The economic downturn that began in 2007 resulted in major challenges for many Governments around the world. As a result, many rescue packages were instituted to try to alleviate the worst effects of the crisis (Brasc, par. 5). The US government developed an economic stimulus package that was aimed at rescuing large financial institutions that were critical to the economic well-being of the nation. Over time, the financial crisis has resulted in numerous job cuts in the US followed by desperate attempts by the federal government to control the situation (Lessinger, par. 6). This has inevitably resulted in discontent and widespread condemnations by people who believe that the Government is not doing right or enough. This paper seeks to identify the current economic situation in the US; the government interventions and the criticism that have resulted; the economic theories of Social Darwinism, neo-liberalism, and Keynesian economics, and how they are being reflected in the current US economic realities.
Current Economic realities in the United States
The current economic situation in the US was occasioned by the global financial crisis that began in 2007. The financial crisis is said to have been “triggered by the liquidity shortfall in the United States banking system” (MacAskill, par. 4). The financial crisis led to the collapse of several corporations and an upsurge in unemployment rates due to massive layoffs. For the US economy, a stimulus plan was crafted to rescue the financial system. “Thus the Federal Reserve embarked on an ambitious plan to buy $600 billion worth of Government bonds” (Brasc, par.5). This was intended to push interest rates down and trigger a chain reaction that will result in the creation of jobs and boost the economy (MacAskill, pars. 3-4). The bailout plan peaked at 787 billion dollars and sparked widespread condemnation of excessive spending by the Obama Administration. The protests have been largely associated “with the ‘Tea Party, which is a political movement that mainly focuses smaller government, fiscal responsibility, individual freedoms and upholding the conservative view of the constitution” (Lessinger, par. 5). Among other reasons, the party has mainly focused on opposing the government’s reform plans. The movement has particularly rejected the financial bailout plans and the healthcare reforms “which have been instituted to enact healthcare insurance and improve healthcare delivery” (Lessinger, par. 6). Regarding the discontent with the bailouts, it is argued that some creditors have become more equal than others (Lessinger, par. 6). This is mainly because the bailouts mainly focussed on large financial institutions whose collapse could have spelled doom for the US economy. This was seen as discriminatory as it focuses on large institutions at the expense of smaller ones. Thus it has become unpopular among populations of people who believe it is not the kind of reforms they want for their immediate troubles. Most recent protests have been due to the general feeling that the government is not doing enough to alleviate the rising unemployment rates (MacAskill, par. 4).
Wall Street Reforms and the Arguments for and Against
The Wall Street reform bill was mainly crafted to address Wall Street regulation issues. This was one of the major plans established to address the current economic situation in the US. The Obama administration hoped that the “bill will be sufficient in addressing the widespread public anger at bankers and financiers” (Hansard, par. 2). This section analyzes the issues, arguments, and reforms prescribed.
Irresponsible lending was a major issue in the Mortgage industry. There were poor verification procedures before the issuance of loans. In addition, lenders were charging penalties for early mortgage payments (Pendlebury, par. 3). The new bill sought to regulate this industry and ensure that proper verification of borrowers is conducted and pre-payment penalties eliminated.
The requirement for banks to charge reasonable fees for credit card processing was lauded by “Senator Dick Durbin who felt it was good for the provision to regulate the $20 billion interchangeable fee system” (Jackson, par. 4).
Strong banks were also advocating for strong regulations especially on the resolution fund which had coursed some friction between the republicans and the democrats. The president had “maintained that the resolution fund of up to $ 50 billion will protect the financial system and the broader economy and American taxpayers in the event a large financial firm begins to fail” (Brasc, par. 5). The U.S Chamber of Commerce asked for much bigger reforms than those proposed in the bill. But they were in harmony as “far as the need for bipartisan agreement of the legislation was concerned” (MacAskill, par. 8).
Arguments against the components of reforms
The most vocal critics of the new Wall Street bill were the republicans who felt it was not sufficient enough. Many Republicans found themselves in a dilemma due to their “traditional close ties with the financial industry and public anger with the Wall Street” and as expected, most ended up voting against it (MacAskill, par. 7). Some Democrats also felt that the bill was not sufficient enough to regulate Wall Street.
The Volker rule which prohibited banks from trading and investment in private equity firms were repealed in the new Wall Street reform to allow large to invest up to 3% of their capital in private equity (Pendlebury, par. 8). This received strong criticism from the “securities and financial markets association” which felt that the Volcker rule should be left as it is (Hansard, par. 5).
Republicans had an issue with the new bill on some matters and were especially not happy with its failure to “address the problems, and sustainability of mortgage giants Fannie Mae and Freddie Mac” (Jackson, par. 6).
The new bill “created bureau within the Federal Reserve to regulate consumer financial products such as mortgages and the credit cards” (Pendlebury 2010, par. 5). The “exemption of auto dealers and pawnbrokers from the regulations did not go well with the department of defense which claimed that auto dealers had exploited military personnel in the past” (Pendlebury, par. 6).
The notion of “too big to fail” seemed to overshadow other matters.
The bailout plan for big financial institutions was a thorn in the flesh for the proponents of the new bill. Many of them felt that this was aimed at the continued oppression of the smaller firms.
The setting aside of up to $ 50 billion to safeguard large firms from the imminent collapse was being seen by some quarters as a kind of insurance or a form of “implicit federal guarantee” (Hansard, par. 10). According to senate “minority leader Mitch McConnell, the Dodd’s legislation would institutionalize endless taxpayer-funded bailouts” (Brasc, pars. 4-7). Some proposed breaking up of the large Wall Street banks that were holding everyone at ransom.
The tenets of social Darwinism, neo-liberalism, and Keynesian economics
“Social Darwinism is a belief which states that the strongest or fittest should survive and flourish in the society while the weak and unfit should be allowed to die”. The theory was founded by Herbert Spencer, “a renowned English philosopher and sociologist who lived between 1820 and 1903” (Holmes 1, par. 3). Herbert developed the theory through elitist concepts which state that “might makes right” (Holmes 7, par. 3). Spencer incorporated Darwinian concepts into his moral theory and used them to justify the adaptation factors that make some people rich and others poor. “According to him, survival for the fittest was not only natural but also morally correct” (Holmes 3, par. 4). The worst application of the theory was the attempt to justify the widespread exploits that were going on at the time. Thus colonialism was viewed as a natural occurrence and natives were regarded as unfit to survive. Social Darwinism “was also applied to military action in which the argument was that the strongest military would win” (Holmes 6, par. 5 ).
In contemporary society, social Darwinism has no clear application. However, some scholars argue that some capitalistic ideals are consistent with the theory of social Darwinism (Holmes 4). They claim that capitalism leads to oppression of the poor in favor of the rich. Thus economic systems may be seen to have some aspects of social Darwinism in them especially when big corporations develop into monopolies.
Neo-liberal economics is founded on three main elements (Kilmister, pars. 1-3). First, the responsibility of government in spending is re-conceptualized. “Spending by the state is only justified by the need to make domestic capital more competitive” (Kilmister, par. 5). Thus the government’s expenditure on public services such as education and health is permitted to a certain level (Kilmister, pars. 3-5). However, the spending must be subject to economic justification. In addition, the private sector rather than the government is recommended to provide public services (Kilmister, par. 6). The state is only required to play a role in awarding contracts and ensuring that a level playing field is maintained for the different market players.
Secondly, neo-liberal practices aim at eliminating national economic barriers. “Neo-liberalism strongly advocates for the removal of capital and exchange controls and the opening up of financial markets to foreign investments” (Kilmister, pars. 7-8).
Finally, “neo-liberalism advocates for flexible labor markets, with maximum freedom for employers in the terms of hiring and firing workers and strict limits on trade union rights” (Kilmister, par.8).
This refers to a “macroeconomic theory that is based on the ideas of John Maynard Keynes who was a 20th-century British economist” (Sullivan and Sheffrin 3). Proponents of Keynesian economics point out that decisions made by the private sector may sometimes result in poor macroeconomic results and thus require policy input from the public sector. The “policies may include monetary policy actions by central banks and fiscal policy by the government to stabilize output over the business cycle” (Sullivan and Sheffrin 3 ). Keynesian economics favor the idea of mixed economies that is largely private but with immense state and private sector input. This brief account of the Keynesian and neo-liberalism economic models will be used to analyze whether Obama’s Wall Street reforms are based on one of the three or are a mix of the two.
Benchmarking the US economic situation against Social Darwinism, neo-liberalism, and Keynesian economics
The US economy was predominantly neo-liberal whereby the private sector commanded a lot of authority in controlling the economy. However, the recession that was witnessed in 2007 signaled a major turning point that signaled the shift in focus from the neo-liberal practices. The Wall Street reforms conducted by the Obama administration were predominantly based on Keynesian economics.
The bill was mainly crafted to regulate financial institutions and improve services for the American consumer.
Proponents of Keynesian economics point out that decisions made by the private sector may sometimes result in poor macroeconomic results and thus require policy input from the public sector (Jackson, par. 2). This is what the Wall Street reforms were addressing.
However, some instances of neo-liberalism are observed, especially on the repealing of the Volcker Rule to allow strong banks to invest up to 3% of their capital in private equities (Hansard, par. 4). Otherwise, all other major components of the bill seek to tighten the control on financial institutions and this is consistent with Keynesian economics.
The arguments for and against the bill are not specifically driven by the two economic models but rather individual opinions regarding the situation on the ground or perceptions. Furthermore, the arguments were specific to different components that constitute the bill. A group opposing one component was seen to be comfortable with another. For instance, securities and financial markets associations were unhappy with the repealing of the Volcker rule but accepted the bipartisan agreement. Thus the discontent that is being witnessed around the country is not theoretically based on the social or economic models but rather on troubles being faced by the people. There are no obvious instances of social Darwinism identified by the above analysis.
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Jackson, Jill. “Wall Street Reform: A Summary of What’s In the Bill”. CBS news.com. 2010. Web.
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Sullivan, Arthur and Steven Sheffrin. Economic Principles in Action. Upper Saddle River: Prentice Hall, 2003. Print.