Summary:
According to E.J. Dionne Jr., the biggest political story of 2008 involves the collapse of assumptions that have dominated our economic debate for three decades: capitalism is crumbling. Criticisms come from both sides of the political spectrum. Excessive deregulation is largely acknowledged to be the cause of the present worldwide crisis. Furthermore, capitalism, in its current form, isn't living by its own rules: CEOs benefit substantially if the risks they take pay off but pay no penalty if their risks lead to losses or even catastrophe. Free trade and globalization are increasingly considered to be contributing to the stagnation of wages and the production of large pools of highly mobile capital, which give employers a huge advantage in negotiations with employees. It is acknowledged that free trade has increased wealth, but it has been monopolized by a very small number of people. Need for a debate focussed not on shutting globalization down, but rather on managing its effects with an eye toward the interests of the most vulnerable people in the country. (Published: 11/07/08)
Notes:
- biggest political story of 2008: the collapse of assumptions that have dominated our economic debate for three decades
- free-market cliches have passed for sophisticated economic analysis since Reagan years:
- regulation is the problem and deregulation is the solution
- the distribution of income and wealth doesn't matter
- providing incentives for the investors of capital to "grow the pie" is the only policy that counts
- free trade produces well-distributed economic growth
- any dissent from this orthodoxy is "protectionism."
- in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing
- Barney Frank (D-Mass):
- "We are in a worldwide crisis now because of excessive deregulation"
- "we let investment banks get into a much wider range of activities without regulation."
- i.e. when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules in 1999
- helped create the subprime mortgage mess and the cascading calamity in banking
- Bernanke:
- "a more robust framework for the prudential supervision of investment banks and other large securities dealers is needed"
- "Fed needs more authority to get inside the structure and workings of financial markets because recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets."
- sounds like big government
- third time in 100 years that support for taken-for-granted economic ideas has crumbled
- Great Depression:
- discredited the radical laissez-faire doctrines of the Coolidge era
- Stagflation in the 1970s and early '80s:
- undermined New Deal ideas and called forth a rebirth of radical free-market notions
- the Panic of 2008:
- will mean an end to the latest Capital Rules era
- striking that conservatives who revere capitalism are offering their own criticisms of the way the system is working
- Irwin Stelzer:
- says subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad.
- "You have to have the person who's writing the risk bearing the risk. That means a whole host of regulations. There's no way around that."
- argues that "the preservation of the capitalist system" requires finding new ways of "linking compensation to performance."
- "I don't like three of your friends on a board voting you a zillion dollars. A cozy boardroom back-scratching operation offends me."
- Barney Frank:
- "CEOs benefit substantially if the risks they take pay off but pay no penalty if their risks lead to losses or even catastrophe"
- another sign that capitalism, in its current form, isn't living by its own rules
- also calls for new thinking on the impact of free trade
- argues it can no longer be denied that globalization "is a contributor to the stagnation of wages and it has produced large pools of highly mobile capital."
- Mobile capital and the threat of moving a plant abroad give employers a huge advantage in negotiations with employees.
- "If you're dealing with someone and you can pick up and leave and he can't, you have the advantage."
- "Free trade has increased wealth, but it's been monopolized by a very small number of people,"
- coming debate will focus not on shutting globalization down but rather on managing its effects with an eye toward the interests of "the most vulnerable people in the country."
