The Irrationality of the System Has Been Fully Revealed – Leo Panitch

The Federal Reserve’s finger in the dike won’t contain the economic storm; we need to think through the steps of achieving democratic central planning and public ownership. Leo Panitch on podcast with Paul Jay.


Paul Jay
Thank you. So you’ve written about the role of the U.S. Treasury and Fed as what you call the manager of global capitalism, and you’ve questioned whether it could continue to play this role in a crisis during a Trump administration. So what’s your assessment so far?

Leo Panitch

Well, one has to say that since the middle of March. The Fed has been remarkably successful as the world’s central bank in preventing a complete seizing up of the global financial system. So what has effectively has happened then? I’m not sure it’s right to call it a deepening depression or to make the comparisons with war so many people are doing, because essentially what has happened is that the world states have shut down production. 

This isn’t something that was triggered by financial collapse or very low growth rates. This after all this triggered by a terrible pandemic, the kind we have not seen in a century, and the world economy was essentially shut down. And in so far as financial markets began to see, that was about to happen, especially in the United States, they began seizing up. And what the Fed did, remarkably, was to start doing things it had never done before, which was to buy commercial paper, that is these short term bonds that corporations issue in order to balance out their cash flows, pay them back over 30 days or 90 days. 

And it started buying not only mortgages, as it did in 2008, but also municipal bonds, of which the US has the largest bond market anywhere, with the world’s banks buying United States municipal bonds. And the Fed has always refused to do that because it would mean profligacy on the part of local governments which don’t have much tax base. So this is a way of disciplining them. And that’s why New York went bankrupt in 1976 because the Fed wouldn’t buy its bonds.

The Fed is even buying junk bonds. It’s buying corporate bonds that have below B rating. And all these things are not just being done in the United States: on top of all of that, it has reinvigorated the Swap relationships with the leading advanced capitalist state central banks and is providing them with dollars. And what this proves, again, is that even under the incompetence and confusion and mendacity of a Trump presidency, when the world economy shudders, when all capitalists fear about the value of their property, they pile into the American dollar, and above all, into the American Treasury bill as the core bond of the American state. And that’s because they know that the American government is, above all, dedicated to protecting property around the world. 

So it is quite remarkable how Fed has overseen some six trillion dollars in liquidity being poured into the world’s financial system, and how this has managed to stabilize it. In March, it looked like there would be a global stock market collapse, now even the stock markets have revived.

Now, that said, the Treasury remains run by an effective idiot, who is nothing like Robert Rubin in the 1990s or Larry Summers or Tim Geithner under Obama. The Treasury still has not replaced many of the key offices that the Trump administration should have filled when it fired the more progressive, quote-unquote, Obama appointees. As we know, the State Department has been bereft of so much of its competence, speaking simply, on the American state’s own terms. 

And in the case of the Fed, Trump appointed lots of people to the various regional and national Fed boards, but the Fed retained its autonomy. Ironically, we used to criticize independent central banking because it meant that central banks couldn’t be told to loosen the purse strings so that governments could engage in spending that wasn’t austerity related. Now, the independence of central banks is providing the lifeline for its autonomy from an administration like Trump’s so as to be able to keep the global financial system going at a time when production has been brought to a stop.

Paul Jay
How long can this go on for that to continue to keep the markets going through stimulus, through creating money as production continues to more or less be stopped. You look at the more recent predictions from the CDC, they’re talking a year to two years before a vaccine, and as a spokesman for the CDC just yesterday said, this may be just the beginning of the pandemic, and we are so far from a peak. How much then can the Fed take on to keep creating all this money? And then the second thing is it’s understandable that some of this money has to go to businesses to keep them going but if to a large extent, the businesses are not continuing to pay people or laying people off and using the money to just pay off debt, which they incurred to a large extent through stock buybacks, then where does all this end up?

Leo Panitch
Yeah, these are the right questions to ask. What the Fed is doing is providing liquidity for the system to operate. But in so far as production is interrupted for any considerable period of time or even without it lasting as long the lockdown as you’re speaking about, if demand doesn’t revive when the lockdown is over, because people then will start need to pay their taxes, they’ll start to have to start repaying the debt that even businesses – small businesses, medium-sized businesses, large businesses – will have to start repaying the debt at that moment. So they won’t be buying from one another all that much at that time. It becomes not a liquidity crisis, but a solvency crisis. And we just saw today that one of the most revered and largest of America’s department stores, Neiman Marcus, has declared bankruptcy.

So, yes, this is the right question to ask.

Moreover, you know, it’s a question as to the US relationship between the rest of the world. The Fed has been coordinating with the central banks of the advanced capitalist countries. But in so far as developing countries, what used to be called ‘third world’ countries, are unable to meet their interest payments to roll over their debt, as the private investors who piled into both government and private debt into ‘third world’ countries because they weren’t getting much of a return from the interest rates in the advanced capitalist countries, now want to pull their money out.

And as a result, the IMF has canceled debt payments from a great many countries in the south. And the Fed, again, has orchestrated, partly through the G7, but especially the G20, that the bilateral loans from richer countries to poorer countries will be postponed – not canceled, but postponed. That said, the majority of the debt is owned by private assets managers, private companies, commercial and investment banks, etc. And getting them to put a moratorium on the debt is extremely difficult. And even if some of them agree to, not all of them will agree to, as happened with Argentina at the beginning of the 21st century. 

So it’s not clear that even with all of this coordination, the Fed will be able to manage all of this. I have to say, one of the things that I think that we haven’t been aware of as we talk about this is that in so far as the financial system hasn’t collapsed, this does actually have to do with the regulations that were introduced after the 2008 crisis on the banks. By forcing them to keep more capital, what is called capital adequacy, first in the United States, and then together with other countries through what is known as the Basel agreement, both American banks and European banks entered this crisis with more capital on hand than was the case in 2008, much more. And the result of that is that they haven’t called their loans, which would have led to a cascade of financial shutdowns. 

Whether they are actually now leveraging what the government is providing to them by buying mortgages off their hands, buying junk bonds off their hands, municipal bonds off their hands – whether they’re actually leveraging that and whether they will in the fall or next winter be lending further to mortgage holders, to companies, to corporations – this is a very, very big question. But it is remarkable, and it couldn’t have happened without the reforms that worked after 2008, that it hasn’t been the banking system that has been fueling the crisis.

Paul Jay

If you go back to the countries that are not in the advanced capitalist world, what you spoke about is their ability to borrow money and pay off debt. And even if the current debt is payments postponed. Those countries don’t have the ability just to make up money the way the U.S. does. And to some extent, Europe, they need U.S. dollars. They have many of the countries that have to import stuff. They don’t even have enough food domestically often. You’re talking millions and millions of people who are going to be destitute if they’re going to manage global capitalism. They’re going to have that whole moral damage. 

Leo Panitch

But absolutely, Paul, that’s the moral…

Paul Jay

Not just moral. What happens with a COVID virus running rampant through these countries? It’s not going to just stay there. Mass migration. Try to get away from the destitution. It’s not just a moral question.

Leo Panitch 

Paul, you’re absolutely right, by saying it is not just but also a moral question, when what I was posing was just in capitalist terms the actual managerial question. You’re quite right to be raising all of this. And insofar as exchange rates are collapsing, which they are vis a vis the dollar, it makes the cost of imports even more difficult. And in so far as the American state, but not only the American state, the Canadians, etc., are scrambling to get hold of PPE protective equipment from China and elsewhere, they are pricing out the ability of the poorer countries of the world to get their own protective equipment. So the danger should the pandemic explode in the global south, in Africa, in Latin America as it hasn’t fully yet, then all those factors enter into this. 

So you’re absolutely right. I was simply pointing to, or was asking us to note, that the financial system has not collapsed. There hasn’t been a run on the banks – imagine what would had happened then on top of what’s now going on. I was also trying to note how great the problem is. Once you look at this globally, not just in terms of the advanced capitalist countries but in terms of the difficulty when even the G20, which includes China, Turkey, etc., get together to try to cope with this to some extent knowing they can’t control what private capital will do, what hedge funds will do, etc. 

Now, once one raises the dimension that you’re raising of the inequality and the dangers that this poses, this also needs to enter into the equation in terms of inequalities inside the advanced capitalist countries themselves, where there are many pockets that are increasingly in ‘third-world’ conditions in any case, and the degree of inequality is phenomenal. The ability of the poor people in these countries, and for that matter even the middle class to be able to resume consumption is much limited by the fact that so much consumption is debt-driven, by virtue of the fact that it depends on them being able to get credit since their wages have stagnated since the early 80s or late 70s, and they haven’t since recovered what they lost by way of many of the assets that they held, especially the houses they lost during the crisis of 2008. So they don’t then have the assets to roll over increased credit. So these are the enormous managerial challenges that capitalism is facing in this new crisis.

But I think it needs to be stressed that this is a production crisis. This isn’t something like in 2008 that was triggered by speculation in finance. This is something that comes right to the heart of any productive system that would be close down. I mean, the irony of calling this a war is that what happens in a war is that production is ramped up, that you get economic planning even by capitalist governments in order to shift production from what is necessary for a consumerized economy to what is necessary for a more wartime economy when production is ramped up to the hilt. This financial system began seizing up now because this is a production crisis and it just shows you the extent to which the financial system is dependent on the productive system. And this is an enormous managerial problem for capitalist governments.

 And I don’t think this problem is going away at the end of the lockdown by way a quick and easy recovery because of the extent of the problem in terms of reviving demand. If that is going to happen, it would require states to be taking the lead in certain types of public expenditure, not just fiscal expenditure that would not just be tiding people over, but because so many firms will go bankrupt, it would require the types of infrastructure programs that Trump was talking about before he got elected. Of course, because he’s a developer, he’s a builder, even if he had done it – which he hasn’t, all he did was give tax breaks to the rich – but if he had done it, it would have involved opening up the public accumulation to the developers, to the construction industry. 

Now, to some extent, that will be done again by capitalist governments. But I don’t think it will be enough. And what will be required is the type of things that were envisaged in the Green New Deal, but much, much more than that. In fact, the type of construction undertaken by the state itself, by the Army Corps of Engineers, by the Works Project Administration under the Roosevelt New Deal, which will be required in order to put enough people back to work and re-establish consumer confidence.

But that could have the effect of undermining investor confidence because it will take the public sector to do it. And the contradictions of this are absolutely immense, there is no doubt.

Paul Jay
They have essentially got themselves in a death spiral. What I’m talking now about lack of demand, like so much of this money is going not to people to spend and creating demand. So much of it is going, as I said earlier, just to finance the debt of corporations, much of which was stock buybacks and such. And it’s just in these guys nature that this crisis is an opportunity to make money, even though they’re cut. They’re cutting their own throats.

Leo Panitch
It’s the nature of an economy and the state which is dependent on production and employment and distribution – which always includes distribution through some form of financial mechanisms – which is dependent on private firms that need to make a profit to do these things. What do we see? Let’s take the health care sector. It just shows you how prescient the socialist campaign, if only for the success of it, under Sanders for a public, a completely universal public health system. In the latest statistics on the fall in GDP in the United States, the fall in annual growth rates for the first quarter of this year showed that the largest portion went down in the health sector, remarkably accounting for forty percent of the over five percent fall in growth rates. And by the middle of the year, it will be a 20 percent fall in growth rates,

Paul Jay
They are doing very little to actually make sure their own bloody system works.

Leo Panitch

Well, I agree with you, but one of the most remarkable things that happened during this lockdown in the pandemic, in the massive bailout, was that JP Morgan paid a billion dollars on April 1st to take control of a Chinese asset management fund. Why on April 1st? Because of the pressure from the Trump administration (and it was also pressure coming from all the Democratic administrations before it) on China to allow foreign financial institutions to fully control Chinese financial institutions. 

This was put into place on April 1st, as China had promised to do as part of the trade negotiations with the Trump administration. And on that day, JP Morgan took a billion dollars and used it to buy out a Shanghai holding company that had a minority share in this Chinese asset management firm. And it’s remarkable that these guys would be doing this now. It shows you the extent to which China is itself locked into this global capitalist system. There’s no doubt that the fact that the US government through the Fed, as well as the governments of Canada and the European Central Bank has to rely on BlackRock to buy up all of these assets that we began this discussion talking about in order to keep the financial system going. This is because BlackRock has the expertise to do it, nobody else has the expertise. So to buy up all these mortgages, to buy up all these but junk bonds, to buy up the commercial paper they have, they are paying BlackRock and Larry Fink to do this. 

At the same time, Larry Fink has a financial markets advisory firm, which doesn’t make a lot of money and he claims is watertight from their other operations, which is advising governments around the world on the very questions you’re asking me. So what we see in this respect is how dependent these allegedly democratic states are on his expertise, which reflects the very fact that the system operates at the financial level through these types of private institutions.  And it’s the same when you look at the productive institutions. In order to be able to get face-masks produce the government how to use a defense production law from the Korean War to force General Motors to do it or to be doing it via General Electric. So you see there that the state is dependent on these private productive firms to produce this most essential stuff. 

So that is why when you try to measure how the economy has seized up, it is so fascinating to see that 40 percent of the fall in the gross national product in the first quarter of the year took place in the health care sector in the United States. Well, how could that be when the one thing that has really been kept going at full capacity is the health care sector. How could that be? Well, the reason is that the private hospitals, at all the hospitals in the United States that charge an arm and a leg and keep themselves going, wouldn’t be profitable without elective surgeries and the enormous price of those elective surgeries which they have stopped doing now. So therefore what shows up in GDP is not all of the real meeting of social needs that hospitals are doing in the face of this pandemic. What shows up is their loss of commodification.

What I’m speaking to here, therefore, is it is not so much that the system is running out of its ability to survive. It’s that the irrationality of the system, the chaos of the system is being revealed in the face of this pandemic. We already see it almost every day in relation to the ecological crisis, this irrationality of the system.

Paul Jay
There’s an article in The New York Times a few days ago, and I kind of pursued the inquiry a little further. The article in the New York Times interviewed a doctor in British Columbia. I don’t know if you saw this, but he had worked and taught at Harvard for 25 years. He’s a health care economist now, now in BC a head of an institute of some kind there. And the journalist was trying to find out how to compare the public health care system in British Columbia to Massachusetts. And what was the difference in the stats? And this guy said that it was dramatic, the difference, because in British Columbia, where, like in the rest of Canada, the hospitals are publicly owned. And this is a full program. The Canadian system goes beyond Medicare for all. It’s not just public health insurance. It’s publicly owned hospitals almost entirely. But in British Columbia, they were able to use central planning as sort of the term they used was command and control, to allocate the hospital resources so they could say, well, all the cancer patients are now going to go to such and such hospital and all the covered cases are going to come to these hospitals and why it has wound up across the country in Canada there.

On the whole, there’s overcapacity for dealing with Covid Crisis because there wasn’t the profit motive to keep the beds filled with more profitable surgeries or treatments. So Canada actually has not to the most leak faced any crisis in lack of beds. There hasn’t, of course, been a problem with lack of masks and gowns and stuff. So they looked at the difference between the morbidity rate in Massachusetts as compared with British Columbia. It was I believe it was per thousand. And I’ll have to check this. It might have been per 10000. But in Massachusetts, the morbidity rate as a result of Covid was 157 – I think it was per thousand, but it might have been per 10000, as I said. British Columbia was two.

And it’s the same across the country and it’s essentially down to what Canada has when it comes to health care, central planning. But this is part of the irrationality of capitalism, as you just said, and it’s being so exposed because it’s killing thousands of people. And it’s more and more pushing that there’s going to have to be some kind of central planning, even like you’re talking about the Roosevelt type of direct federal work plan with massive infrastructure program.

That’s central planning. The system’s being pushed that way. But the people in power, especially the United States, the class that’s in power, and especially the Trump and the Republican Party in that whole sector. They absolutely don’t want to go anywhere near what looks like central planning unless it’s central planning to subsidize themselves.

Leo Panitch

Yeah, that’s absolutely right, although I think, you know, living in Canada and knowing very well that as in other public health systems there has been a lot of marketization in them and a lot of the introduction of public health management experts call competition, even if they’re not privatizing those sectors. It’s also true in the university sector. In other words, neoliberalism introduced, even within the social democratic states, a degree of market competitiveness whereby you see this irrationality operating.

And in the Canadian case, there was enormous downloading by the federal government from the 1990s of its expenditure onto the provincial governments and then provincial governments downloading them onto municipal governments. We see plenty, I have to tell you, of irrationality even in this system. Now, that is not to say that the contrast is not worth drawing with the US, it is real enough. But, you know, even in Britain, the great NHS has been marketized up to the hilt with competition introduced as its key principle for managing everything. The greatest contradiction in the NHS is exactly what you’re describing, because instead of having coherent planning, what you have is competition that was introduced, allegedly, to get greater efficiencies.

In fact, what the Canadian case also shows, and this is quite remarkable you know, is that the vast majority, over 80 percent, of deaths in Canada due to Covid has taken place in nursing homes for the elderly, over 80 percent,

Paul Jay
which are privately owned.

Leo Panitch
Well, they’re not all privately owned.

Paul Jay
Well, the vast majority are privately owned where the deaths have taken place.

Leo Panitch
The morbidity rate in privately owned ones is 10 percent, while in municipally owned ones, it’s three percent.

And so you see in that context what the privatization of health care has led to now, even in Canada you know, Quebec has the largest number of cases and the largest number of deaths. And the reason for that, it just came out today, is that the Quebec hospitals when they were feared that they would be overrun by Covid 19 patients, took a lot of the elderly who were there for other reasons and sent them, or sent them back, to nursing homes.T hose nursing homes, a lot of them were privately run, but whether they were non-profits or not, have been starved of funds for some two decades. And the epidemic went rampant through them as they sent home people from the hospitals into these nursing homes. 

So you see the knock-on effect of a lack of planning. We’re right to be talking about this in the context of the health care sector. But the irrationality operates at the level of the economy and the state as a whole. And there’s no way in which we can have economic planning in this sector without being able to look at the need for public ownership much, much more broadly. In the financial sector and in the productive sector which, after all, provides the hospitals not only with the protective equipment but also with the equipment that is needed for surgery. As with, of course, so much of the private sector makes his profits off selling to the public sector, whether it is public hospitals or whether it is the Defense Department.

And you know, the irrationality of public expenditure for commodities that are produced for a profit, whether the people involved are greedy bastards or not greedy bastards, whether they’re Warren Buffett rather than Larry Fink, as you said, Paul is not the issue. The issue is the irrationality of a system that has competition at its heart rather than democratic planning at its heart.

Paul Jay
If you look not that far into the future, the situation gets worse, not better, both in terms of unemployment, in terms of what’s happening in other parts of the world. And as I go back to the earlier question, how much of this kind of stimulus that the Treasury, the Fed is doing, how long can they keep it up? Because we could be talking months and months, a year. And is there a point where the investor class actually starts losing some faith in the American T bill, even if it’s not like there’s an alternative?

Leo Panitch
That’s right. We don’t know. We simply do not know. And I take the view that it’s not a matter of a solution being found because the system seizes up. If the system seizes up, it could just be an uglier scenario. Even if there’s a recovery – and I don’t think it’s going to be a V-shaped recovery – but even if there is, this has exposed the irrationality of the system. This has proven how right Sanders and Corbyn were. Corbyn was largely defeated in 2019 after doing so well in 2017 on the basis of the old Thatcherite argument being reprised about how are we going to pay for all this stuff that Corbyn is promising? What he was promising isn’t a fraction of what is already being spent by Bora’s Johnson’s government. And imagine if he had been elected in 2017 how much better shape the National Health Service could have been in to cope with this crisis? 

So I think it’s not so much a matter of whether this economic crisis gets worse or not. I think it is a matter of this already showing us how screwed up this system is. How clear this was already becoming to so many people, even when unemployment was three percent was seen in their support for Corbyn and Sanders. They saw this was the case, that the system was irrational as well as ever more inegalitarian.

So it’s my expectation actually that out of this crisis, whether there is a recovery in six months or a year, two or whatever, that out of this will come much greater clarity, and much greater openness on the part of more and more people to the democratic socialist case that was made before this crisis – and that, in fact, was being made before Trump’s election and before Boris Johnson’s election. I think that’s where the hope lies. 

You know, I don’t want to be patting you too much on the back Paul, but I think the kind of media that you have been doing, and that is continuing, is crucial and was crucial before this pandemic, and it will be crucial even if they do manage to contain the contradictions that it has exposed this time. This is crucial to building the kind of consciousness of working-class people, very broadly defined, that the way forward is a democratic socialist one. Now, that isn’t going to take place without a lot of conflicts, without a lot of class struggles.

One of the terrible things that are happening in Canada is that health and safety regulations are completely being ignored in the context of this crisis. There isn’t one case of an appeal to a labor board around unsafe work that has been recognized in this crisis. Now, you can say lives are being saved, but at what expense to lives especially of poorly paid recent immigrant workers who were brought in to work in this sector because they will take the low wages, given the standard of living in their home countries compared to Canada.

We need to ensure is that what we get out of this crisis is a strengthened set of labor regulations that will allow for the extension and the strengthening of trade unionism again. Without that shift in the balance of class forces, and an increased orientation to recognizing the need for the type of public measures that we’re talking about, we will not go very far. We need to rebuild a sense of class awareness, class consciousness, class identity, and class confidence in order to see this through.

You know, people like Powell at the Federal Reserve will put their fingers in the dike and they can be fairly effective at doing it. And they can even use outfits like Black Rock to make them effective at doing it, or outfits like General Electric to provide more personal protection equipment. And, you know, we can marvel at their ability to put their finger in the dike. That’s essentially what the state does. The state is either a firefighter when there are financial crises or in this context, it’s a ventilator. It’s providing oxygen to a system that couldn’t possibly survive when production ends. But what we need to do is build up the confidence of people to get behind a democratic socialist alternative.

Paul Jay
In the 1930s and in a similar situation, in the sense that the unemployment was so deep and in fact, I think we’re already at higher unemployment numbers now than during the thirties, and we’re certainly headed even higher. Many of the big capitalist countries had a kind of two roads to go down fascism or the kind of Rooseveltian solution, a New Deal type solution. And even though there was a lot of support for fascism in the American elites, Roosevelt in that sections of capital that supported him, chose not to go that way and thought there was more in their interest to do the New Deal.

Do the conditions for that exist within the American oligarchy? I don’t see a Roosevelt in sight. And I don’t even see a heck of a lot of talk for the kind of reforms that would be necessary to for that kind of new deal. We hear about a new green new deal, but we’re not hearing it from anyone that might actually have some power to execute it.

Leo Panitch
Well, that remains to be seen in the wake of this crisis, it certainly is the case, given that you mentioned Massachusetts before, that its kind of aristocratic capitalists, the Boston Brahmin who did help build state capacities of a capitalist kind. Indeed they helped create the Federal Reserve, in 1912, after the US government had to rely on JP Morgan to bail out the system in the crash of 1907. Teddy Roosevelt already represented and brought in further into the state the type of capitalists who could see that there was in the system’s own interest to have a state with capacities of the kind that Franklin Roosevelt’s administration built up even further during the 1930s. 

There are far fewer of these types to be seen in the US ruling class these days. That is certainly true. That said, let’s bear in mind that Wall Street did succeed in pressuring Roosevelt not to fully adopt a Keynesian strategy during the 1930s. He was oriented to balanced budgets. And by virtue of pulling back on a public expenditure after the ’36 election, he induced a second depression. And it was really only the war that led to the type of sustained public expenditure that pulled the economy out of the Great Depression.

At that time, the main CEOs went to work for the state at a dollar a year. And their productive capacities were turned towards the war effort. That said, there was no equivalent union involvement in that process. And those CEOs were always suspicious even of the Keynesians, let alone those who were more radical. And in terms of making this into a permanent shift, we have to remember what came out of the Second World War. It was an imperial, informal American imperial state that, yes, wasn’t afraid of public expenditure, but explicitly saw itself as protecting the world from non-capitalist states, that explicitly engaged its foreign policy and to a large extent, its domestic policy in terms of opening up the world to capital accumulation and profit, while persecuting those who wanted to shift towards a socialist alternative. 

Now, that’s not to say that the New Deal reforms didn’t continue, although they did increasingly reach their limits in an increasingly capitalist economy. By the 1960s, let alone later, even before the ideological shift to Reaganism, the regulations of the banks were no longer effective. Once the banks went international with the development of the eurodollar market, the Eurobond market by the 1960s, once multinational corporations were investing abroad, the regulations could be escaped. And increasingly, as we know, the public health system, the public welfare system was replete with contradictions. 

And as it was replete with contradictions, some of that got picked up by profitable firms brought into those sectors to effectively make them run on the basis of a profitability defined notion of efficiency. And that led, of course, to the types of conflicts and the types of irrational behavior on the part of the subordinate classes that vastly expanded the size of the American prison system. Then you got a Democratic president doing away with welfare as we know it. This was not a Republican administration, it was full of the type of people in the Treasury and the Federal Reserve who looked like Roosevelt’s Democratic liberals, people like Rubin and Summers, et cetera. So under them you do away with welfare offices and what fills up? Prisons. The state doesn’t get smaller. It gets bigger. 

So we can’t simply draw a contrast and say we’ll go back to the New Deal. The limits of the New Deal, the fact that the New Deal did not introduce democratic economic planning, take the banking system into the public sector as a public utility, even during the war. All of that left the dynamics in place for us to be where we are now. And what I fear is that people think that if we go back to those old reforms or get similar new ones, we’re going to solve the problem. 

In fact, we need reforms, we aren’t going to be able to get to socialism at one go. But we need the type of reforms that open themselves up to encouraging people to fight for further reforms rather than close off the system of reform and say that’s enough. And it’s crucial that we look at strategically what needs to be done in the 21st century this way.

Paul Jay
I when I interviewed Bernie Sanders, I asked him directly that I said, breaking up the big banks wouldn’t that just lead to those sections of capital, reassembling at some point is what happened with the big telecoms. And don’t you really have to start talking about public banking, banking as a public utility? And he agreed, but then he never talked about it again.

And it seems to me, of all the things we need to be talking about, this issue of one public ownership and two, particularly on the issue in sectors of finance. It’s like the most critical that if there’s going to be. Let’s just go back to an earlier point for a minute. Larry Fink may have the best of intentions. He may be a perfectly lovely guy. This is the guy who’s the head of BlackRock. BlackRock has no choice but to be an institution that does everything it can to maximize its return on investment. It can’t do anything else. It is what it is. And that’s true for the whole financial sector. Without that banking as a public utility and without breaking the hold, the finance sector has not just on economics, but on politics. If you look at the top donors for presidential candidates and almost all the down-ballot races as well, it’s almost all financial institutions, hedge fund guys.

I think this has to be brought even more to prominence in the discussion in progressive circles, the absolute necessity of advocating public banking, banking as a public utility, because this these banks, you know, if Biden does get elected, the banks, and if this crisis continues, these banks only survive because of public money. They don’t survive any other way.

Leo Panitch
I totally agree. I think that’s absolutely right. The challenge for us is how do we do that? 

And I have to say that that very few of us left-wing political economists have tried to think through what banking as a public utility would look like. I’ve organized a number of panels over the last last two decades, including with Bob Pollin in New you recently interviewed on Bob has thought about this a lot and once did an absolutely wonderful article on what it would take to democratize the Federal Reserve, etc. But for the most part, I found that there’s very little by way of thinking of this through even on the part of the intellectual left. 

And we also need to recognize that there’s very little state capacity for this. One of the things that Corbyn and his Chancellor of the Exchequer, John MacDonald, were talking about was how to deal with the large banks that were taken into the public sector in 2008. The Royal Bank of Scotland, which used to be the National Westminster Bank, and Lloyds were bailed out and told to run on a commercial basis, so as to gradually sell off portions of it. But rather than selling it off, what was needed to was turn those banks into a public utility and using them to develop the public capacity to be able to manage a financial system, to have the knowledge and expertise for this. Because it’s never just a matter of us being ‘reds’, it is also a matter of us being ‘experts’.

Having the knowledge to be able to run the banking system as a public utility is all the more difficult in light of the transnationalization of finance. And the role that private finance plays in arbitraging trade because finance isn’t just a matter of money chasing money. In fact, what the financial system does, with all its new financial commodities it provides, is to grease the wheels of the vehicles dealings in exchange rates and in trade financing, which is so necessary to the trade of goods and services, not only financial commodities. 

So then in so far as wanting to have having a publicly owned financial system, what is that really about? It’s about being able to have a degree of control over investment, including by leveraging lending for directed investment. Well, can you have that without capital controls insofar as money can simply flit out of the country? So it isn’t just a matter of public banking. It’s a matter of capital controls. 

This was being promoted by Harry Dexter White – who was later traduced as a communist sympathizer – during the war as the senior official in the U.S. Treasury. He was proposing something more radical than Keynes did. The idea was that the US (which turned out to be the one country not to introduce capital controls after the war) would help all the other countries who would sign on to what became the Bretton Woods agreement by helping them police their capital controls. So if money escaped from Toronto to New York, it would be the responsibility of the regulators in New York to oversee that this wouldn’t happen. This was never introduced, of course. Wall Street was strong enough, even during the war not to allow for that to happen. The United States didn’t adopt capital controls after the war – it was the only country in the Bretton Woods framework that didn’t. 

You know, these are the types of things that we need to get our heads around in order to be able to do this. No one thinks we’re going to be able to turn the financial system into a public utility overnight. But it does involve, insofar as we see the state bailing out any financial firms, taking equity in these firms. And I think that should apply to productive firms as well. It means using that equity not to get the highest return, but using that equity in order to get the kind of people in there who would be able to shift the priorities, whether it’s productive or a financial firm, towards meeting public needs and learning while doing so the kinds of things that we need to know about how to run a productive corporation or a financial one in a way that does meet public needs. 

This is the kind of challenge before us. It isn’t a small one. It’s not a matter of coming up with a slogan, which I often myself do because I think I was the one who coined turning the banking system into a public utility, that trips easily off the tongue. But in order to actually do this in a practical, strategic way, much more than this is required. And we’ve got to start setting ourselves this task. That’s the job of a serious media that is addressing these questions with people who are paid to try to think this stuff through intellectually. And this has got to be taken into account in terms of the strategic capacities of democratic socialist movements. 

So you’re right when you speak of Sanders making the case for breaking up the banks and agreeing that in fact, the whole system needs to become a public utility. Iits not enough if all his campaign is employing are people who are good at reading the polls and being able to raise two dollars and 70 cents a day through the social media, and are good at developing campaigning strategies both through the social media and door to door. They also need to be developing strategic capacities in how to change the state, because it’s not just a matter of having the right policies, it’s having the capacity to think through what it would mean to implement those policies, both in terms of the enormous opposition from the capitalist classes that you’ve been talking about, but also in terms of how do you change the state apparatuses to be able to have that expertise, rather than the expertise to put the finger in the dike, which is what they primarily do.

Paul Jay

Well, we’re obviously going to keep this discussion going. Thanks very much for joining us.

Leo Panitch
Paul, I would love to keep this discussion going with you

Paul Jay
And thank you for joining us on theAnalysis.News podcast.


Similar Posts


  1. Whatever the ills of Goldman Sachs alum Mnuchin at Treasury, would Panitch have us believe Robert Rubin, Lawrence Summers, and Timothy Geithner exemplary of a past plausible alternative? Rubin and Summers engineered Gramm–Leach–Bliley in 1999, repealing depression era Glass – Steagall, ex post facto the illegal merging of Citicorp and Travelers Group. Its results were a principal precipitating factor in the 2008 crash. After facilitating the gutting of important financial regulation, Rubin left Treasury to work at Citigroup, the raison d’etre for Gramm–Leach–Bliley. He pocketed some $200 million there over the next 18 months or so.

  2. I am speechless (almost) while the system is shameless! Extracting ourselves from this horrific mess will be a true struggle, slow and painful, but we must begin. Thank you to the and Leo Panitch, and the likes of Bernie Sanders and Alexandria Ocasio-Cortez, not to mention Naomi Klein and others for starting the process. Now we need a loud, commanding and respected voice to keep the movement moving forward and somehow I do not think it will be Joe Biden or the DNC. Maybe the people, the various socialist movements and writings, perhaps the Diem25 movement in Europe and massive, thoughtful paying of attention to world and local events plus plain old common sense. Good luck to us.

  3. The pandemic has certainly exposed the frailties of the system. What it has also shown however is our utter dependance on consumption. Even Leo talks about regaining consumer confidence. The solutions being put forward essentially amount to managing the system in a different way but not addressing the fundamental dilemma that infinite consumption on a finite planet is not a viable proposition. I fail to see how as a species we are going to avoid consuming our way to environmental catastrophe and therefore total collapse of the system, if not human extinction.

Leave a Reply

Your email address will not be published. Required fields are marked *