The facts are extravagant enough; the theories take our breath away.
“The Great Depression in the United States,” wrote Milton Friedman, “…is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country.”
What a wonderful time to be alive! We get to see things we had only read about in the history books…such as a Great Depression. A depression, of course, is a natural and recurring feature of capitalism. But a Great Depression usually requires lobbying.
The grubby facts are not in dispute and are hardly worth recalling. The Fed dumped on the fertilizer. Asset prices grew like weeds. Investors got carried away. Consumers let themselves go. Wall Street and the City lost their heads.
Then, the capitalists lost their money. Big deal. That’s the way it’s supposed to work. Capitalism is inherently dynamic and unstable…full of sturm and drang, boom and bust, creativity and destruction. It’s always prone to blow itself up just when people count on it most.
As for the present crisis, even a central banker could have seen it coming. When you lend money to people who can’t pay it back, you have to expect trouble. But that doesn’t stop capitalists from whining to the authorities when trouble comes. Half fool, half-knave, governments mobilized; $14 trillion, or thereabouts, has been put up to prevent capitalism from correcting itself. Protectionism is on the increase – even while heads of state rail against it. Banks have been bailed out. In Europe they are shortening the life expectancy of automobiles. In America, the feds are effectively running the largest automobile industry…the largest insurer…and the largest mortgage finance business too. Soon, they may have a chain of hamburger joints. More mistakes…more chicanery – in other words, just what you’d expect.
Even their supposed friends say free markets have been exposed as a failure and a mountebank. That is why the G20 met in London yesterday – they are meant to decide what to do about it. Peter Thal Larsen in the Financial Times:
“The global financial system as we know it was forged by deregulation underpinned by a belief in free markets. That approach failed. The task now is to prove it can be set running again with better brakes and steering… By the end of the week, the world will have a clearer idea whether the system can survive.”
William Pesek at Bloomberg: “There’s no doubt the world that Reagan envisioned didn’t work out. The ‘Washington Consensus’ of free markets, small government and unfettered globalization that characterized the 1990s also is over.”
Meanwhile, over in the other camp, they are sitting around open fires…realizing that they are lost in the woods. The Nation magazine has a feature on “Re-imagining Socialism,” in which Barbara Ehrenreich and Bill Fletcher write: “Do we have a plan, people? Can we see our way out of this and into a just, democratic, sustainable (add your own favorites adjectives) future? Let’s just put it right out on the table: we don’t.”
With no ideas from the usual do-gooders…the world turns its lonely eyes in a novel direction. Who can save capitalism? The communists!
“Market forces, if left unchecked, will lead to asset bubbles and ultimately a disastrous market clearing in the form of a financial crisis like the current one,” says a report from the Chinese central bank.
Everyone wants to be Chinese. Because the Chinese have money. And because they don’t have free markets. It is widely believed that the Middle Kingdom can more effectively fight a downturn without democratic, consensus-driven institutions staying its hand.
But here is where we gasp for air. What theory holds that central planning – whether by Chinese communists or American Democrats – can do a better job of allocating capital than the people who own it?
There is none. That is why the world’s leaders – and most of its economists too – permit themselves a luscious fib; they say they don’t need theory at all. “Pragmatism” was the word on every pair of lips in London this week. Free from chains to dead economists, they say they will try “whatever works.” Oh, the loveable lunkheads! Naïve enough to believe anything; receptive as a trashcan. “Pragmatism” in economics is as phony as the men who preach it. Every one of them has a dog-eared copy of Keynes’ General Theory of Employment, Interest and Money in his briefcase and an ace up his sleeve. And every supposedly new, pragmatic idea they come up with is merely a version of the same quack cures that kept the economy in the hospital last time.
Perhaps you can paint a bridge pragmatically. If you don’t like the color, you can change it quickly. But if you’re building a bridge, an airplane or an economic system, you can’t make it up as you go along. You have to have an idea of how it works before you start. Besides, results from fiscal, monetary and regulatory policies don’t happen overnight. The feedback loop takes years. It took the Bolsheviks seven decades before they realized they’d been had. Friedman’s critique of America’s Great Depression policies didn’t appear until 30 years after the event. In Japan, they still don’t know what they did wrong. And by the time the feds catch on this time, they will have turned an ordinary depression into a great one.
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