"In a free market, there's going to be good times and bad times," said President George Bush in a speech at the Economic Club of New York on Friday. "That's how markets work. There will be ups and downs."
Whether you label them fatuous or wise, the president's comments are not off the mark. The business cycle is real; economies expand and contract; what goes up must come down. But the corollary, unmentioned by the president, is that such ups and downs have real political consequences. When a down cycle occurs in an election year, the incumbent party in the White House takes the heat. Conversely, economic growth is good for the powers that be. Just ask Bill Clinton in 1996, or Ronald Reagan in 1984.
The upward and downward blips that Americans have experienced in the past quarter century, despite their considerable impact on the profits of big corporations and the lives of real working people, don't amount to all that much when measured on a scale that spans centuries, however. Not for nothing have the past few decades been dubbed by economists as the "Great Moderation." The rich have gotten richer, the poor poorer, and the middle class relentlessly squeezed, but there have been no society-wide economic dislocations in recent years that match the inflation-and-unemployment miseries of the late 1970s, much less the outright disaster of the Great Depression.
Until now? Consider the following extraordinary commentary: Alan Greenspan saying, "The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war." Former Reagan economic advisor Martin Feldstein saying, "Could this become the worst recession we have seen in the postwar period? I think the answer is yes." Paul Krugman writing that the current situation "looks increasingly like one of history's great financial crises."
Even George Bush concedes that we face "challenging times," which, when judged against the standards of his usual rosy rhetoric, should inspire a wave of survivalist stockpiling that will make the great Y2K scare pale in comparison.
It is also worth noting that two of the assessments quoted above came before the startling events of this past weekend. The Federal Reserve brokered a bailout of Bear Stearns, an elite Wall Street investment bank that imploded after trading partners started to worry that the brokerage -- hammered by exposure to bad subprime mortgage bets -- could no longer make good on its contractual obligations. The Fed also took unprecedented steps to provide credit and liquidity to the global banking system. These extraordinary moves only underscore that we are witnessing historic events. And historic events have historic consequences. The current financial crisis may determine much more than which political party occupies the White House in 2009 -- it could (and may already have) remake the zeitgeist. The Great Depression of the 1930s spawned the New Deal. Will the Great Credit Crunch of today potentially restructure how government, the financial markets and the general welfare intersect?
Only if we really want it to. New York Times Op-Ed columnist Paul Krugman has been telling us for years that the policy pendulum is finally swinging in the other direction. Liberalism is no longer a dirty word, he thunders; it's high time for government to get back in the business of governing. He might be right. As we review the wreckage created by Wall Street's finest minds, it is tempting to entertain the possibility that the impulse to deregulate and privatize and "trust" markets to be their own best guardian -- that epochal reimagining of government launched by Ronald Reagan -- has finally run its course.
The bailout of Bear Stearns by J.P. Morgan, a shotgun marriage in which Federal Reserve chairman Ben Bernanke played the role of farmer's daughter's father, has excited a buzz of commentary about the proper role of the government in the economy not seen since the orchestrated rescue of Long Term Capital Management in 1998. Critics of Wall Street's relentless drive to innovate new "structured finance" products have long warned that these complex instruments have never been tested by a real shock to the system. The demise of Bear Stearns is an exclamation point on a sentence that declares: The shock is here. Now, Wall Street and the world are catching their breath, and wondering -- is the system about to crash?
In the case of Bear Stearns, some conservatives are worrying that the Fed's move will encourage "moral hazard" -- if Bear Stearns executives are allowed to escape public humiliation and financial ruin, executives of other investment banks may be encouraged to be even more reckless in the future, having now seen that they won't ever be allowed to declare bankruptcy. Some liberals would rather see Bear Stearns' fat cats out on the street, begging for spare change instead of simply switching bosses while the government ensures against default. But both sides are being drowned out by those who have a finer-tuned sense of what is really at stake.
The consequences of Bear Stearns' failing are simply too great to allow ourselves the moral satisfaction of watching the guilty and the greedy drown in their self-inflicted gore. If anything has been conclusively demonstrated by the past year of market follies, it is that the world's financial institutions are bound together more closely than they have ever been before in a web that is extraordinarily fragile. If one string unravels, the whole structure seems poised to disintegrate -- a process that will inflict pain on a far greater number of people than those who go to work in buildings on the southern tip of Manhattan.
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.