The Left inability to come to grips with the financial crisis or anything else


Professor Michael Hudson provides this terribly misleading story about the financial crisis to a German interviewer - it’s a plausible, maybe even a compelling story but it’s profoundly wrong.

Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.

Since Citibank was mostly bailed out during the Bush administration it would be peculiar if Bair really said that she had argued this case with the Obama administration, but Bair is on record as saying that she could not have closed down Citibank.

The absence of FDIC resolution powers for bank holding companies and their nonbank affiliates during the crisis posed insurmountable hurdles to our ability to respond to the financial difficulties of these large banking organizations through our traditional receivership process. While each of these bank holding companies had FDIC-insured depository institutions as subsidiaries, the FDIC’s receivership powers extended only to the insured institutions themselves. Had the FDIC been appointed receiver for these bank subsidiaries, the result surely would have been to trigger the failure of the holding company as well – which would have fallen under the jurisdiction of a Lehman-like commercial bankruptcy, and not an FDIC-managed receivership. Since the non-bank affiliates were not insured depository institutions, the FDIC had very little advance information about their structure, activities, and counterparty exposures, making it difficult to know what effect the failure of the holding company might have on other financial institutions and the financial markets. Under those limitations, if any of those institutions had been allowed to fail, the result could well have been a significant widening of the financial crisis. This was not a risk we were willing to take at the time.

This level of departure from facts in Hudson’s account is not accidental - even though Hudson is a brilliant scholar and historian, he has wildly misreported the financial crisis in the same way that the rest of the remnant US left has. Let’s follow him along as he continues to shovel bullshit at the German interviewer:

The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.

It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.

I’m going to go back to Bair explaining why all of this is fantasy in a second, but take a second look at Hudson above to notice he is arguing that finance capitalism is somehow supposed to operate justly. The righteous regulator is supposed to impose market discipline on the bad actors - the casino gamblers - and then “normal operations” as everyone else marches on by with their savings and insurance policies intact and safe. This spluttering outrage that financial markets were not operating as fairly as they should have is the “left wing” analysis?  If only the top state bureaucrat who was entrusted with keeping the market on balance had not been sabotaged by the evil Obama administration, justice would have prevailed? This shared story is one that allows people like Matt Taibbi, Yves Smith, and William Black  to happily cross fulminate with supposed socialists like Hudson. At places like NakedCapitalism they can all yell together the same right wing scandal narrative - the problem is not in the social structure and power relations, but in the characters of the participants who turn out to be bad people. No surprise that discussions at Naked Capitalism often bring up other Bircher themes - gold, the ominous hidden role of the Rothschilds, the nature of Barack Obama as a talentless affirmative action beneficiary and worse.

Bair had and probably still has differences with the Obama administration (she was, after all, a Bush appointee), but she was a strong proponent of the Dodd-Frank bill that the Obama administration pushed through Congress over the bitter objections of the bankers.

The crisis of 2008 illustrated the overwhelming pressure that develops to provide government bailouts when information is sketchy, fear is the prevailing market sentiment, and there is no clear sense of how bad conditions might get before the system begins to stabilize. The FDIC responded to the problems of large banking organizations in the crisis the only way it could under the circumstances. With the limited information and resolution powers we had at the time, allowing SIFIs to fail would have been irresponsible.

But bailouts of this sort have a number of serious adverse consequences for the financial industry and our economy. They inhibit the restructuring of troubled financial companies and the recognition of losses that are necessary for a prompt recovery from the crisis. Unless large financial institutions and other companies are allowed to fail, our economy cannot correct the mistakes in strategy or risk management that led to the problem, and scarce economic resources will continue to be misallocated. Some 370 FDIC-insured institutions have failed during my tenure as FDIC Chairman. In every case, insured depositors have been completely protected, but uninsured depositors, unsecured creditors and equity holders have been exposed to losses and management has been replaced.

This is how capitalism is supposed to work, as failed companies give way to more successful companies, their liabilities are restructured, and their assets are eventually returned to their highest and best use under new management in the private sector. But our previous inability to resolve SIFIs in a crisis made them exempt from the normal discipline of the marketplace that applies to smaller banks and practically every other private company.


The dilemmas we faced in responding to the crisis only increased our determination to press for a more robust and more effective SIFI resolution framework as the centerpiece of the financial reform legislation. […] . All of these proposals were ultimately enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

The only thing that Bair’s testimony has in common with Hudson’s story is that they agree that capitalism is supposed to operate to punish casino gamblers and reward prudent and capable management. Bair is here making the liberal argument that after 30 years of deregulation and rapid consolidation of financial firms, the regulatory apparatus needed to be updated and made stronger.  But Hudson is making a right wing argument - a scandal argument with sprinkles of populist and marxian phrasing on it.

There are other arguments to be made, arguments that call for much greater reform of how the economy works or even ones that question the moral/structural soundness of the whole system.  But we are not going to see those arguments from “the left” of people like Michael Hudson. What we see instead is a factesque, angry, privileged attack on President Obama in the guise of a left wing rant.

The pace of Wall Street’s war against the 99% is quickening in preparation for the kill. Having demonized public employees for being scheduled to receive pensions on their lifetime employment service, bondholders are insisting on getting the money instead. It is the same austerity philosophy that has been forced on Greece and Spain – and the same that is prompting President Obama and Mitt Romney to urge scaling back Social Security and Medicare.

In the world of facts, President Obama has not urged scaling back Social Security or Medicare - in fact, under his administration social security taxes have been made more progressive and Medicare has been significantly expanded. One constant of the Marxian tradition is the absolute refusal of the privileged academics who generally speak for that tradition to ever apply class analysis to themselves. Hudson works in a society where the dominant ideas of the dominant class of older rich white men are profoundly influenced by racism, sexism, and class privilege. And yet Hudson seems to have not the glimmer of an idea that a wealthy angry old white guy yelling at an imaginary black man in a chair may not be revolutionary struggle after all.

See also