[Marxism] WSJ: In Turmoil, Capitalism in U.S. Sets New Course

[Walter Lippmann <walterlx@xxxxxxxxxxxxx>]

Free Market Ideology is Far From Finished

But with Wall Street rescued by government intervention, 
there's never been a better time to argue for collectivist solutions

By Naomi Klein
The Guardian (UK)
September 19, 2008

http://www.guardian.co.uk/commentisfree/2008/sep/19/marketturmoil.usa

Whatever the events of this week mean, nobody should believe the
overblown claims that the market crisis signals the death of "free
market" ideology. Free market ideology has always been a servant to
the interests of capital, and its presence ebbs and flows depending
on its usefulness to those interests.

During boom times, it's profitable to preach laissez faire, because
an absentee government allows speculative bubbles to inflate. When
those bubbles burst, the ideology becomes a hindrance, and it goes
dormant while big government rides to the rescue. But rest assured:
the ideology will come roaring back when the bailouts are done. The
massive debts the public is accumulating to bail out the speculators
will then become part of a global budget crisis that will be the
rationalisation for deep cuts to social programmes, and for a renewed
push to privatise what is left of the public sector. We will also be
told that our hopes for a green future are, sadly, too costly.

What we don't know is how the public will respond. Consider that in
North America, everybody under the age of 40 grew up being told that
the government can't intervene to improve our lives, that government
is the problem not the solution, that laissez faire was the only
option. Now, we are suddenly seeing an extremely activist, intensely
interventionist government, seemingly willing to do whatever it takes
to save investors from themselves.

This spectacle necessarily raises the question: if the state can
intervene to save corporations that took reckless risks in the
housing markets, why can't it intervene to prevent millions of
Americans from imminent foreclosure? By the same token, if $85bn can
be made instantly available to buy the insurance giant AIG, why is
single-payer health care - which would protect Americans from the
predatory practices of health-care insurance companies - seemingly
such an unattainable dream? And if ever more corporations need
taxpayer funds to stay afloat, why can't taxpayers make demands in
return - like caps on executive pay, and a guarantee against more job
losses?

Now that it's clear that governments can indeed act in times of
crises, it will become much harder for them to plead powerlessness in
the future. Another potential shift has to do with market hopes for
future privatisations. For years, the global investment banks have
been lobbying politicians for two new markets: one that would come
from privatising public pensions and the other that would come from a
new wave of privatised or partially privatised roads, bridges and
water systems. Both of these dreams have just become much harder to
sell: Americans are in no mood to trust more of their individual and
collective assets to the reckless gamblers on Wall Street, especially
because it seems more than likely that taxpayers will have to pay to
buy back their own assets when the next bubble bursts.

With the World Trade Organisation talks off the rails, this crisis
could also be a catalyst for a radically alternative approach to
regulating world markets and financial systems. Already, we are
seeing a move towards "food sovereignty" in the developing world,
rather than leaving access to food to the whims of commodity traders.
The time may finally have come for ideas like taxing trading, which
would slow speculative investment, as well as other global capital
controls.

And now that nationalisation is not a dirty word, the oil and gas
companies should watch out: someone needs to pay for the shift to a
greener future, and it makes most sense for the bulk of the funds to
come from the highly profitable sector that is most responsible for
our climate crisis. It certainly makes more sense than creating
another dangerous bubble in carbon trading.

But the crisis we are seeing calls for even deeper changes than that.
The reason these junk loans were allowed to proliferate was not just
because the regulators didn't understand the risk. It is because we
have an economic system that measures our collective health based
exclusively on GDP growth. So long as the junk loans were fuelling
economic growth, our governments actively supported them. So what is
really being called into question by the crisis is the unquestioned
commitment to growth at all costs. Where this crisis should lead us
is to a radically different way for our societies to measure health
and progress.

None of this, however, will happen without huge public pressure
placed on politicians in this key period. And not polite lobbying but
a return to the streets and the kind of direct action that ushered in
the New Deal in the 1930s. Without it, there will be superficial
changes and a return, as quickly as possible, to business as usual.

=======================================================================

WALL STREET JOURNAL
    * SEPTEMBER 20, 2008

In Turmoil, Capitalism in U.S. Sets New Course
By DAVID WESSEL

This past week marks a decisive turn in the evolution of American
capitalism.

Black September, the biggest financial shock since the Great
Depression, is prompting a Republican Treasury secretary and Federal
Reserve chairman to devise the most muscular government intervention
in the economy since the Great Depression in an effort to prevent the
economic devastation of the Great Depression.

Abandoning its one-rescue-at-a-time strategy of recent months, the
government suddenly has shifted to a broad attack on what Treasury
Secretary Henry Paulson calls "the root cause of our financial
system's stresses," the rot on the balance sheets of America's
financial system.

Gone is the faith, shared by the nation's leadership with varying
degrees of enthusiasm, that the best road to prosperity is to unleash
financial markets to allocate capital, take risks, enjoy profits,
absorb losses. Erased is the hope that markets correct themselves
when they overshoot.

Also scrapped is the notion that government's role is to get out of
the way, limiting itself to protecting consumers and small investors,
setting the rules of the game and stepping in -- only rarely -- to
cushion the economy from shocks like the 1987 stock-market crash or
the 1998 collapse of hedge fund Long-Term Capital Management. Both of
those episodes involved government jawboning and flooding the markets
with money. In contrast to today, neither time did the U.S. take
significant amounts of taxpayer money or anything approaching the
nationalization of a major firm.

As recently as Spring 2007, Mr. Paulson, among others, was arguing
that onerous regulations were crippling American finance in
intensifying global competition. Those cries are silenced.

"The last 20 years saw people actually mouthing the idea that
government should keep hands off," says Richard Sylla, a financial
historian at New York University. "We had this free market ethos:
Reagan's 'government isn't a solution, government is the problem.'
Now people are saying, 'The market is the problem. The government is
the solution.' "

The Depression triggered, among other things, sweeping new rules
governing the financial system -- including the 1933 Glass Steagall
law that separated commercial and investment banking until its repeal
in 1999. The inevitable result of this crisis, once it ends, will be
more government control of the financial system. The only questions
now are how much tougher the new oversight will be, what form it will
take and how long until the restrictions are loosened or evaded?

In March, the Federal Reserve shattered a half-century of tradition
in which it had lent money only to banks whose deposits were insured
by the government. Declaring circumstances to be "unusual and
exigent," as required by a little-used statute, it lent to investment
bank Bear Stearns and eventually risked $29 billion of taxpayer money
to induce J.P. Morgan Chase to buy Bear. It seemed a very big deal at
the time.

But in the past two weeks, the U.S. government, keeper of the flame
of free markets and private enterprise, has:

-- nationalized the two engines of the U.S. mortgage industry, Fannie
Mae and Freddie Mac, and flooded the mortgage market with taxpayer
funds to keep it going;

-- crafted a deal to seize the nation's largest insurer, American
International Group Inc., fired its chief executive and moved to sell
it off in pieces.

-- extended government insurance beyond bank deposits to $3.4
trillion in money-market mutual funds for a year;

-- banned, for 799 financial stocks, a practice at the heart of stock
trading, the short-selling in which investors seek to profit from
falling stock prices.

-- allowed or encouraged the collapse or sale of two of the four
remaining, free-standing investment banks, Lehman Brothers and
Merrill Lynch;

-- asked Congress by next week to agree to stick taxpayers with
hundreds of billions of dollars of illiquid assets from financial
institutions so those institutions can raise capital and resume
lending.

It was less than a week ago that Mr. Paulson appeared to draw a line
at government bailouts, rebuffing Lehman's plea for a Bear
Stearns-like rescue and allowing the investment bank to collapse into
bankruptcy. "The national commitment to the free market lasted one
day," Barney Frank, the Massachusetts Democrat who chairs the House
Financial Services Committee, quipped earlier this week. That one day
was Monday, Sept. 15. The day before the government rejected Lehman's
cry for help; the day after it seized AIG.

The shift in strategy reflects the realization by Mr. Paulson and
Federal Reserve Chairman Ben Bernanke that the financial crisis was
intensifying in recent days, endangering the entire economy.
Confidence deteriorated markedly. Distrust spread. Credit markets
weren't functioning and lending dried up. Normal business wasn't
getting done. The two remaining free-standing investment banks were
under severe pressure. The panic was spreading to ordinary Americans,
who were beginning to pull money out of money-market mutual funds.

"This convulsion that we've had in the past two weeks? I don't think
there's anything like it in history. I want to go back and check the
week in 1933, when all the banks were closed," says Robert Aliber, a
University of Chicago economic historian who updated Charles
Kindleberger's 1978 classic and newly relevant book, "Manias, Panics
and Crashes."

But there is a big difference between then and now. The authorities
moved quicker this time. "In the '30s, the intervention that mattered
came after the disaster," Mr. Sylla says. "Now the interventions are
designed to prevent the disaster we had in the '30s." About the only
pleasant surprise of the past year is that the U.S. economy hasn't
done worse.

It is too early to say whether Mr. Bernanke and Mr. Paulson have made
the right call and will bring the crisis to a close, despite global
stock markets' ebullient reaction Friday. If the fear does subside,
then talk will turn to writing new rules for a financial system that
has changed more in the past six months than in the previous decade.
The government has bailed out financial institutions -- and
particularly their creditors -- and taxpayers will pick up the tab
for many of the institutions' bad decisions. That could encourage bad
behavior in the future. So, the government needs to craft a new
regulatory regime to reduce those incentives.

Some observers look to history, and predict the government will
overdo the regulatory remedy. Bubbles often begin with products
created to get around regulations, says Stephen Quinn, an economic
historian at Texas Christian University in Fort Worth, Texas. "Smart
regulation looks forward to prevent the next regulation-circumventing
... idea from turning into a bubble without stymieing the flow of new
ideas. Dumb regulation looks backward. You can guess which kind of
regulation most crises produce."

But Frederic Mishkin, who recently left the Fed to return to teaching
at Columbia University's business school, takes hope in the
resolution of the savings and loan episode of the 1980s. "It was
handled disastrously at first," he says. Regulators and politicians
were slow to respond, allowing thrifts to make more and more bad
loans instead of shutting them down. Then, in 1989, the first Bush
administration swallowed hard, closed thrifts, paid off depositors
and sold the thrifts' assets at fire-sale prices. The cost to the
taxpayers came to about $124 billion.

Congress and the president moved to reduce the chances of a repeat,
enacting a 1991 law that, among other things, increased the minimum
amount of capital banks were required to hold. As a result, Mr.
Mishkin says, big banks entered the current crisis with far more
capital than they had in the early 1990s. "That's one reason this
crisis hasn't led to a complete disaster. It put banks on a stronger
footing so they had a larger cushion when they blew it," he says. The
other reason, he says, is the Fed's rapid response to the current
crisis.

The rub: The 1991 law didn't apply to institutions other than banks
-- the investment banks, mortgage companies and even insurance
companies that have been central to this episode. That puts writing
new rules for them high on the agenda for the new president and the
next Congress.


=========================================
     WALTER LIPPMANN
     Los Angeles, California
     Editor-in-Chief, CubaNews
     http://groups.yahoo.com/group/CubaNews/
     "Cuba - Un ParaÃso bajo el bloqueo"
=========================================

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