As we near the end of the neoliberal bubble that began nearly 40 years ago, it's worth reflecting on the escalating scale of interventions that have been needed to resuscitate the economy (for the elites, anyway) after each successive near-death catastrophe. By the 2010s, we have reached the peak of that scale, as an entire global network of central banks has teamed together to prop up the "everything bubble".
The basic logic is that when an institution is about to go bust, a relatively bigger institution must intervene to save it. Bigger in scale, in wealth and resources, in social status, in influence, etc. A peer institution would not suffice, since whatever is causing the first institution to suffer near-death collapse could just as easily affect institutions at the same level of complexity. And certainly lesser institutions can not rescue greater ones.
"Big" can only be rescued by "bigger", and once there is no bigger, further rescues become impossible, and they sink or swim on their own.
Almost right out of the gate, the deregulation agenda of the Reaganites nearly blew up one of the largest banks in the nation -- Continental Illinois, in 1982. In the first clear case of "too big to fail," it was rescued by the FDIC, a federal government agency. That was a fairly small-scale rescuer needed to jump on the grenade.
By the end of Reaganism's first decade, deregulation mania had wiped out an even larger swath of the economy -- not just one bank, but an entire group within the finance sector, the savings & loan industry. Now it was no longer possible for just one puny federal agency to bail them out -- the full national government had to pass legislation, sign it into law, and survive judicial scrutiny. That was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
As the Reaganite trend continued toward pointless financial speculation, in place of productive investment, the rescuers would bail out hedge funds, not just lowly regional banks or thrifts. In 1998, Long Term Capital Management imploded and posed such a risk to the Wall Street banks that not even the federal government could serve as the rescuer. They had to go higher to the big banks on Wall Street themselves, along with the central bank (the Fed) serving as a mediator, giving its stamp of approval and trustworthiness.
That was before the New Deal-era Glass-Steagall Act was repealed in 1999 (by the Gramm-Leach-Bliley Act), so the Wall Street banks had not been able to scale up to the behemoths they would become in the 21st century, after the barriers were removed between commercial banking, investment banking, and insurance. Any individual one of them was not so much greater than a hedge fund, or group of hedge funds. One of them bailing out LTCM would have been closer to a peer trying to bail out a peer -- not good enough, and the full network of big banks was needed, plus the central bank coordinating the rescue without, however, supplying funds itself.
When the Tech Bubble 1.0 popped in the early 2000s, it was not bailed out and re-inflated, since the tech sector controls the Democrats -- who had pumped up the Dot-Com Bubble under Clinton -- and the Republicans had just taken office under George W. Bush. So even though the central bank slashed interest rates to cope with the popping of a bubble, there were no "too big to fail" cases that got massive rescuing. Rather, with the military party now back in full control of the government, it would be pointless military speculation that would misallocate trillions of dollars -- the wars in Iraq and Afghanistan -- and receive "too big to fail" protection by the federal government and by the senior member of the governing coalition (the Pentagon).
At the end of the Bush years in 2008, the finance sector would again face a collapse -- not of an individual bank, a sub-industry within finance, or a hedge fund. Now it was the entire finance sector that was about to get wiped out, and nearly 10 long years after the repeal of Glass-Steagall, these Wall Street banks were much higher on the complexity scale than their Clinton-era dinosaur ancestors. In a quantum leap from LTCM, the central bank itself had to directly intervene to bail out these "too big to fail" mega-banks, except for Lehman Brothers.
But even as the big banks survived near extinction, the broader economy was still moribund. And simply slashing interest rates to 0 was not enough of an intervention. Now the central bank would purchase assets directly by the trillions of dollars (quantitative easing). And even then, it needed the other central banks of the major economies to do so as well!
The (re-)inflation of Tech Bubble 2.0, not to mention all the rest of the "everything bubble," could not have been orchestrated by just one central bank alone. That scale of intervention had already been taken out with the rescue of the mega-banks in 2008, just a few years earlier. A bigger rescue requires a bigger rescuer, meaning now a single-minded team of central banks. It was as though they had formed a single central bank for all of Planet Earth, with the Fed, ECB, BoJ, etc., serving as mere district banks within it, akin to the member banks of the Federal Reserve system, albeit with some members ranking above others, in the same way the New York Fed ranks highest in the Fed network.
So, after this everything bubble of globally synchronized growth got popped earlier in the year, who is there left to rescue it? No one -- that's who. There is no central bank of the solar system, no central bank of the Milky Way, no intergalactic central bank, and no central bank of the universe or parallel dimensions. We have reached the maximum on the scale of complexity -- globally synchronized growth, propped up by globally synchronized central banks. That's as big as big gets, leaving no one bigger to bail it out.
This history suggests that it's not so much about the scale of financial resources that could be deployed -- with fiat currencies everywhere, there is an infinite amount of cheap money that could be pumped into the failing system.
But everyone would look at that and say, "Sorry, I don't believe it." Their gut intuition is that big requires bigger to rescue it. So it's more about the social standing of each layer in the institutional pyramid. It's not so much a central bank coming to the rescue by providing money to a cash-starved bank -- it's more about the qualitative stamp of approval from a higher-ranking institution, not the quantitative amount of resources that stem from that approval.
"Credit" comes from the word for believing, in the sense of trusting -- you extend someone a loan if you believe they're good for it, and you don't if you don't believe they're good for it. When in doubt, the borrower needs someone or something to vouch for their credit-worthiness. When a bigger institution rescues a big one, it's like they're vouching for the dying one -- we think they're good for it, so we'll extend them a lifeline. That approval from a higher-up assuages the doubts of the spectators who are witnessing the crash victim.
The rescue is not "supplying liquidity to an insolvent institution," or "reducing uncertainty in a chaotic atmosphere," but reassuring the doubtful who fear the institution is worthless, as well as those who fear that one sick institution may by symptomatic of a broader underlying sickness. Nope, nothing to worry about, we higher-ranking layers of the pyramid give it our stamp of quality approval.
Following the lead of higher-ranking authorities, everyone else stops panicking about the sick institution, and extends it their own credit-worthiness. If these spectators are within the finance sector, that means being open to giving them actual funding. But if they are not financial actors, they will still extend their subjective approval, believing that health has been restored to the system, and acting accordingly.
Crucially, it is not taking it on blind "faith" -- there's an infinite supply of that, too. It may look delusional to a clear-minded observer who still sees that the patient is deathly ill, but it does have a rational basis, namely following the lead of higher-ranking authorities. In a world where value is socially constructed, an individual, a firm, an entire sector has value if the higher-ranking layers of their pyramid say it does. They are credit-worthy if their higher-ups are willing to extend them credit -- however misguided or hopeless some observer may think that extension of credit to the moribund patient to be.
As the global growth continues to melt down, it will reveal the uselessness of funds and faith. Unlike these unlimited resources, "order-of-magnitude higher-ups who can vouch for your worthiness" does have an upper limit, and it has already been reached with the global central bank network of the post-2008 era.
The popping of this bubble is not just the end of yet another business cycle, on the order of years, but the end of an entire period or regime, namely the neoliberal era, that has lasted on the order of decades. It heralds the transition in political periods that we are about to see, out of the Reagan / Thatcher / Mitterand / Craxi period, and into one dominated by populist figures akin to Bernie, Corbyn, Le Pen, and Salvini.
Just as in the last turning point of the 1970s, stagflation has returned for everyone but the 1% -- and suddenly, even their costs of living and doing business are going up, while their assets are collapsing in value. This will cause a crisis of belief in the entire neoliberal model, as shown by the rise in democratic socialism and conservative populism among the post-Boomer generations -- and not just among the masses, but among the elites themselves. Or at least, the would-be aspiring elites whom the neoliberal model has entirely failed.
Ocasio-Cortez won her shocking victory in a district full of downwardly mobile elites and frustrated aspiring elites, who live next door to the closeted Alt-Right Trump voters who also feel failed by the entire system -- and who may in fact work within the same industry as the socialists, namely tech, finance, and media.
This phenomenon was absent during previous collapses within the neoliberal era, and the fact that it has surged from seemingly out of nowhere is a clear signal that this era is ripe for realignment. And with no higher institutions left to bail out the global neoliberal order, the realigners will not have to contend with reformists and rescuers, and can get on with the business of building a whole new system in place of the collapsed old one.