On the eve of the second decade in the new century, not capitalism but the institutions of capitalism are neither stable nor reformable, defending the status quo with the flood of money.
The causes of market failure are well established in economic theory and well known in practice. The innovation of economic policy in the era of the Great Moderation was to literally paper over market imperfections with the lubricant of money supply to “stabilize” the business cycle. Moral hazard, adverse selection and information asymmetries were seen as structural features of economic “nature” irremediable through government regulation, but “overcome” with money supply. A downwardly deviant culture of commerce was foisted on the society as a benefit.
The business cycle has not been conquered and neither the end of economics nor the end of history has been achieved, leaving the world precariously poised to achieving the last man of endogenous, self-fulfilling extinction after the economic and political neo-conservatism of Clinton and Bush. Homo economicus could end homo sapiens, never to be reborn again like the dinosaurs.
Bill Clinton, after the fiascoes of gays in the military and Hillarycare in 1993, had decided he wanted to be a Republican to survive politically, implementing policies which had reversed his own campaign rhetoric, similar to the current president. The country needs not a “Third Way” president who can be a Democrat to Democrats and a Republican to Republicans (feeding the financial markets to feed the government), but one who can meld the two ideologies in proper measure for the problems at hand, issue by issue: every disease has its own medicine.
The oxymoron of Keynesian Monetarism―the new Keynesian economic synthesis which superseded the neoclassical synthesis of Keynes, Samuelson and Freidman―bred in the supposedly top economics graduate schools in the United States particularly since 1993, had intervened, in anticipation of each business cycle slowdown, to finance the radical global economic liberalization project of the Rubin-Summers Treasury during the Clinton administration: Americans consumed, borrowing more and more with their vanishing jobs as collateral, to lift millions of Chinese out of poverty, so that Clinton could “balance the budget” after the Cold War. He had accomplished none of his objectives.
Those who really got the lift were the new emerging global class of the gaudy noveau riche, known as the super capitalists, who employed the economics and business graduates of the self-promoting Anglo-American graduate schools as their foot soldiers to separate, ever more widely, the commoner from the neo-cognoscenti, misallocating the labors of scientists, engineers and doctors, who really matter, in the back offices of Wall Street firms to spin money. This new economic and financial aristocracy, if the ideology of the markets reforming themselves continues, is teetering on the edge of its heads being cut off under the guillotine of justifiable economic populism.
In anticipation of the incapacity of the overstretched American consumer to continue to prop up the nation’s gross domestic product, the overleveraged American economy once again needed government intervention to liquidate (or recapitalize as a well-known Nobel economics Laureate called it) at least 1/10th of the $150 trillion notional value of the U.S economy: notional value being the “money” created by Wall Street in anticipation of increased future base money supply by the Federal Reserve (by comparison the size of the entire real global economic output is about $65 trillion).
When all is said and done with the current government intervention, assuming a continuance in the manner in which the government is intervening, expecting the markets to reform themselves by simply throwing money at the creators of the problem, the total monies supplied to the financial markets would be about $15 trillion, the annualized U.S GDP in the summer of 2007. The issue at hand is not whether intervention was necessary (as the debate is being framed in Washington and New York) but the how of the intervention which none of the policy makers want to dwell on, even when queried.
The financial institutions of American capitalism which began under a buttonwood tree in lower Manhattan more than two centuries ago will have been paid back by the government at the rate of a dollar for every 10 dollars of leverage or 10 cents on the dollar, and largely by the Federal Reserve, a century after the rise of finance as an industry along with the rise of industrial capitalism under the stewardship of J.P. Morgan, essentially rendering the 1913 dollar worthless by 2013.
This was the bad idea behind the “public-private” toxic asset clean up by the U.S Treasury: to fix the broken financial markets with the same markets, akin to supplying blood to a broken heart before fixing it. So, we are not done yet because the government, shamelessly, is going about doing what it wants to do anyway. Credibility is no longer the currency either in New York or in Washington, but misguided political will is. The invisible hand can be as knavish as it can be noble. The banks were “stress tested” ex ante assuming a 10% unemployment rate without bothering to find out, using the existing regulatory authority of the Fed, how bad the books really are on a per bank basis. The unemployment level reached 10% but the banks’ books are still bad.
The Washington-New York charade of letting the markets buy U.S debt with Fed’s money supply, risking both inflation and an unsustainable nation’s debt burden must give way to the Fed honestly and transparently financing the federal debt directly to pay for the costs of government reform on the one hand, and on the other, to clean up the balance sheets of the banks by telling them where to invest without taking their debt onto the government’s books. Off-balance sheet accounting can be useful if done well, especially under the watchful eye of a responsible government. The current crisis is an unusual occurrence of both government failure and market failure at the same time. The government must fix itself first to fix the markets. Government reform is the exit strategy from government intervention. Else, the crisis will not end.
What needs to be done is a housecleaning of the institutions of capitalism, not saving capitalism which does not need saving because capital accumulation―physical, human and knowledge―is the way the world works, no matter what the structure of political or economic governance is.