The crisis on Wall Street appears to be very severe. The Federal Reserve’s emergency actions, background discussions with foreign central banks about outright purchase of mortgages, and the premiums on interbank interest rates over Treasury Bills (The so called Ted Spread) suggest that fear of credit collapse is significant. As a result "the rules of the game" are in play.
Naomi Klein, in her recent book, The Shock Doctrine, addresses the strategy of response to crisis. She cites Milton Friedman who once wrote:
only a crisis-actual or perceived-produces real change. When the
crisis occurs, the actions that are taken depend on the ideas lying
around. That is our basic function: to develop alternatives to
existing policies, to keep them alive, and available until the
politically impossible becomes the politically inevitable. (from Capitalism and Freedom)
I would argue that the Wall Street meltdown and its shocking consequences will create the crisis conditions that are ripe for change. Albeit, Dr. Friedman had the opportunity to enact change because he often promoted ideas particularly suited to the wealthy and the powerful. Yet it is those ideas, largely underpinning the policies of the last 40 years, that are now called into question. Therein lies the opportunity.
The response to the Wall Street shock will have to, as Thomas Palley wisely suggests, be carried out on two fronts. One is policy. But policies must be justified with sound underpinnings. The extent of this crisis is likely to lead to reexamination in a cold critical light of ideological premises where the neoliberal ideas of free market fundamentalism will be shown to be in sharp contrast to the corporatist practice of the United States. As the Wall Street crisis deepens and spreads, the bailout will contradict the notion of a separation between state and market. Seen from the light of the financial crisis, other violations of market fundamentalism will be scrutinized. State support for military, oil, telecommunications, finance, and more belie the notion that there are clean boundaries between markets and politics. We will increasing realize that we have never been in that dream cloud where markets went unsubsidized.
In another instance, the market fundamentalists have gotten great traction from the "Horatio Alger" mythology of the self made man. Individual responsibility is the key to success, they say. That is an attractive notion. It seems to suggest that one has power to control one’s own destiny. While I would never want argue that effort and self discipline are not helpful or necessary components of success, I would argue that context also matters. In the present crisis it is very likely that a multitude of hard working, disciplined and well educated people are going to be blown off their moorings as a result of the fallout from Wall Street. Things beyond their control are going to hurt them. Things that other people were allowed to do.
As a result, the experience dreadful outcomes in our society are likely to illustrate that the attraction of Horatio Alger mythology is illusory. Anxiety is reduced if you feel you have power over your environment. The protection of those beliefs is shattered when activity in society, over which you have no influence, overwhelms your life and livelihood.
Naomi’s book illuminates many episodes where the wealthy and the powerful take advantage of crisis. The raising of consciousness about the process of change is a gift she gives us all. Yet I would augment that perspective with the awareness that the New Deal was also a response to shock. A response that was progressive in orientation. A response born of extreme pain, yet one that did usher in a more prosperous and stable era in the U.S. economy. Growth was higher, the economy more egalitarian, and volatility was lower than in the period since 1980. (See Peter Lindert’s book entitled Growing Public for factual data)
It appears that the forces of change will do battle in the coming months. On the one hand a quick look at the Federal Election Commission data for our three Presidential candidates suggests that there may be one too many markets in America. The market for the rules of the game is one where Wall Street plays a leading role. (See http://www.opensecrets.org/pres08/index.asp) On the other hand votes do matter this November. On that one day they are the ultimate currency.
At the present time many sophisticated social leaders from days past, including Paul Volcker and Robert Rubin are, in my opinion rightfully, saying that we will have to resort to the Federal balance sheet and a public bailout. Wall Street took action, including spending many millions of dollars over the years to unshackle themselves from New
Deal constraints on financial intermediaries, and we must pick up the losses. From this vantage point we are in a lose-lose game and in the short term our task is to mitigate unnecessary losses. It appears to me to be inevitable given the scale of the problem. The question will be what are the changes in the rules that will accompany the
bailout? Who will make these rule changes so that we do not come back this way again. So that trust in our financial system is renewed.
We have a highly combustible societal cocktail brewing The combination of 1) what Sarita Gupta and David Sirota perceive, of rising awareness and mobilization, which we might call the Pissed OffPeoples Party (POPP); 2) The need for a bailout; 3) Wall Street money all over the candidates and Congressional Committees; 4) The refutation of the safety of Horatio Alger; and, 5) the temptation for financiers to suggest that financial issues are "too complex" foranyone but the experts (who made this mess) to rectify the system; combine to make for a very anxious process.
As the process unfolds, awareness of these tensions suggests we are likely to see efforts to:
1) Move the bailout underground along the lines suggested in the Financial Times on Friday where a Committee of Central Banks around the world would buy mortgage backed securities.
2) See repeated warnings (likely to be heeded by the political candidates) that anything they say will deepen the crisis in the markets.
3) Disenfranchise some stakeholders in our social design on the grounds of expertise. Expertise that is needed to comprehend these arcane instruments and their role in the seizing up of our financial system because of fears of counter party default.
4) Berate those who unmask market fundamentalism as socialists or utopians and avoid the contradictions that are apparent to all.
I do not at present see effective countervailing power that will focus the energy of the POPP into action. Organizations to represent this energy are likely to include some strange bedfellows. Independent bankers who are not "too big to fail" may want to participate. The labor movement can play a role. But right now the forces for progressive change are somewhat scattered.
It may be that the progressive effort to organize is too diminished and weak to make a difference to the outcome resulting from this crisis. The energy is felt, but cannot be productively channeled to overcome resistance and introduce constructive change in this iteration. In that event we are likely then to have shattered neoliberal ideology and still have neoliberal remedies adopted. In that event the unfolding events will deepen the anger within the POPP and inspire organization for future challenges.
At very least, I imagine the public will come to wish we had public financing of elections as they experience the questionable rules that will emerge from the current political incentive structures in response to the crisis on Wall Street. Second, because they will look at the bill and realize that they could have avoided this catastrophe and had strong infrastructure, schools, and health carefor what they spent bailing out our financial system in response to the current challenge.
Robert was formerly chief economist to the Senate Banking Committee and also former Managing Director of Solos Fund Management.