Up until the 1970s New York by and large funded its investment requirements,
but after 1975 it was not in a position to do so
because the settlement that came to New York was largely the settlement in which
the principle was established the bondholders and the financial institutions would not suffer.
They would be guaranteed their rate of return and they would be guaranteed. Who would suffer would
be the people, and would be the municipality, or the state, or whatever the institution was.
Now this is a very interesting thing because what it does is to encourage something which we have to
this day which is something called "moral hazard." A moral hazard arises because if the banks are not
going to suffer from any bad decision then they'll go ahead and make any old decision.
Why not? And they are not going to be held accountable for bad decisions.
If they make bad investment decisions you would expect them to bear the cost. But basically what
happened in the New York fiscal crisis was a situation was set up in which the bondholders
and the financial institutions which lent the money were not going to be affected.
And moral hazard, therefore, allowed the banks and the financial institutions to lend
whatever for whatever with no worries about not getting the money back, because if the crisis
occurred of some kind then that crisis would be resolved by the state stepping in and paying off,
making sure that the bankers are paid off. Whereas the entity which is there is seriously,
it could be seriously hurt. Now what was interesting about this was that this
wasn't really well received in many economics circles. There's a very interesting kind of
thing right now that the economists who are not powerful and the bankers who were not powerful
in 1945 and 1960s so on, they started to come into their own a lot. And so the question arose
around this time, if the New York solution is going to become global,
if it's going to become general policy, how is it going to be implemented as general policy?
And the answer was well, we need to have a theory which will help us. And that theory was,
of course, the neoliberal supply side theory as it was set up um by by [Friedrich] Hayek, Milton
Friedman and all the rest of it. So you suddenly found the Keynesian theory, which had been
in a sense sacrosanct during the 1960s [and] which got into trouble because of its inflationary
implications, the Keynesian theory was not able to
accommodate to this new reality of bailing out the banks without any kind of problem,
and engaging in moral hazard. It wasn't able to deal with that. So you get at this point the big
guns, and the corporate heads, casting around for a kind of sign. Okay, this is what we're doing.
Now, my argument here is this: that neoliberalism is often presented as a set of ideas that
became hegemonic for some reason or other. Well, there's a certain truth there. But,
my own view is that neoliberalism was something which arose because the class power wanted to do
something and it needed a rationale to do it. And it looked around for a rationale and it found it.
And it found it in neoliberal theory. So in a sense what we have is (in
kind of Marxist kind of terms) the ruling ideas at any epoch are the ideas of the ruling class.
And how did the idea, how did they get articulated? Well, the ruling class at that
time (the Rockefellers, and heads of General Motors, and all the rest of it) were looking
for a theory that would justify their [actions]. And then there was this theory lying around which
had been there for, actually since the 1920s, and have been articulated through the Mont Pelerin
Society and so on during the 1950s and 1960s. These ideas were lying around but they were
not respectable ideas. So they had to be made respectable. And how do you make them respectable?
Well, one of the things you do is you call up your friends in Sweden and say how about awarding Nobel
prizes to [Friedrich] Hayek. and Milton Friedman? Which, of course, they did. So suddenly this idea
starts to become respectable this idea. These ideas become respectable in the think tanks
which were being set up by these large corporate entities and wealthy donors.
These think tanks were, all of them, think tanks which were developing
this kind of theoretical standpoint which is a set of ruling ideas for the ruling class of
that time. And that these ruling ideas were those in which supply side conditions become
foundational for public policy. Public policy should take care of the supply,
on the inputs as it were, and the demand will look after itself. The Keynesian view had been demand
analysis and supply will match, come up to match demand. So it was a supply side theory which was
being advocated in response to the Keynesian theory which is the demand side theory.