The Great Credit Crash

ORIGINS AND CAUSES

1

RETHINKING NEOLIBERALISM

AND THE CRISIS

Beyond the Re-regulation Agenda

Martijn Konings

One of the most spectacular consequences of the Financial Crisis has been Alan Greenspan’s willingness to contemplate the possibility that the free-market model of the world—which he had done nothing but praise throughout his career—may contain flaws. Greenspan’s cautious but seemingly sincere doubts about the virtues of unbridled markets will provide ammunition for progressives and liberals who view the Crisis as an opportunity to move away from the neoliberal dogma that has governed public discourse for almost three decades and to bring such things as public regulation and social protection back into the realm of the possible. If even the former high priest of neoliberal capitalism has come to believe that more rules and constraints might have helped to prevent the American financial system from spinning out of control, then surely the task of convincing more pragmatically inclined policy-makers of the benefits of prudent regulation has become a great deal easier and we may reasonably hope for the emergence of a consensus that will allow for the implementation of a new New Deal, both at home (through a return to Keynesian regulation) and abroad (through the construction of a new regime of multilateral governance).

In other words, the time might well be ripe for public authority to push back against the hegemony of the market. Many years of deregulation, which allowed financial markets to impose their logic on social life, have generated such deep problems that the prescriptions of neoliberal theory have lost much of their credibility and legitimacy and this is seen as opening up a space for re-regulation. In Polanyian terms, we are possibly witnessing a new phase of re-embedding after several decades of market disembedding. In his New York Times columns, Paul Krugman has argued that the excesses of neoliberal deregulation are directly responsible for the instability that has terrorized financial markets since the summer of 2007. Joseph Stiglitz, until recently portrayed as a brilliant economist who could win a Nobel prize but had little awareness of what works in the real world, no longer sounds out of step with current political realities when he asserts that government regulation and oversight are an essential part of a functioning market economy or that the world needs a new global regulatory agency other than the American government.¹ Suddenly these maverick economists were part of the new consensus. Wade has stated the implications of the progressive analysis of the roots of the Crisis well. Governmental responses to the crisis … suggest that we have entered the second leg of Polanyi’s ‘double movement,’ the recurrent pattern in capitalism whereby (to oversimplify) a regime of free markets and increasing commodification generates such suffering and displacement as to prompt attempts to impose closer regulation of markets and de-commodification.²

This chapter suggests that such assessments of the possibilities created by the current Crisis rest on a misappraisal of its nature and, more broadly, the nature of the neoliberal era. As a result, they do not offer very helpful precepts for political action, and unintentionally increase the possibility that we might be squandering the opportunities for progressive change that are presented to us by the situation. In particular, this essay criticizes the idea that the financial expansion of the neoliberal era can be adequately understood as propelled by the state’s failure to regulate financial markets and the permissive attitude of its agencies towards innovation. The financial growth of the past few decades does not represent a subordination of public authority and political capacity to the expansionary forces of global financial markets, but has rather been a process whereby new organizational linkages were forged and particular relations of institutional control were constructed and consolidated. Fundamentally, financial expansion is a process of institutionalization whereby the web of capitalist power is cast over a wider set of social relations and becomes more, rather than less, rooted and organically embedded in the fabric of social life. The institutional capacities of the American state, sitting on top of these cross-cutting and complex networks of institutional linkages, have not been reduced but enhanced by the reconfigurations of the neoliberal era, as have the leverage and power resources available to those who enjoy privileged access to the state’s organizational mechanisms of control.

RETHINKING NEOLIBERALISM

The idea that the neoliberal era is about deregulation and the growth of market discipline is one of the central myths of that era. It is a myth that is part of contemporary capitalism’s common sense: the association of neoliberalism with a shift from government to markets is no longer a theoretical assumption but rests on deeply rooted, intuitive convictions about the way economic life works. In order to point out some of the problems with the idea of market disembedding, it is useful to consider what it means exactly to analyze neoliberalism as an ideology. Constructivist approaches in political economy often emphasize that neoliberal discourse does not represent neutral or objective knowledge. Wary of Marxist theories of ideology, which often understand ideology as veiling or distorting an objective economic reality, they stress the role of neoliberal ideas in the actual construction of economic life.³ However, what gets lost in this way is a crucial sense in which neoliberal discourse is ideological in nature—namely, that it does not actually correspond to neoliberal practices. This is not to return to a reductionist Marxist understanding of ideology. Rather, it is to suggest that the very fact that ideas are not mere effects of an already existing socio-economic structure but key factors in its very construction means that we can no longer assume that reflecting or matching reality is what they do, or that the emergence of a hegemonic neoliberal discourse means that the world is becoming more like a free market. Critical political economists tend to assume that neoliberalism has been reshaping the world in its own image, that it has replaced public decision making with economic logics, and social bonds with a formalistic and individualist market rationality. But it is important to be critical of such strong constructivism: beliefs and ideas shape the world, but they do not do so by producing a reality that resembles or approximates their idealized version. To be sure, it is often recognized that the implementation of neoliberal policies has not involved a straightforward retreat of the state but is rather a complex process of re-regulation; but what persists is the notion that the significance of the neoliberal era resides in the decline of political capacities vis-à-vis the expansion of markets.

It is the claim of this essay that financial life does not correspond to the model of neoliberal economics any more than it did several decades ago. It is only on an ideological level that neoliberalism has been about market disembedding or the subordination of politics to the market. Neoliberal practices have never been about institutional retreat or diminishing political capacities but, instead, about the construction of new institutional mechanisms of control. Taken by itself, this might just sound like a different way of phrasing things. But it is intended as a new starting point rather than a conclusion: it is meant to effect a shift of focus, to suggest that we start looking for different things in order to understand the neoliberal age. Thus, this essay suggests that we might get a much better sense of what the neoliberal era really has been about when we abandon our indignation-driven concern with the supposed tendency of markets to dissolve their social and cultural context, escape from their institutional environment and impose an abstract regime of anonymous discipline (that is, when we no longer treat capitalist markets as essentially negative and destructive forces that tend to atomize social life and drain it of substance) and instead try to understand the dramatic capitalist expansion of the neoliberal era as a process of institutional construction and consolidation that has involved not the destruction but precisely the creation of new social connections, cultural affinities and political capacities.

Such institutionalization could be seen on different levels. Over the past decades, financial relations have penetrated more deeply into everyday life than ever before. From a historical point of view, there is something extraordinary about the fact that when Americans are faced with financial difficulty, the first thing they do is try to get credit. This is a phenomenon that would have been unthinkable a century ago, and it is sustained by a wide variety of cultural symbols and facilitated by the central operational rules of American finance. Turning to the more traditional level of high finance: while it is easy to lose sight of it in the midst of the current situation, for most of the neoliberal era financial elites have been able to innovate without running into or generating the same kind of contradictions as during the 1960s and 1970s. The greater systemic coherence assumed by these strategies has meant that American finance has been capable of absorbing a much higher degree of economic activity and so of sustaining higher rates of financialization. At the same time, regulators created new policy channels that gave them more grip on the direction of financial flows and their rate of expansion, and the state has been much more consistently capable of using capital markets to finance deficits.

Thus, in some crucial ways, the neoliberal era has not seen the reduction but precisely the growth of institutional control. Critical social scientists tend to focus primarily on the former aspect, seeking to demonstrate how the disciplinary effects of neoliberal policies do not represent benevolent incentives but rather a more pernicious straitjacketing. But they tend to pay much less attention to the flipside of this trend, the fact that such intensified discipline translates into increased strategic flexibility for financial elites and their enhanced capacity to control and steer the dynamics of social life. That is, the effects of neoliberal discipline are often seen to be more or less universal, applying to government and financial intermediaries as well as to ordinary people. But this is, again, to buy into the neoliberal portrayal of market power. As Savage and Williams have pointed out, over the last decades social scientists have not paid nearly as much attention to the specific capacities and powers of elites as is warranted.⁴ This neglect was itself born of a progressive impulse: from the 1960s critical social scientists and historians began to dedicate themselves to uncovering and writing the stories of ordinary people whose everyday lives were not adequately covered in the traditional focus on great men, major events and large structures. But this shift in focus had one odd side effect: it lent credence to the notion that the lives and capacities of elites in fact were adequately covered in official history, as if their lives resembled their self-rendered versions. But, of course, hegemonic narratives obscure as much about their heroes and their authors as about the downtrodden, the grey masses or the altogether unacknowledged.

Thus, this essay explores the possibility that we might be misreading the present Crisis if we consider it as an outcome of unleashed markets and as an opportunity for the re-regulation of financial life. While the Crisis does represent a major kink in some of the cables anchoring American capitalism, it is only on an ideological level that this rupture is about the relationship between states and markets. On a deeper level, this is a crisis of institutionalization, a breakdown of particular relations of power supported by particular ideas, routines and political subjectivities. It is not the result of a clash between different logics, but the result of contradictions internal to a particular way of organizing social control. This opens up political opportunities, but if we look primarily to regulators, politicians and policy-makers for its realization and put our hopes on a re-regulation of the market, we are likely to end up supporting attempts to restore and expand the very patterns of power and control that we were criticizing when they still went under the banner of neoliberalism.

FORDIST FINANCE

Perspectives that take the idea of neoliberalism as a return to free-market liberalism too seriously tend to be associated with a historical narrative that takes the breakdown of liberal world order during the early twentieth century as a key point of reference. Economic and political collapse during the interwar period is seen as a result of America’s unwillingness to provide the global market economy with stabilizing institutional foundations.⁵ After the New Deal and the Second World War, the US took a different approach and committed itself to the construction of an order of embedded liberalism, based on multilateralism abroad and a New Deal sustained by Keynesian policies at home.⁶ This order came under pressure with the onset of post-war financial globalization. The rise of neoliberalism was seen as the American polity’s decision to submit its priorities to the disciplinary effects of global finance—a measure that itself further unleashed those markets.⁷ Since the 1980s, political economists have pointed out that the neoliberal era has seen not just the imposition of constraints but a more complex reconfiguration of financial relations that has involved the continued ability of the American state and citizens to fund debts and deficits.⁸ Yet this is still often seen as speculative, short-term indulgence that is accompanied by a reduction of the structural coherence of American finance.⁹ Neoliberal market fundamentalism is still seen as having eroded the long-term solidity of the American financial infrastructure and the Subprime Crisis is viewed as a manifestation of that fact.¹⁰

This narrative does not accurately characterize the key moments and turning points of twentieth-century capitalism. The image of a Polanyian pendulum, swinging back and forth between the market and society, suggests a cyclicality that is very misleading, not merely as a means to understand the past but also when it comes to our assessment of the nature of neoliberalism and the present conjuncture. When we adopt a more open and less conceptually preoccupied perspective, the reforms of the mid-twentieth century appear not so much as a movement whereby forces emerged to secure the integrity of the social fabric by pushing back the frontiers of the market but rather as a moment in a much longer process whereby the lower classes were integrated into the capitalist order through the extension of citizenship rights—civic, political and later social rights.¹¹ During the era of embedded liberalism, the reach of exchange and commodity relations was not limited but extended, in a manner that was much more stable than during the early part of the twentieth century.¹² Of course, the nature of this process as one of capitalist integration and expansion was more evident in the US than in Europe: whereas in European countries legitimacy was built through public institutions that provided citizens with some degree of protection from the mechanisms of capital accumulation and the vagaries of the labor market,¹³ America’s New Deal reforms expanded citizenship rights in ways that served to integrate citizens further into the modalities of capitalist growth and connected their identities and interests more firmly to financial and exchange relations.¹⁴

The New Deal was rooted in the tradition of Progressive reform, which rose to prominence as a conception of public life in the early years of the twentieth century. Although more radical programs for a republic of independent yeoman producers had been defeated at the end of the nineteenth century,¹⁵ social unrest and protest retained a strongly populist character that extolled independence and self-sufficiency.¹⁶ This made the American working classes very receptive to the promises of freedom and even advancement held out by consumer and mortgage credit, and the efforts of reformers were not just, as in Europe, oriented towards the construction of public schemes for social protection and income replacement, but rather towards the integration of American workers into the institutions of corporate capitalism through advocacy of broader access to the mechanisms of finance and credit.¹⁷ The gradual transformation of the American Dream from a potentially disruptive impulse into an ethos of responsible consumption laid the basis for a steady expansion of mortgage and consumer credit that was a significant factor in the expansionary financial dynamics before the Crash and the Depression.

The New Deal found considerable support among business interests that had grown deeply hostile to the way the Republican administrations of the 1920s had mishandled not only the international situation of the 1920s (when they let narrow self-interest prevail and threw Europe into crisis by demanding full repayment of the war debts) but also developments at home.¹⁸ Their domestic economic policies had been passive, except in the area of industrial relations, where they had resorted to increasingly repressive measures. The business interests that stood at the basis of Roosevelt’s presidential victory were acutely aware of the potential benefits of reforms that would not merely seek to pacify American workers but would further integrate them into the mechanisms of capitalist expansion as active consumers.¹⁹ They realized that consumer and mortgage credit, far from accommodating idleness, locked working people into a schedule of repayments that served to intensify rather than loosen the disciplinary pressures on them. Hence, unlike the more reactionary interests that had supported Hoover’s onslaught on workers’ civic and political rights, they discerned opportunities for making an expansion of social rights serviceable to American business. This political project unfolded against the background of an emerging awareness that the hands-off approach to economic management had done more harm than good, and that the growing connectivity of financial life had created opportunities for manipulating its institutional parameters in more creative and flexible ways than had been imagined possible during the era of nineteenth-century British liberalism, making available new policy levers that would provide a means to guide and stabilize such expansion (a development of which the rise of Keynesian ideas was the clearest manifestation).²⁰

The decommodifying effects of the New Deal reforms were very minimal. Their overall thrust was not to shield the lower classes from market discipline but to lay the basis for their deeper integration into the financial mechanisms of capitalist society. Central to the reconstruction of the financial system was the establishment of agencies charged with creating secondary markets for loans and so reducing borrowing costs and increasing the supply of household credit. The so-called Government-Sponsored Enterprises seized on a particular feature of the American financial system – the highly securitized nature of credit relations – and gave it public backing. The most prominent among these was Fannie Mae, which laid the foundation for the modern American mortgage market. By buying, pooling and standardizing mortgage loans, they enhanced the liquidity of banks’ asset portfolios, increasing not only their ability to extend new mortgages but their credit-creating capacities at large.

While European financiers were enlisted in post-war reconstruction efforts, American bankers were experiencing a wealth of profitable lending opportunities generated by Fordist patterns of work and consumption, and their ability to take advantage of these was greatly facilitated by the American state’s commitment to providing banks with liquidity. In the US, finance was anything but embedded in the sense of suppressed or constrained: financial relations penetrated into new areas of life and the financial entanglements and connections of the average American multiplied rapidly.²¹ This process of financial expansion was overseen by more effective public institutions such as a revamped Federal Reserve System which could avail itself of a much wider range of policy instruments, a Securities and Exchange Commission which permitted the securities industry to regulate itself, and a Treasury keen on monetizing the public debts incurred during the New Deal and the war.²² Total private debt between 1949 and 1954 increased nearly three times as fast as during the five-year period preceding the Crash.²³

But the social integration of American workers and the improvement of their material conditions did not by any means come at the expense of financial elites, who had a firm grip on the conditions and parameters of financial growth and reaped the bulk of the benefits. Indeed, the years from 1949 through the late 1960s became the twentieth century’s second great wealth explosion,²⁴ a development that compensated sufficiently for steadily rising manufacturing wages as to considerably blunt the egalitarian impact of the post-war order, particularly when compared to the considerable leveling of socio-economic conditions in the social-democratic welfare states of Northern Europe.

POST-FORDIST RECONFIGURATIONS

From the late 1950s, various developments combined to put a great deal of pressure on the New Deal order. The economic revival of Europe intensified competition in the manufacturing sector and put a squeeze on profitability,²⁵ while the growth of cross-border financial flows added to the deterioration of America’s payments position. Employers’ initiatives to drive down wages met with considerable resistance. Such confrontations seemed to have a galvanizing effect on industrial militancy and the willingness of unions to go on strike for wage increases.²⁶ Their integration into capitalist order had constituted workers as more competent social and political actors who were increasingly aware of how to effectively exercise their agency. Indeed, just as the rate at which the economic pie grew was slowing down, sections of the Democratic Party woke up to the limits of the New Deal’s achievements and began to push for more serious government initiatives to redress the still dramatic inequalities of American society. Such radicalization resulted in what many perceived (and either lamented or celebrated) as a crisis of governability. The result was political and economic disarray and a stalling of wealth formation.²⁷

However, the radicalism of the sixties did little to slow down the growth in demand for privatized consumption and suburban homeownership. Those who had grown up in the heyday of Fordist capitalism were not only capable of exercising their political rights to criticize the order of things, but had also become steeped in a culture of middle-class entitlement that led them to count on steadily growing access to the conveniences, opportunities and technologies of modern capitalism. In other words, the unrest of the sixties was produced primarily by the system’s growing inability to guarantee the resources for the continued integration of the American middle and working classes and to make available to the new generation the same prospects of socio-economic advancement. As Fordist means to guarantee widespread access to the benefits of a consumer society (i.e. wage rises) became increasingly contested, the readily available alternative means to the same end (i.e. household debt) gained in popularity. In this context, the growth of the financial system accelerated further. While social unrest and industrial militancy remained intense throughout the 1970s, they gradually lost their political edge, remaining relatively fragmented and uncoordinated and producing disorder rather than a viable counterhegemonic politics.

The baby-boomer generation borrowed money for homes, cars, college and consumption.²⁸ Even though this occurred at the same time as the international institutions of the Bretton Woods system began to crumble, there is little point in subsuming the growth of Americans’ indebtedness under the broader heading of global market disembedding. In recent years, many authors have argued that we cannot fruitfully understand financialization in terms of the supposedly autonomous tendency of markets to impose their logic on social life when given a chance, and that we need to conceptualize the operation of such expansionary financial logics as produced through specific discursive forms and cultural norms, situated both at the level of financial intermediation and at the level of everyday life.²⁹ These new theories tend to rely on an understanding of social construction that is subtly different from its conceptualization in the constructivist political-economy literature. Emphasizing the complexities of the process of social construction, they rely on the notion that the institutional and discursive forms of financial life are performed. Actors sometimes play their roles with a knowing chuckle and at other times are fully absorbed in their parts without much awareness of the play’s larger dynamics; there is always already a social script, yet it never operates autonomously.

However, what this conceptual scheme still cannot easily accommodate are the strategic elements of human agency. On the side of financial elites, the idea that financial innovation can primarily be understood in terms of the enactment of concepts and theories fails to fully acknowledge the considerable strategic latitude with which financial elites operated as they entered into and propelled accelerating financial expansion, as well as the additional opportunities and room for maneuver that they created for themselves in the course of this process. On the other hand, to explain the growing financial role of ordinary Americans in terms of the cultural discourses that extol independence and ownership does not tell us much about what exactly pushed and lured people into financial mechanisms that served to confine their agency to the disciplinary mechanisms of borrowing and repayment. The performance metaphor is not particularly helpful when it comes to understanding the differential construction of strategic capacities or the sources from which discursive-institutional forms derive their authority. To explain people’s participation in a culture of debt with reference to their cultural disposition is to divert attention from the process through which people become invested in these cultural codes. While we owe our existence as recognizable, socially competent actors to our insertion into particular institutional, discursive and cultural structures, we need to recognize that such roles and constructions never fully eradicate our distinctively subjective points of view, our negative and antagonistic relationships to social life.³⁰ In other words, if we are to conceive of social construction as a process involving power and domination, we need to realize that such construction is never exhaustive or fully coherent. As Fromm emphasized long ago, the submission to authority is a contradictory process: even in eras where much agency is performative and routine-driven, the internalization of power still requires its ongoing compensations.³¹

The psychological correlates of post-Fordist governmentality that fueled consumption and indebtedness were perhaps most powerfully described in Lasch’s analysis of cultural narcissism.³² If modern life had always fostered a certain degree of vainglorious self-preoccupation, and if the Fordist era had brought the means for such external self-validation within the reach of ordinary Americans, according to Lasch the defeat of 1960s radicalism and the retreat from political ambitions and solidaristic projects were accompanied by new heights of narcissism, the artificial self-love that individuals resort to in order to compensate for the anxiety produced by inauthentic living. The growing preoccupation with identity, authenticity and self-realization served to divert American citizens’ energies from political issues and public life towards the quality of their personal lives. But Lasch emphasized that the content of these processes was radically at odds with the discourses through which they were produced and rationalized. An age that comprehended itself in terms of invidualization and growing self-reliance in fact represented an erosion of everyday competence and a growing dependence on external sources of validation and social structures of authority.³³ The newly emerging selves, far from solid and self-sufficient, were intensely dependent on the menu of lifestyle accessories made available by Fordist capitalism and even more by the post-Fordist cultural industries and the service sector. If modern consumer culture is based on the internalization of, and personal identification with, what had hitherto been seen as external devices and objects, consumer credit epitomizes the way in which such processes temporarily alleviate the pressures of modern life yet at the same time draw people further into their disciplinary regimes.

Lasch stressed that, although these processes of commercialization and hegemonic integration had not been set in motion through the intentional machinations of American elites, they were nevertheless the ones who benefited from them and often promoted them. But, while these trends were instrumental in neutralizing the more serious challenges to American capitalism, they generated their own contradictions. For Lasch, these were bound up precisely with the rapidly declining ability of people to help themselves, the societal pathologies this produced, and the way in which this threatened to undermine the very illusion of individual self-sufficiency. This assessment corresponded to a wider sense of national malaise that also had more concrete economic coordinates. As the growth of Americans’ indebtedness accelerated and banks created credit accordingly, financialization began to strain against the institutional parameters of the New Deal. When American banks found their ability to take full advantage of the growing demand for credit constrained by the New Deal regulations, they responded by pursuing new strategies and instruments to enhance their liquidity-creating capacities. The Federal Reserve was torn. Doing nothing was not an option, but its attempts to tighten money were largely ineffective, as banks would quickly find new ways to access and produce liquidity. When, in the second half of the 1960s, the banks began to apply such techniques in the Eurodollar markets (offshore pools of American dollars that were the result of American capital outflows during the previous decades), virtually all checks on their ability to create and extend credit were gone.³⁴ What all this meant was a huge inflationary pressure on the American economy, which in turn fuelled wage demands and industrial militancy. It also produced considerable pressure on the dollar. By the end of the decade, it was clear that the New Deal institutional order was no longer adequate to the task of securing social cohesion and integration.

NEOLIBERAL FINANCE

It was in this context that the turn to neoliberalism occurred. Due to growing anti–New Deal sentiments, the administrations of the 1970s had enjoyed considerable leeway for reform of the financial system. The main problem was that policy-makers just did not really know how they would regulate a liberalized system of financial markets. Reagan did not know this either, but his commitment to a retreat of the government from economic life was sufficiently strong that his administration embarked on a program of ambitious liberalization without much delay. The way this worked out was deeply affected by the policy turn that the new Federal Reserve Chairman Volcker had implemented just the year before.³⁵ Monetarism was hardly the work of concerting financial elites: the Federal Reserve’s primary objective was to clamp down on inflation and regain control over the gyrations of financial markets. Volcker decided that the Federal Reserve would no longer do anything to accommodate banks’ lending practices and would allow interest rates to rise as much as the demand for credit dictated. While inflation came down, monetarism did not work the way it was supposed to, namely by restricting the creation of money and credit. Given the socio-economic configuration that had already evolved over the course of the 1970s, financial elites had access to a range of means and instruments that allowed them to escape the Volcker shock’s disciplinary effects. Indeed, the creation of liquidity accelerated dramatically.³⁶ The Fed initially viewed these developments with considerable concern, but pretty soon it noticed that, in contrast with the 1970s, the expansion of liquidity and credit no longer resulted in inflation. The high interest rates meant that, rather than finding its way into the real economy and causing price inflation, credit now remained in the financial sector, where it drove up asset prices and accelerated processes of financialization. They also drew in large flows of foreign capital, which pushed up the exchange rate and so reinforced the economic recession while fueling financial growth.³⁷ The Fed’s turn to monetarism did not eliminate but redirected inflationary pressures.³⁸

This dynamic of financialization was much more manageable than the price inflation of the 1970s. The neoliberal shift reconfigured the institutional connections between financial expansion and public authority in a way that largely eliminated the contradictions of the 1970s and so enhanced rather than reduced state capacity.³⁹ This was, of course, not the assessment that emerged in the 1980s themselves. The instability that followed the financial explosion (the debt crisis, the failure of several major banks, the Savings and Loan Crisis, and ultimately the stock market crash of 1987) all served to instill widespread doubt concerning the fundamental health of the American economy.⁴⁰ It seemed as if the US had been able to buy some short-term relief but that economic constraints were now coming back to haunt it with a vengeance: neoliberalism had unleashed a monster that the US state did not know how to control. The theme of imperial decline echoed Lasch’s assessment that the culture of narcissism, the passive consumerism it sustained, and the cynical politics it permitted were on their last legs.⁴¹ However, just as progressive political economists have consistently underestimated Americans’ capacity to sustain ever higher levels of indebtedness and the state’s ability to finance its deficits, so Lasch underestimated Americans’ capacity to sustain higher levels of cultural narcissism.

While Lasch associated the new cultural constellation primarily with the tragic turn taken by East-coast liberals’ political ambitions and affinities, not all Americans were liberal intellectuals sublimating their alienation through self-deprecation and psychoanalysis. Elsewhere, in other strata and areas, the culture that would come to shape the neoliberal era was formed not through the subtle evaporation of progressive ideals but rather through the aggressive assertion of conservative ones. The foundations for this shift in American political culture had been laid during the New Deal era itself. Whereas the postbellum and Progressive eras had been characterized by the hegemony of Northern elites, the New Deal era was based on a geographically much more diverse coalition. Its policies were more conducive to the economic development of the American South, and the relocation of many American businesses seeking to take advantage of weak labor laws gave the region a further economic boost. The 1960s saw the rise of a set of Southern elites who enjoyed access to a very different kind of cultural capital than their Northern brethren,⁴² based on a mixture of Birchite conspiracism, traditionalist Protestant morality, and cultural nationalism.⁴³ The conservative discourse that this produced was more exclusionary and outwardly sadistic in nature; it was not about the relatively thoughtful exploration or reconstruction of the individual personality, but rather about a resolute refusal to interrogate the socially constructed self. Based on the collective affirmation of the authenticity and purity of such identities against external elements and otherness, it drew on and fostered strong nationalist, racist and religious sentiments. Interestingly, this discourse viewed progressive liberalism much the same way Lasch did, associating it with self-absorbed do-goodery that brought ordinary working people little material benefit and added insult to injury through its condescending attitude towards their values and sentiments. In this way it managed to align large sections of the working class with an anti-government discourse and produced the new electoral constellation that ensured a period of Republican hegemony that, interrupted only by Carter, stretched from 1968 to 1992.

What predictions of decline failed to recognize was that the American state and financial capital derived very significant capacities from processes of financialization and the new cultural configuration with which it existed in intricate relationships of interdependence. What neoliberalism meant was not an across-the-board internalization of financial discipline but a redistribution of discipline: it gave the US state a lot more policy room and financial capital much more leverage, and the flipside of this was the intensification of economic discipline on the lower strata of the American population. Banks innovated like never before, and their strategic room for maneuver was considerably enlarged in the new regime of financialization: because their strategies no longer resulted in price inflation they had much greater leeway. The Fed was no longer so concerned with slowing down credit creation but rather with channeling it. It no longer felt the need to get in the way of intermediaries’ innovative strategies but rather supported them by granting regulatory exemptions and opening up loopholes. The Reagan administration spent enormous amounts on tax cuts and the military, and the Treasury had no difficulty financing the huge deficits that resulted. At the same time as the economic recession resulted in mass layoffs, the Reagan administration dismantled social programs and initiated an assault on labor unions, often undermining basic civic and political rights and freedoms that had long been considered consolidated gains. These events had a devastating impact on the income of the lower strata of the American population, and the result was a huge growth in the household demand for credit, which partly compensated for declining incomes but also drew them into the discipline of repayment and refinancing against historically unfavorable rates.⁴⁴

The dramatic growth in household credit would become the most reliable and consistent mainstay of financial expansion during the neoliberal era, and the innovations produced by elites in financial markets were the very means through which working people could gain access to credit. The increased room for maneuver for the state and the growing leverage of financial intermediaries thus evolved hand-in-hand with tightening pecuniary constraints on the American working class. The turn to neoliberalism hardly served to lift the market out of its social context, but, on the contrary, was able to last for more than a few years precisely because its key organizing rules became organically anchored in the most everyday habits and cultural norms of American citizens. It represented a deepening of social connectedness rather than the abstraction of social life. Capitalist integration now advanced through a more cultural dimension: if, until the late 1970s, cultural dimensions had primarily supplemented the other dimensions of capitalist legitimation, from the early 1980s they were tested for their capacity to support part of the burden that had previously been borne by those other pillars.

The growth of political capacities and the amplification of their asymmetrical and differential effects was perhaps most visible in the emergence of a too-big-to-fail regime. This policy is often portrayed as a very recent development and a sign of how incoherent neoliberal policies have become. But it has actually been a very consistent feature of American financial policy since the early 1980s. The bail-outs during the debt crisis, the Continental Illinois Crisis and the Savings and Loans Crisis all created expectations for the way in which authorities would deal with the imminent failure of large financial intermediaries in the future.⁴⁵ Too-big-to-fail is inherently asymmetrical in nature, as access to its benefits is conditional on a participant’s degree of market power and the likelihood that its bankruptcy could throw a wrench into the operation of the financial system’s key mechanisms. The risks that are guaranteed through this policy are only those that have already effectively been externalized, and involve the exposure of a wider range of social interests. Too-big-to-fail has definitely entailed a major element of moral hazard, but it is crucial to see that it has never just been a problem, and has been a key factor in the creation of an infrastructure of incentives that continuously generates new products and services. This makes it comprehensible that since the Savings and Loans Crisis, policy-makers and legislators have hardly been concerned with finding ways to reduce moral hazard but much more with increasing the public resources available for bail-out interventions.

Over the course of the 1990s things began to look quite different than they had in the late 1980s. Of course, a key theme in recent work in political economy has been that the new economy of the 1990s was little more than a huge bubble,⁴⁶ and the roaring nineties have often been compared to the roaring twenties.⁴⁷ The latter comparison is appropriate in some respects: banks, often assisted by financial authorities who granted exemptions and opened up loopholes, undermined the last New Deal barriers, and constructed a pattern of rapid financial expansion that was based on a very dense network of linkages between high and low finance. The formation of Citigroup in 1998 meant the birth of a new kind of institution that incorporated virtually all financial functions. But the key difference with the 1920s was that this pattern of financial expansion possessed much greater internal coherence, as it was embedded in a wide range of cultural, social and economic norms and rules and was connected to regulatory authority in much more functional ways.

Financial norms and principles penetrated further into everyday life and were sustained by the deepening of a financialized culture that shaped the American psyche in new ways. Although regional divisions remain central to American politics to this very day, the cultural shift that had produced a political configuration dominated by the Republican Party had of course never remained confined to the American South. But it was especially during the 1990s that it began to blend in subtle ways with the trends described by Lasch to produce a particularly powerful and cohesive cultural configuration, based on the dialectical mixture of affirmatively therapeutic (You’re worth it!) and sadistic (Earn it!) sensibilities that is so central to debt-based consumption. The culture of self-help that is crucial to neoliberal governmentality involves a dialectic of continuous affirmation and rejection, seduction and denial. The interplay of these elements is very visible in the financial discourses employed on America’s most influential major talk shows. One day’s broadcast will feature an emotional celebration of a particular individual who is living the American Dream and enjoying all the social recognition and human appreciation that comes with material abundance; the next day will see a financial adviser lecturing a young couple who let themselves go and ended up with a crushing mortgage and credit card debt, berating them for their profligacy and their inability to behave responsibly and spend only what they earn.

The public put-down, and the announcement of the financial pain that will be part of their rescue package, are a key part of the narcissistic deal. The self-love involved in the narcissistic personality structure is a fragile one. Except for the most self-absorbed among us, it cannot merely be sustained by empty affirmations of entitlement. If we were only ever told that being wealthy is really just a matter of overcoming our fear of owning what is rightfully ours (as suggested in the title of financial self-help guru Suze Orman’s book The Courage To Be Rich, which resembles the title of theologian Paul Tillich’s spiritual treatise The Courage To Be),⁴⁸ we would soon become incredulous. Instead, the dynamics of narcissism must involve an active externalization of our insecurity: the opportunity to see others falter and to disapprove of their lives.⁴⁹ Dr Phil–style entertainment affords us an extraordinary degree of intimacy, familiarizing us with issues in others’ lives that we do not confront in our own, while at the same time allowing us to put a distance between our own lives and those on public display. It is not just that, as Lasch tended to emphasize, the difficulty of living an authentic life under prevailing social conditions produces an artificial self-love that feeds our consumption habits. The fact that narcissism only appears as an inwardly directed emotion and more fundamentally represents a problematic relationship to others means that it is anchored in the institutional mechanisms available to us for externalizing our insecurity. Neoliberal governmentality involves the creation of chains of disciplinary pressures, networks composed of acts of everyday sadism, and expressions of judgment that serve to distract us from the resentment provoked by our submission to authority structures that we do not fully understand and experience as oppressive and constraining. This redirection of our anger and discontent serves to consolidate the very disciplinary mechanisms that wreak so much havoc on our lives and contort our notions of self-realization and responsible living in such a way that we end up ascribing a spiritual dimension to balancing the household budget.

It was through mechanisms constructed along these lines that three decades of growing inequality and stagnant wages came to exist in a relationship of mutually reinforcing interaction with neoliberal governmentality. Neoliberalism represents a shift in the modalities and instruments through which the integration of the American middle and working classes into the financial system was effected. This provided financial elites with a world of opportunities. The internet-driven stock market was the most visible element of the 1990s, but it was only part of the picture. After the Savings and Loans Crisis, the government had viewed securitization as the best way to ensure that mortgage credit would be widely available, and Fannie Mae and Freddie Mac produced a steadily growing volume of securitized mortgages that enjoyed implicit government guarantees. The Clinton administration did little to reverse the Republican cutbacks on public schemes for income provision and instead promoted wider access to financial products and services, giving intermediaries incentives to increase their lending to lower-income Americans. Maximum rates were abolished, so now households that