By Max A. Joseph Jr.
If Satan, allegedly the instigator of all evils, was making the rounds of talk shows, he would accuse God of misrepresenting his good intentions toward humanity with calumnies and concocted lies. It is therefore not surprising that those essentially responsible for the U.S’ greatest financial crisis since the Great Depression are having troubles reconciling their positions with the present reality. Whether by intention or naiveté, this unapologetic approach exemplifies what is wrong with the people entrusted with the future of this country.
Undoubtedly capitalism encourages creativity and generates wealth and, as such, remains the best economic system that reduces poverty and creates affluence. But the tendency of many to see capitalism (read unregulated) as infallible led many governments to abandon the Keynesian model, named after British economist the late Sir John Maynard Keynes (1883-1946), which advocated government interventions to regulate the economy and correct social imbalances. It is indeed the responsibility of a state to correct social imbalances in its capacity as an omnipresent entity upon whose leadership depends social peace, stability and progress. Although the Keynesian model needed fine tuning in the 1970’s, it worked well for the most part of the 20th century by creating an orderly redistribution of income in the industrialized and parts of the underdeveloped world.
Face with stagflation (high inflation and no growth) in the late 1970’s, the U.S embraced the theories of Nobel Prize winner Milton Friedman (1912-2006) who argued that intrusive government regulations stifled productivity and must be kept to a minimum. Certainly, the merits of Milton Friedman’s theory cannot be dismissed because over regulating the economy upon which jobs creation and trade depends deters investments and suppresses entrepreneurship. This otherwise true tenet however led to a minimalist approach to regulations, akin to the rubber barons’ domination of the U.S economy in 19th century’s, and naturally the consequences proved to be the same: uninhibited greed whose destructive effects enveloped the entire nation.
Like it or not, the government is the ultimate arbiter against imperfections and abuses wherever they arise and is expected to show evenhandedness in its approach to protecting the interests of businesses and those of the public. Indeed, intrusive government intervention, like the 1930 protectionist Smoot-Hawley Tariff Act, whose noble intent to protect U.S businesses and workers, backfired because it impeded global trade, the essence of social progress and affluence. Most importantly, unlike the 19th century, today’s financial institutions are basically privately-run public institutions entrusted with the American workers’ retirement savings, investments, and state-funded pensions. Therefore, an effective supervisory role for the government is needed in order to prevent greed, a typical human behavior, from destroying a way of life that many generations of Americans took for granted.
It would be disingenuous to argue that deregulation does not work. The trend, which started at the end of the 1970’s with the deregulation of the Airline and later the telecommunications and other industries, was mostly responsible for the great economic expansion of the 1980’s and 1990’s. As everyone benefited from the process, the captains of industries, emboldened by its success, lobbied for more deregulations to which successive Congresses and administrations agreed. Naturally, many industries’ stalwarts acted responsibly and everyone benefited from the economic boom that followed, while those in the financial industries behaved like teenagers squandering their inheritance.
More ominously, the financial industry, deregulated to the point where the word regulation lost its relevancy, set its sight on the mother load: the Social Security Trust Fund, which guarantees every American a source of income in their twilight years. Since then, a campaign to privatize Social Security has been gathering steam within Congress whose own prolific spending habit disqualifies it as a trusted overseer of the Fund. Even the collapse of Enron ( the energy giant) in 2001 did nothing to dampen the self-indulgence of the philanderers of other people’s money.
What is happening today has been in the making since the end of the 1980’s when celebrity business executives and corporate raiders embarked on a crusade to reinvent capitalism, which resulted in a speculative economy relying on junk bonds, hedge fund managers and brokers with oversized bonuses, mismatched mergers, hostile takeovers, accounting fraud, short-selling of stocks and excessive consumerism. Although the productivity of the American worker remains second to none, U.S exports could not counterbalance the excessive consumerism that catapulted the country from the rank of number one creditor to that of number one debtor. With the days when a simple intervention by the Federal Reserve Bank was enough to calm fears in the global financial market rapidly shrinking, the chicken has come home to roost.
When a bank lends 300.000 of dollars to people making 25.000 dollars at a double digit rate and the C.E.O gets a big bonus, which incidentally is not contingent on these borrowers repaying the loans but on the remote possibility that the money will be repaid, one can argue criminal intent in those cases. Unquestionably, the titans of the banking industries knew what was in the pipeline, which was why they lobbied so hard for the passage of the Bankruptcy Prevention and Consumer Protection Act, which Congress enacted on April 14, 2005 and President Bush signed on April 20, 2005. Americans are very emotional people. Because of the magnitude of the crisis, the government’s expedited response may not get to the bottom of the problem and that could create a much bigger catastrophe in the future.
Max Joseph is a columnist at The Haitian Times. He can be reached at [email protected]