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Death of a dogma

John Samuel writes an obituary for the Washington Consensus. This is part one of a five-part series

“It is over”. That’s a succinct way of describing the death of greed-driven neoliberal capitalism. And that is how one Wall Street analyst described the fall of Lehman Brothers on September 15, 2008.  The fall of Lehman was a visible signifier of the tsunami that has hit Wall Street and the world of high-profile financial trade and investment. 

It was the story of a disaster foretold. 

That morning a painter called Geoffrey Raynold landed up in Manhattan and unveiled a large canvas titled The Annotated Fuld, showing Richard Fuld, the beaten Chairman and CEO of Lehman Brothers, with sunken eyes. The painter invited Lehman employees and others to scrawl their message on the canvas. Someone scribbled “This sucks”. The next day the painting was sold for 100,000 dollars. 

The rise and fall of Lehman Brothers is symbolic of the rise and fall of the neoliberal economic policy paradigm. When the financial market roared, speculators, traders and typical financial intermediaries played in the global casino as if the good days would never end. The rich laughed their way to the bank. They dined, wined and partied with perpetual cheer as the stock market index climbed to the sky. Many were seduced into the red-hot stock market. The percentage of Americans owning stock rose from 16% in the 1970s to more than 50% by 2005. Everyone wanted a piece of the cake. 

It’s true that Lehman Brothers is a 158-year-old brand. However, it is actually a 14-year-old company that was spun off by American Express in 1994. In 1994, Lehman Brothers  had a relatively small capital base. But the ambitious captains of Lehman were thirsty for profit and capital. To make more profits, they borrowed huge sums in relation to their real size. Lehman’s debt became 35 times more than its capital – surely an unsustainable ratio. But they were making profits and they jumped into the lucrative real estate market with new financial instruments – derivatives -- to make more quick money.  

Credit-rating agencies too played the casino game. The top credit rating agency Moody and Standard and Poor gave top AAA-ratings to the greedy nexus. It was a clear conflict of interest when the bankers themselves paid Moody and S&P to give their respective banks a good credit rating. It was a lie waiting to explode in the scandal of sub-prime lending -- easy mortgage given away to anyone ready to buy real estate, unmindful of their economic capacity to repay the loans. These intermediaries were betting someone else’s money -- if they gained, they made a huge bonus. If they lost, it was someone else’s loss. No wonder Richard Fuld made US$ 490 million as the CEO of Lehman Brothers, making the best use of stock options. Those whiz kids called investment bankers went for risky deals and quickie profits as they too made their millions through stock options and moved on.  

Now the party is over.  More than a trillion dollars worth of stock market wealth vanished in a single day. They call it a financial meltdown. It was the beginning of the end. 

Dogmas are authoritarian doctrines. Neoliberalism emerged in the early-1980s, and became a dogma over a period of ten years. The dogma was that the market knows best. Neoliberalism consisted of tax cuts for the rich, more indirect taxes (which affect ordinary people), deregulated financial markets, easy money with low interest rates and free markets with forced liberalisation of economies, markets and financial sectors across the world. Anyone who questioned the dogma was marginalised as a heretic. 

In fact, by the late-1970s, markets were saturated in the US and Europe. They required new markets for the movement of finance capital as well as manufactured goods. Unless the market was expanded to the emerging economies and unless there was a free flow of capital, Anglo-Saxon capitalism in the early-1980s would have faced a deep crisis. The State too was saturated and fat. That is how the neoliberal agenda, along with the neo-conservative politics of the Reagan era, entered the scene.  

Many developing and poor countries were in a debt trap resulting from the oil price shock of the 1970s. So the USA and its allies used the World Bank and IMF as strategic institutions to force many debt-driven countries to open up their markets and deregulate their economies.  By the early-1990s it came to be called the Washington Consensus, a neat packaging of neoliberal dogma, pushed across the world by the Word Bank and IMF.  The charismatic face of Bill Clinton and the glib talk of Tony Blair gave the neoliberal dogma a “human face’. 

This was a time when investment bankers looked like sexy guys with lots of money. Globalisation became a fashion statement for many countries. The World Economic Forum became an extension of Wall Street. Political leaders and corporate executives went there for their annual pilgrimage. The deadly dogma preached growth and growth, and toasted the new billionaires. Newspapers told the rags-to-riches stories of the new billionaires. Billions of poor were swept under the carpet. Poverty and inequality did not make it to the front page. Bill Gates, Warren Buffet and Laxmi Mittal smiled at us from the TV. The upwardly mobile, upper-caste and urban classes in India’s metros celebrated their new world with a saffron glow -- India Shining. Governments competed to show how much they were committed to the neoliberal dogma. Any sceptics were dumped as relics of the past or the residue of a Left in disarray. 

When neoliberal finance capitalism, initiated by the Reagan-Thatcher combine, pushed towards us the new order of the day, their wholesale agents the Word Bank and IMF pedalled neoliberal policies as the medicine for all ills in all countries. By the early-’90s, neoliberal globalisation and deregulation became the mantra of the day. Politicians wanted to be in the good books of Uncle Sam and bureaucrats wanted to be in the good books of Brettonwoods institutions. When the Soviet model too collapsed, the neo-conservative intellectuals began to pedal old wine in new bottles -- the End of History, the Clash of Civilisation and There are no Alternatives. There emerged a deep nexus between Wall Street and the US treasury. It is not a mere accident that Hank Paulson, the Treasury Secretary, was the former Chief Executive of Goldman Sachs. Many of the top executives in the government and Word Bank came from Wall Street. Money-driven corporate politics and the agents of investment banks in the corridors of power and their media minions created the myth of the growth engine -- driven by unbridled finance capital.  

During the last 25 years, politics in many countries was corporatised, driven by money, media, fund managers and agents of big corporations. Policymaking too was subcontracted to the votaries of neoliberal dogma. Though many of them talked about “freedom” they were actually in the business of denying dignity and fudging freedom. Meanwhile Forbes magazine kept celebrating the increasing number of billionaires – never mind the billion who went to bed hungry every day. 

Many warned that the wolf was on the way. George Soros, one of the original gurus of financial capital markets, warned about “market fundamentalism”. Warren Buffet, old hand at Wall Street, called derivatives the “financial weapons of mass destruction”. But who listened in the midst of the party? 

In an ethical liberal democratic system, the State is expected to determine the boundaries of the market and citizens are expected to determine the boundaries of the State. But the dogma reiterated that “Markets know best”.  Thus the market began to determine the boundaries of the State and the State began to determine the boundaries of citizens. Then markets were captured by speculative finance capitalists and investment banks. Finance markets were increasingly detached from real people, real wealth and the real economy. The market was driving governments.  

Ironically, now government is forced to bail out and nationalise the losses, while the rich get away with their fat profits. The US federal government had to take on the huge burden of two of the biggest mortgage companies and dumped more than USD 5 trillion of the debt of the companies into the lap of taxpayers -- almost doubling the amount that the US owes to its lenders.  This is termed the biggest transfer of debt in the history of money. Almost a couple of trillion has been pumped into the economic system to keep those sinking ships afloat.  

Ultimately it is the people who end up paying for the indulgent excess of the rich and powerful in the global casino of the so-called free market. The free market was never free and now the toxic burden is dumped on the people. 

Bush presided over a brutal war and a deadly financial casino. US unilateral militarism prostituted the term “democracy” and “freedom” by bombing people and countries. Unbridled neoliberal finance capitalism bulldozed ahead with greed -- till it crashed. Within weeks, the American dream became a nightmare. 

The dogma is dead, buried under the debris of the famed investment banks. There is no more consensus in Washington.  Karl Marx must be laughing in his grave in London. 

InfoChange News & Features, November 2008