The End of American Capitalism? 5 Short Takes on Where the Financial Crisis Might Be Headed

The End of American Capitalism? 5 Short Takes on Where the Financial Crisis Might Be Headed

Op-ed in Al Jazeera/ AlterNet
October 17, 2008

Five prominent economists share their thoughts on what's happening and how bad the situation really is.

The past week has seen the US economy rocked by some of the worst
global financial turmoil in decades, with venerable
firms collapsing, global banks and governments pouring huge sums of
money into financial markets in a bid to ease turmoil and
thousands facing unemployment or financial ruin. 

As US officials announce planned measures to tackle the crisis, Al Jazeera
asked five prominent economists: Does the crisis signal the end of
US-style capitalism? And if so, what are the lessons learned?

James Galbraith, economist, professor at University of Texas, Austin

This does not mean the end of the United States' position in the world economy.

The US dollar has not moved, which does suggest that the position of the US government is still very much intact.

I think what it means is that in the future the big firms will have a smaller presence.

The
years when the US government took the position that financial firms can
run the country as they see fit and that regulation could be dismised
is finished. There will be a major examination of how the financial
markets are regulated.

Such financial events will have a lagged
effect on everyone ... its most likely consequence is that the credit
crisis will get more intense and the foreclosure crisis will get worse.

We will have to wait and see. But people do not learn from mistakes. How many times do we have to go through this?

'Enormous mess'

A
well-functioning financial system has rules and it's when the rules are
relaxed that shady practices and get rich quick schemes abound, which
is what happened in the [sub-prime] mortgage system in 2005 and 2006.

The
banks' behavior was conditioned by Bush. [He] sent a clear signal that
they could get away with everything, [that there was] no more effective
supervision so go ahead and make toxic loans, we won't stop you, then
everyone made a bundle and left an enormous mess.

The evolution
of good conduct is defined by effective rules. John McCain [the
Republican presidential candidate] lectures on the morals of Wall
Street but they are no more or less corrupt than other humans.

A
full recovery will only begin with a new administration with a
different philosophy seriously committed to ... bringing in new people,
giving them adequate resources and the legal authority.

I would
argue it is impossible for McCain to do it. Even if he is a genuine
convert to prudent regulation which he has opposed thoughout his
career, who would believe it?

He has been an enabler of the most speculative elements of banking system.

I
think Barack Obama [Democratic presidential candidate] appreciates
the severity of the issue and has the judicious temperament.

This is not a job for zealots or revolutionaries, it's for serious people to build institutions that can last for a long time. 

Gerald Friedman, economics professor, University of Massachusetts

The end of US capitalism? I really doubt it. 

This
is a very serious financial crisis and if mishandled could become a
serious recession even a depression, but it is unlikely to be as bad as
the Great Depression of 1929-40 as the authorities have learned to
co-operate in crises.

More importantly, a capitalist system - or
any social system - can only be brought down by an opposing system
supported by a rising economic class. 

There is no such contender on the horizon right now to challenge capitalism. So, we'll continue to muddle along.

Still,
it will be bad all around unless we change direction. An effective
anti-depression strategy would help those with bad mortgages so that
they will be able to make payments on their mortgages and keep their
houses; such a policy would help the banks by allowing for a
"trickle-up" effect.

Instead, the Federal Reserve is trying to hold back the tide of defaults and foreclosures by helping the top. 

At
best, this will transfer the costs to average Americans, who lose their
homes, watch their neighbours lose their homes, and will in many cases
lose jobs when construction and other businesses fail.

Foreigners
will be hurt too because many banks and other financial institutions
outside the US have invested heavily in US securities including
mortgages and stocks and bonds in US investment banks. 

Helping the people

We need a trickle-up strategy: Help the financial barons by helping the people.

The US should provide major help to people holding mortgages to
renegotiate these and to make some payments so that people can stay in
their homes and banks will be able to continue to carry these mortgages
on their books.

There should also be a major increase in
unemployment benefits so laid-off workers are protected and can
continue to buy things and make payments on their debts. This, too,
will help the banks.

We should also have a major public works
programme to employ laid-off construction workers in overdue
infrastructure building and have strict new transparency requirements
on banks and other financial institutions.

The Fed, the Treasury,
and foreign central banks (especially the European Central Bank and the
Bank of Japan) should announce that they will stand behind every major
bank and financial institution so that average investors will be
absolutely protected. 

This will end panic selling and allow the markets to stabilise. 

At
the same time, the Fed and others should take an equity stake in these
institutions to to pry open the accounting records and to enforce new
regulations that would clearly separate normal business operations from
the speculative activities of the last decade.

Mark Weisbrot, co-director, Centre for Economic and Policy Research (CEPR)

No, the US Federal Reserve has the capacity to provide enough liquidity so this crisis can be smoothed over.

But it's not going to end the bankruptcies of institutions that are financially insolvent, including some major banks.

The
problem is the real economy [ie. not the financial markets], which is
on a downwards path because of the housing bubble, and it will continue
even if banking crisis is resolved.

There have been a lot
of crisis in the last 40 years and this happens to be the worst one
since the US depression (in the 1930s) but I wouldn't exaggerate it.

It
is not like the 1930s, we have learned from that period. This time the
Fed and banks have pumped hundreds of millions of dollars of liquidity
into the market and as long as they are willing to do that we should be
able to minimise the impact of the credit crunch on real economy.

'Serious recession' fears

The
economy will slow down because consumers are not borrowing against
their homes as they did since 2001 when the last recession ended, that
is what drove the last recovery - rising home equity. That process
is now in reverse.

The solution is fiscal policy, the
government can make up for slowing demand - it did some work with the
stimulus package and if willing to do more the US can neutralise the
effect of recession.

However, I don't think they'll be smart enough so there will be a serious recession.

The
most affected are those who have lost jobs, people who have lost homes,
millions losing equity or life savings - these are top the three
negative impacts.

Should the US rethink its policies? No doubt. Even John MCain is acknowledging that, must be a change of policy?

The
most important question not being asked is a simple one – why was this
housing bubble allowed to grow to catastrophic portions? This shouldn't
have happened.

I think we can blame media irresponsibility to an
extent, as the [journalists] that report should have looked at the
numbers, but I think they were following Alan Greenspan [former
chairman of the Federal Reserve] and he had to know there was a bubble. 

John Berlau, Competitive Enterprise Institute (CEI)

Is this the end of US capitalism? No, because we haven't had pure capitalism for a long time.

Our
banking system is heavily regulated, but we have outdated rules for
banks and we should be getting rid of these rules for banks so they can
compete with hedge funds.

More competition is needed, everyone
is bashing the short sellers but they are heroes - they were right and
we should have been listening to them years ago.

Savings and
mutual funds should be able to short bank funds as well. I think one
way of lessening risk is letting common investment vehicles use those
strategies, if more had been shorting we would not have a bull market
now.

I think we need a modernisation of regulation and an updating of rules but that does not mean more.

'Moral hazard'

The
Bush administration is hardly deregulatory – they put in rules after
the Enron scandal which cost companies billions of dollars and also had
accountants chasing after minutiae and not the big stuff.

We have had some regulation and it did not turn out to do much good. So examining what makes sense and doesn't could be good.

The
US housing crisis has not impacted as much as some might think. It is
only if people were involved in real estate or had to sell now. Oil
prices increasing and inflation would have much more effect on lives of
everyday Americans than the failure of a big banking firm.

It was
right to let Lehmans to let them go bankrupt and not right to bail out
AIG, how is that aiding ordinary Americans? It's a moral hazard if we
bail out everyone out.

Failure is a part of capitalism but we also have to be responsible for the outcomes.

No 'scapegoats'

People
who took risks and got big loans should learn their lesson. I have
sympathy for those who were deceived and the government should punish
fraud but the people who gambled should have live with the consequences
and neither should a borrower be bailed out.

[We should look at]
accounting rules and what makes regulatory sense, so if one bank sells
a bad loan and others are spreading that contagion that should be
looked at.

The government created Fannie Mae and Freddie Mac as
implicitly government supported so they were not as careful as other
firms, they inflated the bubble.

Polititians also pushed
this idea that everyone should have a home, some of the laws they
created encouraged banks to abandon underwriting standards and accusing
them of discriminatign against the poor, it must be more transparent. 

Everyone
is looking for scapegoats but it is about the antiquated rules, not
more or less regulation, and what makes sense for the 21st century.

James S Henry, economist, author of The Blood Bankers

This certainly
changes the nature of US capitalism. It is not the the end of it,
but it is the beginning for a new more carefully regulated financial
and housing sector and I thnk with much more government oversight.

We have allowed
basically a more or less hands off policy towards major financial
institutions at the core of the economy. We've deregulated and now we
must regulate.

The system as we know it exercises enormous
political and economic power and we should have learned about the
perils of this kind of "laissez-faire" approach.

Every time we act as if this has never happened before when actually lessons could have been learned much earlier.

Years of neglect

Is
either political party ready to take a new approach? Many are
ideologically beholden to the neo-liberal approach of financial
capitalism.

But there is a whole new generation of younger ecomomists who will be more activists and less free market oriented.

Ironically, we've
had all kinds of government intervention but it's been on the side of
the institutions - what's the national interest there?

There are
enormous ramifications for developing nationsas the US is a main
trading economy. People from Mexico and the Philippines come here
to send back billions in remittances but those flows are declining.

Trade
will also suffer. We're a big market for industrial countries such as
China, Japan and Canada. Middle tier countries such as Brazil and
India may also notice some immediate impact.

And from the
standpoint of Europe, there has been a major loss of net worth to lots
ordinary investors and homeowners, so it will have real impact on the
main street economy in the first world,.

The sources of credit people have lived off for year are drying up and will have big impact on consumption.

I don't think we need to worry about collapse, it's more like stagnation, many years of trying to work off loans and bad debts.

We
are suffering from years of neglect, we'll learn that you need a market
economy that is led and regulated intelligently, with strong government
institutions with smart people not hostage to the institutions they are
regulating.