DOES CAPITALISM CHANGE IN A FINANCIAL TSUNAMI?
By Glenn Cutler November 15, 2008
A most uncanny aspect of the 2008 presidential campaign was the issue which became a prime determinate for the final outcome. Unquestionably, early in primary season the war on terror and what to do about Iraq was expected to be the main debate. Then along came the financial meltdown….and everything changed. Not only had the economy become the number one focus with the American people and in American politics, but the magnitude of it and the still evolving response to its dynamism has created a confused understanding as to what “free market” capitalism really is. The lines of demarcation have been blurred by recent actions of the Treasury and Fed, which imply more nationalistic type approaches to business. “Socialism” became a key phrase in the latter stages of the election, thanks to the impromptu conversation held by “Joe the Plumber” with now president-elect, Barack Obama.
Obama’s “trickle up” economic plans notwithstanding, some free market purists argue that the United States has already adopted a new policy stance by authorizing endless billions to support financial institutions ranging from banks to insurance companies and perhaps soon the auto industry. They assert that free markets should always be allowed to work themselves out. Apparently, that means even if the result would be the horror of a Great Depression II. Theirs is a somewhat fatalistic view that implies that either the worst case scenario is unavoidable, or that even if certain interventions with traditional free markets could avert disaster, somehow that path should not be taken.
Would it be cynical to assume that such a position suggests that we, as a nation, created this mess and therefore should accept whatever outcome awaits us, even the worst outcome we can imagine? As a practitioner of free markets my entire adult life, even I recognize that in cases of extreme and dire consequences, unorthodox actions can and must be taken. While there is no guarantee that measures taken to stem the tidal wave will work, the fundamental choice that must be voiced by every American is: Do we take whatever action we can, even outside the normal boundaries of traditional capitalism, to work feverishly to plug the financial dike or do we act selfishly as free market purists and take a let-the-chips-fall-where-they-may attitude and stand idly by to accept the worst that may be coming?
Last week, outgoing president George Bush, gave perhaps his most rousing speech since the World Trade Center attacks, where he made this deep from the heart statement, “I’m a market-oriented guy, but not when I’m faced with the prospect of a global meltdown.” What he really said was – extraordinary events call for extraordinary measures, measures that may fall outside the long-standing definition of how our capitalistic financial system normally functions. This was a very important comment, as it conveys a clear distinction between addressing a once-in-a-lifetime crisis which threatens to produce unacceptably devastating outcomes for far too much of the population, versus adopting a key philosophical change to the basics of capitalism and free markets as we know them. Bush ended his vigorous talk with a robust endorsement of capitalism, free markets and free people as the way for the future and economic success for the global world.
Those who argue that the United States has already become a quasi-socialistic form of government cite the recent actions taken with Bear Stearns, AIG, Fannie and Freddie and all the beneficiaries of the government TARP rescue package. This suggestion of a “policy change” is more of a political argument than a factual one, though without continual public discussion, it could become factual if the suasion of the populous keeps shifting left, as may be suggested by the constituency of support gathered by Obama during the campaign process.
Economic ideology has not changed in the United States. What has changed is that the complexities of the financial system are far beyond the comprehension of most individuals, including right up the ladder to those who’ve held regulatory positions in Congress, who seem to have had no idea that the notion of promoting “broad home ownership” at any cost could lead to a critical interconnect of dominoes that would topple financial markets and freeze inter-bank activities worldwide. I’ve watched the Congressional hearings and brow-beatings of the Treasury and The Fed to the Investment Bankers to more recently the Hedge Funds and all the while I thought, it would be more appropriate if there was a panel made up of a cross section of hard working Americans holding hearings with members of Congress and cross examining them on how they allowed the meltdown to develop…..why they promoted home ownership at any price…..why they allowed Fannie Mae to buy high risk paper which gave even conservative lenders the willingness to create that paper…..and why the Regulators were not only asleep at the wheel, but were in fact promoting, and later defending, the very institutions that are at the root cause of the housing bubble.
The difference between socialism and capitalism has never been in question. The majority of Americans will stand by the belief that capitalism, while not perfect, is far and away better than the next best thing. And like everything else in life, it goes through cycles, up and downs, and the ups bring on excess and the downs wring those out. To nationalize business, such as the oil industry in Mexico or health care services as in some European countries is a conscientious policy enacted with or without public support depending upon the amount of free choice existing in each country. For the United States to move to provide aggressive financial government assistance to avoid economic tsunami is not a national move toward socialism, but rather is a one-time process to subvert an economic calamity of unthinkable proportions. The basic premise being, if there is at all a chance to divert a worst case diasaster, it behooves us to take that chance.
What we have done is pooled taxpayer money to strengthen the financial system. We have asked Americans to band together. We have one and all made an investment in America. Americans have invested in American companies. Americans have invested in America. Americans have invested in the future. Americans have invested in themselves. And it is the very nature of free markets that will eventually create a better outcome, one that free market purists will question until a time in the future, years out, when the results show that taking extraordinary actions can create extraordinary results. And not only will we have avoided a glum return to the dusty roads of the Grapes of Wrath, but we just may create a tremendous financial dividend that often occurs when Americans stick by each other and show the world the greatness of our country and our people. What will we do with such a dividend? Pay down the deficit? Perhaps the American public should get that in writing now, because once Congress finds extra money, we know what can happen!