America's effort to mend the world will be suspended until it mends itself.
By AMOTZ ASA-EL1710-middle(photo credit: AP)
At this writing it is too early to say how bad the '08 market crash will get, how long it will last and how rude the subsequent awakening will prove.
And yet with leading stock markets tumbling 30 percent in recent weeks; major banks, insurers and investment houses taken over, nationalized or altogether collapsed; and with Washington's efforts to affect the situation about as effective as reading a newspaper against the wind, some conclusions can already be drawn.
First of all, John McCain's candidacy has been clobbered; the market trauma is too massive, the administration's response too confused and ineffective and the repercussions to the middle class will have to be harsh. It's become an economic election, and most voters are likely to attribute this catastrophe to the Republicans. In fact, chances are high the GOP will pay in more than one term, even if not the 20 years it spent in opposition following the Great Crash. Moreover, McCain's economic shallowness, now compounded by his running mate's, makes it difficult to vote for him even regardless of his affiliation.
Just where a Barack Obama presidency will lead is an entirely different question. Chances that he will emerge an FDR are low, if not for any other reason than because the man who ended the Great Depression brought with him some valuable executive experience as governor of New York and before that as undersecretary of the navy. He knew to both doubt and work the bureaucracy; Obama lacks policymaking experience, as even The New Yorker observed in its unsurprising endorsement last week. And yet in a few weeks he will likely be tasked with restabilizing and inspiring the global economy. And when that transition arrives, the Republican Party will do well to ask itself where it failed - where it failed in crowning George W. Bush, where it failed in failing to oversee his actions and inactions, and where it failed in designating his successor.
THE SECOND conclusion is that this tsunami will put capitalism on the defensive for the first time since the fall of communism.
With Britain effectively nationalizing its banks and even the US partly following suit, the era of unbridled economic freedom as an international bon ton is now drawing to a close, a quarter of a century after its launch by Margaret Thatcher and Ronald Reagan. Clearly, the economic pendulum is swinging back to the Left, as politicians, economists and ordinary people unwittingly echo the sages' timeless insight that "if not for government authority, people would swallow each other alive."
Capitalism's many enemies had awaited this moment for decades, following in despair its successive gains, beginning with Deng Xiaoping's dismantling of China's socialism, then with the unraveling of the East Bloc and finally with India's and continental Europe's retreats from their distinctive versions of socialism.
Now, with George W. Bush himself conceding that only government intervention can solve the current market crisis, temptation is high to question capitalism's very validity.
Well, that would be ludicrous. Not only because the alternatives, including all the mild varieties of social democracy from Keynesianism to the Swedish model, have been tested empirically and proven untenable, but because what has now transpired is not the result of capitalism's activation - but of its abuse. And that abuse constitutes the moral failure that is at the heart of the Second Great Crash.
THERE ARE two levels to the moral failing which has led us where we have arrived: the financial and the historic.
Financially what began with the manipulation of credit in the American housing market soon caused a price collapse, as weak lenders failed to repay exorbitant mortgages, which in turn made them sell their houses all at once, which then made prices fall and foreclosures abound.
Now it suddenly emerged that assorted financial institutions had been excessively invested in the housing market - both when compared to their other investments and in terms of their overall ratio of investments to paid capital. That is how some of them could not sustain a collapse in the housing markets.
Meanwhile, banks that were excessively invested in securities that were tied to the housing market also began to teeter and sell assets, but in doing so only exacerbated the glut, further depressing the markets and reducing their own liquidity. Beyond there, up in the high-management echelons, executives whose pay was linked to their success in expanding sales and profits were pushed to exceed reasonable risk and effectively gamble. This, in a nutshell, is what happened financially.
Morally, all this added up to a culture of gambling, one that had lost touch with textbook capitalism, where caution and responsibility are hallmarks.
THE MORAL collapse had its financial turning point in 2004, when the Federal Reserve ignored clear signs that the housing market was ill, and still left credit at a ridiculously low rate of 1 percent. With credit so cheap, it is no wonder that people were tempted to abuse it.
However, the Fed's dereliction that fateful moment was but a detail in a broader picture whereby America responded with conceit the morning after the end of the Cold War.
With its ideological, strategic and economic victory swift, unequivocal and unexpected, America's leaders abandoned themselves to the devices of self-congratulation. It never crossed their minds that their great nation, too, might have to correct a thing or two about the way it conducts its own life. This mind frame was so deeply rooted that it even survived 9/11, a trauma that in fact made a self-righteous America embark on a world-mending crusade, the gist of which was: "We know how to run countries, and will now make the rest of you do as we do."
Well, America sure has had remarkable credentials in running countries, both its and others', but in recent years some things in its own country had really spun out of control, both financially and morally. Now all this must be mended regardless of America's designs abroad, but even more so if it is to remain in the business of mending the world.
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