[Pen-l] The end of American capitalism?

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/09/AR2008100903425.html

The End Of American Capitalism?

By Anthony Faiola
Washington Post Staff Writer
Friday, October 10, 2008; A01

The worst financial crisis since the Great Depression is claiming 
another casualty: American-style capitalism.

Since the 1930s, U.S. banks were the flagships of American economic 
might, and emulation by other nations of the fiercely free-market 
financial system in the United States was expected and encouraged. But 
the market turmoil that is draining the nation's wealth and has upended 
Wall Street now threatens to put the banks at the heart of the U.S. 
financial system at least partly in the hands of the government.

The Bush administration is considering a partial nationalization of some 
banks, buying up a portion of their shares to shore them up and restore 
confidence as part of the $700 billion government bailout. The notion of 
government ownership in the financial sector, even as a minority 
stakeholder, goes against what market purists say they see as the 
foundation of the American system.

Yet the administration may feel it has no choice. Credit, the lifeblood 
of capitalism, ceased to flow. An economy based on the free market 
cannot function that way.

The government's about-face goes beyond the banking industry. It is 
reasserting itself in the lives of citizens in ways that were 
unthinkable in the era of market-knows-best thinking. With the recent 
takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of 
AIG, the U.S. government is now effectively responsible for providing 
home mortgages and life insurance to tens of millions of Americans. Many 
economists are asking whether it remains a free market if the government 
is so deeply enmeshed in the financial system.

Given that the United States has held itself up as a global economic 
model, the change could shift the balance of how governments around the 
globe conduct free enterprise. Over the past three decades, the United 
States led the crusade to persuade much of the world, especially 
developing countries, to lift the heavy hand of government from finance 
and industry.

But the hands-off brand of capitalism in the United States is now being 
blamed for the easy credit that sickened the housing market and allowed 
a freewheeling Wall Street to create a pool of toxic investments that 
has infected the global financial system. Heavy intervention by the 
government, critics say, is further robbing Washington of the moral 
authority to spread the gospel of laissez-faire capitalism.

The government could launch a targeted program in which it takes a 
minority stake in troubled banks, or a broader program aimed at the 
larger banking system. In either case, however, the move could be seen 
as evidence that Washington remains a slave to Wall Street. The plan, 
for instance, may not compel participating firms to give their chief 
executives the salary haircuts that some in Congress intended. But if 
the plan didn't work, the government might have to take bigger stakes.

"People around the world once admired us for our economy, and we told 
them if you wanted to be like us, here's what you have to do -- hand 
over power to the market," said Joseph Stiglitz, the Nobel Prize-winning 
economist at Columbia University. "The point now is that no one has 
respect for that kind of model anymore given this crisis. And of course 
it raises questions about our credibility. Everyone feels they are 
suffering now because of us."

In Seoul, many see American excess as a warning. At the same time, anger 
is mounting over the global spillover effect of the U.S. crisis. The 
Korean currency, the won, has fallen sharply in recent days as 
corporations there struggle to find dollars in the heat of a global 
credit crunch.

"Derivatives and hedge funds are like casino gambling," said South 
Korean Finance Minister Kang Man-soo. "A lot of Koreans are asking, how 
can the United States be so weak?"

Other than a few fringe heads of state and quixotic headlines, no one is 
talking about the death of capitalism. The embrace of free-market 
theories, particularly in Asia, has helped lift hundreds of millions out 
of poverty in recent decades. But resentment is growing over America's 
brand of capitalism, which in contrast to, say, Germany's, spurns 
regulations and venerates risk.

In South Korea, rising criticism that the government is sticking too 
close to the U.S. model has roused opposition to privatizing the 
massive, state-owned Korea Development Bank. South Korea is among those 
countries that have benefited the most from adopting free-market 
principles, emerging from the ashes of the Korean War to become one of 
the world's biggest economies. It has distinguished itself from North 
Korea, an impoverished country hobbled by an outdated communist system 
and authoritarian leadership.

But the repercussions of crisis that began in the United States are 
global. In Britain, where Prime Minister Margaret Thatcher joined with 
President Ronald Reagan in the 1980s to herald capitalism's promise, the 
government this week moved to partly nationalize the ailing banking 
system. Across the English Channel, European leaders who are no 
strangers to regulation are piling on Washington for gradually pulling 
the government watchdogs off the world's largest financial sector. Led 
by French President Nicolas Sarkozy, they are calling for broad new 
international codes to impose scrutiny on global finance.

To some degree, those calls are even being echoed by the International 
Monetary Fund, an institution charged with the promotion of free markets 
overseas and that preached that less government was good government 
during the economic crises in Asia and Latin America in the 1990s. Now, 
it is talking about the need for regulation and oversight.

"Obviously the crisis comes from an important regulatory and supervisory 
failure in advanced countries . . . and a failure in market discipline 
mechanisms," Dominique Strauss-Kahn, the IMF's managing director, said 
yesterday before the fund's annual meeting in Washington.

In a slideshow presentation, Strauss-Kahn illustrated the global impact 
of the financial crisis. Countries in Africa, including many of those 
with some of the lowest levels of market and financial integration and 
openness, are now set to weather the crisis with the least amount of 
turbulence.

Shortly afterward, World Bank President Robert Zoellick was questioned 
by reporters about the "confusion" in the developing world over whether 
to continue embracing the free-market model. He replied, "I think people 
have been confused not only in developing countries, but in developed 
countries, by these shocking events."

In much of the developing world, financial systems still remain far more 
governed by the state, despite pressure from the United States for those 
countries to shift power to the private sector and create freer 
financial markets. They may stay that way for some time.

China had been resisting calls from Washington and Wall Street to 
introduce a broad range of exotic investments, including many of the 
once-red-hot derivatives now being blamed for magnifying the crisis in 
the West. In recent weeks, Beijing has made that position more clear, 
saying it would not permit an expansion of complex financial instruments.

With the U.S. government's current push toward intervention and the 
soul-searching over the role of deregulation in the crisis, the stage 
appears to be at least temporarily set for a more restrained model of 
free enterprise, particularly in financial markets.

"If you look around the world, China is doing pretty good right now, and 
the U.S. isn't," said C. Fred Bergsten, director of the Peterson 
Institute for International Economics. "You may see a push back from 
globalization in the financial markets."

Staff writers Blaine Harden in Seoul and Ariana Cha in Washington 
contributed to this report.
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