“We are suffering just now from a bad attack of pessimism. It is common to hear people say that the epoch of enormous economic progress … is over; that the rapid improvement in the standard of life is now going to slow down…; that a decline in prosperity is more likely than an improvement in the decade ahead. I believe that this is a wildly mistaken interpretation of what is happening to us.” So wrote John Maynard Keynes in 1928.
Actually, the pessimists had a point, since 1938 found many countries still on the cusp of recovery from the great depression. But that is to niggle: Keynes’ main point, that “we are suffering, not from the rheumatics of old age, but from the growing pains of over-rapid changes,” stands today.
Proved by any dispassionate look at what we will see when we emerge, blinking, into the “broad sunlit uplands” that Winston Churchill foresaw during another period in which the future looked grim.
The world of finance capitalism will, of course, be different. Just as it was different after Franklin D. Roosevelt laid hands on it in the 1930s.
Out went rampant insider trading, in came the Securities and Exchange Commission to enforce rules about honesty and transparency.
Out went runs on banks, in came the Federal Deposit Insurance Corporation to guarantee savers’ deposits. Out went indiscriminate home repossessions, in came the Home Owners’ Loan Corporation to give struggling families a means of revising their mortgage commitments. Capitalism survived, reformed, grumbles about “socialism in our time” notwithstanding.
We will to see further changes when we emerge from the current credit crisis and impending recession. All of Roosevelt’s New Deal reforms have already been strengthened. Sarbanes-Oxley requires corporate executives to report truthfully on pain of criminal prosecution; deposit insurance has been increased and extended; steps are being taken to minimize repossessions.
But there will be more than extensions of New Deal reforms. Rating agencies will be forced to be stingier with the triple-A ratings that they have lavished on dicey securities.
Mortgage originators will have to retain some of the default risk associated with the loans they write. Banks will be forced to have more shareholder capital behind the loans they make. And throughout capital markets, transparency will be the watchword.
So far, so good. But, as is the case with all swings of the pendulum, this swing will go too far. Financial innovation will be slowed, even though many recent innovations have added to the efficiency with which capital is allocated and risk shared.
Gone are the investment banks and the swaggering masters of the universe who did so much to make capital available to entrepreneurs; they are now subsumed in bureaucratic bank holding companies.
Worse still, control follows money, and the governments that now own a piece of many banks will have their own ideas about which prospective borrowers are the most worthy.
And there will be a price to be paid for the recent bank bailouts. Unless the banks recover, and the value of the assets on their books rises, taxes will have to go up.
And with all the new money being pumped out, inflation will tick up. Indeed, the rate demanded by investors in long-term government securities is already rising in anticipation of inflation.
But these problems are nowhere as severe as the doomsayers would have us believe, at least in America. All of the bailouts in America come to something like a tolerable 5% of GDP, and history suggests that most of the taxpayer money being invested in financial institutions will eventually be recaptured, perhaps along with a small profit.
The view from the “broad sunlit uplands” at that point will be of a world in which economic and political power is more widely shared, which is a good thing.
The game of world economic rivalry is not a zero-sum game: America does not become poorer because China and India become richer. Quite the opposite.
The posturing of Nicolas Sarkozy and his EU allies will produce several high-level conferences, a good deal of sound and fury, and probably a few new assignments for the International Monetary Fund.
But America is not about to cede control over its financial institutions and monetary policy to any international organization.
So, much will change, but much will not. The capitalism that will emerge from our current trials will be a New Capitalism, not socialism or some other ism. An uplands not cloud-free, but sunny nevertheless.
Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
