Today's leading financial observers, from left to right, depict a banking sector teeming with bespoke-suited knaves willing to mortgage their mothers’ souls. As several recent books make clear, violation of rules has become deeply integrated into banks' business models.
NEW YORK – In January 2023, I interviewed the Financial Times columnist Martin Wolf, hoping the conversation would flesh out the review I was writing of his recent book, The Crisis of Democratic Capitalism. Toward the end of our conversation, I asked him to comment on Mervyn King’s book, The End of Alchemy, which I reviewed when it appeared in 2016. King had recently retired as the head of the Bank of England, and Wolf was then at the peak of his influence. They had known each other since their student days, and I wondered about their different paths to authoritative positions within or astride the global financial system.
My more pressing concern in asking Wolf about King was the radical doubt they seemed to share about the system they knew so well: they both echoed Willem Buiter, another alumnus of the BOE, who has suggested in various venues that there are no rational grounds for private control of banking. To me, all three were sounding like the Marxists that former US President Donald Trump keeps warning us about. Was I over-reading these eminent authorities to follow my own political compass (which admittedly points due left)?
King, for example, had argued in his book that the best way to prevent crises on the scale of the 2008-09 Great Recession was to abolish banking as we know it – that is, the practice of lending money at interest against liquid collateral with only a small fraction of the value of the loans, which often are used to fund investment in fixed assets. In support of this argument, King had enlisted none other than William Leggett, the leader of the New York Workingmen’s Party, who proposed reconstituting the wildcat system of antebellum America by forcing all banks to hold liquid collateral with value equal to that of their loans. This would make bank runs impossible.
I asked Wolf why his friend the former banker-in-chief of England would endorse the ideas of an obscure American widely known as a “money crank,” and go on to quote, approvingly, William Jennings Bryan’s famous “Cross of Gold” speech. At the Democratic Party’s 1896 nominating convention, the presidential candidate-to-be denounced the national banks for their unearned, unjustifiable incomes deducted from the value produced by workers and farmers. Bryan proposed expanding the money supply and inflating prices – thus letting debtors off the hook – by establishing a US currency tied to silver, not the international gold standard.
“Mervyn is right,” Wolf replied. “Banking is a very special problem … The core problem is that these institutions are absolutely central to modern economies, [but] they’re running a con game.” That astonishing answer now seems to characterize the consensus of writers from every point on the political spectrum, left to right. No matter where you look, there it is: the idea that banking as we know it is a very long con, a public utility pretending to be a private enterprise.
What follows from this? We can understand life only “backwards,” according to Kierkegaard, but we must live it “forwards,” proceeding on faith alone. But if banking really has become a “con game,” what’s the point? Perhaps we should suspend our belief and ask how we arrived at the present: a time and place where the emperor not only has no clothes, but has lost interest in any fashion, embraced nudism, and eagerly goes forth among his subjects without shame.
The Naked Corpse
Let us suppose that Joseph Schumpeter was right to claim that the financial system is the “headquarters” of modern capitalism, where individuals’ savings and corporations’ surplus revenues are pooled, allocated according to calculations that balance risk and return, and channeled to sectors where, opportunity costs being equal, profits are predictably higher than elsewhere. If King, Wolf, and Buiter are also right to claim that this headquarters is teeming with bespoke-suited knaves willing to mortgage their mothers’ souls, capitalism is brain dead, a body without a mind, comatose, if not already a corpse.
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That is the substance of four recent coroners’ reports, none of which, not even the “conservative” outlier among them, by Ruchir Sharma, proposes a realistic way to revive the patient. Sharma, an alumnus of Morgan Stanley, where he was chief global strategist specializing in emerging markets, is the author of The Rise and Fall of Nations, a New York Times bestseller, and a columnist at the FT. His new book is the capstone course – actually, the only course – in a curriculum that begins with the teachings of Eugen von Böhm-Bawerk, matures in the minds of Böhm-Bawerk’s students, Ludwig von Mises and Friedrich von Hayek, takes recess under the careless supervision of Milton Friedman, and matriculates with publications by the likes of Robert Higgs, Robert Nozick, Niall Ferguson, and Edward Chancellor. The student evaluations of Sharma’s course include fawning reviews from ideological allies like George Will and Bret Stephens, but also exclamatory blurbs from ur-liberal pundits like Fareed Zakaria and Thomas Friedman.
The lesson to be learned from this course, however, is always the same, no matter who teaches it. It goes like this: Markets are indispensable to individual freedom and political pluralism because they “de-center” authority. They dismantle the state’s monopoly on power, then disperse it among many savers, investors, and consumers with different preferences and incomes, whose choices, when give proper scope, constitute modernity by convening civil society and enabling individualism. Capitalism is the highest stage of market society, so conceived; as the pinnacle of freedom, it thus forms the outer limit of political innovation.
To be sure, government tampering with the anonymous forces of the market is necessary in times of economic crisis, when unemployment and deprivation render a social fabric woven by commodity exchange and wage labor vulnerable to political unrest or even rebellion. But such tampering is inherently dangerous, because it implies the substitution of rule-bound bureaucracy for the free play of preferences, prices, and choices in the market. It threatens to extinguish the unknowable sources of freedom, which survive only insofar as they remain unknowable, removed from the reach of reason.
Still, such periodic feats (or failures) of crisis management, however notable, do far less damage in the long run than more insidious forms of government tampering: regulation of private enterprise, public spending funded by taxation, and routine central-bank interventions in the business cycle. These create incentives, distort choices, and become permanent fixtures of the economy, gradually eroding freedom. Regulation makes the real world unintelligible, public spending crowds out private investment, and central-bank interventions lead to easy money, and then, before you know it, to free money, which inexorably becomes worthless money.
What Free Market?
This old story is told most cheerfully by Friedman and Ferguson, and most threateningly by Hayek, Higgs, and Chancellor. In writing What Went Wrong With Capitalism, Sharma’s twist on the story is to retell it as if we had reached the ending. That is how it must look from his lofty perch atop the Dumpster of history – into which failed nations, like hopeless addicts, have found themselves diving, after thoughtlessly spending themselves into debt oblivion. He worries that the dollar has already lost significant ground to China’s renminbi, to the sporadic efforts by the BRICS+ grouping of major emerging economies to forge its own monetary union, and more generally to the horizons of investor expectations, because the US national debt has increased so rapidly – and as heedlessly as that of earlier empires.
But the novelty of Sharma’s retelling of this familiar story derives from his ability to draw on leftist or “progressive” accounts of neoliberalism to fortify his own revisionist account of the last half-century. For example, he cites Gary Gerstle, Jonathan Ira Levy, J. Bradford DeLong, and Thomas Piketty to argue that massive government spending to equalize the effects of the Great Recession and the COVID-19 pandemic actually exacerbated the long-term trend toward inequality, as measured by wealth and incomes. These recent events prove that the Reagan Revolution did not usher in an age of free-market neoliberalism; on the contrary, the state’s role in resource allocation has actually increased since then. The cure for the disease of inequality implied by the progressive diagnosis – more rule-bound application of bureaucratic reason – merely worsens the illness by creating and feeding an addiction. Like opioids, the medication has become an all-purpose refuge from painful reality, in this case the need to balance budgets and live within available means.
Sharma is unafraid to press illness metaphors into the service of his argument. The invisible, inevitable, and belatedly symptomatic effects of government regulation are observable, for example, in the metastatic growth of “shadow banking.” This unfettered precinct of the financial sector, which now accounts for 24% of US corporate profits, is, in Sharma’s accounting, the result of regulation, not of its negation. Hedge funds and private equity firms are simply lawful devices by which finance “finds a way” around the law, you see, as finance always has and always will.
According to this narrative, the repeal of the Banking Act of 1933 (Glass-Steagall) was merely a recognition of financial reality – the creative barbarians initially inspired by Walter Wriston at Citibank had already breached the wall separating commercial and investment banking. The rise of “shadow banking,” on the other hand, was a direct response to regulatory legislation – Sarbanes-Oxley (2002) and Dodd-Frank (2010) – designed to prevent financial meltdowns caused by esoteric definitions of bank loan collateral, as happened in the run-up to the dot-com bust of 2001-02 and the subprime mortgage crisis later in the decade. The outright piracy of private equity, its freedom to seize, strip, and sell off health-care facilities, or to buy residential and commercial real estate merely to hike rents or write off tax losses, is what results from any attempt to contain the rational exuberance of profit-seeking surplus capital.
Guerrillas in Our Midst
One would think that Mehrsa Baradaran, a progressive law professor at the University of California, Irvine, and an expert on banking law, would strongly disagree with Sharma’s accounting. She does not. In fact, her book, The Quiet Coup, deploys a similarly medical metaphor to explain the symptoms of a body politic in the throes of a terminal illness. She calls this illness a cancer, not an addiction, but it has the same source – government regulation of markets – and similarly dire effects.
How can that be? Baradaran details what historians, political scientists, and consumer advocates used to call “regulatory capture,” and what theorists of racial capitalism now call “elite capture”: leaders in an industry that is targeted for regulation get ahead of the curve and seize the initiative, actually drafting the legislation. Baradaran argues otherwise, but typically this is not a matter of high-minded officials getting what they want and special interests then infiltrating the new agencies or watering down the new laws after the fact. Since the Progressive Era of the early twentieth century, the business community has sought reform and regulation just as much as public-interest lawyers and activists have. Until the advent of crackpot capitalism in the 1990s, private enterprise’s champions understood that a society held together by commodity exchange and wage labor must continually reconstruct the market, not just to stabilize or increase profits, but also to guarantee social stability and political legitimacy, without which profit-seeking becomes impossible.
So, the neoliberal regime that has put the public at the mercy of the private sector was not the product of a criminal conspiracy; but its emergence does signify corruption of the body politic. As Baradaran puts it: “The neoliberal coup was perfectly legal because it was conducted through the law. The same courts and legal interpretations honed and argued by activists to bend the law toward justice” – the work of the civil-rights lawyers who carried the day until the 1970s – were used to bend it “quietly back to protecting the powerful.” Examples abound, beginning with the infamous Lewis Powell memorandum of 1971, in which the future Supreme Court justice sounded the alarm for US corporate leaders about the perils of progressive legislation, particularly President Lyndon B. Johnson’s Great Society agenda. And as Friedman’s surprisingly effective shareholders’ rights doctrine took hold during this period, the Federalist Society, founded in 1982, began organizing and mobilizing ideologically kindred lawyers and judges. Corporate guerrilla warfare had erupted, and no counterinsurgency manual was available until it was too late.
Banking was the cutting edge of the counter-revolution that rolled back the real gains of the 1960s. Here, Baradaran echoes the language of Wolf, King, Buiter, and their antecedents in the rhetoric of America’s populist past: “For much of US history – that is, until the 1980s – banks were treated, in law and in practice, as quasi-public institutions.” But while regulation could and did increase, as per Sharma’s redefinition of the Reagan Revolution, that did not mean that the liberals and their leftist comrades had won. On the contrary,
“The Reagan era was when the quiet coup became a big bang. By the time he took office, the Powell-memo-inspired long-range planning had been completed, the right-wing think tanks were positioned inside the administrative state, and Law and Economics had eroded common law contract protections. As such, neoliberalism transformed the world within a few short years in the 1980s – and it was done through finance.”
Law’s Labor Lost
Anat Admati of the Stanford Graduate School of Business and Martin Hellwig of the Max Planck Institute almost agree with the argument, advanced in different ways by both Sharma and Baradaran, that the left should not automatically celebrate market regulation. In the new expanded edition of The Bankers’ New Clothes – which Wolf calls “the most important book to come out of the financial crisis” – they suggest that something like criminality has paid off, big time, for the nudists who run US banking. The authors explain that their goal is not an indictment of criminal behavior driven by conscious intent or obdurate negligence, because, as far as they can tell, no laws have been broken – not exactly, anyway. They just want to know “why violations of rules could have become the normal way of doing business in banks.”
Their answer is consistent with the findings of Joris Luyendijk, a contributor to The Guardian and the author of Swimming with Sharks, who, having interviewed dozens of London bankers in the wake of the Great Recession, concluded as follows: “Seven years after the collapse of Lehman Brothers, it is often said that nothing was learned from the crash. This is too optimistic. The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little that they will not get away with.”
Admati and Hellwig valiantly resist this conclusion, but they end their massive book with a chapter on regulatory inertia which wearily explains why the regulators don’t need to be captured (or cajoled or bribed or browbeaten or extorted) by the banks they are supposed to regulate. “For rules to be effective,” they intone, “they must be enforced. Enforcers, however, are often inactive, because of fear, complicity, or sheer laziness.” Fear prevails over the other causes, it seems, including the fear of wasting scarce resources on cases that become too costly simply because banks can afford the best legal talent. But the bottom line is clearly marked: “As abstract entities, corporations cannot go to jail.” As a result,
“In most cases, the authorities actually avoid the costs and the uncertainties of a court trial by reaching a settlement with the corporation that requires the payment of a fine but does not require the admission of wrongdoing. If the fines are small in relation to the size and the profits of the institution, there is little if any deterrent: fines are merely a ‘cost of doing business,’ never mind the unlawfulness.”
The title of that last chapter is a question: “Above the Law?” By this point, after 200,000 words, it sounds wholly rhetorical, almost like an inside joke. But, like Sharma and Baradaran, these are serious authors who believe that something radical must be done to restore faith in markets as the foundation of freedom – to renovate the headquarters of capitalism, revive the patient, restore its fashion sense, and replenish its wardrobe. Otherwise, they claim, conspiracy theories will continue to flourish, the dollar will continue to lose market share to rival reserve currencies until the US goes bankrupt, and, as Admati and Hellwig put it, most Americans will continue to believe that “our economic, political, and legal systems are rigged against ordinary people” until someone like Trump proves that they are not.
But they are scientists without a lab, a grant, or a staff. Sharma will never convince anyone that adaptable models of governance under capitalism are to be found in Taiwan, or Switzerland, or Vietnam, where free markets and strong regulatory states co-exist. Baradaran will never persuade us that the promise of free markets and free trade can be retrieved from the wreckage of neoliberal globalization by nurturing small business and encouraging interfirm competition. And Admati and Hellwig will never convert enough of us to the cause of a purified political discourse, a public square where no truth must ever be spoken to power because power derives from truth.
Capitalism and Freedom
Joseph E. Stiglitz has a more realistic and practical approach, precisely because it is more theoretical. That sounds paradoxical, but, given the clear choices America’s political system has made available since Joe Biden withdrew from the presidential race, it is not: the United States is already in the thick of a debate about what freedom means, which requires answering the question of who gets to exercise it and how. In The Road to Freedom, an obvious retort to Hayek’s most-read treatise, The Road to Serfdom, Stiglitz walks us through the theoretical controversies that have mattered since the 1920s, with special attention to the difference between the claims and the consequences of the contestants’ ideas.
Stiglitz’s premise is that neoliberalism has already died and cannot be resuscitated. That is a good thing, he insists, because, having promised more freedom for more people by liberating them from the shackles of rule-bound bureaucratic reason, whether imposed by Soviet planners or New Deal agencies, it produced the opposite. Perfect competition and self-regulating markets are fantasies that, if indulged by stripping public policy down to the bare minimum of annualized monetary growth, will lead directly to the complete breakdown of market society and, from there, to political dictatorship from left and/or right, as per the warnings issued in 1944 by Karl Polanyi in The Great Transformation and Lawrence R. Klein in The Keynesian Revolution (the original retorts, as it were, to Hayek’s manifesto).
It is not as if Stiglitz thinks that the neoliberals epitomized by Bill Clinton delivered on their promise of less regulation: “What really was new was the trick of claiming neoliberalism stripped away rules when much of what it was doing was imposing new rules that favored banks and the wealthy.” The novelty of his book lies elsewhere, as it becomes the analog of Jefferson Cowie’s approach in Freedom’s Dominion, digging into the various iterations of the word itself, how its meanings differ under different historical conditions, which include the assumptions available to the people who can act on those meanings.
Freedom, Stiglitz shows, does not require the absence of coercion, or the erasure of all external obstacles to the accomplishment of private purposes, because no social system can subsist as a collection of centrifugal particles without the application of force. So, rational deliberation, political debate, and the authority of rule-bound bureaucratic reason are required to decide which private purposes are socially acceptable and adaptable to public needs, or the common good, through the exercise of state power. Free markets are of no help in addressing such issues.
By Stiglitz’s accounting, freedom for most of us requires social democracy, or what he also calls “progressive capitalism.” His book demonstrates that it no longer matters much what we call the means by which we realize freedom, as long as we understand that none of us will get there if we leave anyone behind. The US Supreme Court’s fetishization of the presidency notwithstanding, we are long past the need for an emperor, clothed or not.
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While even the world’s poorest economies have become richer in recent decades, they have continued to lag far behind their higher-income counterparts – and the gap is not getting any smaller. According to this year’s Nobel Prize-winning economists, institutions are a key reason why. From Ukraine’s reconstruction to the regulation of artificial intelligence, the implications are as consequential as they are far-reaching.
Though antitrust enforcement has been gaining momentum on both sides of the Atlantic, a handful of private actors still wield extraordinary market power – and thus power over ordinary people’s lives. With some calling for more radical action, and others warning that reining in firms’ market power would be unhelpful and even harmful, we asked PS commentators what needs to be done.
Marietje Schaake
warns that Big Tech’s outsize influence threatens democracy, suggests what Western leaders can learn from Chinese technology governance, urges governments to use public procurement to influence the trajectory of digital technology, and more.
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NEW YORK – In January 2023, I interviewed the Financial Times columnist Martin Wolf, hoping the conversation would flesh out the review I was writing of his recent book, The Crisis of Democratic Capitalism. Toward the end of our conversation, I asked him to comment on Mervyn King’s book, The End of Alchemy, which I reviewed when it appeared in 2016. King had recently retired as the head of the Bank of England, and Wolf was then at the peak of his influence. They had known each other since their student days, and I wondered about their different paths to authoritative positions within or astride the global financial system.
My more pressing concern in asking Wolf about King was the radical doubt they seemed to share about the system they knew so well: they both echoed Willem Buiter, another alumnus of the BOE, who has suggested in various venues that there are no rational grounds for private control of banking. To me, all three were sounding like the Marxists that former US President Donald Trump keeps warning us about. Was I over-reading these eminent authorities to follow my own political compass (which admittedly points due left)?
King, for example, had argued in his book that the best way to prevent crises on the scale of the 2008-09 Great Recession was to abolish banking as we know it – that is, the practice of lending money at interest against liquid collateral with only a small fraction of the value of the loans, which often are used to fund investment in fixed assets. In support of this argument, King had enlisted none other than William Leggett, the leader of the New York Workingmen’s Party, who proposed reconstituting the wildcat system of antebellum America by forcing all banks to hold liquid collateral with value equal to that of their loans. This would make bank runs impossible.
I asked Wolf why his friend the former banker-in-chief of England would endorse the ideas of an obscure American widely known as a “money crank,” and go on to quote, approvingly, William Jennings Bryan’s famous “Cross of Gold” speech. At the Democratic Party’s 1896 nominating convention, the presidential candidate-to-be denounced the national banks for their unearned, unjustifiable incomes deducted from the value produced by workers and farmers. Bryan proposed expanding the money supply and inflating prices – thus letting debtors off the hook – by establishing a US currency tied to silver, not the international gold standard.
“Mervyn is right,” Wolf replied. “Banking is a very special problem … The core problem is that these institutions are absolutely central to modern economies, [but] they’re running a con game.” That astonishing answer now seems to characterize the consensus of writers from every point on the political spectrum, left to right. No matter where you look, there it is: the idea that banking as we know it is a very long con, a public utility pretending to be a private enterprise.
What follows from this? We can understand life only “backwards,” according to Kierkegaard, but we must live it “forwards,” proceeding on faith alone. But if banking really has become a “con game,” what’s the point? Perhaps we should suspend our belief and ask how we arrived at the present: a time and place where the emperor not only has no clothes, but has lost interest in any fashion, embraced nudism, and eagerly goes forth among his subjects without shame.
The Naked Corpse
Let us suppose that Joseph Schumpeter was right to claim that the financial system is the “headquarters” of modern capitalism, where individuals’ savings and corporations’ surplus revenues are pooled, allocated according to calculations that balance risk and return, and channeled to sectors where, opportunity costs being equal, profits are predictably higher than elsewhere. If King, Wolf, and Buiter are also right to claim that this headquarters is teeming with bespoke-suited knaves willing to mortgage their mothers’ souls, capitalism is brain dead, a body without a mind, comatose, if not already a corpse.
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That is the substance of four recent coroners’ reports, none of which, not even the “conservative” outlier among them, by Ruchir Sharma, proposes a realistic way to revive the patient. Sharma, an alumnus of Morgan Stanley, where he was chief global strategist specializing in emerging markets, is the author of The Rise and Fall of Nations, a New York Times bestseller, and a columnist at the FT. His new book is the capstone course – actually, the only course – in a curriculum that begins with the teachings of Eugen von Böhm-Bawerk, matures in the minds of Böhm-Bawerk’s students, Ludwig von Mises and Friedrich von Hayek, takes recess under the careless supervision of Milton Friedman, and matriculates with publications by the likes of Robert Higgs, Robert Nozick, Niall Ferguson, and Edward Chancellor. The student evaluations of Sharma’s course include fawning reviews from ideological allies like George Will and Bret Stephens, but also exclamatory blurbs from ur-liberal pundits like Fareed Zakaria and Thomas Friedman.
The lesson to be learned from this course, however, is always the same, no matter who teaches it. It goes like this: Markets are indispensable to individual freedom and political pluralism because they “de-center” authority. They dismantle the state’s monopoly on power, then disperse it among many savers, investors, and consumers with different preferences and incomes, whose choices, when give proper scope, constitute modernity by convening civil society and enabling individualism. Capitalism is the highest stage of market society, so conceived; as the pinnacle of freedom, it thus forms the outer limit of political innovation.
To be sure, government tampering with the anonymous forces of the market is necessary in times of economic crisis, when unemployment and deprivation render a social fabric woven by commodity exchange and wage labor vulnerable to political unrest or even rebellion. But such tampering is inherently dangerous, because it implies the substitution of rule-bound bureaucracy for the free play of preferences, prices, and choices in the market. It threatens to extinguish the unknowable sources of freedom, which survive only insofar as they remain unknowable, removed from the reach of reason.
Still, such periodic feats (or failures) of crisis management, however notable, do far less damage in the long run than more insidious forms of government tampering: regulation of private enterprise, public spending funded by taxation, and routine central-bank interventions in the business cycle. These create incentives, distort choices, and become permanent fixtures of the economy, gradually eroding freedom. Regulation makes the real world unintelligible, public spending crowds out private investment, and central-bank interventions lead to easy money, and then, before you know it, to free money, which inexorably becomes worthless money.
What Free Market?
This old story is told most cheerfully by Friedman and Ferguson, and most threateningly by Hayek, Higgs, and Chancellor. In writing What Went Wrong With Capitalism, Sharma’s twist on the story is to retell it as if we had reached the ending. That is how it must look from his lofty perch atop the Dumpster of history – into which failed nations, like hopeless addicts, have found themselves diving, after thoughtlessly spending themselves into debt oblivion. He worries that the dollar has already lost significant ground to China’s renminbi, to the sporadic efforts by the BRICS+ grouping of major emerging economies to forge its own monetary union, and more generally to the horizons of investor expectations, because the US national debt has increased so rapidly – and as heedlessly as that of earlier empires.
But the novelty of Sharma’s retelling of this familiar story derives from his ability to draw on leftist or “progressive” accounts of neoliberalism to fortify his own revisionist account of the last half-century. For example, he cites Gary Gerstle, Jonathan Ira Levy, J. Bradford DeLong, and Thomas Piketty to argue that massive government spending to equalize the effects of the Great Recession and the COVID-19 pandemic actually exacerbated the long-term trend toward inequality, as measured by wealth and incomes. These recent events prove that the Reagan Revolution did not usher in an age of free-market neoliberalism; on the contrary, the state’s role in resource allocation has actually increased since then. The cure for the disease of inequality implied by the progressive diagnosis – more rule-bound application of bureaucratic reason – merely worsens the illness by creating and feeding an addiction. Like opioids, the medication has become an all-purpose refuge from painful reality, in this case the need to balance budgets and live within available means.
Sharma is unafraid to press illness metaphors into the service of his argument. The invisible, inevitable, and belatedly symptomatic effects of government regulation are observable, for example, in the metastatic growth of “shadow banking.” This unfettered precinct of the financial sector, which now accounts for 24% of US corporate profits, is, in Sharma’s accounting, the result of regulation, not of its negation. Hedge funds and private equity firms are simply lawful devices by which finance “finds a way” around the law, you see, as finance always has and always will.
According to this narrative, the repeal of the Banking Act of 1933 (Glass-Steagall) was merely a recognition of financial reality – the creative barbarians initially inspired by Walter Wriston at Citibank had already breached the wall separating commercial and investment banking. The rise of “shadow banking,” on the other hand, was a direct response to regulatory legislation – Sarbanes-Oxley (2002) and Dodd-Frank (2010) – designed to prevent financial meltdowns caused by esoteric definitions of bank loan collateral, as happened in the run-up to the dot-com bust of 2001-02 and the subprime mortgage crisis later in the decade. The outright piracy of private equity, its freedom to seize, strip, and sell off health-care facilities, or to buy residential and commercial real estate merely to hike rents or write off tax losses, is what results from any attempt to contain the rational exuberance of profit-seeking surplus capital.
Guerrillas in Our Midst
One would think that Mehrsa Baradaran, a progressive law professor at the University of California, Irvine, and an expert on banking law, would strongly disagree with Sharma’s accounting. She does not. In fact, her book, The Quiet Coup, deploys a similarly medical metaphor to explain the symptoms of a body politic in the throes of a terminal illness. She calls this illness a cancer, not an addiction, but it has the same source – government regulation of markets – and similarly dire effects.
How can that be? Baradaran details what historians, political scientists, and consumer advocates used to call “regulatory capture,” and what theorists of racial capitalism now call “elite capture”: leaders in an industry that is targeted for regulation get ahead of the curve and seize the initiative, actually drafting the legislation. Baradaran argues otherwise, but typically this is not a matter of high-minded officials getting what they want and special interests then infiltrating the new agencies or watering down the new laws after the fact. Since the Progressive Era of the early twentieth century, the business community has sought reform and regulation just as much as public-interest lawyers and activists have. Until the advent of crackpot capitalism in the 1990s, private enterprise’s champions understood that a society held together by commodity exchange and wage labor must continually reconstruct the market, not just to stabilize or increase profits, but also to guarantee social stability and political legitimacy, without which profit-seeking becomes impossible.
So, the neoliberal regime that has put the public at the mercy of the private sector was not the product of a criminal conspiracy; but its emergence does signify corruption of the body politic. As Baradaran puts it: “The neoliberal coup was perfectly legal because it was conducted through the law. The same courts and legal interpretations honed and argued by activists to bend the law toward justice” – the work of the civil-rights lawyers who carried the day until the 1970s – were used to bend it “quietly back to protecting the powerful.” Examples abound, beginning with the infamous Lewis Powell memorandum of 1971, in which the future Supreme Court justice sounded the alarm for US corporate leaders about the perils of progressive legislation, particularly President Lyndon B. Johnson’s Great Society agenda. And as Friedman’s surprisingly effective shareholders’ rights doctrine took hold during this period, the Federalist Society, founded in 1982, began organizing and mobilizing ideologically kindred lawyers and judges. Corporate guerrilla warfare had erupted, and no counterinsurgency manual was available until it was too late.
Banking was the cutting edge of the counter-revolution that rolled back the real gains of the 1960s. Here, Baradaran echoes the language of Wolf, King, Buiter, and their antecedents in the rhetoric of America’s populist past: “For much of US history – that is, until the 1980s – banks were treated, in law and in practice, as quasi-public institutions.” But while regulation could and did increase, as per Sharma’s redefinition of the Reagan Revolution, that did not mean that the liberals and their leftist comrades had won. On the contrary,
“The Reagan era was when the quiet coup became a big bang. By the time he took office, the Powell-memo-inspired long-range planning had been completed, the right-wing think tanks were positioned inside the administrative state, and Law and Economics had eroded common law contract protections. As such, neoliberalism transformed the world within a few short years in the 1980s – and it was done through finance.”
Law’s Labor Lost
Anat Admati of the Stanford Graduate School of Business and Martin Hellwig of the Max Planck Institute almost agree with the argument, advanced in different ways by both Sharma and Baradaran, that the left should not automatically celebrate market regulation. In the new expanded edition of The Bankers’ New Clothes – which Wolf calls “the most important book to come out of the financial crisis” – they suggest that something like criminality has paid off, big time, for the nudists who run US banking. The authors explain that their goal is not an indictment of criminal behavior driven by conscious intent or obdurate negligence, because, as far as they can tell, no laws have been broken – not exactly, anyway. They just want to know “why violations of rules could have become the normal way of doing business in banks.”
Their answer is consistent with the findings of Joris Luyendijk, a contributor to The Guardian and the author of Swimming with Sharks, who, having interviewed dozens of London bankers in the wake of the Great Recession, concluded as follows: “Seven years after the collapse of Lehman Brothers, it is often said that nothing was learned from the crash. This is too optimistic. The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little that they will not get away with.”
Admati and Hellwig valiantly resist this conclusion, but they end their massive book with a chapter on regulatory inertia which wearily explains why the regulators don’t need to be captured (or cajoled or bribed or browbeaten or extorted) by the banks they are supposed to regulate. “For rules to be effective,” they intone, “they must be enforced. Enforcers, however, are often inactive, because of fear, complicity, or sheer laziness.” Fear prevails over the other causes, it seems, including the fear of wasting scarce resources on cases that become too costly simply because banks can afford the best legal talent. But the bottom line is clearly marked: “As abstract entities, corporations cannot go to jail.” As a result,
“In most cases, the authorities actually avoid the costs and the uncertainties of a court trial by reaching a settlement with the corporation that requires the payment of a fine but does not require the admission of wrongdoing. If the fines are small in relation to the size and the profits of the institution, there is little if any deterrent: fines are merely a ‘cost of doing business,’ never mind the unlawfulness.”
The title of that last chapter is a question: “Above the Law?” By this point, after 200,000 words, it sounds wholly rhetorical, almost like an inside joke. But, like Sharma and Baradaran, these are serious authors who believe that something radical must be done to restore faith in markets as the foundation of freedom – to renovate the headquarters of capitalism, revive the patient, restore its fashion sense, and replenish its wardrobe. Otherwise, they claim, conspiracy theories will continue to flourish, the dollar will continue to lose market share to rival reserve currencies until the US goes bankrupt, and, as Admati and Hellwig put it, most Americans will continue to believe that “our economic, political, and legal systems are rigged against ordinary people” until someone like Trump proves that they are not.
But they are scientists without a lab, a grant, or a staff. Sharma will never convince anyone that adaptable models of governance under capitalism are to be found in Taiwan, or Switzerland, or Vietnam, where free markets and strong regulatory states co-exist. Baradaran will never persuade us that the promise of free markets and free trade can be retrieved from the wreckage of neoliberal globalization by nurturing small business and encouraging interfirm competition. And Admati and Hellwig will never convert enough of us to the cause of a purified political discourse, a public square where no truth must ever be spoken to power because power derives from truth.
Capitalism and Freedom
Joseph E. Stiglitz has a more realistic and practical approach, precisely because it is more theoretical. That sounds paradoxical, but, given the clear choices America’s political system has made available since Joe Biden withdrew from the presidential race, it is not: the United States is already in the thick of a debate about what freedom means, which requires answering the question of who gets to exercise it and how. In The Road to Freedom, an obvious retort to Hayek’s most-read treatise, The Road to Serfdom, Stiglitz walks us through the theoretical controversies that have mattered since the 1920s, with special attention to the difference between the claims and the consequences of the contestants’ ideas.
Stiglitz’s premise is that neoliberalism has already died and cannot be resuscitated. That is a good thing, he insists, because, having promised more freedom for more people by liberating them from the shackles of rule-bound bureaucratic reason, whether imposed by Soviet planners or New Deal agencies, it produced the opposite. Perfect competition and self-regulating markets are fantasies that, if indulged by stripping public policy down to the bare minimum of annualized monetary growth, will lead directly to the complete breakdown of market society and, from there, to political dictatorship from left and/or right, as per the warnings issued in 1944 by Karl Polanyi in The Great Transformation and Lawrence R. Klein in The Keynesian Revolution (the original retorts, as it were, to Hayek’s manifesto).
It is not as if Stiglitz thinks that the neoliberals epitomized by Bill Clinton delivered on their promise of less regulation: “What really was new was the trick of claiming neoliberalism stripped away rules when much of what it was doing was imposing new rules that favored banks and the wealthy.” The novelty of his book lies elsewhere, as it becomes the analog of Jefferson Cowie’s approach in Freedom’s Dominion, digging into the various iterations of the word itself, how its meanings differ under different historical conditions, which include the assumptions available to the people who can act on those meanings.
Freedom, Stiglitz shows, does not require the absence of coercion, or the erasure of all external obstacles to the accomplishment of private purposes, because no social system can subsist as a collection of centrifugal particles without the application of force. So, rational deliberation, political debate, and the authority of rule-bound bureaucratic reason are required to decide which private purposes are socially acceptable and adaptable to public needs, or the common good, through the exercise of state power. Free markets are of no help in addressing such issues.
By Stiglitz’s accounting, freedom for most of us requires social democracy, or what he also calls “progressive capitalism.” His book demonstrates that it no longer matters much what we call the means by which we realize freedom, as long as we understand that none of us will get there if we leave anyone behind. The US Supreme Court’s fetishization of the presidency notwithstanding, we are long past the need for an emperor, clothed or not.
Mehrsa Baradaran, The Quiet Coup: Neoliberalism and the Looting of America(W. W. Norton & Company, 2024)
Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It – New and Expanded Edition (Princeton University Press, 2024)
Joseph E. Stiglitz, The Road to Freedom: Economics and the Good Society (W. W. Norton & Company, 2024)