COLUMN LEFT/ ALEXANDER COCKBURN : Disaster Will Make Reform Smell Sweeter : Bank mergers are another symptom of the economic blows dealt by the pig-out years.

Twenty years ago, the news that America’s biggest banks were merging would have prompted shouts of alarm about the growth of a banking Octopus--the domination of the nation’s financial life by one or a very few huge institutions. Today such shouts are muted. As Manufacturers Hanover and Chemical Bank, and now Bank of America and Security Pacific, announce mergers, the mood is one of fear that the financial system is teetering on a precipice.

The factors that caused these shotgun banking marriages are well known. First came the huge Third World loans, many of which had to be written off. Then came the high-roller frenzies of the Roaring Eighties, when the banks plunged into the commercial real-estate market, mergers and acquisitions and household credit.

Mergers will continue in the months to come. In the near future, the structure of banking will change beyond recognition as bank after bank faces the option that confronted Security Pacific, the weak sister in the latest union: Merge or perish.

Over half a century’s worth of deposit insurance has cushioned most Americans from the raw panic of bank failures, even though some saw their savings swept away in the S&L; debacle. The scenes being enacted in Hong Kong this week--long lines of desperate depositors outside banks rumored to be on the edge of insolvency--have no parallel here. But with the Federal Deposit Insurance Corp. now predicting that 400 banks will have failed by the end of 1992, taxpayers will surely have to pony up to keep deposit insurance afloat.

It’s not as though these shudders in the banking industry are just the creaking of a basically solid economic foundation. As the recession began in July, 1990, predictions were that it would be shallow and short. Neither adjective has stood the test of time. Real estate continues in deep depression. The unemployment rate is down this month from 7% to 6.8%, but the reason is that more people have simply dropped out of the labor market, a situation that government statisticians define as when the job seeker quits looking for work for more than three weeks. The drop in the federal funds rate last week caused only a day-long rally in the stock market.

So this may turn out to be a double-dip recession, in which the recovery now being given a tearful welcome slips away as deeper fissures and weaknesses in the economy assert themselves. This might be the moment when Americans realize how sick the system is.

There’s a mass of evidence to buttress this statement. In its Aug. 19 edition, Business Week put together some of the data in a cover story called “What Happened to the American Dream?”

The theme was the future faced by the under-30 “baby-buster” generation, the 75 million Americans 10 to 30 years old. Among the indexes of gloom: Median income for families headed by someone under 30 is now 13% lower in real terms than for an equivalent family in 1973; for such families headed by school dropouts and blacks, the decline is 25%; for those headed by high-school graduates, 16%.

One conclusion to be drawn from such figures--and Business Week takes it very seriously--is that Americans will never again know the income gains enjoyed by those who began work after World War II.

There is a crisis and the political system has to respond. But how? Robert Pollin, an economics professor at UC Riverside who is co-chairman of an Economics Policy Institute project on financial restructuring, makes a strong point: “The Congress and Administration are rushing to give financial institutions ever greater market freedom, yet it was just such ‘freedoms’ which produced the banking crisis and the misallocation of investment funds into financial manipulation rather than into the creation of productive assets.” U.S. living standards will decline and financial systems will become unstable so long as the notion of democratic control of finance and investment remains a political no-no.

But at the conventional political level, there is immobility. In the same issue of Business Week, an assessment of Democratic presidential candidates contains a slighting reference to the Iowa Democrat, Sen. Tom Harkin, in which he is pummelled for his “shrill, class-based attacks” on President Bush, and for his “throwback populism.” Such sentiments are already being echoed by the opinion-forming fraternity in Washington, which calls for a candidate of “the center,” advocating just the sort of policies that have brought the country closer to ruin.

In other words, there is extreme economic fragility and political paralysis. But Harkin and those to his left should take heart. As fragility increases--and it seems certain to do so--radical economic reform will have more allure to Americans finally realizing how much damage has been wrought by the pig-out years.