The End of American Capitalism?

5 Short Takes on Where the Financial Crisis Might Be Headed

By , Al Jazeera

Posted on October 7, 2008, Printed on October 8, 2008
http://www.alternet.org/story/101854/

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.


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