Public interest in progressive financial reform is growing. After the epic crash of 2008 and the “Great Recession,” and with a boost from a sharply populist campaign season, a number of left-of-center proposals have circulated around the question of what to do about the banking system, which has molded contemporary society in its image and defines the horizon of what is politically possible.
The international banks, whose outstanding derivative contracts are estimated to have a value of over $500 trillion, are the massive and powerful conduits of world capital, with financial assets that dwarf the annual GDP of the richest countries. A new antitrust movement aims at breaking the power of the largest banks by dismantling them. But while the intentions behind “breaking up the banks” are good, such a program is deeply flawed, doubling down on market competition and nationalism when we should be thinking about new forms of public control and transnational coordination.
We need a politics that can empower progressive political forces by shifting the economic center of gravity decisively to the left. Instead of “too big to fail, too big to exist,” the new watchword for the politics of finance should become “financial power for the public good.”
The liberal thrust of the new antitrust movement
Bernie Sanders has come out most forcefully in favor of “too big to fail, too big to exist,” but he is far from the only one. Elizabeth Warren advocates similar measures, and even Hillary Clinton, a staunch advocate for Wall Street, has paid lip service to popular hatred of the banks. Some academic economists also now endorse some version of the proposal to break them up.
On its face, the claim makes sense. The basic assumption is that restoring free and fair competition among equal, smaller players in the financial industry will end monopoly power in the market, reduce systemic risk and de-fang the banks, benefiting consumers and society at large.
Yet even assuming there is enough will and political muscle to do so (and it’s not clear there is), breaking up the banks would actually seriously disempower average citizens.
Without a real plan for imposing democratic accountability on a smaller banking system, we would get the same kind of short-term, dysfunctional financial markets that we currently have, just on a much smaller scale. A bunch of smaller banks that aren’t subject to democratic control would actually act much like the big banks.
And even if such plans were enacted, the smaller size of the banks would profoundly reduce the scope of progressive economic projects. Shrinking the banks might allow for regulating smaller financial markets in the near term, but it would weaken public power over the economy as a whole, because reducing the size of the banks would mean reducing the scale of the investments that could be carried out—investments that we desperately need.
At its root, “too big to fail, too big to exist” relies on a romantic vision of small business competition that not only reduces the scale of our economic power, but also ignores capitalism’s built-in drive toward combination and centralization. Cutting the banks down to size might momentarily rein them in, but in the end it would merely set the stage for their eventual re-concentration in an ever larger form, at least under the current arrangement of a capitalist society.
Breaking the power of finance by downsizing it is not the solution. Rather than dismantling the banks, we must transform them.
Finance and the politics of production
We need a major shakeup in how we understand the relationship between politics and the economy. Instead of leveling down the scale of the economy to fit our public institutions, we need to empower and expand those institutions to match the scale of the economy. And rather than assuming the United States exists in a vacuum from the rest of the world, we have to start taking the international organization of production seriously.
This means moving from a politics of redistribution to a politics of production.
The politics of redistribution frames the question of economic and financial reform as simply a matter of sharing the existing national wealth more equitably. It means making demands around goals like tax equality, a strengthened welfare state, market regulation, and expanded access to education. These are desirable goals, of course, but all tend to be seen in isolation from the world economic system in which they are embedded.
This perspective ignores the political and economic consequences of the United States’ position in the global division of labor. It takes for granted that a strong, social-democratic welfare state could simply be rebuilt in international economic and financial conditions that are radically different from the mid-20th century, when such states were the norm. And it also overlooks the necessary role played by international finance in coordinating production and distribution across the world.
For all its recklessness and complexity, the global financial system is integral to the world economy. A giant multinational firm like Apple, for instance, relies on the whole bizarre catalogue of financial derivatives — swaps, futures, options and all of their related mutations — to coordinate its investments across a dozen or more countries. These countries all have different debt levels, currency exchange rates, interest rates and political conditions of their own that are factored into investment decisions as different forms of risk.
Liquidity, or the ability to buy and sell financial assets at will, is the engine of this process, and the big investment banks — Morgan Stanley, Goldman Sachs, Citigroup — are its main vehicles. Their enormous size allows them to act as the oil in the gears across the global geography of production.
Size itself is not the real problem here. Huge and powerful transnational institutions are needed to power global society and will be required in the future to address the planetary scale of deepening ecological and political crises — crises that can only be met through coordination and large investments of productive capital into new areas where they are most needed.
Massiveness is actually an asset for this task. The problem is not that the banks have such huge amounts of capital — it is who has control over those resources.
The world banking system has evolved into a wildly anarchistic form in which it can only create liquidity — and thus power production — through a highly volatile, permanent speculative frenzy. This means what is conventionally written off as “mere speculation” is actually at the core of “real” or productive national economies, which could not exist without international capital flows powered by market speculation.
The “real economy” of manufacturing and industry is often seen as independent from the socially worthless gambling that goes on in the financial markets. But in fact, the two are interconnected in a contradictory, crisis-ridden whole. While much of it is indeed socially worthless, all speculation cannot simply be subtracted from this equation. In fact, the very idea of some pure “real economy” beneath the parasitic excesses of speculation, which would finally be allowed to thrive if we could only eliminate the latter, is a myth.
But it is a very powerful one, especially in times of economic crisis. It drives the demand to break up the big banks and the notion that the U.S. or any advanced economy with crippling inequality could simply turn the clock back and return to a strong, social-democratic welfare state on the Scandinavian model, which is actually not looking so progressive itself these days. It also informs new liberal policy initiatives, like Joseph Stiglitz’s ambitious proposal to “reimagine the rules” of the economy — as if it were only a matter of getting the right laws on the books that would allow the capitalist economy to hum along indefinitely, to everyone’s benefit.
Such proposals, which restrict the focus to fighting inequality in one country, have three major disadvantages: They confine political attention to the boundaries of the nation-state when financial power is global; they assume away the historical evidence suggesting that the contradictions of capitalist production cannot be contained; and their national orientation is solely concerned with improving workers’ conditions in the United States instead of including working people across all national borders. The politics of production recognizes these constraints and calls instead for transnational strategies that aim to increase democratic control over capital investment. Rather than focusing on a fairer distribution of a given country’s economic output, it aims to change how the whole international economic system works.
The best traditions of the Left are explicitly internationalist, rejecting all national borders as artificial constructs of rival economic power blocs. Recovering this vision is not only morally right; it is strategically essential for any leftist politics worthy of the name.
Progressive globalization as the antidote to economic nationalism
Instead of breaking up the banks, thinkers and actors on the Left need to work together to create serious proposals for converting the banks into public, democratically accountable institutions. How can we do it?
A financial transactions tax that would create enormous public revenues through a tiny tax on speculation is an excellent starting point, but we need to be thinking bigger. The Left should set its sights on the global stage. We could start by generating concrete proposals around the kinds of institutional structures necessary to coordinate democratic control over the financial circuitry of the world economy.
Some measure of control in this area is the only real way to counter austerity, which is driven by the need to appease international financial markets by countering the (mostly imaginary) threat of inflation through ever-smaller public budgets and allowing debt-fueled speculation to drive up the value of financial assets. Public control of finance will be necessary to defeat the stranglehold of “bubblenomics” over our social existence.
One can imagine a set of institutions whose publicly elected officials have the authority to oversee the ebb and flow of liquidity, manage and, if necessary, intervene to reduce systemic risk, and channel capital in specific directions.
One example: directing the revenue from a general tax on financial transactions into the most capital-starved regions of the world. The only possibilities for long-term development through large-scale productive investment are outside the short-term demands for quarterly profits and the relentless competition that dominates the investment decisions of financial markets. An institutional answer to this could look like the International Monetary Fund or the World Bank, but not so narrowly beholden to the interests of U.S. and European capital — one that is actually democratic.
Another important idea comes from Germany’s Die Linke (the Left) party, which has developed an ambitious proposal to socialize the German banking system. Their proposal would reduce banking to its three core functions of payments, savings and loans by transferring the most systemically risky banks to public ownership. Their controlling boards would be strengthened and expanded to include social stakeholders like trade unions, environmental groups, community organizations and others, whose representatives are democratically legitimated through direct elections.
Though Die Linke’s research is based on the unique features of the German banking system, it could provide a point of departure for more research on transnational public banking, which could channel capital investment on a much larger scale and in directions that are impossible with our current financial system.
Instead of turning away from the daunting challenges presented by contemporary financial power, the left has to turn and face them squarely. This means no longer ceding a monopoly on how finance works to those within the current banking system. If the global economy is no longer to operate by blind necessity and submit to conscious, democratic direction and control, then the Left must find ways to politicize financial power and transform it from a reckless, bubble-driven frenzy into a public utility. This would amount to progressive globalization.
In contrast, contemporary antitrust movements are essentially pushing towards economic nationalism, which sees individual nation-states as locked in battle with their economic “competitors.” The ideology of economic nationalism undermines transnational solidarity by encouraging workers in different countries to compete with each other instead of uniting against their multinational corporate exploiters.
And by making the interests of individual nations the bottom line for economic policy, economic nationalism pushes an increasingly fragile, crisis-ridden world economy towards further fragmentation in which countries must compete for increasingly scarce markets and resources. The logical endpoint of this process is the division of the globe into rival economic and political blocs whose confrontation can lead to catastrophe.
Transnational power is the only way forward to a post-neoliberal future, and democratizing financial institutions is an indispensable piece of the puzzle. Bernie Sanders and progressives everywhere should drop “too big to fail, too big to exist,” and instead call for “financial power for the public good.”