[Peace-discuss] Soft coups at home and abroad

[C. G. Estabrook]

Begin forwarded message:
>
> Austerity & bankers’ coups: the NYC precedent
> Posted: 24 Feb 2012 07:49 AM PST
> With the displacement of Greece’s elected government by Eurocrats  
> acting in the interest of the country’s creditors, I thought this  
> would be a good time to reprise the section of my 1997 book Wall  
> Street that covers the New York City fiscal crisis of 1975, which  
> was something of a dress rehearsal for the neoliberal austerity  
> agenda that would go global in the 1980s. Certain celebrity  
> academics are constantly cited for making this argument, but I was  
> there first. You can download Wall Street for free by clicking here:  
> Wall Street.
>
> This chapter, and this book, has mainly been about the private  
> sector, but it would be incomplete to finish a chapter on  
> “governance” without looking at the relations between Wall Street  
> and government, not only in the U.S., but on a world scale.
>
>
> One advantage that Wall Street has in public economic debate, aside  
> of course from its immense wealth and power, is that it’s one of the  
> few institutions that look at the economy as a whole. American  
> economic policymaking is, like all the other kinds, largely the  
> result of a clash of interest groups, with every trade association  
> pleading its own special case. Wall Streeters care, or presume to  
> care, about how all the pieces come together into a macroeconomy.  
> The broadest policy techniques—fiscal and monetary policy—are what  
> Wall Street is all about. For some reason, intellectuals like the  
> editors of the New York Review of Books and the Atlantic have  
> decided that investment bankers like Felix Rohatyn and Peter  
> Peterson have thoughts worth reading in essay form. Not  
> surprisingly, both utter a message of austerity—the first with a  
> liberal, and the second with a conservative, spin—hidden behind a  
> rhetoric of economic necessity. These banker–philosophes, creatures  
> of the most overpaid branch of business enterprise, are miraculously  
> presented as disinterested policy analysts.
>
> Wall Street’s power becomes especially visible during fiscal crises,  
> domestic and international. On a world scale, the international debt  
> crisis of the 1980s seemed for a while like it might bring down the  
> global financial system, but as it often does, finance was able to  
> turn a crisis to its own advantage.
>
> While easy access to commercial bank loans in the 1970s and early  
> 1980s allowed countries some freedom in designing their economic  
> policies (much of it misused, some of it not), the outbreak of the  
> debt crisis in 1982 changed everything. In the words of Jerome I.  
> Levinson (1992), a former official of the Inter-American Development  
> Bank:
>
> [To] the U.S. Treasury staff…the debt crisis afforded an  
> unparalleled opportunity to achieve, in the debtor countries, the  
> structural reforms favored by the Reagan administration. The core of  
> these reforms was a commitment on the part of the debtor countries  
> to reduce the role of the public sector as a vehicle for economic  
> and social development and rely more on market forces and private  
> enterprise, domestic and foreign.
>
> Levinson’s analysis is seconded by Sir William Ryrie (1992),  
> executive vice president of the International Finance Corporation,  
> the World Bank’s private sector arm. “The debt crisis could be seen  
> as a blessing in disguise,” he said, though admittedly the disguise  
> “was a heavy one.” It forced the end to “bankrupt” strategies like  
> import substitution and protectionism, which hoped, by restricting  
> imports, to nurture the development of domestic industries. “Much of  
> the private capital that is once again flowing to Latin America is  
> capital invested abroad during the run-up to the debt crisis. As  
> much as 40–50 cents of ever dollar borrowed during the 1970s and  
> early 1980s…may have been invested abroad. This money is now coming  
> back on a significant scale, especially in Mexico and Argentina.” In  
> other words, much of the borrowed money was skimmed by ruling  
> elites, parked profitably in the Cayman Islands and Zürich, and  
> Third World governments were left with the bill. When the policy  
> environment changed, some of the money came back home — often to buy  
> newly privatized state assets for a song.
>
> That millions suffered to service these debts seems to matter little  
> to Ryrie. Desperate Southern governments had little choice but to  
> yield to Northern bankers and bureaucrats. Import substitution was  
> dropped, state enterprises were privatized, and borders made porous  
> to foreign investment. After Ryrie’s celebrated capital inflow,  
> Mexico suffered another debt crisis in 1994 and 1995, which was  
> “solved” using U.S. government and IMF guarantees to bail out Wall  
> Street banks and their clients, and creating a deep depression; to  
> make the debts good, Mexicans would have to suffer. Once again, a  
> dire financial/fiscal crisis—the insolvency of an overindebted  
> Mexican government—was used to further a capital-friendly economic  
> agenda.
>
> These fortunate uses of crisis first appeared in their modern form  
> during New York City’s bankruptcy workout of 1975. This is no place  
> to review the whole crisis; let it just be said that suddenly the  
> city found its bankers no longer willing to roll over old debt and  
> extend fresh credits. The city, broke, could not pay. In the name of  
> fiscal rectitude, public services were cut and real fiscal power was  
> turned over to two state agencies, the Municipal Assistance Corp.  
> (MAC, chaired by Rohatyn), and the Emergency Financial Control  
> Board, since made permanent with the Emergency dropped from its  
> name. Aside from the most routine municipal functions, the city no  
> longer governed itself; a committee of bankers and their delegates  
> did, Rohatyn first among them. Rohatyn, who would later criticize  
> Reaganism for being too harsh, was the director of its dress  
> rehearsal in New York City. Public services were cut, workers laid  
> off, and the physical and social infrastructure left to rot. But the  
> bonds, thank god, were paid, though not without a little melodrama,  
> gimmickry, and delay (Lichten 1986, chap. 6).
>
> The city was admittedly borrowing irresponsibly—though the lenders,  
> it must be said, were lending irresponsibly as well. When a bubble  
> is building, neither side has an incentive to stop its inflation.  
> But when it broke, all the pain of adjustment fell on the citizen– 
> debtors. The pattern would be repeated in the Third World debt  
> crisis, in many U.S. cities over the next 20 years, and, most  
> recently, with the federal budget.
>
> Obviously the bankers have the advantage in a debt crisis; they hold  
> the key to the release of the next post-crisis round of finance.  
> Anyone who wants to borrow again, and that includes nearly everyone,  
> must go along. But that’s not their only advantage. The sources of  
> their power were cited by Jac Friedgut of Citibank (ibid., p. 192):
>
> We [the banks] had two advantages [over the unions]…. One is that  
> since we were dealing on our home turf in terms of finances, we knew  
> basically what we were talking about, and we knew and had a better  
> idea what it takes to reopen the market or sell this bond or that  
> bond…. The second advantage is that we do have a certain noblesse  
> oblige or tight and firm discipline. So that we could marshal our  
> forces, and when we spoke to the city or the unions we could speak  
> as one voice…. Once a certain basic process has been established  
> that’s an environment in which our intellectual leadership…can be  
> tolerated or recognized…we’re able to get things effected.
>
> It’s plain from Friedgut’s remarkably candid language that to  
> counter this, one needs expertise, discipline, and the nerve and  
> organization to challenge the “intellectual leadership” of such  
> supremely self-interested parties. According to the union boss  
> Victor Gotbaum (in an interview with Robert Fitch, which Fitch  
> relayed to me), the unions’ main expert at the time, Jack Bigel,  
> didn’t understand the budgetary issues at all, and deferred to  
> Rohatyn, whom he trusted to do the right thing. For the services  
> rendered to municipal labor, the once-Communist Bigel was paid some  
> $750,000 a year, enough to buy himself a posh Fifth Avenue duplex  
> (Zweig 1996). Gotbaum became a close friend of Felix Rohatyn.  
> Politically, the unions were weak, divided, self-protective,  
> unimaginative, and with no political ties to ordinary New Yorkers.  
> It’s easy to see why the bankers won.
>
> What was at stake in New York was no mere bond market concern. In a  
> classic 1976 New York Times op-ed piece, L.D. Solomon, then  
> publisher of New York Affairs, wrote: “Whether or not the promises… 
> of the 1960’s can be rolled back…without violent social upheaval is  
> being tested in New York City…. If New York is able to offer reduced  
> social services without civil disorder, it will prove that it can be  
> done in the most difficult environment in the nation.” Thankfully,  
> Solomon concluded, “the poor have a great capcity for  
> hardship” (quoted in Henwood 1991).
>
> Behind a “fiscal crisis” lurked an entire class agenda, and one that  
> has been quite successfully prosecuted in subsequent crises for the  
> next two decades. But since these are fought on the bankers’  
> terrain, using their language, they instantly win the political  
> advantage, as nonbankers retreat in confusion, despair, or boredom  
> in the face of all those damned numbers.
>

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