I missed this yesterday. EJ Dionee had a blistering column in the Washington Post:
Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.
The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe have any idea what kinds of devalued securities sit in one another's portfolios.So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can't have that. It's just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail," because they could bring us all down with them.
Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don't expect these people to trade in their BMWs for Saturns, do you?
...I don't fault Ben Bernanke, the Fed chairman, for being so interventionist in trying to save the economy. On the contrary, Bernanke deserves credit for ignoring all the extreme free-market bloviation. He doesn't want the economy to collapse on his watch, so he is willing to violate all the conservatives' shibboleths about the dangers of government intervention. As a voter once told the legendary political journalist Richard Rovere: "Sometimes you have to forget your principles to do what's right."
But if this near meltdown of capitalism doesn't encourage a lot of people to question the principles they have carried in their heads for the past three decades or so, nothing will.
We had already learned the hard way -- in the crash of 1929 and the Depression that followed -- that capitalism is quite capable of running off the rails. Franklin Roosevelt's New Deal was a response to the failure of the geniuses of finance (and their defenders in the economics profession) to realize what was happening or to fix it in time.
As the economist John Kenneth Galbraith noted of the era leading up to the Depression, "The threat to men of great dignity, privilege and pretense is not from the radicals they revile; it is from accepting their own myth. Exposure to reality remains the nemesis of the great -- a little understood thing."
But in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary, and the market system is, on balance, a wondrous instrument -- when it works. But the free market is just that: an instrument, not a principle.
In 1996, back when he was a Republican senator from Maine, William Cohen told me: "We have been saying for so long that government is the enemy. Government is the enemy until you need a friend."
This is exactly, precisely right. The entire premise of the awful bankruptcy bill was that people who take out bad loans should be forced to pay for their mistakes. If we made it to easy for them to walk away from their debts, we would simply encourage bad behavior. But now, when big investment banks are failing, all of the very same people who loudly proclaimed these principles are abandoning them, wailing about how we must do something to minimize the harm that would be caused were the full pain of these mistakes to be felt.
They are right, of course. These banks are too big to fail. But what does it say about the society we have created that we are willing to bail out corporations but not our fellow human beings? More to the point here, if these banks are so important to society that they cannot be allowed to fail, doesn't this call into question their previous claims that society has very little right to regulate them? As Dionee points out, their calls for deregulation were based on claims that we now know were false: they are not nearly the risk-managing wizards that they claimed to be. And now we are all left to clean up their mess.
We learned the hard lessons of unbridled capitalism in the 1920s and 1930s, but it was only a matter of decades before they had nearly all been forgotten. And so here we are once again - the masters of the universe risked everything we have to get rich, and get rich they did. They used the society we have collectively created to get rich, and now that its all gone awry, they'll pass the costs of their mistakes along to that very same society.
This is why we need a capital gains tax. This is why an inheritance tax on the wealthy makes sense. They did not build their wealth on their own. Without the markets that we all - each and every one of us - help create, they would have no way to grow their fortunes. They do not grow "too big to fail" on their own. Without us behind them to bail them out, far fewer of them would be willing to take these sorts of risks. Wealth does not, and it cannot, exist in a vacuum. Taxes, when carefully managed and spent, do not necessarily inhibit economic growth, because taxes often pay for the things necessary to create economic growth. Markets are not perfect. They can fail. And more importantly, they can grow so large that they simply cannot be allowed to fail. And when they do, it is often up to society to bail them out. Even Warren Buffett and Bill Gates understand this.
Anyway, I've been passing along primers on the financial crisis these past few days, and here's another great one. Via Mark Thoma, Steve Waldman writes about how he would explain our problems to his children:
Alice, Bob, and Sue have ten marbles between them. Whenever one kid wants another kid to take over a chore, she promises a marble in exchange. Alice doesn't like setting the table, so she promises Bob a marble if he will do it for her. Bob hates mowing the lawn, but Sue will do it for a marble. Sue doesn't like broccoli, but if she says pretty please and promises a marble, Bob will eat it off her plate when Mom isn't looking.
One day, the kids get together to brag about all the marbles they soon will have. It turns out that, between them, they are promised 40 marbles! Now that is pretty exciting. They've each promised to give away some marbles too, but they don't think about that, they can keep their promises later, after they've had time to play with what's coming. For now, each is eager to hold all the marbles they've been promised in their own hands, and to show off their collections to friends.But then Alice, who is smart and foolish all at the same time, points out a curious fact. There are only 10 marbles! Sue says, "That cannot be. I have earned 20 marbles, and I have only promised to give away three! There must be 17 just for me."
But there are still only 10 marbles.
Suddenly, when Bob doesn't want to mow the lawn, no one will do it for him, even if he promises two marbles for the job. No one will eat Sue's broccoli for her, even though everyone knows she is promised the most marbles of anyone, because no one believes she will ever see those 17 marbles she is always going on about. In fact, dinnertime is mayhem. Spoons are placed where forks should be, and saucers used for dinner plates, because Alice really is hopeless in the kitchen. Mom is cross. Dad is cross. Everyone is cross. "But you promised," is heard over and over among the children, amidst lots of stomping and fighting. Until recently, theirs was such a happy home, but now the lawn is overgrown, broccoli rots on mismatched saucers, and no one trusts anyone at all. It's all a bit mysterious to Dad, who points out that nothing has changed, really, so why on Earth is everything falling apart?
Perhaps Mom and Dad will decide that the best thing to do is just buy some more marbles, so that all the children can make good on their promises. But that would mean giving Alice 19 marbles, because she was laziest and made the most promises she couldn't keep, and that hardly seems like a good lesson. Plus, marbles are expensive, and everyone in the family would have to skip lunch for a week to settle Alice's debt. Perhaps the children could get together and decide that an unmet promise should be worth only a quarter of a marble, so that everyone is able to keep their promises after all. But then Sue, the hardest working, would feel really ripped off, as she ends up with a much more modest collection of marbles than she had expected. Perhaps Bob, the strongest, will simply take all the marbles from Alice and Sue, and make it clear than none will be given in return, and that will be that. Or, perhaps Alice and Bob could do Sue's chores for a while in addition to their own, extinguishing one promise per chore. But that's an awful lot of work, what if they just don't want to, who's gonna force them? What if they'd have to be in servitude to Sue for years?
Almost whatever happens, the trading of chores, so crucial to the family's tidy lawns and pleasant dinners, will be curtailed for some time. Perhaps some trading will occur via exchange of actual marbles, but this will not be common, as even kids see the folly of giving rare glass to people known to welch on their promises. It makes more sense to horde.
A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It's less a matter of SIVs than ABCs.
Of course, this entire thing could have been avoided had the parents made a rule that prevented the children from borrowing too many marbles. Doing so would have been in everybody's best interest. It would have been work, of course, and for the children it would have been far less fun, but in the end everyone would have been better off.
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