When even the Economist magazine concedes that "it's difficult to imagine a scenario where trading rules and regulations are not subject to a significant overhaul in the near term," the go-go days of market fundamentalist primacy are clearly long past. Even Alan Greenspan can see the writing on the wall. Listen to him lament in the Financial Times on Monday:
The crisis will leave many casualties. Particularly hard hit will be much of today's financial risk-valuation system, significant parts of which failed under stress. Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief. But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.
Even Greenspan acknowledges that a higher degree of government regulation is inevitable after a disaster this large. But rather than blame unregulated markets for creating the mess, he faults the inherent unpredictability of markets -- the current market turmoil extends from the failure of risk-management mathematical models to capture the vulnerable bubbliciousness of reality. He then notes that no equation will likely ever be able to predict the silliness that irrational humans are prone to engage in. This is all as if to say: The best minds did the best they could do, but perfection is impossible. And now, alas, because we couldn't be inhumanly perfect, the government is going to stop allowing us to do whatever we want.
It could almost be a tragedy worthy of Aeschylus -- ah, to be punished so harshly for our hubris. But, unfortunately, it's a farce by Aristophanes. Greed does not self-regulate well. Who would have guessed it?
Poor Greenspan. It's no fun to watch your legacy be rewritten, in real time, in the economic textbooks of the future. If we could choose one person, outside of Milton Friedman, whose influence over how the government should manage the economy connects the Reagan, Clinton and Bush administrations -- and who has consistently inhibited regulators from being more aggressive at reining in the excesses of market capitalism -- it would be Greenspan. As one joker commenting at the economic blog Naked Capitalism wrote over the weekend, here's how Greenspan's Wikipedia entry in the year 2020 might read:
Former U.S. Federal Reserve chairman chiefly known for implementing the disastrous policies leading up to the 2008-?? recession that proved to be the death knell of neo-liberalism.
To be sure, 2008 is not 1929, even though some despondent Bear Stearns shareholders may well be eyeing the nearest window. Today's economic regulatory apparatus is a far cry from what existed in the 1920s, in large part due to the reforms that grew out of the Great Depression. There are many imponderables, not least of which is the chance that disaster can be averted. One can question Ben Bernanke's tactics, but there's little doubt that under his leadership the Federal Reserve is fully engaged, now, with an aggressive effort to stave off a systemic meltdown, and he might well succeed. The Fed's dynamic leadership over the weekend may have prevented a full-scale market rout on Monday. (The market was plenty volatile, but most indexes finished flat to slightly down.) If Bernanke can engineer an escape from the toppling architecture of the cathedral that Greenspan built, we should give him a hearty cheer. If history is any guide, systemic financial collapse leads to widespread chaos and war. No one, no matter how fierce a critic of market fundamentalism, wants that.
But whether or not the current ills afflicting the economy do bloom into something much worse, it's hard to argue with the thesis that the rhetoric of market fundamentalism hasn't looked this threadbare since Ronald Reagan won office in 1980. Deregulated markets were given their chance. They didn't work, or, at least, they now look to be in need of serious overhaul. The question is whether Americans will seize the opportunity to rethink and reshape how government manages the economy. But will a President Clinton or Obama or McCain seize the day?
Clinton held a press conference on Monday at which she called the current crisis "a really serious piece of business." She even referenced the Great Depression.
There are lots of people who are talking about using tools we haven't used since the Great Depression, legal tools that give the government the right to do certain things. You know, I haven't looked at the legal background, but some say that even the Fed's unprecedented intervention has roots in what was necessary then.
I mean, I cannot stress to you [enough]: We are in a very dangerous period in the economy. We need vigilance, and we need leadership.
How often is it that a politician can utter the words "since the Great Depression" without its being dismissed as hyperbole?
Barack Obama released a statement on Monday:
The news coming from Wall Street today has confirmed our fears that the financial fallout from the mortgage crisis would spill over into the wider economy ... Now, as the Federal Reserve does its best to bring stability to the market, we must focus on what we can do to restore the public's confidence in the market and help the millions of Americans who are worried about their jobs, their homes, and their financial future...
[President Bush's] principal policy to address the financial crunch that now threatens millions of Americans with foreclosure and thousands of business[es] with bankruptcy is to extend his tax cuts for the wealthiest few. It's a policy so divorced from the reality facing the American people and the American economy that it would be laughable if it weren't so frightening.
That's not much of a change from Obama's stump speech. He might want to sharpen it by pointing out that those who are currently getting bailed out by the Fed are exactly the people who benefited most from Bush's tax cuts.
John McCain was in Iraq on Monday. But his senior policy adviser, Doug Holtz-Eakin, released a statement:
Senator McCain has complete confidence in Chairman Bernanke and the actions of the Federal Reserve, and is committed to ensuring the economy continues to grow -- because no government program or policy is a substitute for a good job. John McCain understands the federal government's responsibility to ensure the stability of the US financial system, and is equally committed to protecting the pocketbooks of hardworking American families.
Simultaneously trashing government programs and acknowledging government responsibility to ensure financial stability! Strangely, McCain made no mention of the Great Depression or tax cuts that benefit the wealthy.
Maybe all three politicians need more time to hone their messages. Judging by the volatility of markets on Monday, they'll have plenty of additional opportunities. Whoever wins the presidency will face a remarkable opportunity to reset the playing field.
The New Deal didn't emerge of its own accord as some kind of organic reaction to the Great Depression. Leadership was required, and the political fights were brutal. The same will no doubt be true for any sustained effort to crack down on Wall Street shenanigans and redistribute wealth more equitably. Indeed, for most of the past 25 years just imagining such a thing would have seemed ludicrously out of touch with political reality. But that's what makes the current events so dramatic. The dangers -- of great economic distress and turmoil -- are clear and intimidating. But the opportunity for reform is fantastic.
About the writer
Andrew Leonard is a staff writer at Salon.
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