“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’s 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 its architecture 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 calm the nerves of panicky savers by guaranteeing the safety of their 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–the grumbles of the unreconstructed about “socialism in our time” notwithstanding.
We are likely to see further changes when we emerge from the current 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 become somewhat more parsimonious when it comes to issuing 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: The old days of leveraging capital 30 times will be gone, replaced by limits in the 12 times range. 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 of the innovations of the past decade 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, the price of access to the Treasury and the Federal Reserve Board in times of stress. Worse still, control follows money, and the governments that now own a piece of many banks will have their own ideas about lending practices. Barney Frank, Nancy Pelosi & Co. can be counted on to be certain that the next Treasury secretary will want to make borrowing easier for homeowners in trouble, small businesses, and any other constituency that strikes their fancies.
And there will be a price 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–governments do have to run the printing presses overtime in order to pay for the preference shares they are buying–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 percent of GDP (in Germany and Britain the figures are a more worrying 16 percent and 30 percent of GDP, respectively), and history suggests that most of the taxpayer money being invested in financial institutions will eventually be recaptured, perhaps along with a small profit. How soon will depend on how quickly the economy recovers.
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. And there is no reasonable time span in which any rising power will be in a position to threaten America’s military primacy. Narrow the gap, yes, but overtake America, no.
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, not even if led by Europeans’ ideal of an American politician, Barack Obama, is not about to cede control over its financial institutions and monetary policy to any international organization, no matter how hard British prime minister Gordon Brown tries to sell his highly regulated version of a new world financial order.
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. The balance of power between government and the private sector will shift a bit to government; the balance between real cash and debt in businesses and households will shift to cash; other nations will be richer, relative to the United States, not a bad thing. An uplands not cloud-free, but sunny nevertheless.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
