The Beast Runs Free
The Treasury Department is slowly restraining the Capitalist Beast. If Secretary Geithner has his way, a single institution (probably FDIC) will be empowered to take over troubled financial institutions and a regulator will be able to "peer", so the financial journalists describe it, into the books of heretofore unregulated hedge funds. These black boxes will be "brought into the light" and their "skeletons exposed" we're told; the taxpayer will then be protected.
Color me skeptical. The "more conservative regulatory regime" that the Secretary laid out is undoubtedly an improvement on the old one. But the principles upon which this rethinking is based - that "too-big-to-fail" institutions are a natural, even necessary, part of our capitalist system and that the best we can do is to watch how hedge funds balloon into systemically risky entities - are retrograde. Particularly, I would add, when Alan Greenspan urges, "In any event, we need not rush to reform. Private markets are now imposing far greater restraint than would any of the current sets of regulatory proposals."
In the Financial Times last week, John Kay provided an example of why certain (unfortunate) financial structures persist. Tax havens, he noted, are far from a creation of recent shady behavior, but first emerged more than a century ago as refuges for gamblers. But, he concluded, "Havens only exist because larger states allow them to exist, and larger states allow them to exist because the customers of havens are the rich and powerful." In other words, financial regulations don't stop the Capitalist Beast, they just tell it where to run wild.
In this way, the debate about appropriate regulatory reform is really a distraction from the real debate about our financial and economic futures. Two very different thinkers have suggested this recently in evaluating how capitalism is changing.
In a speech at the American Enterprise Institute, Charles Murray worried that the increasing dominance of "social democrats" threatens to quash American exceptionalism, the fundamental striving that allows Americans to take pride in their failures and successes because they are uniquely their own. Government action - the welfare state, in particular - has caused "the collapse of functioning neighborhoods into Hobbesian all-against-all free-fire zones."
On the other hand, Amartya Sen, while reluctant to endorse what some have called the New Capitalism, urges us (and our economists, in particular) to recognize the nuanced views of thinkers like Adam Smith and Arthur Cecil Pigou, who defended the existence of "other" - that is, non-market - institutions to provide public services, financial regulation, and assistance to the poor. "What is also needed," Sen writes, "is a clearheaded perception of how different institutions actually work, and of how a variety of organizations - from the market to the institutions of the state - can go beyond short-term solutions and contribute to producing a more decent economic world."
Murray and Sen offer clashing viewpoints on what the current economic and financial crises do and should hold in store for us. But what both remind us is that the problems that government addresses are often not the ones that need addressing: financial regulation will have little effect on the best and worst of worlds that Murray and Sen can imagine.
This is really to say that the efforts of some politicians and commentators to caution President Obama against doing too much - indeed, to caution against addressing the truly paradigm-shifting issues of health care, energy, and education - is a theatrical way of maintaining the status quo. True change will not come from altering how we regulate the financial sector - at least not in statements of the sort Secretary Geithner issued this week.
As T.D. Allman wrote in a 1978 article for Harper's, "The whole history of policy discourse over the past twenty years often has been no more than a pantomime in which vast amounts of money and officials, technology and newsprint have been marshaled to fight crises that, it eventually was discovered, weren't really crises at all." Funny, then, that so much time and effort and money should be put towards fixing our financial crisis when those former crises - health care, energy, education - have been reduced to untimely nuisances.