The week that democracy won

Godfrey Hodgson
30 September 2008

If the third week of September 2008 was (as Ann Pettifor described it in openDemocracy) "the week that changed everything", the fourth was the week when Wall Street met democracy. What is remarkable is that, after a fashion, democracy has won.

Also in openDemocracy on the global financial crisis of 2007-08:

Ann Pettifor, "Globalisation: sleepwalking to disaster" (11 December 2007)

Ann Pettifor, "The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

Ann Pettifor, "Debtonation: how globalisation dies" (15 August 2007)

Tony Curzon Price, "The end of gentlemanly capitalism" (13 August 2007)

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

Avinash D Persaud, "The dollar standard: (only the) beginning of the end" (5 December 2007)

Fred Halliday, "Sovereign Wealth Funds: power vs principle" (5 March 2008)

The days and night of intense and tortuous negotiations came to a provisional conclusion on 28 September when agreement was at last reached in Washington on a reformed version of the $700-billion bailout package first proposed by United States treasury secretary Hank Paulson on the weekend of 20-21 September. A day later, in a moment of extraordinary drama, the House of Representatives in Washington rejected the deal by 228-205 votes.

It is what happened in the interim - during the painful renegotiation of the plan in the week of 22-28 September - that makes the latest phase of Wall Street's financial meltdown so historic. This is that the momentum of popular and civic opposition to the Paulson plan - to making taxpayers bear the burden of the long-term misjudgments and worse of the US's political and financial leaders - forced the establishment to pause, reflect, reconsider, and revise.

Whatever happens now, this was the week that the balance of power in the United States shifted. The financial crisis still has a long way to go, but it is already clear that this momentous week may have changed the terms of debate in which America's political argument is being conducted.

The way it was

A century-old precedent is relevant here. For there is an echo in the 2008 events of a famous encounter during the panic of 1907. That too was brought on by speculation, and involved the collapse of a bank: the Knickerbocker Trust.

Theodore Roosevelt was then the Republican president. JP Morgan, the bottle-nosed banker (whose two eyes, it was said, blazed like the lights of an approaching express-train) was the king of Wall Street, the Hank Paulson of the day.

A major brokerage was in danger of going bankrupt. It owed stock in Tennessee Coal and Iron, effective owners of Birmingham, Alabama. The bankers assembled in JP Morgan's library, under the eyes of his old-master paintings. The Croesus of the age, playing a patient game, heard them out. A deal was done: Big Steel was allowed to buy Tennessee Coal and Iron, with steel stock used to shore up the brokerage. Confidence was restored - and incidentally (if that is the right word) the deal turned out to be immensely profitable for JP Morgan and the Steel Trust.

A single phrase from an earlier phase of struggle between JP Morgan (the "banker of bankers") and Theodore Roosevelt (the White House's "bull moose") also resonates in the panic-driven negotiations of 2008. In 1902, the Roosevelt administration prosecuted Morgan's holding company Northern Securities for breaking the Sherman anti-trust law (1890). "Send your man to my man", Morgan suggested, "and they can fix it up."

That was the spirit in which George W Bush's secretary of the treasury, Hank Paulson, set out to save capitalism.

The elite fix

Hank Paulson was the head of Goldman Sachs before he went to serve in Washington. In that culture, the big boss-man does what he thinks best; tens of thousands of underlings jump to carry out his will; while hundreds of public-relations flacks explain to an awed world why all is for the best in the best of possible Wall Streets.

In this spirit, Paulson produced three pages over the weekend of 20-21 September to save his world. The document's terms would require the long-suffering taxpayers of the United States themselves to stump up the money to allow Wall Street's institutions to emerge from the crisis of dodgy securities and rotten mortgages with as little damage as possible.

Godfrey Hodgson was director of the Reuters' Foundation Programme at Oxford University, and before that the Observer's correspondent in the United States and foreign editor of the Independent.

Among his books are The World Turned Right Side Up: a history of the conservative ascendancy in America (Houghton Mifflin, 1996) The Gentleman from New York: Senator Daniel Patrick Moynihan,
More Equal Than Others: America from Nixon to the New Century
(Princeton University Press, 2006), and A Great and Godly Adventure:The Pilgrims and the Myth of the First Thanksgiving (PublicAffiars, 2007)

Among Godfrey Hodgson's recent openDemocracy articles on American politics:

"The United States election: time for ‘change'" (10 January 2008)

"America's change election: reality or mirage?" (11 February 2008)

"'Superdelegates' and the US election" (25 February 2008)

"The lost election year" (15 May 2008)

"Barack Obama: at the crossroads of victory" (11 June 2008)"

A game of two halves" (15 July 2008)"

Barack Obama's political tour" (28 July 2008)

The Americans at the sharpest end in this whole crisis are the "ninjas" - those with "no income, no jobs, no assets". They were offered mortgages at 2%, rising - according to the fine print few of them were equipped to read - to whatever the broker in his mercy allowed them to pay (perhaps as much as 10%- 15%). This is how they were offered the opportunity to own their own homes, and so clamber on to the lowest step of the pyramid at whose glittering apex sit ...Hank Paulson and his fellow masters of the universe.

The mortgage-selling was irresponsible, indeed wicked, enough. But what has destroyed some of Wall Street's biggest and richest institutions, and threatened American capitalism ("as we knew it", to add Willem Buiter's qualification) itself, was the cleverness with which these mortgages were wrapped up in fancy "derivatives" and sold on (to the gullible, the cynical or the greedy).

At the heart of the crisis-management in Washington in these epic weeks has been the fact that no one knows for sure what this paper is worth; how much of it there is; or who may own more of it than is compatible with their solvency. Assets that cannot be priced cannot, after all, be sold. And how can assets be priced that cannot even be defined?

Paulson's original grand scheme required the federal government to replace these worthless assets with its - that is, the taxpayers' - hard-earned and reliable money. Thus refreshed and relieved, the banks would start lending again - initially to each other, then to corporations and investors, and eventually to the hapless American public.

The amount Paulson proposed to disburse to his former colleagues and rivals was bold in its immensity: $700 billion - or more, if that's what it would take. The work would be undertaken by the treasury department. There would be the lightest supervision, no higher authority to judge whether the rescue was being carried out competently or even honestly. The three-page scheme was wrapped up and popped out over a weekend, to minimise public scrutiny (see Saskia Sassen, "The new new deal", 23 September 2008).

In retrospect, it could never have worked - for even in the George W Bush administration, it was recognised that such a vast government expenditure would have to pass Congress. True, the government's placemen expressed the administration's trademark arrogance and contempt for democracy at this stage (most notably the Republican leader in the House of Representatives, John Boehner: "We don't need 535 members of Congress adding their best idea. We need to keep it clean, simple, move it through the House and Senate, and get it on the president's desk.") But from millions of Americans came a clean, simple response of their own which their elected representatives have found it impossible to ignore: no.

The Democratic speaker of the House, Nancy Pelosi of California, expressed their collective sentiment with three points in response to the Paulson plan: that there must be some supervision of the treasury; help for everyday citizens worried that their mortgages might be foreclosed; and recognition of the fundamental indecency about handing money to the very people responsible for the mayhem while doing nothing for their victims.

That wise and even brave reaction (in face of the administration's doom-laden warnings) was matched by less predictable opposition from Republican footsoldiers in Congress who were forced into mutiny by the lucid and passionate voices of their voters. A congressman from the state of Washington said he was getting 400-500 emails a day expressing his constituents' rage and dismay at what was being proposed.

The people speak

Then, in one of those all-night sessions that Washington loves - where middle-aged politicians relive the crisis sessions of their law-school student days - a provisional agreement was reached that on 29 September 2008 was packaged into a bill - the Emergency Economic Stabilisation Act - and placed before Congress for emergency consideration.

The reformed package was scheduled to be voted on by a House of Representatives (29 September) that has now given a decisive answer, and the Senate (1 October). Its components include giving Congress veto-power over the release of any sum above $350 bn, limiting top bankers' pay, allowing taxpayers to benefit from the banks' recovery, requiring the banking industry in certain conditions to help finance the bailout, and establishing independent oversight of the deal.

It is not clear at the time of writing whether after the House of Representatives' vote - and amid plummeting stock-markets in Wall Street and elsewhere - a later version of the compromise bill or a successor can pass Congress. The impact of this unfolding story on the course of the presidential election is also an unanswered question. What can be said at this stage is that the American people have spoken - and as so often, their instincts were and are for fairness, common sense, and right.

After the week that changed everything, the week that Wall Street met democracy - and blinked first. The people have forced their politicians to bend the knee. The United States is in new territory.

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