Part 1. Free Markets Depend on State Intervention
After President Bush signed the controversial bailout bill into law, Senior Editor of The Real News Network Paul Jay talked with Leo Panitch to get his analysis of the situation. Leo said it is irresponsible to suggest that the government should have let these banks fail, ultimately advocating for the full nationalization of the troubled banks. Leo then explains the significance of the US treasury bill as the base upon which everything else in the global financial system is valued, as well as explaining the US government's role as the guarantor of the t-bill's value. Finally, Leo criticizes the dominant paradigm that states and markets are separate and opposing forces in the modern capitalist system.
Transcript
PAUL JAY, SENIOR EDITOR, TRNN: With the passing of the bailout bill through Congress, various voices are still debating will it work or will it not. The bill was rationalized through the idea that we are looking into the abyss: without the bill, we're looking at financial collapse and depression. Other people are saying these are scaremongering tactics; this is just another bubble, another blip; or let it fall, because something okay will take its place. Well, just how okay is it anyway, and how dangerous is it? Joining us now to analyze the situation is Professor Leo Panitch. Teaches political science at York University in Toronto. He's the author of American Empire and the Political Economy of International Finance. Thanks, Leo, for joining us.
LEO PANITCH, POLITICAL ECONOMY, YORK UNIVERSITY: Glad to be here, Paul.
JAY: So were we looking into the abyss? Are we still, post-bailout bill, looking into the abyss? Or not?
PANITCH: Well, I think it was irresponsible of people to say that there didn't have to be some means of stabilizing the financial system. I think the—.
JAY: And you're talking about people who said, "Who cares if the banks fail?"
PANITCH: Yeah, "Who cares if the banks fail?" or, you know, that nothing has to be done, or, "It's all a scaremongering tactic." This is a very major financial crisis. And you could get a sense of how major it was from the fact that the Russian finance minister, and the head of the European Central Bank, and the German chancellor, and the German finance minister, all of whom are calling for the American state to act after Congress turned down the first bill, because it has global implications. And they expected the American state to exercise its responsibilities for managing the financial system, which is very integrated internationally. And it would have had severe consequences for ordinary people as well, who are tied into the financial system, not only through their savings accounts, but also through their credit cards and through their, of course, pension funds, etcetera.
JAY: One of the arguments that was coming from the left, who said, "Who cares if these institutions fail?" is that the States should introduce direct ways to finance ordinary people.
PANITCH: Well, that would have been even more intervention. Sure, you could have argued that there should have been a nationalization of the banking system. And you can get different kinds of nationalization. You get the kind where it's done to save bankrupt banks and then sold back to the private private sector, often to the very same people who you saved, which is most common. So you could have had that; by all means you could have had that. And you've got that—.
JAY: Or some people are arguing for more direct ways to give consumer liquidity and not worry about who loses on Wall Street.
PANITCH: That wouldn't have done it. What was happening was that the inter-bank loan market was seizing up. Banks have been afraid to lend to each other by virtue of not knowing what really is in their accounts, because you couldn't value so much of this debt. This debt could not find a market that are on the bank books.
JAY: "Debt" meaning all the subprime housing debts.
PANITCH: And all of these assets. Not only that, but, yes, a lot of derivatives.
JAY: What they're calling "toxic debts."
PANITCH: The toxic debt. How much of it's toxic is unclear, but, you know, those markets in what are called derivatives, assets based on assets, had seized up, and you didn't know what they were worth. So, you know, this was the problem, that insofar as the inter-bank market seizes up, where banks lend each other money overnight to balance their books, right, that's what was seizing up. And not only in the United States—it's happening everywhere, and that had to be dealt with. Sure, a more radical government would have nationalized, would use this as an opportunity to nationalize the banks, put them under public control, and you'd have the banking system, the whole financial system, treated as a public utility, which it ought to be. But given the balance of forces in the United States, or for that matter almost anywhere in the world today, that wasn't on the cards. But just to say there would be no problem if nothing was done I think was irresponsible.
JAY: So in terms of the global finance system, talk a bit about what is the importance of the American Treasury Bond. What role does it play? And why was everyone so freaked out at this moment?
PANITCH: Well, I mean, what's happened is that over the last 50 years, especially over the last 30 years, the world's financial system has revolved around Wall Street and the city of London. And the city of London is really an offshoot of Wall Street, and it's very renowned, in some ways the biggest financial sector, but it's dominated by American financial institutions—American banks, American financial institutions. And they sit on, they depend on the guarantee that the American state gives to money, above all gives to the dollar. All calculations of value in the world go back to what value is attributed to US Treasury bills that now serves the function that gold used to serve back in the 19th century. And that's because the world expects that the American state will be the state that guarantees property. All of the states in the world that will be responsible for guaranteeing property, above all the money that capitalists lend to states, that the United States is the ultimate in that respect.
JAY: But bailing out, and I assume through one form of borrowing or another, whether it's $700 billion, if it winds up being $1 trillion, or less than that, why was that necessary to do that to defend the American state and American Treasury bonds?
PANITCH: Well, it wasn't so much defending the American state; it was the American state performing its function.
JAY: I meant the American state's role in defense of the treasury bond. I mean, why was one necessary for the other? Or was it?
PANITCH: Well, I think the reason that the world sees the Treasury Bond as as stable as it is, as the measure of all value, is that they know the American state or they hope the American state is going to act—
JAY: No, no, that I understand.
PANITCH: —as a manager.
JAY: No, that I understand. But did saving these Wall Street institutions defend the Treasury bond? What's the connection there?
PANITCH: When you're defending a Wall Street institution, you're not just defending that one institution; you're defending all of the people who expect that their money will get paid back from those Wall Street institutions, which is a much, much wider and larger part of the globe. It's partly to do with the pension funds that workers have that, you know, need to be met by those institutions; it has to do with all the world's capital that's invested through those banks. So you're not just, you know, dealing with you're going to save that bank. In fact, for the most part they've let the shareholders go under. You know, in that sense, the shareholder's taking a hit for every one of these corporations. They've all taken a hit. But who's been saved are the people who have assets in these banks. And that's what's been saved. That's a much larger group than these particular Wall Street banks. In that sense the United States, in playing that role, is playing the role of guaranteeing to capital that they will be able to get assets out of New York and, more broadly, out of London.
JAY: So you think they didn't really have a choice.
PANITCH: They had to act. There's no question. And in any case, you know, any understanding of the nature of a capitalist state would lead you to know that they would act. It's the illusion that the state somehow stands apart from capitalism, is not part of capitalism; it stands outside of it. It's all this misunderstanding when we speak of states versus markets. These markets are full of power, asymmetric power, very unequal power, and those power is founded on the backing that states give them. The free markets that we know have been made by very active state intervention, and people enter into market activities knowing that states will back up property in those markets. So it's an illusion to think that states are something other than capitalism. When you understand American capitalism, you understand the state is part of it. Federal Reserve and Wall Street, right, need to be seen as part of a whole—sure, in which the Federal Reserve is not acting as a competitor inside the market; it's acting as an overseer of it; more or less regulation in different periods, it's true, but it's an overseer of it.
JAY: Well, in the next segment of our interview, let's get into the roots of the state and its integration with capital markets and capitalism itself in the United States. And also just how is this going to affect ordinary people? And what should they be demanding for their solutions?
PANITCH: Very good.
Part 2: The roots and remedies of the financial crisis
JAY: So let's revisit this question of how did we get to this crisis and what immediate things could people be demanding in terms of solution.
PANITCH: Well, in terms of how the mass of Americans got into this crisis, I think it does go back to the fact that in the 1970s there was a fundamental switch from trying to integrate the workers and the poor people of America into American society, into the riches of American consumerism.
JAY: And maybe just to get some context, especially for some of the younger people in our audience, there were cities burning in the 1960s. You had the Civil Rights Movement. You had workers demonstrating for their rights and for higher wages. The entire society in North America was at a state of intense conflict.
PANITCH: Yes, and you were sending off young black men, conscripting them and sending them off to the Vietnam War. There was the Black Power movement. And the response more under Lyndon Johnson than under Kennedy was to create the war on poverty, or what was known as the Great Society programs, which involved increasing public expenditure at the same time as you were prosecuting the war in Vietnam at great expense. And that was part of the period of inflationary pressures that public deficits were causing, that workers wage demands were causing, 'cause when workers had full employment, they, you know, felt they could make high wage demands in order to buy everything that they were being told to buy that the good life was all about. And the response in the 1970s—and it was a product of the fact that the United States dollar was the world currency, and on here was the rest of the world holding dollars, and they didn't want their dollars to be devalued by inflation, were demanding of the United States that they cut back on their public expenditure. And they did, and they cut back on it.
JAY: You're talking about the Volcker shock treatment.
PANITCH: They cut back on it even before that, even under Jimmy Carter in 1976-77. And they cut back on public expenditure, but they still had to try to integrate the masses in the cities. They still had the problem of how do you house people. And one of the things they did was to try to integrate them through getting them into the financial system as borrowers. A act which a lot of radicals were pushing—and they didn't mean it in a way that would end up in this crisis that we're now in—was that banks ought to be required to lend to poor people, that they had to lend to those portions of their communities they'd never lent to. Right? And the banks all objected. "What do you mean? We can't lend to poor people. We're not going to be sure we're going to get paid back." They said, "Okay. We'll allow Fannie Mae and Freddie Mac, the government-sponsored mortgage housing corporations, to create this secondary market in mortgages. They'll buy them off you."
JAY: When the Republicans now critique this, they leave out the extent to which there was social unrest that had to be dealt with.
PANITCH: Well, they leave out the fact that this was actually a poor option relative to the Great Society programs, that it was happening because they were cutting back on welfare, on the Great Society programs, on food stamps, on public expenditure in the cities, etcetera. So in a sense they drove people into, "Okay, you want to deal, you want to be able to buy in our society, get it from the banks." And Clinton made it worse: having bought into neoliberalism as all part of the third way, I mean, partly he said, "I'm being driven into this because of some"—and he used a word we can't use on television, blank-blank-blank 28-year-old bond trader. Right? But once he did, he cut back on welfare. He did away with the American welfare system, Clinton, right? And what he then did was he radicalized this community reinvestment act, radicalized it in the sense of push people further into trying to get mortgages through this. Right? And this created it even more. And then Bush came in and let every shyster in the mortgage system into this as a competitor, completely unregulated; removed the reserve requirements on Fannie Mae and Freddie Mac, who—you know, banks have a 10 percent reserve requirement that they have to loan as cash—they only have to have 2.5 percent rather than 10; and you got this mountain of debt. It isn't the poor people's fault; it's the product of not being willing to have public expenditure. It's a scandal that the United States doesn't have a massive program of public housing.
JAY: So they could have had two strategies here. One is state investment in cheap public housing direct. Get people to borrow money, get into debt, to somehow buy their own housing.
PANITCH: Exactly. And they pushed it through the private sector; they pushed it through private finance. And of course it was the biggest portion—.
JAY: And they were making money on both sides here: they make money on the interest on the debt, and they make money through the asset inflation in the real estate market.
PANITCH: Yeah, until it all blows up in their faces. So, you know, in terms of what is to be done, we need to look at it historically. Sure, there needs to be regulation; sure, the Bush administration should not have allowed every shyster in the mortgage industry in.
JAY: I can't resist doing a Sarah Palin, her doggone, do you want to look back again [inaudible]. Go on.
PANITCH: Yeah. Well, we do. I mean, we need to learn the lessons from mistakes of the past. And we need to go back to public expenditure. Now, I think it is true that, you know, this is a capitalist system, and that will itself create contradictions. So down the road you have to be able to think ambitiously about being prepared for what's going to happen if you're doing redistributed taxation in order to raise that money. If you're pushing out the private sector through public expenditure, what's going to happen in the long run? And I think you have to build support during that process of public expenditure for actually taking the banking system into public hands, making that a public utility. You can't do that right now apart from a bailout. But I think there's enough anger around that you could be building towards it, not just as a bailout, but as this will become a way of redistributing what is produced in our society in a more rationable, more equitable way, will have a banking system that serves a different function.
JAY: And then the other issue raised by—. I interviewed Chalmers Johnson the other day, and he was saying he wrote a piece recently called "We Have the Money," and he talked about this recent Pentagon budget, which is over $600 billion, that, in fact, right now, if we could just reallocate some of the military budget to civilian expenditure and infrastructure, you could solve some of it rather quickly.
PANITCH: Both through increasing taxes on those who haven't paid, through introducing a massive wealth tax, and through reducing the military budget. And this goes back again to the '60s Vietnam expenditure on the Cold War expenditure, Reagan's enormous inflation of military expenditure just when he was calling for, you know, reducing government spending. There's been a tremendous misallocation of funds. And I must say one of the things that's most scary about Obama and Biden's buying into the threat from Russia and the threat from Iran and the threat from Pakistan is it creates the basis of continuing this kind of increased military expenditure, apart from whatever misjudgment's going to be involved, and I think there are many. And I find that very worrying in terms of what is needed. We need a reallocation of state funding, of state expenditure, massive kind.
JAY: Well, I guess we'll find out whether the reality of this crisis pierces some of the mythology behind the need for militarization.
PANITCH: It certainly looks like it.
Part 3: The financial crisis at the local level
JAY: Welcome back to the next segment of our interview with Leo Panitch, professor of political science at York University in Toronto and author of American Empire and the Political Economy of International Finance. Thanks for joining us again, Leo. So a couple of days ago, Governor Schwarzenegger in California talked about the possibility of a bankrupt California. And if that's true, one can imagine cities and states across the country, and perhaps across Canada as well, going into crisis. What's that about? And what can be done about it?
LEO PANITCH, PROFESSOR, POLITICAL ECONOMY, YORK UNIVERSITY: Well, people who have been watching The Real News earlier this year, they would have had the jump on this, because I remember you and I talking about this early on in the year, and we were talking about the next big shoe to drop would be, insofar as the housing prices fall, states and municipalities, one of their main sources of income is property taxes. And when that tanks, the ability of states to balance their budget and municipalities to balance their budget also tanks, and their ability, therefore, to sell their bonds tanks. And that's what's happening, and it's happening in a big way. It was happening at the time we talked back then to such an extent that Schwarzenegger actually let prisoners out of jail early in order to cut back on prison expenditure. This is, you know, Schwarzenegger of all people—law and order.
JAY: So what can be done?
PANITCH: So, well, a very radical move is needed here. One needs to go back to remember that the Great Depression really began with municipalities defaulting on their debt, and closing down relief, etcetera. The only thing that can be done is for the federal state to guarantee the bonds at state and local levels, and to guarantee that it will back up a default in any of those. And that would overcome this problem. This is a very radical step.
JAY: Why? Why is it so radical?
PANITCH: Well, because it means that the federal state is taking on a responsibility for spending that would be done by local aldermen and councilors, many of whom they would see as irresponsible, unconstrained, etcetera, etcetera, in the usual balance-the-budget kind of way. And this has a lot to do with what has really been the populist essence to the neoliberal era, to the Reaganite movement, to the free market ideology. It's never been about getting the state out in the sense of backing up capital; it's been about cutting taxes. That's been oriented, of course, substantively towards the rich, towards capitalists, towards the wealthy, and so on. Very true. But it's had this great appeal to people who come to define politics, democracy, their vote in terms of "Will I pay $100 less a year in taxes or a maximum $1,000 less in taxes?"—the ordinary working person. So if you look at the presidential debates, the vice presidential debates, the Canadian election debate, so much of it was bound up with "I will not increase your taxes." And the irrationality of this is staggering, in the sense of if, you know, municipalities are going to go bankrupt, are people really saying that they will not pay $100 more in taxes? And the mentality of it is irrational. But the notion is democracy's about "I use my vote to pay as little as possible," when they, you know, will pay $100 more to Rogers at the bat of an eye without even fighting it, or a cable company.
JAY: Or Time Warner or Comcast.
PANITCH: Or Time Warner. Yes, exactly.
JAY: But isn't there a point that if the federal state, the American state, is going to defend Treasury bonds, perhaps even if under critical circumstances defend even some state or municipal bonds, at what point does that backing up by the state meaningful if they don't raise taxes?
PANITCH: Sure.
JAY: 'Cause you can't just print money and say, "We're now backing up the bond."
PANITCH: Well, let's remember that during the Second World War you had enormous deficits, the highest in history, and nobody was calling the States' bonds at that moment, because of the enormous deficit, when it came to a major project like that. Moreover, when you have a major recession or a depression, where do capitalists or anybody have to put their money that's safe? In public debt. Right? You know, back in the 1930s, everybody was screaming that Roosevelt was a socialist, all the capitalists, for his union reforms and welfare reforms. They were lending money to the state. They were lending money to all the agencies he'd created to build all the infrastructure, etcetera, etcetera. And that's going to happen again if states are prepared to take this on. That's not to say that there shouldn't be a massive redistribution of wealth through the tax system. Bernie Saunders, the American congressman, in the face of the bailout, was saying you could raise $300 billion by imposing a surtax, a 10 or 20 percent surtax, on all incomes above $500,000, and I totally agree with him, but it doesn't go far enough. They've done away with the estate tax, as they call it in the United States, the wealth tax. We ought to have a wealth tax. I mean, after the enormous inequalities that have grown in wealth over the last 30 years, there ought to be a very major wealth tax.
JAY: Well, is there any rational, realistic way, other than some kind of tax increase, to deal with the panic?
PANITCH: Well, I think there can be both deficits. People do not have to be afraid of it. It was ridiculous to see every Canadian politician promising there wouldn't be a deficit. It's not anything they can control anyway, and pandering to this irrationality around "I mustn't have a small increase in my taxes." But more than that, I entirely agree with you that insofar as one doesn't want to be beholden to have the public debt overburdening a particular government, there also ought to be a massive redistribution of wealth in the society passing through the state sector, passing through the government sector, definitely.
JAY: Is there a point where the world financial system or China and Russia and Europe and the Gulf states say that "We can't trust the American system any longer, and we don't trust the American Treasury bond, we don't trust this financial system, and we're going to have to take whatever the hit is and come up with something else"?
PANITCH: It's conceivable, but they are so integrated that it's a bit like saying, "Is there some point at which Nova Scotia doesn't trust the Bank of Canada?" It's integrated in that way. They have been so anxious for the American state to act, to bail out. And so, you know, when one hears they're spending too much money, they're going to pull their money out, etcetera, they were the ones who were screaming, "We need this trillion dollar bailout." It's irresponsible of the American state not to be doing it. We're dependent on the American state to do it. And they understand very well that this is a very integrated political system globally which coordinates the management of global capitalism.
JAY: But for the American state to then say, "Okay, we're going to back state bonds, municipal bonds," the potential debt that that could create, doesn't that then force the American state, for the sake even of preventing a continuing panic around the world, to say, "We're going to raise taxes in order to back up this backing-up"?
PANITCH: Absolutely. They would need to both raise taxes but also have access to a great deal of private capital in the world that is going to have and does have no safer place to put their money than into US Treasury bonds. And that's why US Treasury bonds now, people are buying them, virtually getting no interest on them, and are happy to hold them, 'cause it's the one thing that they're sure of.
JAY: Now, we're talking as if there's rationality behind all of this. And a lot of people thought there could never be an invasion of Iraq, 'cause there was nothing rational about that. And the more I grow older, the more I say to myself, never underestimate the role of banality and stupidity in the making of history. We're not seeing that much rationality right now. And if we're not seeing some more rational solutions, what are we likely to see out of this?
PANITCH: Well, rational in who's terms?
JAY: Well, even in terms of just keeping the system going, you know, with kind of things as is.
PANITCH: Yeah. I mean, you saw irrationality within the framework of keeping the system going when American congressmen didn't vote for what Paulson had produced. A lot of them didn't vote 'cause they thought, "Well, I can vote against it. It's going to pass anyway. And then I can go to my constituents and say, 'I voted against it. Don't blame me.'"
JAY: You had others like Kucinich saying use the opportunity to have a more profound solution.
PANITCH: You had others who voted on principle, and you had others voting not understanding that this was as serious a problem as it was.
JAY: What Nader was saying was interesting, was that you actually had a point where you had some real leverage on Wall Street, "you" being the public interest, and could have used this opportunity—if you're going to bail them out, bail out under certain conditions.
PANITCH: Sure. You could have, had the treasury not been the type of capitalist organization it is, had the Federal Reserve not been the type of capitalist organization that it is, and had the Democratic Party not been the kind of capitalist organization it is, had the American Democratic presidential candidate not been as dependent for funding on Wall Street as he is, had he not had among his advisors so many Wall Street and Goldman Sachs executives.
JAY: Who helped create this crisis in the first place.
PANITCH: You could have had it if you have a different balance of forces in the United States, if you have the development of the kinds of movements that either transform the Democratic Party or create a new type of party outside of it, part of its agenda being to reorganize the American state so that it is really democratic rather than phonily democratic in the sense that it is. Yes, you could have had that. That's not to say people shouldn't be calling for it. I admire those who do. I just think one also needs to understand this isn't about a change in policy; it's about a change in deep structures.
Part 4: The cash-out society
JAY: So there's so many pieces to this financial crisis that one can break down and talk about, but one's struck first of all with the issue of panic. So much of what's been doing is in terms of the bill, the rescue bill, bailout bill, however you want to label it, is about stopping panic. And the bottom line is people lining up in long lines outside the doors of banks asking to get their money out, 'cause nobody trusts the whole financial system anymore. So there's that, and then there's what people are calling "the real economy." And let's move to this issue of the real economy to start with, because if people had faith in the real economy, we probably wouldn't be seeing such chaos in the financial side of it. So talk about the fundamentals, which John McCain says are just fine.
PANITCH: Well, I think it is true to say that had the American corporate sector and American exports not done as well as they've done through the last decade, this would be a far, far worse problem than it already is. It's acted as a stabilizer.
JAY: And that's to do with the weakness of domestic demand.
PANITCH: It has compensated for the weakness of demand, this demand, but, you know, American exports, partly related to the decline of the dollar, but American corporations have been able to take advantage of it, have been growing by close to double-digit figures for five, six years, which is quite remarkable. And corporations have been quite flush in cash. Their profits have been relatively high. (I'm talking about non-financial corporations.) And that has helped stabilize things. This is talking about outside the auto sector, of course, which is an entirely different thing, and that's been weak. And so it means particular regions have been really hit, and here in Ontario we’ve suffered from that. So that's been a stabilizer. At the same time, however, this system has been kept going by consumer credit for 30 years; it's been kept going by workers expecting that when they get older the value of their homes and the value of the shares that their pension funds hold are going to be worth a fortune, are going to be continually going up.
JAY: The entire society's sitting around, waiting to cash out, in theory. Most people don't get a chance, but this cash-out mentality—. I heard this term the other day, which I thought was great: a liquidity event. Everyone's waiting for the liquidity event.
PANITCH: For the liquidity event. That's lovely. Exactly. And everybody had confidence in this growth of this asset bubble that has been going on since the early '80s, with constant crises in it, you know, with constant moments of crises. Then the American state would come in and it would throw an enormous liquidity at the crisis, a helicopter would drop it in, and then the thing would take off again. Well, what happened this time was that it really began to unravel in a serious way, and in such a way that because it hit in the mortgage market and in, above all—it's not surprisingly—that portion of the mortgage market that was trying to integrate African-American communities, and Chicano communities, etcetera—.
JAY: Well, this is one of the points you make in your recent article is that they needed and got sections of not just the middle section of the working class but even a poorer section of the working class to buy into the cash-out mentality: get into a house with cheap money, sell it for a fortune later on, and everyone will live happily ever after.
PANITCH: Well, in order to be fair, in order to sustain your income, re-mortgage your house, which a fair number of people did. And a lot of these subprime mortgages were not only got into—and although it was that, it was also re-mortgage your house. Part of that was, if I re-mortgage my house, I can maybe add a room and then sell it for a hell of a lot more money, and part of it was that people consume through that. So, you know, at root this has to do with the fact that American trade unionism was defeated 30 years ago, that the Great Society programs which were [inaudible] the 1960s—.
JAY: Back up a step. And in terms of trade unions being defeated, you're talking about how small the section of the organized workers have gotten. It's a question of militancy.
PANITCH: That's one side,—
JAY: And a stasis in wages.
PANITCH: —that there was a constantly declining portion of the American working class that was unionized. But it was not only that. It was that the ability to win wage demands was undermined in a really serious way. And so even those that were unionized from the early '80s on were suffering a stagnation in their wages.
JAY: And a lot to do with this threat of cheap global labor. If you ask for more money, we're going to move our factory.
PANITCH: That did, but it also had to do with the kind of reactionary role that labor boards played, and it had to do with the complete defensiveness and confusion of the American trade union leadership, which, you know, had forgotten that they were dealing with a society based on exploitation and didn't know how to engage in struggle any further. I mean, it really is quite remarkable.
JAY: And just to remind viewers, and you tell me if I'm correct, but essentially ordinary American workers' wages—and I don't think Canadians are that much better off—more or less in 1972, wage labor—.
PANITCH: Some people say. It varies by sector. But their standard of living has not gone down. And why has it not gone down? Because of credit, or because whole families are working, or because people are working much longer hours. So that's really what's happened. And, yes, we've come up against the kind of crisis that depends on people being able to borrow in order to spend. The borrowing goes through the credit system, goes through the banking system, whether it's through mortgages, through credit card debt, what have you, and this spills over to the real economy in the sense of, you know, will this seize up, this credit-driven demand? But not only that—.
JAY: But seize up because so much of the credit is to—
PANITCH: Is to working people.
JAY: —who can't really afford it.
PANITCH: Yeah. But that isn't all. It also, of course, while the non-financial sector has done relatively well, they've got to be able to issue what is called commercial paper, even the big corporations, you know, through which, in the short term, getting into the money market, they pay their workers, they buy supplies, etcetera. And the danger is: will that seize up? *And that began [inaudible]
JAY: *Or default, or major corporate default on that too.
PANITCH: To some extent that's been a problem. And so, in the short-term money market, you know, non-financial corporations are involved in it. And then you see the problem of small-, medium-sized corporations having trouble getting access to debt, as the banking system, you know, they're afraid to lend. They don't know what calls are going to be on their money. They're afraid to lend money out. And this is the kind of thing that leads to a recession and can lead—although it certainly hasn't happened since the 1930s—to, you know, the equivalent of the Great Depression. That also brings in government debt, not so much at the federal level, especially in the case of the United States, where people see the American state as the guarantor; it'll never default on its debt, etcetera. And that was kind of proven by the way they immediately nationalized—re-nationalized Fannie Mae and Freddie Mac, 'cause everybody took that as government corporations, even though, you know, there had been this privatization under Johnson in the 1960s. But the municipalities in the States are having difficulty selling their bonds.
JAY: Well, in the next segment of our interview, let's talk about what is the next consequences of where we're at right now, for cities, for states, and Canada, for provinces and cities, and the whole issue of what's going to happen to these jurisdictions that base their taxes on property, if property keeps tanking.
Leo Panitch is the Canada Research Chair in Comparative Political Economy and a Distinguished Research Professor of Political Science at York University in Toronto. Panitch is also the author of "Global Capitalism and American Empire" and his most recent release "American Empire and the Political Economy of International Finance".