Richard Wolff: US Faces Multifaceted Economic Crisis
13:55 GMT 23.03.2023 (Updated: 16:31 GMT 23.03.2023)
Washington is facing a crisis that is broader than the collapse of a few banks. The whole pattern and structure of the world's economy appears to be changing, with challenges crashing in on the US from different directions, Richard D. Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, told Sputnik.
"We should be definitely very worried," said Richard D. Wolff, who is also a visiting professor in the graduate program of international affairs of the New School University in New York.
"This is a serious breakdown in the banking system, both of the United States and Switzerland for sure, but probably brought more, broadly speaking, the whole Western part of global capitalism. It is difficult to say how worried we should be. We should be worried, but we are waiting to see how general these problems are. It is highly unlikely that the problems are only in those particular banks and sectors that have been affected to this point."
The Silicon Valley and Signature banks collapsed earlier this month, being overtaken by federal agencies. Meanwhile, First Republic Bank is struggling to stay in business even after Wall Street's heavyweights - including Bank of America, Citigroup, and JPMorgan Chase - pledged a $30 billion lifeline to it.
Many blame the crisis on the Federal Reserve's aggressive rate hike, but this did not prevent the US central bank from increasing its key interest rate 0.25 percentage point on Wednesday. Some experts suggest that between 25 and 200 US small and midsize banks are running the risk of collapse.
Likewise, on the other side of the Atlantic Ocean, the Swiss government had to arrange a merger between the ailing lender Credit Suisse and UBS. EU regulators and officials fear that the US banking crisis will continue to spill over into the Old Continent. They claim that the American banking sector needs stronger regulation and lament the fact that the 2008 lesson has remained unlearned by the US, as per Western media.
I think what you're seeing is a broad-based risk. I can give you one or two examples, but I would urge you to think or urge the audience to think of almost a more general problem. Banks have been taught a lesson. I mean, they've been taught this lesson before. But as long as you leave banking to be a private, profit-driven enterprise, what we see over and over again for centuries is banks that collapse. Then there are reforms that are imposed. Then the banks go to work to weaken, remove, [and] evade the reforms. Then the next crisis builds and the same story is repeated. So one result is for a while, banks are afraid.
US Government's Influence on Economy is Growing
According to the academic, banks have got cold feet over two major issues: first, they are not sure that their depositors will not pull the money out when they feel danger. Second, they're going to be much more careful about who they lend money to.
"What that means in the general case is that it's going to be harder and more difficult for businesses to borrow money from the banking sector the way they did before. That's typically what happens. That's reasonable to expect to happen now," he said.
On the other hand, US customers have also got nervous, resorting to panic withdrawals. To calm things down Treasury Secretary Janet Yellen pledged to protect depositors of other, smaller US banks, after the federal government took over SVB and Signature Bank. The emerging trend is signaling a growing role of the government in the private sector, according to the academic.
"[The US government is] in the process of saving a much larger bank called the First Republic Bank. And it is working on plans, the most important of which coming from Secretary of the Treasury Janet Yellen, is that the government will guarantee all deposits of any amount of money in every bank. Okay. Well, then the pretense that we have a private banking system is disappearing. Now, they may figure out a way to rescue it in some form. But the role of the government in saving this system from itself is becoming so big and so obvious that the ideological adjustments that are going to unfold now are going to be a very important shaper of what happens to the capitalist West," Wolff said.
"We are watching what is either the end of private capitalism or a very deep change," he continued. "We are seeing the collapse of private banking and its only savior is the government. All the ideological arguments about the self-healing, self-repairing qualities of private capitalism are flying out the window."
As per the professor, what is happening in the West is that countries are becoming "a society in which there is a private sector and there is a government operating with enormous power." "You know what that's like? That's like the People's Republic of China. It's not different," Wolff remarked.
Yellen and Powell Don't Have Plan, They're Acting Reactively
The unfolding changes are not part of some plan by Treasury Secretary Yellen or Federal Reserve Chair Jerome Powell. In fact, they are just "reacting" to a series of crises, according to the professor.
"At that point, all that you're getting from Powell or Yellen or Biden or anybody else is a panic-filled room in which over a few hours people come up with things they can do to deal with the demand of that group that just came with its crisis. Now it gets messy, because, I give you an example, they came in, they rescued the Silicon Bank, okay, that's a relatively small bank, the 15th or 16th largest bank, it is not part of the huge banks in New York that run the country financially," Wolff explained.
"So Janet Yellen fixed something up for that, but it was limited to these smaller banks and that wasn't enough because the big banks had their own agenda," the professor continued. "They wanted something else to be done, something that was better for them to be done. And so there was a conflict. Would the Federal Reserve guarantee deposits in only small banks or in all banks, or maybe only in big banks or only for a short time? Well, this impacts the struggle between small and medium banks and big ones (…) Now, Janet Yellen is torn between two groups and her problem becomes more difficult. It's still the same reactive policy, but it's a reactive policy torn apart by the different industry groups affected."
To complicate matters further, there is also a conflict between saving the banking system and controlling inflation, as the Fed's continuous interest rate hikes are fraught with the risk of a banking meltdown. Make no mistake, Powell's decisions are dictated by the same reactive policy, influenced by the different industry groups affected, according to the economist.
"When you see Mr. Powell act, you should not think he's acting by some theoretical commitment," Wolff said. "Not at all. He has those, they play a little role, but the major role is played by the different economic and political forces screaming at him: do this, don't do that."
One should bear in mind that raising interest rates never was and is not now the only way to deal with inflation, the professor pointed out.
"It is one way and we are in a very bizarre situation in Western Europe and the United States in which something that is only one of several ways is being treated as if it were the only way," he said. "And it is a highly expensive one on all sides, in human life and everything else."
Economic Tensions May Translate Into 'Military Adventures'
The problem is that there's no guarantee in any of the possible options to curb inflation because the level of difficulty crashing in on the United States is multiple and coming at it from different directions, according to Wolff.
"Much of the American foreign policy, both economic and political and cultural and military, is undergoing as great a level of stress as I have seen in my lifetime," the professor said, referring to Washington's increasing involvement in the Russo-Ukrainian conflict and the unfolding competition with China. In fact, "the United States has to confront multiple crises at multiple levels at the same time," stressed the academic.
Meanwhile, soaring inflation, which engulfed both the US and Europe, may deal a heavy blow to the West's competitiveness in the world market, according to Wolff. Once one has rising prices one is pricing oneself out of the market, he warned. To illustrate his point, the academic noted that while the average inflation in the US and in Europe is around 7% and 10%, respectively, China and Japan do not have inflation rates in this league.
"That's changing the whole pattern and structure of world trade. This is very, very dangerous for the West," Wolff said. "This is a very contradictory situation. There is no easy solution. There will be big problems either way. This is when you get to a situation where a society is forced not by its ideological self-delusion, but by the harsh reality it lives in to come to some big and basic decisions. The fear, and that's a rational fear, is that some kind of military adventure emerges out of these tensions. The hope is that some rethinking of global politics, geopolitics, is a substitute for war and is a better way to cope with these interconnected problems. And I can't predict any better than anyone else which way this choice is going to be made."