True Democracy Requires Serving the Interests of All People, Including Ordinary Workers
During the financial crisis of 2008, the banks were rescued because they were too big to fail. The crisis, however, was precipitated by sub-prime mortgages. Many banks were enabling people to buy homes with low interest rate mortgages to begin with, but when interest rates rose because they were variable rate mortgages, many of these homeowners ended up being foreclosed on. Instead of bailing out ordinary homeowners who couldn’t afford their mortgages, the government, of course, bailed out the banks. It would appear that with the SVB failure, the same pattern is repeating itself, albeit with a slightly different twist.
The government isn’t “bailing out the bank,” but is bailing out the depositors for accounts that exceed the $250,000 cap on FDIC insurance, which means the bank will have effectively been bailed out through the back door. This also means that depositors today, and the future, will have been immunized from risk. This actually is the definition of moral hazard. If depositors know that they will be bailed out in the future, they don’t have to be as circumspect when deciding what banks to do business with. Those who run the banks are also free to continue making risky decisions if they too know that one way or the other the government will step in to immunize them from risk.
The financial crisis of 2008, however, isn’t the precedent for these types of government decisions. Government fell into the habit of immunizing the public from risk beginning with the New Deal in response to the Great Depression. In short, the lesson was that when the market fails, which it often does, there will be programs and policies in place to ensure that the most vulnerable will not necessarily have to crash to the bottom.
If we truly lived according to the precepts of a free market, there would be absolutely no immunity from risk. Workers taking jobs with corporations that are on questionable grounds would have no recourse. Similarly, companies like Chrysler who were bailed out in the late 1970s would be allowed to fail. After all, it was Chrysler executives who made bad decisions; so why should the taxpayer have to pay? Because Chrysler failing, as then Chair Lee Iacocca said, would result in the loss of more than two million jobs nationwide between those working directly for Chrysler, and then those servicing and selling their products, and suppliers.
That is, the bailout of a corporation was justified on the grounds that it would save the jobs of ordinary workers. Interestingly enough, it would appear to rest on a novel idea that just because corporate executives make bad and risky decisions doesn’t mean that their workers should be forced to suffer the consequences. The rationale behind property owners reaping all the profits from their risky decisions is that they assumed the risk in the first place. Conversely, if they lost all their money, that was something they understood as a possibility in the first place.
Most workers, however, take whatever jobs are available because they need a job. They are needs traders who have no choice but to work. Otherwise, they will starve. It is true that when a company fails all they lose is their jobs; investors lose considerable amounts of money. The ordinary worker who loses a job because of the risky decisions of managers really shouldn’t have to pay for those bad decisions. If they should, then they should also be entitled to a share of the profits. In other words, if corporate executives are to be bailed out, then maybe they shouldn’t be entitled to the obscene compensation packages they routinely receive.
In the case of the Silicon Valley Bank, the depositors who are being bailed out are mostly tech corporations, who, if they aren’t bailed out, will be unable to make payroll and possibly have to lay workers off. Or worse, they too could go out of business. Arguably, by coming to the rescue of depositors, ordinary workers' jobs are being maintained.
Still, one wonders if the government would have been so quick to respond if the investors weren’t wealthy. The depositors, after all, are members of the elite. Ordinary workers, as we know from recent Fed decisions over interest rates, have no such clout. In recent hearings before Congress, Senator Elizabeth Warren told Fed Chair Jerome Powell that perhaps he should address the two million or so workers who are bound to lose their jobs because of interest rate hikes. Somewhat dumbfounded, he asked if she was suggesting that he abandon the “necessary” war on inflation.
And yet, his response typifies the elites’ view of ordinary workers. If they lose their jobs, they can always find new ones. If they don’t pay as much, then so what? He is fighting for financial stability and the solvency of the banks. In other words, he is fighting for the greater good as defined by the elites. Why can’t ordinary workers, i.e. those deplorables, understand that it really is for their own good?
Nevertheless, the Fed that insists on raising interest rates to fight inflation is the same Fed that bears some responsibility for exacerbating inflation by maintaining artificially low interest rates for so long. The same Fed also bears some responsibility for SVB’s failure because banking is an interest rate sensitive industry. Too much pressure was put on the bank because of aggressive rate hikes. One might think that given that, the Fed might want to back off from future rate hikes. All indications, however, appear to point in the direction of another rate hike in the coming week, albeit at a lower one. Why? Because we haven’t achieved our target of a two percent inflation rate. Who will pay the price? Ordinary workers. In all fairness, however, the Fed statutorily doesn’t exist to serve the interests of workers. Its primary constituency is the banking industry.
Once the government gets into the business of bailing out corporations and banks for whatever reason, the public comes to expect that when necessary more bailouts will continue into the future. This effectively absolves everybody of responsibility and ultimately accountability. If we are living in an age where the government constantly comes to the rescue due to market failure, it is also an age when the public and private sectors are working together. No longer is it legitimate for corporate executives to deny accountability to the public for their decisions because they are private. The consequences are profoundly public with far reaching consequences for the meaning of real democracy.
If we truly want to give meaning to the words “our democracy,” then maybe we need to reform any number of institutions that are supposed to serve the public. At a minimum, the Federal Reserve Act may need to be rewritten. Democracy does not rest on accountability to just the elites, but to all people, which includes ordinary workers.