Twenty Years Later: The Opening of the Berlin Wall

(This post is Chapter 1 of my book Inventing Europe: The Rise of a New World Power, published by Lester Publishing in 1991. The chapter on the opening of the Berlin Wall was written at the time.)

BERLIN

Berlin is a phoenix. A city of ashes and ruins at the end of history’s greatest war, its destruction was brought on itself by a regime that planned conquests, concentration camps, and the Final Solution from its inner sanctums of power. Hitler’s fondest dream was to crown his empire with a completely rebuilt Berlin, a city of enormous boulevards, massive structures, giant monuments---a totalitarian vision, a focus for the rule of a megalomaniac. Hitler’s legacy, instead, was a destroyed Berlin rent in two, a partitioned Germany, and a divided Europe. In place of the demolished Nazi empire, two superpowers were to anchor their global systems in Berlin. During the decades of their Cold War rivalry, Berlin was the most intimate meeting ground for the United States and the Soviet Union, the most likely flashpoint should their deadly antagonism become uncontrollable. The city became the symbol of irreconcilable ideologies. For the capitalist world, West Berlin became an oasis, a materialistic temptress in the antechamber of Stalin’s communist empire. For the East, West Berlin was a choke-point, the target for skilful threats that could extract concessions elsewhere. Twice the Soviet Union tried to bring West Berlin to its knees. First, it used a strategy of annihilation when it closed off land routes to the city in 1948, forcing the West to supply the metropolis by air in the famed Berlin airlift. Second, it deployed a strategy of attrition when it placed the city under long-term siege with the building of the Berlin Wall in 1961. In both cases, West Berlin rebounded to become more brilliant, more culturally significant: because of the failure of the assaults, this city under siege was gaining the upper hand, negating the legitimacy of the East German system by its very presence. These assaults transformed the former Nazi capital into a symbol of freedom. As Berliners responded to menacing encirclement with grace under pressure, they started down the long road to rehabilitation in the eyes of the world. Time would be needed before other Europeans would again accept Berliners and other Germans simply as neighbours and not as invaders and murderers. Time would be needed for the Communist empire in the East to corrode.

In the end, West Berlin prevailed over its surrounding Communist hinterland. On the day the Berlin Wall was opened, November 9, 1989, the city celebrated as one. It would be whole again. The consequences were legion. Berlin was again the heart of Germany. Beyond that, it was the city around which the New Europe was to be constructed. The bipolar world of American and Soviet global power was in its twilight days. On November 9, it became clear that Europe as well as Berlin could be whole again. With Germany at its centre, Europe could become a vast and effective global power. The Berliners who celebrated that night as they danced by the Wall, popping champagne corks and shouting delirious cheers as bewildered East Germans crossed into West Berlin, were feting the coming together of their city. The celebrations heralded the birth trauma of a new era of global power. Berlin, Germany, and Europe would no longer have their fate determined principally in Washington and Moscow, as had been the case since the end of the Second World War. The era in which the Germans were the losers of a global war was over. They would chart their own course, while an anxious world waited to see how they would use their new found power.

Those who reveled that night in Berlin could not escape the ghosts of history, nightmarish ghouls whose shadows intruded on the glittering celebrations. Just a few meters west of the Wall was the Reichstag building, reconstructed after the notorious fire of February 1933 that served as a pretext for the Nazis to tighten their dictatorship. Only a short distance from here, but on the other side of the Wall, was the Brandenburg Gate, the symbol of German unity. Not far away was the site of Hitler’s destroyed bunker, where the Nazi leader took his own life. From the time before the Nazi era, were the ghosts of earlier days. It was down the Unter den Linden, the grand boulevard that passes around the Brandenburg Gate, that German officers drove their vehicles on August 1, 1914, as they exulted in the news that mobilization for war had been proclaimed. The echoes of Bismarck’s triumphs were here, as were the memories of tragic Weimar, the febrile, ill-fated cultural capital of the world during the 1920s.

From the day the Wall was opened, the process of exorcizing the ghosts began. It was not that the past would ever be forgotten. Too many people, Germans and non-Germans, were determined never to lose the lessons of two world wars and the Holocaust for that to happen. Germany’s most distinguished writer, Gunter Grass, sounded a lonely protest against the creation of a single, powerful Germany: “no one of sound mind and memory can ever again permit such a concentration of power in the heart of Europe. Certainly the great powers cannot; nor can the Poles, the French, the Dutch, the Danes.” Despite the eloquent warning, however, Berlin was moving ineluctably away from its past towards its future at the centre of the continent, with the potential to play a pre-eminent global role.

The exorcism took different forms. One was the sound of hammers ringing as enterprising Berlin students worked round the clock, chipping fragments from the Wall and selling them to passers-by for a few marks each. They were all too willing to stop their work to philosophize with astonished visitors about the future of their city and the future of Europe. “You foreigners are too worried about German reunification,” one serious student told me as he chipped away at the Wall near the Brandenburg Gate. “We have learned our lessons, and it hurts us that we are still not trusted,” he said, stopping to warm his hands. It made a great impression on me, this sober youth, the grandchild of those who had lost the war, reassuring an older visitor from one of the victorious countries. History had come full circle.

Just up the Wall from the serious young men, revelers in red and white Father Christmas outfits were singing carols to two bemused East Berlin border guards who stood atop an observation point, right beside the Wall. Not far from them, near the Reichstag building, simple memorials marked the places where people desperate to escape from East Berlin had been shot down by border guards. One person who would not be enjoying the reveling that night was a young man of twenty-two who had been killed at the Wall in February 1989. The words “Honecker Murderer” were scrawled across the memorial.

Exorcism took political forms as well. Just six weeks after the opening of the Wall, the West German Social Democratic Party held its national congress in West Berlin, having transferred it there from Bremen at the last minute. The congress opened on the seventy-sixth birthday of Willy Brandt, the former mayor of West Berlin, who had become the first Social Democratic chancellor of West Germany in 1969. Brandt was a special kind of godfather for German social democracy, indeed for German democracy as a whole. “Lieber Willy, dear Willy, we love you,” said Herta Daubler-Gmelin as she opened the party congress, embracing Brandt and presenting him with a bouquet of roses. There was no artificiality in the gesture. Brandt had spent a long time fighting for German democracy and now he was there to preside over the exorcism of the past. He had gone into exile during the Nazi era. Mayor when the Wall was built, Brandt had stood at John F. Kennedy’s side when the president delivered his famous “I am a Berliner” speech. Even in those tense days, Brandt had fought to keep up a modicum of communication with those on the other side. As chancellor, he had challenged Cold War orthodoxy with his Ostpolitik, his historic opening to East Germany and Eastern Europe. On November 10, 1989, he had stood by the newly breached Wall to proclaim: “What belongs together, grows together.”

As long as the Germans were on the front lines of two geo-political systems centred elsewhere, they were safely contained. They were history’s ultimate potential cannon fodder, all too aware than any war between the superpowers would begin with Germans killing Germans. Suddenly, the opening of the Wall made them no longer victims, but the most important political actors in Europe.

Berliners felt the change in the status of the Germans more acutely than anyone else. For more than four decades, Berlin was a city to which things were done. It was a crucial piece on the Cold War chessboard. It symbolized two social systems and, in a characteristically German way, managed to push both of them to their limits. No bureaucracy has ever made itself so coldly ugly at that in East Germany. Crossing by car from West Berlin to East Berlin was an education in itself. At Checkpoint Charlie, you would pass the small allied control hut without having to stop, and then encounter the East German bureaucratic maze on the other side of the Wall. Handing your passport and car-ownership papers to one guard after another, you would finally be motioned to stop and get out of the car to buy Ostmarks for Deutschmarks. Typically, the officials in the wickets were facing the other way and would turn to make the currency exchange only after interminable delays. At last, you were signaled to drive into East Berlin. The city was stilted and lifeless in a way that had to be experienced to be believed. There was an emptiness at the heart of this metropolis that no perfectly preserved opera house or museum of German history could ever dispel.

West of the Wall, by contrast, was capitalism at its most orgiastic. The matchless way to experience the full high of West Berlin was to set out by car from West Germany, passing through East Germany to reach the city. After the long journey that took you past the dreary, smoky East German towns and through the ugly checkpoints---if passport processing were a growth industry, this country’s future would have been assured---the entry into West Berlin was mind altering. All at once you were cruising down the Kurfurstendamm. The brilliant lighting, the opulence of the breathtaking structures, the explosiveness of the contrast brought you fully alive to the oasis that was West Berlin. New York had nothing on the Kurfurstendamm, where capitalism felt as bright and new as it did on Tokyo’s great thoroughfares. Here were the neon gods calling down the names of the world’s great corporations from on high. On the street, the sleek Audis and Mercedes swept past crowds of window shoppers.

Behind the façade, however, there was another story. The decades-long, Soviet-sponsored siege of West Berlin exacted a toll. Even though its symphony orchestra was probably the finest in Europe, and its museums, theatres, and nightclubs were without equal, West Berlin entered a period of long-term industrial and commercial difficulty as a consequence of the interminable Berlin crises and the building of the Wall. Over time, Berlin-based industries suffered decline, sometimes falling on hard times, closing their doors or moving elsewhere. The West Berlin economy became increasingly dependent on highly mobile multinational corporations whose commitment to the city was no greater than to any other specific location. In part as a consequence of the claustrophobia that went with living in a city under siege, many Berliners left for West Germany. The German-born population of West Berlin stagnated. The city came to have a much higher proportion of those over sixty-five and a much lower proportion of those under fifteen than did the cities of West Germany. Many of the newcomers were Turkish and Yugoslavian guest workers, whose influx provoked a nativist reaction among some Berliners, fuelling the development of an important constituency for the extreme right wing. Many other newcomers were students from West Germany who often drank deeply at the well of Berlin culture and intellectual life and then took disturbing ideas back to the stolid West German communities from which they came. Hard-drug use was much higher in West Berlin than in the Federal Republic. The city became a spawning ground for a proliferation of subcultures and political protest movements. West Berlin became associated with violent demonstrations, the occupation of buildings by protesters, street battles involving the police, and terrorism. To help the city withstand the siege, the West German government poured money into it, setting up programs to entice people to move there from the Federal Republic. West German taxpayers ended up paying about $2 billion a year for the nurturing of West Berlin. Considering the long-existing feelings of estrangement between Berliners and other Germans, this tax was a very real irritant. Berliners had thought of themselves as more intelligent, more cultured, more alive than the comfortable burghers of other German cities and towns. For their part, other Germans often saw Berlin as a city of anarchists, drug pushers, and spawners of dangerous ideas.

Despite the costs extracted as a consequence of the siege, however, West Berlin sparkled, becoming every more a jewel of freedom. In East Berlin, it was instantly obvious that a terrible social experiment had been carried out. And the Wall and the social corruption in East Germany made it evident that the experiment had been stillborn from the start. The regime that had gunned people down for attempting to flee to West Berlin ruled from behind an unchallengeable arsenal of Soviet weaponry. While its leaders were making the monstrous claim that East Germany was breeding the “new socialist man,” they were themselves living luxuriously in perfumed villas north of Berlin, in secluded Wandlitz, where all the pleasures of the West were sumptuously present. The barbecues, double bathrooms, bars, aquariums, and satellite dishes were installed and serviced by West German workers so that East Germans would not be tainted by acquaintance with these luxuries. I could not help thinking of Wandlitz as I was driving across East Germany one rainy afternoon in early December, just weeks after the Wall had been opened. I stopped at what was called a restaurant, actually a trailer that served no coffee, only lemon tea as a hot beverage. What turned out to be quite good toffee was the only thing to eat. Posted up a this peculiar establishment was a sign warning parents to guard against the television advertising of the West and to take seriously the task of rearing socialist children. Along the side of the highway, people could often be seen working under the hoods of their Trabant cars, trying to coax a few more kilometers out of these two-stroke pollution-generating machines. The families sitting in them, often with their belongings on the roof or in the rear window, did not look like West Germans. They had that genuine proletarian appearance---old-fashioned moustaches, haircuts, and clothes that had long since disappeared in the West. These were characters out of a Steinbeck novel, for whom the phrase “the people” would not seem embarrassing or out of place. The leaders who had hidden out at Wandlitz had presided over a system that made people wait fifteen years for a Trabant. In the end, it was “the people” working in the most polluting factories in Europe who could stand it no longer. Even more than in relatively well-supplied East Berlin, it was in miserable, industrial Leipzig that implacable hatred for the regime had boiled over into the streets.

The regime had specialized in grand and petty tyrannies. Locking people up so they could not travel, and transforming their country into a prison where they could not speak or publish or meet freely, made East Germany a grand tyranny. Deciding how scarcity would be allocated so that the friends of the regime were more likely to be rewarded with consumer goods made it a petty tyranny.

One dissident who was finally expelled from East Germany in 1977, and now lives in West Berlin, where she is an author of children’s books, told me how she explains the difference between the two Berlins to her youthful audience. Franziska Groszer recounted the story of buying food for her family. In East Berlin, she would have to spend an hour each day in long line-ups to purchase food. Occasionally, she would be lucky and buy a large fish. When she reached home, she would call her friends at once to make the fish the occasion for an instant party. In West Berlin, she would find the fish she wanted easily enough, but might have to go to five or six stores to find one she could afford, since she had no job.

As the story shows, neither social system seemed ideal to her. She had, however, the kind of appreciation for the freedoms of the West that only those who have lived without them can ever feel. In the East, her children’s bookstore was closed on the order of the authorities, her efforts to publish or to present children’s puppet shows blocked. In the maze of bureaucratic repression she experienced, she was never given the satisfaction of being told what rules of the East German state her cultural activities had violated. She was simply told that she could not continue them.

Her description of the dissident circle of which she was a part in the mid-1970s was a testament of hope and hopelessness. Her circle included thirty or forty people, for the most part intellectuals, who would gather in people’s houses. While they had no concrete basis for optimism during what was the heart of the Brezhnev era, they tenaciously clung to a belief that someday something would have to give. Their main weapon against a system that enjoyed an overwhelming monopoly of coercive power was to try to raise the consciousness of people, to counteract the mind-numbing message of the regime that any well-being they could hope for came from an unassailable power above them. For the dissidents, reading to children and putting on puppet shows were acts of subversion, aimed at instilling the idea that people could be self-sufficient, that they did not depend on largesse from on high. During these years, Franziska Groszer would never go to see the Wall. She avoided it, always aware that it was there. She and her friends were well-informed, and knew a great deal about other countries. But they could not reach out to them. For her, the Wall meant the loss of the world. She felt diminished by it. Everything she lived was shrunken. While the Germans were clearly one people, it was evident that those who had survived the experience of being dissidents in East Germany had no intention of giving up the hard-won lessons of their experience. That experience would always mark them off from other Germans.

The euphoria, the sense of possibility that accompanied the opening of the Wall, was worth savouring. It would not last; the practical difficulties ahead, the calculations of the powerful, the dislocation of the powerless would foster new and often dark emotions. But for those who experienced the opening of the Wall, the wonder of the moment could never be taken away. However briefly, people without positions of power had seized control of their fate and, in the process, they had toppled not only a local system of tyranny, but a world order: they had opened the way not only for a new Germany, but for a new Europe, a Europe that would be invented not only in the streets, but at the highest political levels.

Does Toronto Have to be a Mean City?

The best case you can make for a bourgeoisie is that from time to time its members take the lead in launching major developments that benefit a society over the long term. They do it for profits, of course, but on those occasions when people with imagination understand the shape the future could take, their innovations can bestow rewards on themselves and everyone else.

When Torontonians contemplate the course their city could take in the 21^st century, they quickly come up against the hard fact that the city’s business class is tight-fisted, unimaginative, and much more concerned with today’s pennies than tomorrow’s dollars. And for the most part, the Toronto bourgeoisie is backed up politically by the city’s home-owners.

During the civic workers strike in the summer, this bone headedness was plainly apparent. Egged on by Toronto’s anti-worker daily newspapers and broadcasters, property owners, the people most likely to vote in municipal elections, were talked into the idea that driving a draconian bargain with municipal workers was what they wanted. Keeping salary increases to a minimum, and most of all, dispensing with the banking of the benefits from unused sick days, was all the rate payers could get their heads around. So what if that benefit had existed for half a century and was used as a way to discourage workers from booking off sick? I encountered the meanness among my neighbours who took little interest in whether the people who picked up their trash in fair weather and foul could earn a living wage.

The political consequence of all this was David Miller’s announcement that he will not seek a third term as mayor. He might still have made the same decision under more positive circumstances. Who knows? Being mayor of Toronto is no easy job.

David Miller has what it takes to be the great mayor of a great city. What he must have found endlessly frustrating----he never shows it----is trying to lead a city whose business class and opinion shapers are consistently dull-witted, too selfish even to look out for their own long-term interests.

Consider for a moment the great challenges and potential opportunities Toronto is bound to face in coming decades. Here are six of them---more could be added to the list. How Torontonians negotiate them will have much to do with shaping the city’s success or failure in the time of our descendants.

· The decline of the suburbs. The decades following the Second World War were the golden age of the motorcar, the suburb, and the flight from urban density. We have now entered the era of Peak Oil, the struggle to contain climate change and the decline of the motorcar. Cities of the future will be more densely populated, more like those of the 19^th century than those of the second half of the 20^th century, in that respect. Managing the shift to greater density---the shift is not a matter of choice, it will come----while paying heed to social justice, urban planning and the minimizing of dislocation, will figure largely in determining the success or failure of Toronto.

· The rise of rail. Subways and trams will be key transportation arteries in the cities of the 21^st century. Visit Bordeaux in France’s south west and you will see a city luminous with new vitality following the construction of tram lines through the city’s heart and the refurbishing of its great architectural heritage of the 17^th and 18^th centuries. The combination of trams, venerable buildings and electric lighting has made a city, once dowdy, shine again. Business and capital investments have been drawn to the new Bordeaux. Toronto’s streetcars, dedicated streetcar lines and subway lines provide a strong base for the immense developments that will be needed in the future. Toronto city councils and Ontario governments are famous for announcing subway extension, tram lines, and a rail link to the airport, but much slower in delivering on these announcements. As a professor at York University, I’ve gone from youth to advanced middle age (some may chortle at this understatement) waiting for the promised subway to reach the campus. Enormous investments are required to push ahead the agenda of revolutionizing the city’s transit systems.

· Inter-city high speed rail. Often talked about, but always put on the back burner, the Quebec City to Windsor corridor needs a high speed passenger rail system, whose link between Toronto and Montreal is crucial to the future of the country’s two most populous cities. In an age when short-haul flights and inter-city highway travel will be in decline as a consequence of Peak Oil and the struggle to contain climate change, the prosperity of urban Central Canada requires the building of a system of the kind the French and the Japanese have been establishing for decades. We are laggards on this issue in comparison to other advanced countries.

· Post-secondary education. Toronto has already become a major centre for the education of post-secondary students from around the world. The opportunity exists to expand this enormously in coming decades. In part, this is because the ultra-security consciousness that now prevails in the United States has convinced tens of thousands of students from abroad to study elsewhere. Many have chosen Canada as a more welcoming country in which to study. Toronto, drawing on its unique heritage, as a city whose population hails from the whole world, can become the destination of choice in North America for international students. This won’t just happen in a fit of absence of mind, however. Making this materialize requires a far-sighted approach on the part of Toronto’s post-secondary educational institutions and the leadership of the city, political and otherwise. The multiplier effects that would flow from the development of this sector would enliven the whole of the city’s economy, creating tens of thousands of jobs throughout the service sector. In addition, a firm foundation would be laid for the promotion of the large scale research and development that is so sorely lacking in Canada. Post-secondary education is a pillar, as well, for the development of the city’s cultural institutions. The great cities of the 21^st century will be centres of learning and culture. (Highly profitable by the way for the private sector.)

· The re-occupation of the waterfront. It is rather amazing, in a wholly negative way, to live in a city located on one of the world’s greatest lakes and to have that go unnoticed by most Torontonians most of the time. I remember the building in the 1950s of the expressway that cuts the city off from the lake. What was later called the Gardiner Expressway was welcomed by the people of that time as an indicator that their city was modernizing, keeping us in sync with the construction of great highways on the other side of the border. We’ve moved well beyond that age when the sight and smell of automobile exhaust were hailed as signs of progress. City leaders, planners and dwellers have long pressed for the simultaneous development of the waterfront and the construction of a tunnel through which the expressway could pass. (Such a tunnel beneath the city of Lyons prevents an expressway from tearing up the heart of that city.) Instead of seizing this great question and planning boldly, city governments and Toronto’s small-minded developers have left the expressway where it is and have gone ahead with piece-meal, thoughtless construction of condos and other high-rises along the lake that only make the problem worse. Chicago revels in its magnificent waterfront. Toronto shrugs. Ironically, the re-occupation of the waterfront on the grand scale to make it accessible to the whole city would promote the development of all parts of Toronto. It would even, dare I say, drive up the value of the property of the city’s home-owners. But many of them are pre-occupied with making life miserable for civic employees and would fear any political leadership that proposed planning for the city’s future.

· A new constitutional deal for cities. Despite the revision of the constitution in 1982, Canadians have a horse and buggy regime where cities are concerned. The idea that a city like Toronto needs to rely on an unholy combination of property taxes, and handouts from Queen’s Park and occasionally from Ottawa is a recipe for urban failure in the 21^st century. The members of both “senior” levels of government enjoy looking down their noses at Toronto with its impossible fiscal problems. Year by year, the city’s infrastructure falls into ever greater disrepair. City council members spend their time trying to keep their heads above water, with the exception, of course, of those members who are building careers on phony attacks on David Miller as the source of all evil. Even as imaginative a leader as the present mayor, who clearly understands the constitutional bind, has had little time to address the issue. Toronto and the other great Canadian cities need to liberate themselves from a constitutional order that makes them the creatures of their provincial governments. To allow them to raise money through income and corporate, as well as property, taxes, city dwellers will have to wage a fight not dissimilar to the great 18^th century struggles to create democratic regimes. Where their basic needs are concerned, Canadian cities do not enjoy democracy. They live in a paternalistic order that is as remote from their priorities as royal governments were from the citizenry before the American and French Revolutions. Unless the cities, Toronto in particular, gain control of much more of the tax revenues they generate, all of the ideas suggested above will be unrealizable.

In the early 20^th century, Toronto, indeed all of southern Ontario, received inspired political leadership on which the urban development of the region was based. It came, not from City Hall, but from Queen’s Park, in the person of a cabinet minister in a Conservative government by the name of Adam Beck. Beck led the fight for “public power” in Ontario, the creation of the publicly owned Ontario Hydro to replace the private power companies and to ensure cheap energy for manufacturers and homes in the province. The industrial take off of Ontario, the nation’s manufacturing heartland, rested on the power provided at cost by Hydro.

Will there be inspired leadership in the 21^st century to make of Toronto what it can become? It’s possible. But in the aftermath of the demagogic hounding of a talented mayor who can see beyond this afternoon, there are few encouraging signs. The next mayor of Toronto could be a man named Tory who runs for all available offices, or a provincial Liberal cabinet minister, more renowned for bluster than brains.

In the early 20^th century, Adam Beck had a politically mobilized citizenry, including many enlightened business leaders, who supported his grand cause. Today, that is what is missing. Its absence does not mean that a movement of the kind that took shape a century ago, cannot arise today.

Why did the NDP concede the high ground to the Liberals?

For three quarters of a century Canadian social democrats have been working to make their movement and party into a major political force in Canada, a force that can actually compete effectively for power in Ottawa.

Never have the conditions for the NDP to move to major party status been more favourable than they are today. (Don’t quote polls to me. They’ve been all over the place, and pre-election polls aren’t worth a pitcher of warm spit.)

The Harper government is wretchedly unpopular with a majority of Canadians. It is hanging on to its right-wing base, but cannot grow beyond that. The Liberals are led by a man whose instinctual response to every issue is to turn to the right. A believer in the benign character of the American Empire, he’s done this for years on Afghanistan. He did it on the coalition when he walked away from the chance to install a progressive government last January with himself at the helm. And over the past year, he’s repeatedly failed to come up with sweeping new ideas to cope with the economic crisis and to offer a platform that addresses the needs of Canadians. When he walked away from the coalition and supported the Harper government in return for the issuing of a few report cards, Ignatieff made it evident that he offers Canadians nothing new.

Meanwhile, over the past year, Jack Layton grew in political stature. His role in launching the coalition was masterful. It was Ignatieff who abandoned this progressive initiative not Jack Layton. As the months went by the NDP was making itself the real alternative to Stephen Harper. It was the right approach and it was working. (It’s true that a much more public assault on the failed economics of neo-liberalism would have helped.)

The move this week to vote confidence in the government was wrong-headed. The NDP has abandoned the high ground to the Liberals on the central question of who is leading the fight against the Harper government. From now on, the Liberals will vote against the government at every turn in parliament, and the NDP will have to prop up the Conservatives until the changes to EI it favours are passed into law. (Gilles Duceppe has announced that the Conservatives won’t be able to count on him for future votes.)

By the time the next opportunity to defeat the government comes along in the winter or spring, the Ignatieff Liberals will be rhetorically entrenched on the high ground----substantively they offer nothing----while the NDP is reduced to a minor player whose job is to sustain the Harperites who loath social democrats.

The coming months are going to be difficult ones for Canadian families and communities as the rate of unemployment rises and the bite of the economic crisis is more deeply felt.

The Harper government is set to lose the next election. Had the NDP stuck to its role as the unwavering opponent of the Conservatives, the party could have gained enormously. More important, the party could have offered the country the prospect of real change.

Jack and Gilles Went up the Hill

Anyone who has regard for the Canadian political tradition or the great things we have done together in the past as a nation should avert his or her glance today as the NDP and the Bloc vote to keep the Harper government in office on a confidence motion.

There is no glory on this day for anyone. All four parties in the House gain and lose from what is happening in Ottawa.

The Harper government gets to stay in office, having thrown a few crumbs on the table to win the support of the NDP and the Bloc. The Conservatives who relish their take-no-prisoners approach to governing are tall in the saddle. What they have lost is the ability to frighten Canadians with the terrors of last autumn’s failed attempt to create a Liberal-NDP coalition government with the backing of the Bloc. Now it is Stephen Harper who is being kept in office by the socialists and the separatists, the very political forces he earlier portrayed as unfit to have a say in governing the country.

Michael Ignatieff is a winner because his bluff paid off. The Liberals are now free to vote against the government on every confidence motion. They have succeeded in shifting the burden of determining the fate of the government to the two other opposition parties. While the Liberals may be the major victors in this week’s brawl, that doesn’t reverse the remarkable shrinkage Ignatieff’s stature has undergone over the past year. Once thought of as a sparkling intellectual, a second Pierre Trudeau, the Liberal leader bumbled his way into and out of the coalition, gave his support to the Harper government in return for a few report cards, and spent the summer who knows where.

Jack Layton delayed another trip to the polls, which may have been his short-term aim. He has lost his position as the stalwart opponent of a deeply reactionary government. Principle gave way to expediency. Chiding the Liberals for their previous votes of confidence in Stephen Harper doesn’t amount to much if the NDP backs the government when it really counts.

For the Bloc Quebecois to vote confidence in a government that excoriated their movement and party as having no right to a role in running the country shouts the message that all Gilles Duceppe and his MPs care about is saving their seats. Quebecois who were furious about Harper’s demagogic campaign to de-legitimize their members of parliament can only shake their heads in disgust.

Jack fell down and broke his crown and Gilles came tumbling after.

Canadians grow cynical as they watch. Last year, a smaller proportion of Canadians than Americans voted in their countries’ respective elections, and that was unprecedented. At a time when Canadians need political leadership to cope with a broken economic system, they get this.

One Year Into The Financial Maelstrom

(Today, U.S. President Barack Obama went to Wall Street to make the case for regulatory reform to govern the operations of the U.S. financial system. This post deals with the financial crisis and its role in the general economic malaise. It is an excerpt from my upcoming book, Beyond the Bubble: Imagining a New Canadian Economy, to be published in a few weeks by Between the Lines Publishing.)

In sharp contrast to the Great Depression of the 1930s when the United States was the world’s leading creditor nation, the U.S. is now the greatest debtor in the world. This places enormous constraints on the course the United States can pursue to cope with the economic crisis and with the broader foreign challenges that confront it.

Two forms of debt are particularly important to the external position of the United States: the U.S. government deficit and debt; and the U.S. current account deficit.

First, let’s look at the effects of the U.S. government debt, which presently amounts to $11 trillion and is set to soar much higher. The Obama administration’s economic recovery plan is driving the U.S. government’s annual deficit from $410 billion at the beginning 2008 to well over a trillion dollars a year. The administration projects that trillion dollar deficits will persist for years to come. The U.S. federal debt is financed in part by securities held by U.S. government accounts, among the most important, the Federal Employees Retirement Funds, and the Federal Old-Age and Survivors Insurance Trust Fund. At the beginning of 2008, 55 per cent of the debt was held the “public”, meaning those who purchased U.S. treasury bonds. Forty-five per cent of these “public” purchasers were made by foreigners, two-thirds of that total by foreign central banks. By far the most important of the central banks in making these purchases were those of China and Japan. When to the central banks of China and Japan are added to other purchasers from these two countries, about 47 per cent of the purchases by foreigners is accounted for. In total, foreigners have been financing about 25 per cent of the gigantic U.S. National Debt, a percentage that the Obama agenda could drive much higher.

Between them, the central banks of China and Japan hold over a trillion dollars worth of the U.S. securities used to finance the U.S. national debt They don’t buy them because they regard them as a good investment. Quite the contrary. They buy them to save the United States from the crippling consequences of its own internal weakness. This, they do, not as an act of generosity, but to safeguard their vitally important export markets in the U.S. and to prevent a global economic collapse.

Suppose the Chinese and Japanese central banks, along with about eight or ten other central banks, decided to reduce their purchases of U.S. Treasury bonds. The consequence would be a sharp decline in the value of the U.S. dollar against other currencies. A lower dollar would lead to a very substantial reduction of U.S. imports. Keeping exports flowing into the vast American market is what motivates Asian central bankers to buy trillions of dollars worth of U.S. Treasury bonds.

There is a limit to this willingness to serve as lenders for the deeply indebted Americans, however. The biggest money makers in China are foreign multi nationals that set up shop in that country to avail themselves of a highly productive and relatively inexpensive labour force. Those multi-nationals are earning a far higher return on their invested capital in China than the Chinese central bank makes sustaining the U.S. dollar through its purchases of U.S. Treasury Bonds. In March 2009, the Chinese central bank issued a clear warning that it was tiring of playing such a pivotal role in propping up the U.S. dollar. Zhou Xiaochuan, the governor of the People’s Bank of China, suggested that the time had come to consider replacing the dollar as a global reserve currency with a new currency made up of a basket of currencies to include the Euro, Yen, Pound and Dollar. Zhou proposed that the International Monetary Fund increase the use of “Special Drawing Rights”, a notional currency already used by the IMF. Not surprisingly, both President Barack Obama and U.S. Treasury Secretary Timothy Geithner rejected the Chinese idea and predicted that the dollar would remain the world’s dominant reserve currency for a long time to come.

The Obama administration will need to sell vastly more (the dollar total could more than double) Treasury Bonds to Asian and other central bankers. This will have two effects. First, it will substantially increase the downward pressure on the American dollar against other currencies. A renewed fall in the value of the U.S. dollar will serve as yet another disincentive in the path of central bankers and private investors buying up the bonds. Buying bonds denominated in a falling currency is a money loser, especially if the interest rates on the bonds are low. To sweeten the pot, the interest rates on U.S. Treasury Bonds will have to be substantially raised, both to slow the decline in the U.S. dollar and to increase the return to the buyers of the bonds.

This, of course, creates yet another problem for the United States. Higher interest rates on American bonds make the cost of financing the rapidly expanding U.S. national debt ever more dauntingly stratospheric. Thus, borrowing immensely more from foreigners to finance the administration’s stimulus program is an exercise that can only be described as fraught. The more expensive the cost of borrowing, the less effective will be the U.S. recovery program.

In principle, there is a way to reduce the volume of additional foreign borrowing. This would be to dramatically reduce the income and wealth gaps between the rich and the rest of the American population, in part by imposing much higher income and wealth taxes on the very affluent. While in theory, this could work, in practice this would necessitate such an enormous shift in the American socio-economic system that it is inconceivable under present circumstance. It remains only a theoretical possibility to be noted. The continuing dependence of the United States on foreign borrowing, and thus on the need to tie much of the world into an American centred geo-political system is rooted in the marked inequality that exists in the United States itself.

Adding to the problem is the current account deficit of the United States, which was running at an annual rate of $-673 billion in the spring of 2009. (The current account includes the trade in commodities, tourism, and the trade in services, including profits, dividends, and interest payments between the United States and all other countries over the course of a year.) To finance its gigantic current account deficit, which amounts to just under five per cent of the U.S. Gross Domestic Product of $14.3 trillion, the U.S. is forced to engage in immense foreign borrowing. This can take a number of forms. One of the most important is the inflow of investments by foreigners to acquire assets in the United States. During the 1990s, these inflows were occurring at a time when the U.S. was on the cutting edge of the global technological revolution. It was the age of the dot.com boom. Following the dot.com crash in 2000, though, much of the flow of new foreign equity into the United States halted. Indeed, over the next few years, if the U.S. dollar should drop significantly against other currencies, foreign investment inflows into the United States would likely be aimed at the acquisition, on the cheap, of American economic assets. This is hardly a prospect that the U.S. government and corporate sector can view with equanimity.

For any country to have a perennial current account deficit that runs at just under five per cent of its GDP is a perilous exercise. For any country other than the United States to do it is unthinkable. The U.S., as those who believe that America can go on doing this indefinitely insist, has a special role in the global system which allows it the privilege of greater indebtedness than other countries. Among other reasons for this is the fact that the U.S. dollar remains the reserve currency of the world. This means that when the U.S. government borrows money abroad it does so in its own currency, so that even if that currency depreciates against other currencies, Washington does not have to assume the additional cost this would impose on other borrowing governments.

The merit of this argument has declined as the prospects for the further depreciation of the U.S. dollar have increased. The burden to be borne by foreign central banks has simply grown dangerously large and it is about to become more enormous still.

The U.S. current account deficit---the extent to which the United States spends more abroad than it earns abroad---creates a paradoxical relationship for the U.S. with other countries. On the one hand, there is the vast American market on which China, Japan and other countries, including Canada, depend so much for the profitability of the enterprises based on their soil. (Manufacturing companies, because of the economies of scale they achieve as their sales and volume of production increase---as the ratio of fixed to variable costs falls---make as much as half of their profits on the last fifteen or twenty per cent of their sales.)

It helps to picture the size of the U.S. market for foreigners this way: each year the U.S. offers to foreign suppliers a market more than half the size of the entire Canadian market as a consequence of its deficit. This additional market exists on top of what the U.S. market could offer foreigners if Americans sold abroad as much as they bought. The paradox is that foreigners have to pay dearly to keep this market open and available to them. The bigger the U.S. current account deficit, the more lucrative it is to foreigners. But the bigger the U.S. current account deficit, the more burdensome is the weight of the unprofitable U.S. Treasury Bonds foreigners must buy to keep that market open.

There is an inherent instability at work here. It is the kind of arrangement that could only exist in the relationship between a declining empire, or hegemon, and its clients. When the United States was a rising empire---as it was even in the dark days of the Great Depression in the 1930s---it creditor status, its superior productive plant and ultimately its unexcelled military potential, ensured its ability to invest abroad on its own terms and to dictate its trade arrangements with other countries. Indeed, in the last days of the Second World War, in 1944, the United States, along with its allies established the rudiments of the post-war economic system at Bretton Woods, New Hampshire, placing itself at the centre.

The United States can be likened to a ballerina. When she is young she makes difficult feats look easy. When she is aging she has to settle for making easy moves look difficult.

At what point will foreigners conclude that the game is not worth the candle, that financing the foundering U.S. is more trouble than it’s worth? Since so many factors are at play, including the stresses so evident in the U.S. effort to sustain its geo-strategic position in the world, no precise answer can be given to this exceptionally important question. What is abundantly clear, however, is that the Asian powers and the Europeans could adopt economic strategies in which the role of the U.S. as a market of necessity (much more for the Asians than the Europeans) becomes far less important than it is today.

Every winter, government and business high-flyers from around the world flock to Davos, Switzerland to pontificate about the state of the world economy. In January 2009, the World Economic Forum at Davos was unusually subdued. Those who ran the global economy were not receiving high kudos from anyone about the job they had been doing.

A major topic at Davos in 2009 was how the Obama administration was going to raise the $819 billion it was seeking to finance its stimulus package. Unprecedented borrowing of capital from foreigners would be needed to fund the program. Experts at Davos warned that American borrowing could push up interest rates, generate inflation, and drive down the value of the American dollar against other currencies. While some might wonder about the risk of inflation in a global setting where the deflation, its opposite, posed the greater peril, the question of where the capital would come from was on many minds. Alan S. Blinder, a Princeton University economist and former vice-chairman of the Federal Reserve in Washington told the New York Times: “At some point, there may be so much Treasury debt that investors may start wondering if they are overloaded in dollar assets.” Another concern raised as Davos, a concern expressed many times about U.S. borrowing in recent years, is that it has the effect of making it extremely difficult for poorer countries to borrow the capital they urgently require. Ernesto Zedillo, the former Mexican president who was in office during his country’s financial crisis in 1994 warned that “the U.S. needs to show some proof they have a plan to get out of the fiscal problem. We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

While much of the focus, and rightly so, has been on U.S. public debt and on the gargantuan U.S. current account deficit, the level of American private debt is equally alarming, and has enormous implications for the prospects for economic recovery in the United States. In 1960, the household debt of Americans stood at a level that was equivalent to fifty per cent of the U.S. GDP. By 1980, that level had grown to sixty per cent of U.S. GDP. Since 1980, the level of household debt in the United States has taken off to unprecedented levels. By 2004, the average American was spending $1.04 for every $1.00 he or she earned. By the end of that year consumer debt alone (not all of household debt) had reached an amount equivalent to 85.7 per cent of U.S. GDP.

There are various ways of analyzing the shocking rise of U.S. private debt. Some see it as a cultural phenomenon, the consequence of the inability of contemporary Americans to defer gratification. Others attribute sky high consumer debt to the mass marketing of credit cards and the goods and travel that flow from them. Campaigns to win over young Americans to credit card use have been especially effective. Between 1990 and 2003, the number of Americans holding credit cards jumped from 82 million to 144 million. A fundamental cause of the rising of personal indebtedness has to do with the way the incomes of most Americans have stagnated since 1980, as we have seen. An economy in which the mass of the population enjoys rises in real incomes is one in which the market for goods and service expands rapidly. On the other hand, an economy in which incomes for the majority are stagnant is one in which there are real barriers in the way of market expansion. Just as financial institutions found ways to expand the markets for their activities by promoting mortgages and home purchases to millions of people who could not afford them, these institutions were enormously successful in enticing tens of millions of Americans to spend today, building up massive debts for the future.

But now the time has come to pay the piper.

That is now no easy task. Now that Humpty Dumpty has fallen, even the vigour, intelligence and dedication of Barack Obama may not be enough to put him back together again. The problem is that the crash in the United States occurred when the financial institutions, with the full support of Washington, had used up every method they could think of to grind more profits for themselves out of the system. What they had created was an arrangement with distinct similarities to a gigantic Ponzi scheme. A full-fledged Ponzi scheme exists when a financier like Bernie Madoff takes the money of investors, promises them a high rate of return, and then pays them dividends, not drawn from profits, but from the capital invested by the next group of investors. While U.S. financiers had not created a pyramid scheme along the lines of Madoff, they had erected a system that was constructed on vast layers of debt, as we have seen. If the economy stopped moving forward, a crash, when it came, would create vicious cycles involving all those layers of debt.

That is what happened with the crash of 1929. When the market fell, it forced all those who had made investments on margin to sell off positions they held to pay off the margin calls they had to meet. This pulled the market down much further. The system was running in reverse. The same thing has happened with the crash of 2008. The ways that leverage was exercised in the 21^st century were much more arcane and technologically advanced than the old method of stock purchases on margin of the 1920s. But through a slew of derivatives and other financial instruments, the same result was achieved. With the investment of let’s say one million dollars, high rollers, whether individuals or enormous financial firms, were able to achieve the leverage of an investment of as much as thirty million dollars. Such leverages yielded huge profits. But once the crash came, it halted the whole machine. Individuals and enormous companies such as AIG were unable to cover their positions. Left exposed, they plunged into bankruptcy. Too big to fail, Washington rushed in to save the giants, the mastodons. First the Bush administration and then the Obama administration tried desperately to put Humpty Dumpty back together again.

The problem with Humpty Dumpty, the financial sector of the American economy, is that while Washington believed it was too big to be allowed to fail, it had actually grown too big to succeed.

Over the past quarter century, an extraordinary shift has occurred in the make up of the U.S. economy. As late as the early 1980s, manufacturing accounted for close to 20 per cent of the American economy, while the financial sector (commercial banking, investment banking, insurance firms and other financial firms) generated 12 to 14 per cent of GDP. By the eve of the 2008 crash, manufacturing had shrunk to 12 per cent of GDP while finance had swollen to account for 20 to 21 per cent of GDP.

For over one fifth of the economic output of a major nation---we are not talking about the Cayman Islands or even Switzerland---to be accounted for by finance is a shocking phenomenon. Considering the allure finance had acquired in the English speaking countries by the eve of the crash, it is not surprising that analysts rarely step back to consider what this really means. In theory at least, finance is not a benign phenomenon in and of itself. It is a means to an end. The proper and most efficacious raising and investing of capital is supposed to open the way for the production of goods and services that are actually useful to, or desired by, people. Manufactured goods, food, houses, education, medical care, entertainment, a host of other services, and transportation are useful to people.

On its own, finance is not. Only as a means to an end does it have value in any meaningful sense of the word. In a great and powerful country such as the United States, once the world’s leading industrial nation, when manufacturing steadily shrinks and finance expands remorselessly, as a proportion of GDP, we have to ask ourselves what is really going on.

One thing that has been going on is that a few people have been vastly enriched by the immense profits that have been juiced out of the engorged financial sector. These are the people who have now become notorious, in the aftermath of the crash, for their sky-high salaries, advantageous stock options and gargantuan bonuses. As finance has become a huge industry unto itself, more and more of the “best and the brightest” among the young have eschewed engineering, medicine, scientific research and other fields to go into “money”.

On campuses across North America, universities have responded to the rise of “money” as an industry by establishing schools of business whose function is to turn out graduates ready and eager to work in the financial sector. Money has been sexy; manufacturing has been old-hat. At business schools, a very particular school of economics has dominated the curriculum. Students are taught how to apply neo-classical economics in the setting of contemporary globalization. In the world-view as they receive it, free trade is benign, as is the right to invest anywhere in the world, and to shift investments freely from country to country. Protectionism is negative, as are government interference in economic decision making, and militant trade unionism. Other schools of economics get short shrift at business schools, and such schools are not enamored with having their students take courses from departments on campus where neo-classical economics is more thoroughly critiqued. It is not an exaggeration to say that the economics taught to business students in North America fits hand and glove with the economic practices that have been found so wanting in the aftermath of the crash of 2008.

Of more immediate concern is whether the Obama administration remains hooked on a finance-centred conception of the economy. Over the past couple of decades, as finance has grown ever larger as a proportion of the GDP, financial institutions have evolved a plethora of instruments, more or less arcane, whose purpose is to invite investors to heighten the risk, or the pleasure, that flows from their investments. Securitization, credit default swaps and derivatives in many shapes and sizes were the products on the market from which investors were able to choose. Securitization is a process which creates instruments that enable those who have lent money to sell the loans---credit card debts, sub prime mortgages, car loans, etc.---to those who wish to purchase these instruments as investments. The idea, of course, was to spread risk widely, so that investors could assume a portion of the risk, while making a healthy return when times were good. “Banks used securitization to increase their risk,” wrote Paul Krugman in the New York Times “not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption. Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.” In October 2008, Columbia University economics professor Joseph Stiglitz quipped to a congressional committee in Washington that “securitization was based on the premise that a fool was born every minute.” The problem with securitization, as with other exotic instruments was that while the spreading of risk allowed financial institutions to do yet more lending to increase their risk, when the market plummeted the investments under the securitization label blew up, became toxic, and helped drag their holders toward bankruptcy.

Credit default swaps were another Alice in Wonderland creation that apparently provided protection for investors, but actually vanished into inutility the moment the insurance they supposedly provided was actually needed. As the name suggests, credit default swaps involve a deal between two parties, a swap, in which one party is buying protection and the other party is selling protection. They are betting on whether a particular company will default on its bonds. The first party is buying protection so that if the company does default within a specified period of time, it will collect a large payment from the party selling the protection. The second party, the seller, receives payments for assuming the risk. Thus the purchaser of the credit default swap is acquiring what looks like an insurance policy, protection which covers it so that it can go out and make other risky investments without the appearance of having a balance sheet that involves too much risk. The seller, on the other hand, collects money for selling protection on let’s say a risky bond in the sub prime mortgage market. In recent years, according to some estimates, hundreds of trillions of dollars (yes, that read trillions) of these credit swaps have been made. The numbers involved are absurdly large. For comparison, the U.S. GDP is about $14 trillion.

In the run up to the great crash of 2008, Credit default swaps were traded in the creation of an ever higher fantasy skyscraper. When the sub prime mortgage market, among others, imploded, the entities that had sold credit default swaps suddenly discovered that the assets they held on them were reduced to rubble. In March 2008, when Moody’s downgraded the ratings of Bear Stearns, Bear----the party in $13 billion in credit default swap trades---imploded and was acquired for next to nothing by J.P. Morgan.

No one knows how huge the bill could be for the collapse of the credit default gambit? That’s because with hundreds of trillions of notional dollars gambled in the various forms of exotic financial instruments including credit default swaps, it is next to impossible to calculate the price tag for a potential collapse of all this. The Bank for International Settlements (BIS), an international organization of central banks based in Basel, Switzerland, took a crack at calculating the potential risk making use of 2007 data. The BIS estimated the notional value of the whole at $596 trillion dollars, divided among interest rate derivatives ($393 trillion), credit default swaps ($58 trillion), and currency derivatives ($56 trillion), with the rest allocated to other categories. The BIS calculated that the net risk from all of this was $14.5 trillion, and the gross credit exposure was $3.256 trillion.

The utility of such calculations is questionable. What we learn from this sort of abstract exercise is the vastness of these shadowy transactions, which can and do have implications for the real world. To make sense of this, it is necessary to understand the motivation that underlies the proliferation of exotic financial instruments and more broadly what caused their emergence. This takes us back to the discussion in the previous chapter about the predominance of the neo-liberal Anglo-American model in the world. Holding down the growth in real wages and salaries has limited the expansion of the market for goods and services. In response, the financial sector has proliferated enormously, the motivation being the rapacious quest for new sources of profits. In our time, capitalism has cannibalized itself. The financial sector has grown ever larger as a proportion of U.S. GDP, not to produce useful goods and services, but to squeeze ever more out of the existing economic pie.

Pushing out sub-prime mortgages to people who often could not afford them, and credit cards to millions of people who have maxed out their cards, as well as financial products to heighten the leverage of investors have all been ways for finance to juice out more profits for itself. Most of that has involved various forms of borrowing against the future. Today’s capitalism, swollen with debts that will take many years to reduce or write off, has fouled its own future, ensuring lean years ahead.

As is the case in its most extreme form with a Ponzi scheme, the cannibalizing of the economy by financial institutions has shifted the economic engine into reverse. Now that the time has come to cope with the debts, both the toxic and the more salubrious ones, the impact of the activities of financial institutions has been to put the brakes on the economy for coming years. The same thing happened with the financial meltdown of 1929, when the world of buying on margin imploded. That time the Dow Jones did not reach October 1929 levels until 1954.

Just over two months after Obama was sworn into office, the United States seethed with populist rage. Storm clouds were forming ever since the bailouts of financial firms began in the fall of 2008 while the Bush administration remained in office. What caused the maelstrom to burst were payments of bonuses totaling $165 million to executives of the American International Group (AIG) in March 2009, in the wake of Washington’s massive bailout of AIG which amounted to more than $170 billion. Everywhere across the country, ordinary Americans were furious. With rising anxiety, they had numbly accepted the vast Wall Street bailouts, and the talk of trillions more dollars needed to get the financial sector and the auto industry back in business. But the idea of the people who had presided over the AIG plunge into toxicity receiving handouts of a million dollars each, and in some cases more, blew the lid off.

I was in California when the hurricane hit. On television, on the front pages of papers in small and large cities, in conversations in cafes, the fury was everywhere. CNN covered a busload of working people, some of them political activists, going on a tour of the palatial homes owned by AIG executives, to deliver the message to the doorstep that they were angry. They were met by security guards who halted them and so delivered the message to the Pinkerton police. CNN titled the segment “The Lives of the Rich and Shameless.”

American populism extends from left to right. As has been the case for decades, when it rears its head, populism can be anti-capitalist one moment, then racist the next. It can demand fairness for all one day, and then can recoil in fury against the guy next door who is living on the dole. During the Great Depression of the 1930s, populism showed up under the banner of the Congress of Industrial Organizations (CIO), with its drive to unionize industrial workers, that of Louisiana’s Huey Long, as well as that of the fascistic Father Charles Coughlin. And Coughlin was adept at sounding radical as when he urged his audience to “attack and overpower the enemy of financial slavery.”

In the United Kingdom, when banks crashed in the autumn of 2008, the government of Gordon Brown did not hesitate to nationalize them. Pumping capital into these banks was accompanied by government control and public equity. If the banks returned to profitability while they remained in the hands of the crown, the public would earn a return on its investment. In the United States, the ideological recoil from the very idea of nationalizing banks was much stronger. It amounted to a violation against the very shibboleths on which American capitalism rested, a step that was to be avoided unless there was absolutely no alternative. The Obama administration, as New York Times columnist Paul Krugman observed, appeared “to be tying itself in knots” to avoid having taxpayers take ownership in return for their rescue of banks. The dilemma Krugman noted was that “bank stocks are worth so little these days---Citigroup and Bank of America have a combined market value of only $52 billion---that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.”

The problem for Obama was that many of his top officials were deeply involved with Wall Street. Treasury Secretary Timothy Geithner, to name one prominent case, was a Wall Street enabler for years. Mentored by Clinton era Treasury Secretaries, Robert Rubin and Lawrence Summers, Geithner was named president of the Federal Reserve Bank of New York in 2003. He was critically involved in the sale of Bear Stearns, in the bailout of AIG and the decision to let Lehman Brothers go down. He was the principal architect of the Obama administration’s move to partner up with the private sector to buy up the toxic assets of Wall Street financial firms.

While right-wing populist ranters such as Rush Limbaugh salivate about the evils of big government, there is nothing big financial firms and other top corporations love more than handouts of tax dollars to them. The Obama administration’s policy toward the financial sector, in his first months in office, was to shovel out the money while leaving the private bankers in charge. The president was so afraid of nationalizing the banks that he was willing to run the risk of putting Wall Street back in the driver’s seat while leaving the tax payers stuck with a mountain of bad debts.

As soon as George W. Bush was out of the White House and Barack Obama in, the Republicans turned their guns on the size of the stimulus package being proposed and on the danger of government control of the economy. Even in the last months of the Bush administration, the White House had to rely on the Democrats to push through its bailouts of the financial sector. Out of power in the executive branch and both houses of Congress, the Republicans became the defenders of tax cuts, new tax incentives to lure buyers back into the housing market, smaller government, and warning Americans of the perils of socialism.

In the New York Times, columnist Frank Rich wrote: “The Republicans do have one idea, of course, but it’s hardly fresh: more and bigger tax cuts, particularly for business and the well-off. That’s the sum of their ‘alternative’ stimulus plan. Obama has tried to accommodate this panacea, perhaps to a fault. Mainstream economists in both parties believe that tax cuts in the stimulus package will deliver far less bang for the buck than, say infrastructure spending. The tax-cut stimulus embraced a year ago by the G.O.P. induced next-to-no consumer spending as Americans merely banked the savings or paid down debt.”

Even in opposition, the political right, which speaks for much of American business, has had a very significant impact on the national debate. In a country where socialism is a dirty word and free enterprise is a deity, the Obama administration has bent over backwards to avoid the appearance of promoting a government takeover of the U.S. banking system.

In January 2009 as the Obama administration weighed the idea of an immense new bailout of the banking system, Treasury Secretary Timothy Geithner declared that “we have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

Barack Obama’s much touted promise to transcend the partisan divide forced his administration to cut $80 billion from his economic stimulus package. The cuts came in plans to spend money on school construction, on aid to the unemployed to maintain their health care and in the provision of food stamps, among other things. In return for these cuts to his plan, the president failed to win the support of a single Republican in the House of Representatives, and wound up with the backing of only a handful of Republican Senators.

Potential public backlash against the stimulus package and especially against additional measures to bail out financial institutions posed yet more risks for the administration. The Bush administration’s $700 billion bailout of the financial sector in the autumn of 2008---half of which had been paid out under the Troubled Asset Relief Program (TARP) by the time Obama took office---was deeply unpopular with the American people. As President Barack Obama sought to win public and Congressional support for his stimulus package, he struck out at the practice of handing out huge bonuses to executives at Wall Street firms that were surviving on infusions of public money. The announcement that in 2008, the worst year since the Great Depression for Wall Street, firms handed out over $18 billion in executive bonuses brought the issue to a head. Obama said that at a time when the economy was faltering and Washington was spending billions to keep Wall Street firms afloat, such bonus were “shameful.” In an interview with NBC Nightly News, the president said that “if taxpayers are helping you, then you have certain responsibilities to not be living high on the hog.”

On February 4, President Obama and Treasury Secretary Timothy Geithner announced that at firms receiving significant funds from Washington, executive compensation would be capped at $500,000 a year. To put this sum in perspective, Obama’s annual salary as President of the United States is $400,000. But to top Wall Street CEOs, half a million dollars a year is a chump change. In 2007, the top guns at Wall Street Firms were compensated at a much more stratospheric level. John Thain of Merrill Lynch took home $83 million; Lloyd Blankfein of Goldman Sachs, $54 million; Kenneth Chenault of American Express, $51.7 million; and John Mack of Morgan Stanley, $41.7 million.

To the average American, half a million dollars sounded like a great deal of money. To those used to the lives lived by top corporate executives it was a meager ration. James Reda, the founder and managing director of James F. Reda and Associates, a compensation consulting firm thought the pay cap would not work. “That is pretty draconian---$500,000 is not a lot of money,” he said “particularly if there is no bonus.” Reda said that few large companies pay their top executives such puny salaries and that it would be “really tough to get people to staff” corporations if they have to apply such a cap.

Reda was among those warning that top executive talent would flee to firms not being bailed out by Washington and therefore, not subject to such a miserably low salary cap.

The question of compensation has always been a tricky one in the United States. According to the American Dream, earning an enormous income and acquiring great wealth are among the rewards that are possible for anyone with the drive, the imagination and the luck to make it. Nothing should ever stand in the way of this dream being fulfilled according to the American creed. But with the crash of Wall Street’s titanic firms, CEOs and top executives of the bailed out firms became the butt of the harsh populist humour of Americans.

It is a cardinal error to believe that the United States will sustain its present role at the centre of the global economy and that it can continue the virtually unlimited access to foreign borrowing it has enjoyed in recent decades.

Although this has not been widely acknowledged in public discourse, the United States will have to navigate a wrenching economic transition. One cost that is virtually certain to accompany this is a falling standard of living for the American people.