Capitalism is dead. America has gone socialist. US leadership has collapsed. Europe has shown the way. Oh yes?
originally published in the Times of London
There's something curious about the human imagination. Confronted with unprecedented events of unfathomable scale, it seems to find the shocking reality insufficiently interesting and reaches instead for even grander, more cosmic explanations of what's going on.
The financial crisis is precisely that sort of moment. It's a vast drama, with consequences that will ripple steadily from immediate economic hardship to changes in short-term political fortune to a broad recasting of the way our economies and societies work.
But that's not enough, apparently, for the drama queens and kings of our political and media establishments. Hastily, they've constructed a grand historical narrative in the last couple of weeks, composed largely of overarching myths that are in danger of hardening into conventional wisdom.
So at the risk of being accused of missing the historical boat, let me try to take a few of them on.
Capitalism has failed and the US has embraced socialism
This one has adherents, surprisingly, on both sides of the Atlantic. In Europe, the birthplace, etymologically speaking, of Schadenfreude, the Germans and French have been eagerly stamping on the grave of Anglo-Saxon capitalism. In America they've found unlikely allies among a bunch of hardline conservative Republican politicians and commentators. These latter-day Bourbons claim the Bush Administration's $700 billion bailout plan for banks will rank with the October Revolution and Mao's Long March as seminal events in the history of human serfdom.
Let's take the latter claim first. Seven hundred billion dollars certainly sounds like a big chunk of the economy to be placed in the hands of the Government. It could, spent wisely, get you some way to the top of the commanding heights of America's $14 trillion economy.
But I doubt the Hank Paulson plan would win him plaudits with Marx and Engels. For starters, acquiring the financial equivalent of a junkyard is not quite what socialists have in mind when they urge nationalisation.
In any case the actual outlay will not be anything like $700 billion. The Government is merely proposing to use that money to buy the putrid assets that now clog the balance sheets of banks. When the frozen credit markets thaw, it will sell them back. It's unlikely the whole exercise will cost more than a couple of hundred billion dollars, which represents about 1.5 per cent of the US economy.
That leads us to the argument about capitalism's terminal failure.
As I've argued before, the current collapse owes as much to government intrusion into the free market (the abominable hybrid of Fannie Mae and Freddie Mac; the regulatory requirement that banks lend money cheaply to those who couldn't afford to repay it) as it does to the madness of free market savagery. There's been precious little financial deregulation in the past ten years. The one big piece of liberalisation - the abolition in 1999 of Depression-era legislation that separated commercial and investment banks - has been a lifesaver, enabling investment banks to save themselves by merging with, or becoming, retail banks.
Capitalism's Cassandras might also want to consider that the crisis the current mess most closely resembles is the Swedish banking collapse of 1991-92. I don't remember Sweden being reviled in those days as a model of heartless capitalism.
The unpleasant truth is that financial excesses occur quite frequently in the capitalist system and always require modifications to it, not its abolition.
One hundred years ago, John Pierpont Morgan singlehandedly rescued a financial system near collapse. The experience led directly a few years later to the creation of the Federal Reserve, America's central bank (greeted then, by the way, by the same sort of extremists, as a harbinger of socialism). In the 1930s the Depression resulted in reforms that changed but did not destroy the free market. In the early 1990s the Government spent a couple of hundred billion dollars bailing out the savings and loans industry. That didn't noticeably undermine capitalism.
America's political leadership has collapsed
Let us acknowledge first that this is not a week to earn many American politicians a chapter in a future volume of Profiles in Courage. The vote on Monday was a failure of management as much as anything.
John McCain has rightly taken a lot of stick for making a big deal out of returning to Washington to save the world. There was nothing wrong with his Superman act except that he didn't execute it. When you dive into the telephone box and don the suit with the S on the chest, you can't simply sit quietly and listen sympathetically to everyone's concerns, say you hope it all works out and head back to the office.
Barack Obama's performance was even less inspiring. His message to Washington in the midst of the worst financial crisis in 75 years was (I'm not making this up): “Call me if you need me.”
But - and I'm loath to excuse politicians - could we have expected them to fall into line, without a struggle, with the plan the Bush Administration handed them? If you asked the top 200 economists what they thought of the plan, I guarantee that a clear majority of them would say it was riddled with flaws.
In any case, all the indications are that the House will pass the plan - with amendments - today. Not a straight path to a resolution, but certainly not one to perdition either.
Europe has shown how to deal with the crisis
This myth strikes me as the most dangerous and delusional of all. Its first incarnation a few months back was that social democratic Europe had avoided the financial disasters of the Anglo-Saxons. Little local difficulties at Fortis and Dexia have taken care of that, so now the claim is that cool-headed Europeans have saved the day.
Really? Ireland's bold move to protect depositors is producing a competitive run on other European banks and seems to have mortgaged the entire eurozone to an open-ended commitment from a government that is already fiscally challenged. Over to you, Mr Sarkozy and Mrs Merkel.
The bigger problem with the Europeans is their steadfast refusal to recognise the severity of the crisis. While the Federal Reserve has slashed interest rates, the ECB and the Bank of England continue to worry about inflation and refuse to cut interest rates.
Capitalism is flexible enough to bend when the financial hurricanes blow. Let's hope we can say the same for Europe's policymakers.
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