic turning point. The speed and pragmatism with which the U.S. Treasury and Federal Reserve adjusted their thinking and launched temporary nationalizations of whole swaths of the financial system are certainly impressive. And though it will take some time before we'll know the final net cost to the taxpayer, it's possible that the scale of the interventions underway will surpass levels reached in the past. Sums between $700 billion and $1.4 trillion are now being discussed — between 5 and 10 percent of U.S. GDP — whereas the savings and loan debacle of the 1980s cost around 2.5 percent.
Still, to a certain extent these kinds of interventions in the financial sector represent a continuation of doctrines and policies already practiced in the past. Since the 1930s, American elites have been convinced that the 1929 crisis reached such great proportions and brought capitalism to the edge of the abyss because the Federal Reserve and the public authorities let the banks collapse by refusing to inject the liquidity needed to restore confidence and growth to the productive sector. For some Americans on the free market right, faith in Fed intervention goes hand in hand with a skepticism toward state intervention outside the financial sphere: to save capitalism, we need a good Fed, flexible and responsive — and certainly not a Rooseveltian welfare state, which would only make Americans go soft. If we forget this historical context, we might be surprised by the U.S. financial authorities' swift intervention.
Will things stop there? That depends on the American presidential election: a President Obama could seize this opportunity to strengthen the role of the state in other areas beyond finance, for example in health insurance and reducing inequality. But given the budgetary chasm left by the George W. Bush administration (military spending, bank rescues), the room for maneuver on health care might be limited — Americans' willingness to pay more taxes is not infinite. Moreover, the current debate in Congress on limiting finance sector pay illustrates the ambiguities of today's ideological context. One certainly senses mounting public exasperation with the explosion of supersalaries for executives and traders over the past thirty years. But the solution being envisaged, setting a salary cap of $400,000 (the salary of the U.S. president) in financial institutions bailed out by taxpayers, is a partial response that's easily evaded — higher salary payments just need to be transferred to other companies.
After the stock market crash of 1929, Franklin Roosevelt's response to the enrichment of the very economic and financial elites who had led the country into the crisis was far more brutal. The federal tax rate on the highest incomes was lifted from 25 to 63 percent in 1932, then to 79 percent in 1936, 91 percent in 1941, then lowered to 77 percent in 1964, and finally 30–35 percent over the course of the 1980s and 1990s by the Reagan and George H. W. Bush administrations. For almost fifty years, from the 1930s until 1980, not only did the top rate never fall below 70 percent, but it averaged more than 80 percent. In the current ideological context, where the right to collect bonuses and golden parachutes in the tens of millions without paying more than 50 percent in taxes has been elevated to the status of a human right, many will judge those policies primitive and confiscatory. But for more than half a century they were in effect in the world's largest democracy — clearly without preventing the American economy from functioning. They had the particular virtue of drastically reducing corporate executives' incentive to dip their hands into the till, beyond a certain threshold. With the globalization of finance, such policies could probably be enacted only with a complete reworking of accounting disclosure rules, and relentless efforts against tax havens. Unfortunately, it will probably take many more crises to get there.
Two weeks after the U.S. Congress passed TARP, the European Union announced its own framework for stabilizing the continent's banks. In an October 13 statement, President Nicolas Sarkozy unveiled the French government's response.
A TRILLION DOLLARS
OCTOBER 28, 2008
Forty billion euros to recapitalize French banks; &8364;320 billion to guarantee their debts; &8364;1.7 trillion at the European level. Do we hear a higher bid? In racing to see who can announce the most enormous bailout plan, the governments of the rich countries are taking big risks.
First, there's no guarantee that this publicity strategy will quell the crisis and avert a painful recession. Financial markets do like big numbers. But they also like to know exactly what the money will be used for, who will get how much, for how many years, and under what conditions. Yet on this score, murkiness prevails. In truth, governments are behaving like the worst of the corporations they're supposed to be regulating. Every accounting gimmick is making an appearance, with special mention going to the French president. Annual flows are confused with stocks, hard cash with mere bank guarantees, single operations are counted multiple times. And everything gets added up: the bigger, the better. We find ourselves in a grotesque situation where the American and French authorities are rushing to hand out public money, with no real conditions, to banks that don't want it. The &8364;10 billion lent last week to big French financial institutions was supposed to stimulate lending, but the commitment is merely verbal. Yet there is a whole legislative and regulatory arsenal that could force banks to lend some of their funds to small and medium-sized businesses, which would have been worth revisiting and improving in the current crisis.
Next, and most important, this strategy, based on misleading announcements of numbers in the hundreds of billions, risks disorienting the public in the long run. After explaining for months that the public coffers are empty, that even the smallest cuts involving a few hundred million euros are worth making, suddenly the government seems willing to take on unlimited debt to save the bankers!
The first source of confusion that needs to be clarified comes from the fact that annual flows of income and production are constantly being mixed up with stocks of wealth, though the latter are far larger than the former. For example, in France, annual national income (that is, GDP minus depreciation) is around &8364;1.7 trillion (&8364;30,000 per capita). By contrast, the stock of national wealth is &8364;12.5 trillion (&8364;200,000 per capita). If we move to the American or European level, these numbers should be multiplied roughly by six: &8364;10 trillion in income, &8364;70 trillion of wealth.
The second important point is that 80 percent of total income and wealth belongs to households: by definition, firms own almost nothing, since they pay out most of what they produce to wage-earning and stock-owning households. That's what makes it possible to understand how the initial shock caused by the subprime crisis, which came to about a trillion dollars (the equivalent of ten million American households each having borrowed $100,000), though modest in size compared to total household wealth, could threaten the whole financial system with collapse. Thus, the biggest French bank, BNP Paribas, reports &8364;1.69 trillion in assets against &8364;1.65 trillion in liabilities, leaving &8364;40 billion in equity. Lehman Brothers' balance sheet was not much different before its collapse, nor are those of other banks around the world. The central fact is that banks are fragile organizations that can be devastated by a $1 trillion writedown of their assets.
Given this reality, it's legitimate to intervene to avert a systemic crisis, but only on several conditions. First, there must be guarantees that the shareholders and managers of banks bailed out by taxpayers will pay a price for their mistakes, which hasn't always been the case in recent interventions. Second, aggressive financial regulation must be put in place to ensure that toxic assets can no longer be sold into the markets — with the same vigor that food regulators use when supervising the introduction of new products. This will never be possible as long as we leave more than $10 trillion in assets to be managed in tax havens in the most opaque fashion. Finally, we have to put an end to the obscene compensation packages of the financial sector, which helped stimulate excessive risk-taking. That will require more heavily progressive taxes on high incomes, the polar opposite of France's current tax-shield policy, which aims to preemptively exempt the best off from any effort to foot the bill. With that kind of a strategy, we will probably have to prepare ourselves for even more severe crises to come — social and political ones.
Barack Obama's historic victory in November 2008 arrived amid widespread fears that the nation was sliding into a new Great Depression. Drawing on the parallel, an iconic New Yorker cover image depicted the first black president as Franklin Roosevelt, cigarette holder in his teeth, waving to the crowds from his Inauguration Day touring car. Like Roosevelt, Obama offered a message of hope and a promise to break with the policies of his conservative predecessor. Many wondered whether another New Deal was at hand.
OBAMA AND FDR: A MISLEADING ANALOGY
JANUARY 20, 2009
Will Obama be a new Roosevelt? It's a tempting analogy, but misleading for several reasons. Most obvious is the profound difference in timing. When Roosevelt was inaugurated as president in March 1933, the economic situation seemed completely desperate: production had fallen by more than 20 percent since 1929 and the unemployment rate had reached 25 percent, to say nothing of the alarming international situation. After the calamitous Hoover presidency, mired for three years in a "liquidationist" strategy aimed at letting "bad" banks fail one after the other, ensnared in antigovernment dogmatism (budget surpluses until 1931, no expansion of public spending), Americans wanted big change and awaited Roosevelt like the messiah. That desperate situation was what allowed a radically new policy to be put in place.
To punish the financial elites who had enriched themselves while bringing the country to the edge of the abyss, and to help finance a gigantic expansion of the federal government, FDR thus decided to raise tax rates on the biggest incomes and estates to 80–90 percent, a level maintained for almost half a century.
Obama, arriving in office just a few months after the onset of the current crisis, faces a totally different situation and much less favorable political timing. The recession is still far from reaching the apocalyptic depths of the 1930s — which limits Obama's maneuvering room to impose revolutionary measures. And if the recession worsens, he could be held responsible, which couldn't happen to Roosevelt. Indeed, less sure of his legitimacy than Roosevelt, Obama has cautiously put on hold his plans to raise taxes on high incomes, while choosing to let the Bushera cuts gradually lapse: the tax rate on the highest incomes will be modestly lifted, from 35 to 39.6 percent by late 2010; the capital gains rate will rise from 15 to 20 percent.
His supporters are already criticizing the inadequacy of his public investment and stimulus plans, too oriented toward tax relief for the middle class, popular among Republicans, not ambitious enough in terms of public spending. A "bipartisan depression" is beckoning, the economist Paul Krugman wrote a few days ago in the New York Times. In Obama's defense, though, we should remember another essential difference from the situation Roosevelt faced. In a certain sense, it was much easier to broaden the field of government intervention after the 1929 crisis, simply because at the time the federal government was practically nonexistent. Before the early 1930s, total federal spending had never exceeded 4 percent of GDP; Roosevelt raised that to 10 percent by 1934–35; it peaked during World War II before stabilizing at 18–20 percent in the postwar period, which is where it remains today.
The historic growth in the federal government reflected major public investment and infrastructure projects launched in the 1930s and, especially, the creation of public pension and unemployment systems. The task facing Obama today is more complicated. As in Europe, the modern state's great leap forward has already happened; now is more the time for a rationalization of the welfare state than for its development and indefinite expansion. Obama will have to convince his fellow citizens that resolving the crisis and preparing for the future will require a new wave of public investment, especially in energy and the environment, as well as social spending, particularly in the area of health insurance, the poor relation of America's weak welfare state. Let's hope for his sake, and for the world's, that he manages to do it without our having to go through a depression on the scale of the 1930s.
As the economic crisis deepened in early 2009, trade union–led protests and mounting public concern over inequality and falling living standards prompted French president Nicolas Sarkozy to convene a "social summit," bringing together representatives of unions and employers to discuss the crisis and how to respond to it. Following the February summit, Sarkozy announced that he would request a report from Jean-Philippe Cotis, head of France's National Institute of Statistics and Economic Studies (Institut national de la statistique et des études économiques, or INSEE), on the distribution of national income, or "value added," between labor and capital. Although the report would not be submitted until May, Sarkozy's announcement quickly stirred debate about how national income was being distributed between wages and profits.
PROFITS, WAGES, AND INEQUALITY
MARCH 17, 2009
In a moment of brutal crisis, it's a shame to waste time on pointless quarrels. The debate about profits versus wages as a share of companies' income has sometimes taken surprising turns. Anyone pointing out that these shares have been stable is accused by some on the left of arguing that income inequality in France isn't growing, even though these are two totally different questions — and that's crucial to understand if we want to adopt the right distribution policy. Since inequality is the real issue in this debate, let's state it clearly: inequality has exploded in France over the last ten years.
A study by the French economist Camille Landais shows this indisputably. Between 1998 and 2005, purchasing power rose by several dozen percentage points among the richest in France (20 percent on average for the richest 1 percent and more than 40 percent for the richest 0.01 percent), even as the bottom 90 percent have seen growth of barely 4 percent. There is every indication that these trends continued and even accelerated between 2005 and 2008. This is a new and massive phenomenon, unknown in the preceding decades: the trend is of comparable size to that observed in the United States since the 1980s, which resulted in a transfer of something like 15 percent of national income to the richest 1 percent and income stagnation for the rest of the population. How can the first fact be reconciled with the second fact — that is, the stability of the aggregate profit and wage shares?
Anyone who logs on to the website of INSEE, France's national statistics agency, can see for herself. If you add up all wages (including employer taxes) paid out by French companies in 2007, you get a total wage bill of &8364;623 billion, versus &8364;299 billion in gross profits (what companies have left after paying workers and suppliers), so that "value added" (defined as the sum of wages and gross profits) was split between a 67.6 percent wage share and a 32.4 percent profit share. In 1997 the figures, in today's euros, were &8364;404 billion in wages and &8364;195 billion in gross profits, thus a 67.4 percent wage share and a profit share of 32.6 percent. We've seen the same stability around 67–68 percent for wages and 32–33 percent for profits since 1987. Unless INSEE got its sums wrong, the fact appears clearly established.
(Continues…)
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Table of Contents
Title Page,
Contents,
Copyright,
Translator's Note,
Preface,
WHY SAVE THE BANKERS? 2008–10,
Why Save the Bankers?,
A Trillion Dollars,
Obama and FDR: A Misleading Analogy,
Profits, Wages, and Inequality,
The Irish Disaster,
Central Banks at Work,
Forgotten Inequalities,
Mysteries of the Carbon Tax,
Lessons for the Tax System from the Bettencourt Affair,
Enough of GDP, Let's Go Back to National Income,
Down with Idiotic Taxes!,
Who Will Be the Winners of the Crisis?,
With or Without a Platform?,
Record Bank Profits: A Matter of Politics,
NO, THE GREEKS AREN'T LAZY 2010–12,
No, the Greeks Aren't Lazy,
Europe Against the Markets,
Rethinking Central Banks,
Does Liliane Bettencourt Pay Taxes?,
Toward a Calm Debate on the Wealth Tax,
Should We Fear the Fed?,
The Scandal of the Irish Bank Bailout,
Japan: Private Wealth, Public Debts,
Greece: For a European Bank Tax,
Poor as Jobs,
Rethinking the European Project — and Fast,
Protectionism: A Useful Weapon ... for Lack of Anything Better,
François Hollande, a New Roosevelt for Europe?,
Federalism: The Only Solution,
The What and Why of Federalism,
ACTION, FAST! 2012–15,
Action, Fast!,
Merkhollande and the Eurozone: Shortsighted Selfishness,
The Italian Elections: Europe's Responsibility,
For a European Wealth Tax,
Slavery: Reparations Through Transparency,
A New Europe to Overcome the Crisis,
Can Growth Save Us?,
IMF: Still a Ways to Go!,
Libé: What Does It Mean to Be Free?,
On Oligarchy in America,
To the Polls, Citizens!,
The Exorbitant Cost of Being a Small Country,
Capital in Hong Kong?,
Capital According to Carlos Fuentes,
2015: What Shocks Can Get Europe Moving?,
Spreading the Democratic Revolution to the Rest of Europe,
The Double Hardship of the Working Class,
Must Debts Always Be Paid Back?,
A Crackdown Alone Will Solve Nothing,
Index,
About the Author,
Connect with HMH,
Footnotes,
