“…comforting as it may be to invoke sovereign power at moments of great uncertainty, this is a mystification of the events in September and October of 2008. The path from Lehman to TARP was less one of a sovereign state rising to a crisis than of a dysfunctional power struggle within the social and political network that tied Washington, DC, to Wall Street and to the European financial system beyond.”
CRASHED: HOW A DECADE OF FINANCIAL CRISES CHANGED THE WORLD, ADAM TOOZE (2018)
In what way were bailouts and other measures acts of sovereign power? If it was sovereign power, whose sovereignty was being asserted? In what way did the financial crisis also indicate a crisis of nation-state sovereignty? The shadow banking system was global but states and their central banks were national: how was this gap filled? What does the nature of the (global) response tell us about who is the sovereign?
Bailouts
and other measures were acts of ‘sovereign’ powers, in that, the ‘state’ of US,
as a political and economic institution in which its sovereignty is embodied,
asserted its authority to protect the financial system from a brutal collapse to
contain its negative externalities to the wider economy and the public. However
asymmetric the effects of those acts, it was based on ‘self-determination’ of
US national interests by those chosen to represent the American people. We
cannot just look at ‘sovereignty’ in an ideological vacuum, for there is no
such thing. It has to be juxtaposed with the prevailing ideology at the time –
neoliberalism, where engineering of markets by the state is the primary goal.
In that sense, some markets were engineered through bailouts while others
disfavored – for whose benefit is a different question.
It
was the American people’s sovereignty that was being asserted, albeit not
directly but through its state-embodiment – to ease their pain in difficult
times, to protect them from another Great Depression, to get onto a path or
recovery as soon as possible etc. If the financial system was on the verge of
collapse, it held the proverbial gun to the heads of the American people – the
threat of taking them down along with it, if not bailed out. And the threat was
all too real to be cast aside. Politicians could not possibly have stood by and
let the economy collapse, it would be brutal. An undemocratic, unelected
sovereign could possibly have seen through the effects of letting the system
collapse but for a democratic state, taking that chance could have been
catastrophic. So, in a perverse sort of way, it was in asserting the people’s
sovereignty that led the state performed those bailouts. However, this should
not prevent us from questioning why the state couldn’t invoke national interest
in a preventive act of prudently regulating the financial system that it later
bailed out or for not holding individuals accountable post-facto.
The
global financial system is a network of interconnected private and public
balance sheets with scant regard to national borders. It operates on a plane
that lies separate from, while only loosely tethered to, the realm of nation-state
sovereignty. While unrestrained globalization had been the mantra during the
build up to the crisis, there were few takers for an even moderately global
governance post-crisis. While the world seemed ‘flat’ to the likes of Thomas
Friedman, what the financial crisis bared was a financial hierarchy with dollar
at the top of the pyramid of liquidity replacing national currencies as the
safest asset in the world. While the crisis continues, it has fallen on
surprised national governments to handle the prickly pressures that failure of
globalized finance has put them under. It has revealed the paradox of
globalized finance with only hardly any governance of it by nation-states. This
underscored the crisis of nation-state sovereignty.
The
nation-states realized in varying degrees their inability and powerlessness in
exerting control over how the crisis should play out in their territory. On one
hand was the Unites States where those in power acted with a militaristic
determination to save the ‘system’, the Greeks lay on the other end, with their
national government reduced to following the orders of the troika of ECB, IMF
and the European Commission (EC). What the crisis also showed in stark relief
was the inadequacy of regional intergovernmental institutions that lack
substantive political authority (e.g. EU) while at the same time circumscribing
the powers of nation-states (e.g. over monetary policy). At the same time, it
unveiled the dangers of centralization of all monetary power in one nation-state
i.e. the US, through the Fed and its dollars – if the US had formulated
backstop policies without consideration of its global effects, the global
financial system would have paralyzed even further. So, while one nation-state
had the willingness, power and capacity to impose its ‘comprehensive solution’,
it is sufficiently clear that sovereignty of nation-states was in crisis.
The
shadow banking system was global but states and their central banks were
national. Before the crisis, the gap between the two was not apparent or
papered over by national regulators. The assumption was that the market and
adults acting ‘rationally’ would sort things out. However, this turned out to
be a dangerously naïve view of the system of globalized finance and
nation-states that was fundamentally asymmetrical. This asymmetry, arising due
to use of dollar as a global currency, had to be ‘fixed’ up by the Fed through
currency swap lines with major national central banks to provide dollar
liquidity to the stressed megabanks. Moreover, the dollars moved further to
other central banks through bilateral agreements between recipients of Fed
liquidity and non-recipients, e.g. Japan (BoJ) and India (RBI). This fix seems
to have been institutionalized such that the gap remains in the vertical
hierarchy with dollar at the top – so much for a flat world!
The
nature of global response tells us that there is no absolute sovereign in the
world. It seems that banks are sovereign but that hides the political pressure
and scrutiny that banks were under – from Occupy movement and the likes of
Sanders and Warren. So, was it the people who were sovereign – as the global
response was in their name? I don’t think so. There is little to suggest that
they or their representatives had substantive say in the discretionary
technocratic regime that finance was regulated under. Notwithstanding the
Dodd-Frank and Warren’s CBFC, the beating heart of the crisis – problem of
liquidity – was consciously kept outside Congressional oversight.
In an interconnected world, sovereignty of one entity has no substantive meaning unless it is recognized by another – it is reciprocal. While European politicians claimed to lead sovereign nation-states with autonomy under EU, the megabanks were only too glad to be trading in dollars – outside the sovereign authority of EU, if it had any. Moreover, ECB became the site of political maneuvering – completely outside the nation-state framework that politicians waxed so eloquently about. In America, while the financial system was saved in the name of the people, Obama was happy to shield the banks from the ‘pitchforks’ – the very people whose sovereignty his office embodied. When the supposed ‘pitchforks’ came to power, ‘drain the swamp’ turned out to be a lie. In other words, there was and is a hypocritical doublespeak in the name of sovereignty – both by Americans and Europeans, both on the left and the right – at least by those in power from the crisis till now. So, who is sovereign? There is no clear answer.
References:
- Tooze,
A. (2018). Crashed: How a decade of financial crises changed the world. Penguin.
- Kapadia,
A. (2019). Capitalism: Theories, Histories and Varieties, HS 449 (Class
Slides). IIT Bombay, delivered Jan – Apr 2019
Changing Economy and Politics 