[Peace-discuss] Chomsky's analysis on the financial crisis

[Brussel Morton K.]

  For those who regard Chomsky as a Delphic oracle I emphasize his  
his comments on what might be distinctions between Obama/McCain  
presidencies.  The rest, copied below, is his clear analysis of what  
has been happening in global finance. --mkb

…Sometimes I have the feeling that the two terms of Bush were in a  
context of the changing of the global order, trying to maintain power  
using force and in contrast Obama could be a way to have a kind and  
polite face to renegotiate the world order. Do you think this could  
be true?

Remember that the political spectrum in the United States is quite  
narrow. The U.S. is a business-run society, somewhat more than  
Europe. Basically, it is a one-party state, with a business party  
that has two factions, Democrats and Republicans.  The factions are  
somewhat different, and sometimes the differences are significant.  
But the spectrum is quite narrow. The Bush administration, however,  
was way off the end of the spectrum, extreme radical nationalists,  
extreme believers in state power, in violence overseas, in big  
government spending, so far off the spectrum that they were harshly  
criticized right within the mainstream from early on.

Whoever comes into office is likely to move things back more towards  
the center of the spectrum, Obama probably more so. So I would expect  
in Obama's case something like a revival of the Clinton years, of  
course adapted to changing circumstances. In the case of McCain,  
however, it is quite hard to predict. He is a loose cannon. Nobody  
knows what he would do...

Yes he seems quite dangerous.

Very dangerous, especially in a country like the U.S. with so much  
power. This isn't Luxemburg, after all. McCain himself is extremely  
unpredictable. The vice Presidential candidate, Sarah Palin, comes  
from a radical extremist background (by world standards), for example  
creationism - you know, the world was created 10,000 years ago, etc.  
etc. If someone like that was running for high office in Luxemburg it  
would be comical. But when it happens in the richest and most  
powerful country in the world, it is dangerous.
  …

The Financial Crisis of 2008

Interviewed by Simone Bruno

October, 13 2008

By Noam Chomsky

Noam Chomsky's ZSpace Page



I would like to talk about the current crisis. How is it that so many  
people could see it coming, but the people in charge of governments  
and economies didn't, or didn't prepare?

The basis for the crisis is predictable and it was in fact predicted.  
It is built into financial liberalization that there will be frequent  
and deep crises. In fact, since financial liberalization was  
instituted about thirty five years ago, there has been a trend of  
increasing regularity of crises and deeper crises, and the reasons  
are intrinsic and understood. They have to do fundamentally with well  
understood inefficiencies of markets. So, for example, if you and I  
make a transaction, say you sell me a car, we may make a good bargain  
for ourselves, but we don't take into account the effect on others.  
If I buy a car from you it increases the use of gas, it increases  
pollution, it increases congestion, and so on. But we don't count  
those effects. These are what are called by economists externalities,  
and are not counted into market calculations.

These externalities can be quite huge. In the case of financial  
institutions, they are particularly large. The task of a financial  
institution is to take risks. Now if it is a well managed financial  
institution, say Goldman Sachs, it will take into account risks to  
itself, but the crucial phrase here is to itself. It does not take  
into account systemic risks, risks to the whole system if Goldman  
Sachs takes a substantial loss. And what that means is that risks are  
underpriced. There are more risks taken than should be taken in an  
efficiently working system that was accounting for all the  
implications. More, this mispricing is simply built into the market  
system and the liberalization of finance.

The consequences of underpricing risks are that risks become more  
frequent, and, when there are failures the costs are higher than  
taken into account.  Crises become more frequent and also rise in  
scale as the scope and range of financial transactions increases. Of  
course, all this is increased still further by the fanaticism of the  
market fundamentalists who dismantled the regulatory apparatus and  
permitted the creation of exotic and opaque financial instruments. It  
is a kind of irrational fundamentalism because it is clear that  
weakening regulatory mechanisms in a market system has a built-in  
risk of disastrous crisis.  These are senseless acts except in that  
they are in the short-term interest of the masters of the economy and  
of the society. The financial corporations can and did make  
tremendous short term profits from pursuing extremely risky actions,  
including especially deregulation, which harm the general economy,  
but don't harm them, at least in the short term that guides planning.

You couldn't predict the exact moment at which there would be a  
severe crisis, and you couldn't predict the exact scale of the  
crisis, but that one would come was obvious. In fact, there have been  
serious and repeated crises during this period of increasing  
deregulation.  It is just that they hadn't yet hit so hard at the  
center of wealth and power before, but have instead hit mostly the  
third world. So, again, the crises are predictable and predicted.  
There was a book, for example, ten years ago, by two very well  
respected international economists, John Eatwell and Lance Taylor -  
Global Finance at Risk - in which they ran through the pretty  
elementary logic of how financial liberalization underprices risk and  
therefore leads to regular systemic risks and failures, sometimes  
serious. They also outline ways of dealing with the problem, but  
those were ignored because decision makers in the corporate and  
political systems, which are about the same, were making short term  
gains for themselves.

Take the United States. It is a rich country, but for the majority of  
the population, a substantial majority, the last thirty years have  
probably been among the worst in American economic history. There  
have been no massive crises, large wars, depressions, etc. But,  
nevertheless, real wages have pretty much stagnated for the majority  
for thirty years. In the international economy the effect of  
financial liberalization has been quite harmful. You read in the  
press that the last thirty years, the thirty years of neoliberalsm,  
have shown the greatest escape from poverty in world history and  
tremendous growth and so on, and there is some truth to that, but  
what is missing is that the escape from poverty and the growth have  
taken place in countries which ignored the neoliberal rules.  
Countries that observed the neoliberal rules have suffered severely.  
So, there was great growth in East Asia, but they ignored the rules.  
In Latin America where they observed the rules rigorously, it was a  
disaster.

Joseph Stiglitz recently wrote in an article that the most recent  
crisis marks the end of neoliberalism and Chavez in a press  
conference said the crisis could be the end of capitalism. Which one  
is closer to the truth, do you think?

First, we should be clear about the fact that capitalism can't end  
because it never started. The system we live in should be called  
state capitalism, not just capitalism. So, take the United States.   
The economy relies very heavily on the state sector. There is a lot  
of agony now about socialization of the economy, but that is a bad  
joke. The advanced economy, high technology and so forth, has always  
relied extensively on the dynamic state sector of the economy. That's  
true of computers, the internet, aircraft, biotechnology, just about  
everywhere you look.  MIT, where I am speaking to you, is a kind of  
funnel into which the public pours money and out of it comes the  
technology of the future which will be handed over to private power  
for profit. So what you have is a system of socialization of cost and  
risk and privatization of profit. And that's not just in the  
financial system. It is the whole advanced economy.

So, for the financial system it will probably turn out pretty much as  
Stiglitz describes.  It is the end of a certain era of financial  
liberalization driven by market fundamentalism. The Wall Street  
Journal laments that Wall Street as we have known it is gone with the  
collapse of the investment banks.  And there will be some steps  
toward regulation. So that's true. But the proposals that are being  
made, which are major and severe, nonetheless do not change the  
structure of the underlying basic institutions. There is no threat to  
state capitalism.  Its core institutions will remain basically  
unchanged and even unshaken. They may rearrange themselves in various  
ways with some conglomerates taking over others and some even being  
semi-nationalized in a weak sense, without infringing much on private  
monopolization of decision making. Still, as things stand now,  
property relations and the distribution of power and wealth won't  
alter much though the era of neoliberalism operative for roughly  
thirty five years will surely be modified in a significant fashion.

Incidentally, no one knows how serious this crisis will become. Every  
day brings new surprises. Some economists are predicting real  
catastrophe. Others think that it can be patched together with modest  
disruption and a recession, likely worse in Europe than in the U.S.  
But no one knows.

Do you think we will see anything like the depression, with people  
out of working and cuing up in long lines for food. Do you think it  
is possible we could have that kind of situation in the U.S. and  
Europe? Would a big war then get economies back on track, or shock  
therapy or what?

Well, I don't think the situation is anything like the period of the  
great depression. There are some similarities to that era, yes. The  
1920s were also a period of wild speculation and vast expansion of  
credit and borrowing, creating of tremendous concentration of wealth  
in a very small sector of the population, destruction of the labor  
movement.  These are all similarities to today. But there are also  
many differences. There is a much more stable apparatus of control  
and regulation growing out of the New Deal and though it has been  
eroded, much of it is still there. And also by now there is an  
understanding that the kinds of policies that seemed extremely  
radical in the New Deal period are more or less normal. So, for  
example, yesterday in the presidential debate, John McCain, the right- 
wing candidate, proposed New Deal style measures to deal with the  
housing crisis, borrowed straight from the New Deal Homeowners  
Refinancing Act, though actually McCain borrowed it from Hilary  
Clinton who took it from the New Deal. That's the far right. So there  
is an understanding that the government must take a major role in  
running the economy and they have experience with doing it for the  
advanced sectors of the economy for fifty years.

A lot of what you read about this is just mythology. So, for example,  
you read that that Reagan's passionate belief in the miracle of  
markets is now under attack, Reagan being assigned the role of High  
Priest of faith in markets. In fact, Reagan was the most  
protectionist president in postwar American economic history. He  
increased protectionist barriers more than his predecessors combined.  
He called on the Pentagon to develop projects to train backward  
American managers in advanced Japanese methods of production. He  
carried out one of the biggest bank bailouts in American history, and  
formed a government-based conglomerate to try to revitalize the  
semiconductor industry.  In fact, he was a believer in big  
government, intervening radically in the economy. By "Reagan" I mean  
his administration; what he believed about all of this, if anything,  
we don't really know, and it's not very important.

There is a tremendous amount of mythology to be dismantled here,  
including the talk about the great growth and escape from poverty  
which, as I said earlier, isn't false, but is missing the fact that  
it took place overwhelmingly in areas that ignored the neoliberal  
rules, while the areas that kept to the rules are the ones that  
suffered.  The same holds in the U.S. To the extent that the  
neoliberal rules were applied, it was quite harmful to the majority  
of the population. So to talk about these matters, we first have to  
sweep away a lot of mythology and then, when we look, we see that a  
state capitalist economy that has, particularly since the Second  
World War, relied very heavily on the state sector, is now returning  
to reliance on the state sector to manage the collapsing financial  
system, its collapse being the predictable result of financial  
liberalization. The underlying institutional structure itself is  
being modified, but not in fundamental ways.

There is no indication right now that there will be anything like the  
crash of 1929.

So you don't think we are going toward a change of the world order?

Oh there are changes in world order, very significant ones and maybe  
this crisis will contribute to them.  But they have been underway for  
some time.  One of the greatest changes in world order you can see  
right now in Latin America. It is called the backyard of the United  
States and it's been supposed to be run by the U.S. for a long time.  
But that is changing. Just a few weeks ago, mid September, there was  
a very dramatic illustration of this. There was a meeting on  
September 15 of UNASUR, The Union of South American Republics, so  
that's all the South American governments meeting, including  
Colombia, the U.S.'s favorite. It took place in Santiago, Chile,  
another U.S. favorite. The meeting came out with a very strong  
declaration supporting Evo Morales in Bolivia and opposing the quasi- 
secessionist elements in Bolivia that are being supported by the  
United States.

There is a major struggle going on in Bolivia. The indigenous  
majority of the population for the first time in 500 years entered  
the political arena, carried through a very impressive democratic  
election, and took power. That of course horrified the United States  
government, which is strongly opposed to popular democracy unless it  
comes out the right way.  And it particularly antagonized the  
traditional ruling groups, the minority elite which is mostly white  
and Europeanized, who had always run the country and of course don't  
want a democratic society in which control of resources and policy  
generally will be directed by the majority and towards its needs. So  
the elites are moving toward autonomy and maybe secession, and it is  
becoming quite violent, with the U.S. of course backing them. But the  
South American Republics took a strong stand in support of the  
indigenous-dominated democratic government. The statement was read by  
President Bachelet of Chile, who is a favorite of the West. Evo  
Morales responded by thanking the presidents for their support, while  
correctly pointing out that this was the first time in 500 years that  
Latin America had taken its fate into its own hands without the  
interference of Europe and particularly the United States. Well, that  
is a symbol of a very significant change that is underway, sometimes  
called the pink tide. It was so important that the U.S. press  
wouldn't report it. There is a sentence here and there in the press  
noting that something happened, but they are completely suppressing  
the content and significance of what happened.

Now that is part of a long term development in which South America is  
indeed beginning to overcome its tremendous internal problems and  
also its subordination to the West, for the most part, the United  
States. South America is also diversifying its relations with the  
world. Brazil has growing relations with South Africa and India, and  
particularly China, which is increasingly involved in investments and  
exchange with Latin American countries. These are extremely important  
developments and now it is beginning to spread to Central America.  
Honduras, for example, is the classic banana republic. It was the  
base camp for Reagan's terror wars perpetrated in the region and has  
been totally subordinated to the U.S. But Honduras recently joined  
ALBA, the Venezuelan-based "Bolivarian alternative." It is a small  
step, but nonetheless very significant.

Do you think these trends in South America like ALBA, UNASUR and the  
major events in Venezuela and Bolivia and the rest might be affected  
by an economic crisis of the dimension we are facing now?

Well, they will be affected by the crisis, but for the moment they  
are not as much affected as Europe and the United States. So, if you  
look at the stock market in Brazil, it collapsed very quickly, but  
Brazilian banks aren't failing. Similarly, in Asia the stock markets  
are declining sharply, but the banks are not being taken over by the  
government as is happening in England and the U.S. and much of  
Europe. These regions, South America and Asia, have been somewhat  
insulated from the ravages of the financial markets. What set off the  
current crisis was the subprime lending for assets built on sand, and  
these are held, of course in the United States, but apparently about  
half by European banks.  Holding mortgage-based toxic assets has  
embroiled them in these events very quickly -- and they have housing  
crises of their own, particularly Britain and Spain. Asia and Latin  
America were much less exposed, having kept to much more cautious  
lending strategies, particularly since the neoliberal meltdown of  
1997-8. In fact, a main Japanese bank, Mitsubishi UFG, has just  
bought a substantial part of Morgan Stanley, in the U.S. So it  
doesn't look, so far, as though Asia or Latin America will be  
affected nearly as severely as the U.S. and Europe.

  Do you think there will be a big difference between Obama or McCain  
as President for things like the Free Trade Agreement and Plan  
Colombia, because here in Colombia, where I live, you can feel that  
the President and the establishment are kind of scared about an  
election of Obama. I know you feel Obama is  like a blank slate, but  
still, do you feel there is a difference?

That's pretty much the case. Obama has presented himself as pretty  
much a blank slate.  But there is no reason for the Colombian  
establishment to be scared of his election. Plan Colombia is  
Clinton's policy and there is every reason to expect that Obama will  
be another Clinton. He is pretty vague. He keeps appearances mostly  
empty, on purpose, but insofar as there are policies they look very  
much like centrist policies, like Clinton's, who fashioned Plan  
Colombia and militarized the conflict, and so on.

Sometimes I have the feeling that the two terms of Bush were in a  
context of the changing of the global order, trying to maintain power  
using force and in contrast Obama could be a way to have a kind and  
polite face to renegotiate the world order. Do you think this could  
be true?

Remember that the political spectrum in the United States is quite  
narrow. The U.S. is a business-run society, somewhat more than  
Europe. Basically, it is a one-party state, with a business party  
that has two factions, Democrats and Republicans.  The factions are  
somewhat different, and sometimes the differences are significant.  
But the spectrum is quite narrow. The Bush administration, however,  
was way off the end of the spectrum, extreme radical nationalists,  
extreme believers in state power, in violence overseas, in big  
government spending, so far off the spectrum that they were harshly  
criticized right within the mainstream from early on.

Whoever comes into office is likely to move things back more towards  
the center of the spectrum, Obama probably more so. So I would expect  
in Obama's case something like a revival of the Clinton years, of  
course adapted to changing circumstances. In the case of McCain,  
however, it is quite hard to predict. He is a loose cannon. Nobody  
knows what he would do...

Yes he seems quite dangerous.

Very dangerous, especially in a country like the U.S. with so much  
power. This isn't Luxemburg, after all. McCain himself is extremely  
unpredictable. The vice Presidential candidate, Sarah Palin, comes  
from a radical extremist background (by world standards), for example  
creationism - you know, the world was created 10,000 years ago, etc.  
etc. If someone like that was running for high office in Luxemburg it  
would be comical. But when it happens in the richest and most  
powerful country in the world, it is dangerous.

Now that we are at the end of neoliberal globalization, is there a  
possibility of something really new, a good globalization?

I think the prospects are much better than they have been. Power is  
still incredibly concentrated, but there are changes with the  
international economy becoming more diverse and complex.  The South  
is becoming more independent. But if you look at the U.S., even with  
all the damage Bush has done, it is still the biggest homogeneous  
economy, with the largest internal market, the strongest and  
technologically most advanced military force, with annual expenses  
comparable to the rest of the world combined, and an archipelago of  
military bases throughout the world.  These are sources of continuity  
even though the neoliberal order is eroding both within the U.S. and  
Europe and internationally, as there is more and more opposition to  
it. So there are opportunities for real change, but how far they will  
go depends on people, what we are willing to undertake.

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