Tuesday, September 16, 2008

The System's Broke, Now So Are You

Yesterday Lehman Brothers went underwater faster than Galveston. Merrill Lynch was helicoptered to safety at the last minute. AIG is stalled on the railroad tracks, hoping the engineer of the oncoming train isn’t text messaging anyone. All of us are riding the tiger, and we might as well wait until he gets tired; he’ll eat us if we jump off at the wrong time. (Thus ends the strained metaphor section of today’s essay.)

Free market, laissez-faire capitalism is at the heart of the American economic myth, and the country has profited from it We’re in the process of being reminded the free market ain’t free, and it’s not just those who reach for the brass ring and miss who get ground up in the wheels of its machinery.

Unfettered capitalism is based largely on the premise of self-regulating markets, and the idea of balancing risk against rewards. Theoretically, it works. We’re seeing it work now, as bubbles in housing and credit positions have burst more or less simultaneously, creating havoc across the economy. In theory, those who made mistakes are being punished financially, and those who were prudent will be rewarded. That’s not how it works in practice.

This is not the place to debate just desserts for those whose greed brought us to this place, nor to argue who should, or should not, get bailed out by the government. All we can do is to make the best of an increasingly bad situation and devise workable plans to see to it such events don’t happen again.

Which means regulation. Public policy has stripped away layers of regulation since Ronald Reagan’s inauguration in 1981. Much of this was necessary. Government regulations created a culture of featherbedding, where no business in selected sectors—commercial airlines, telecommunications, interstate shipping—could go broke, thanks to what amounted to government price fixing. Everyone paid for that, except the shareholders of the protected industries.

The freewheeling, devil-take-the-hindmost attitude that replaced it has swung the pendulum of business too far the other way. It’s never good to see a business go bust, though some deserve to. Our current situation has evolved into a caricature of laissez-faire, where those with the most to gain had little to lose, and those who stood to benefit least may lose most.

Tax laws were made more lenient for brokers of certain investments, because their income depended to a large extent on commissions, never mind they were building their fortunes with other people’s money. Their risk was they wouldn’t get rich; their reward could be to become obscenely rich. Exorbitant bonuses were paid to executives who built short-term profits on dubious strategies, such as buying securities based on mortgages unlikely to be paid. These, and others, have been swept up in the debris of the bursting bubble, but they’ve already cashed in. Their investments will suffer, but a $10 million (or more) nest egg can take a substantial hit before its owner becomes middle class, even by John McCain’s definition.

Those who will be hurt most are those who had the least to gain. People who were in the market hoping for no more than a relaxing retirement, or to send a child to college are seeing those possibilities move farther away every time they open a newspaper. Adding insult to injury, the tightening of credit makes it harder for their kids to get student loans; the potential of getting money out of their houses diminishes with the value of the house.

These are the people who never stood to become millionaires, but who are paying the greatest real price. The nebulous “market” true capitalists reflexively genuflect before has no mechanism of concern for these people; they don’t matter. The excessive regulation of an overlarge government can be blamed for a lot of things, but we forget the uses and benefits of government at our peril. It seems America has to learn the dangers of capitalism run amuck every eighty years or so. Let’s do what we can to make it a little easier on our grandchildren.

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