“…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:

1. Tooze, A. (2018). Crashed: How a decade of financial crises changed the world. Penguin.
2. Kapadia, A. (2019). Capitalism: Theories, Histories and Varieties, HS 449 (Class Slides). IIT Bombay, delivered Jan – Apr 2019