Financial meltdown and the Establishment press

Tom Engelhardt amkes a similar observation to that of Joschka Fisher when he writes:

It is far clearer now [than in 1998], as American economic power visibly crumbles, that rather than a victor and a vanquished there were two great power losers in the Cold War. The weaker, the Soviet Union, simply imploded first, while the U.S., enwreathed in a rhetoric of triumphalism and self-congratulation, was far more slowly making its way toward the exit.

It's long been the case that during economic expansions the business press and the Establishment press more generally adopt an optimistic tone about the future, and we get articles speculating about how this time, the expansion will go on and on and just maybe the business cycle has finally been banished for good.

When the inevitable downturn comes, the press tends to go to the other extreme and starts predicting catastrophe. When an actual economic catastrophe like the failure of the private financial system occurs, we can expect panic reaction from the press, as well.

The Washington Post gets into the act with The End Of American Capitalism? by Anthony Faiola 10/10/08. But don't let the headline worry you. Of course, "free market" capitalism is still the magic that heals all. Well, almost all:

Other than a few fringe heads of state and quixotic headlines, no one is talking about the death of capitalism. The embrace of free-market theories, particularly in Asia, has helped lift hundreds of millions out of poverty in recent decades. But resentment is growing over America's brand of capitalism, which in contrast to, say, Germany's, spurns regulations and venerates risk. [my emphasis]

Gee, what kind of "fringe" newspaper would run "quixotic headlines"?

Faiola's article isn't entirly frivolous, though. He quotes Joseph Stiglitz, for instance, who has become a leading critic of the "neoliberal" economic dogma that clearly has failed:

"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do -- hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us." [my emphasis]

It's still darkly amusing to see how supposedly serious American journals still tippy-toe around the word "nationalization". Why can't they describe current policies straightforwardly? The US currently owns the largest insurance company in the world (AIG) and the mortgage giants Freddie Mac and Fannie Mae. Those together are already the largest nationalizations ever undertaken outside the Communist world. But here's how Faiola describes that realiy:

The government's about-face goes beyond the banking industry. It is reasserting itself in the lives of citizens in ways that were unthinkable in the era of market-knows-best thinking. With the recent takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of AIG, the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans. Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system. [my emphasis]

The current bailout plan is a bridge measure to keep the financial system afloat through nationalization and regulation during the Presidential transition period. The Treasury this week discussed further nationalization, i.e., the government will buy shares in banking corporations to provide them additional capital. And this is actually needed, and sooner rather than later, because the banking system generally is current under-capitalized. (I take it for granted that the Cheney-Bush administration would try to implement any bailout plan in their typically corrupt, crony-capitalist style.)

As I'm writing this, I'm listening to a broadcast on the Austrian radio channel Ö1 that matter-of-factly describes the current demand for more capital injections to American banks as the demand for further systematic partial nationalization.

It's not surprising but nevertheless sobering to see how inadequate our "quality" American press is to describing even the economic events themselves, so accustomed are they to reciting the "free market" gospel that both Democrats and Republicans have been preaching for decades, but only the Democrats actually try to take seriously.

Note the tone of mourning in which Faiola reports the fall from grace of the sacred myth of the "free market" in capital:

In South Korea, rising criticism that the government is sticking too close to the U.S. model has roused opposition to privatizing the massive, state-owned Korea Development Bank. South Korea is among those countries that have benefited the most from adopting free-market principles, emerging from the ashes of the Korean War to become one of the world's biggest economies. It has distinguished itself from North Korea, an impoverished country hobbled by an outdated communist system and authoritarian leadership.

But the repercussions of crisis that began in the United States are global. In Britain, where Prime Minister Margaret Thatcher joined with President Ronald Reagan in the 1980s to herald capitalism's promise, the government this week moved to partly nationalize the ailing banking system. Across the English Channel, European leaders who are no strangers to regulation are piling on Washington for gradually pulling the government watchdogs off the world's largest financial sector. Led by French President Nicolas Sarkozy, they are calling for broad new international codes to impose scrutiny on global finance. [my emphasis]

Say what? Nationalization??!!! Oh, wait, it's that exotic, kinda-sorta European country Britain that has moved to "partly nationalize" its banking system. The far greater assumption of public owernship of banks by the Republican government in Washington isn't some sinful European thing like "nationalization". No, it's that "the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans".

It would have been nice to have had a functioning national press corps during the years Cheney and Bush were doing everything they could to establish a Party-controlled authoritarian semi-democracy in the US. It would also be nice now to have a press corps that could actually focus and report realistically on what's happening in the protracted financial crisis.

But, to paraphrase Rummy, you go through the failure of the private financial system with the press you have, not the press you would want or might like to have.

If you read Faiola's dumbly ideolgical story all the way to the last three paragraphs, you see an interesting fact noted:

China had been resisting calls from Washington and Wall Street to introduce a broad range of exotic investments, including many of the once-red-hot derivatives now being blamed for magnifying the crisis in the West. In recent weeks, Beijing has made that position more clear, saying it would not permit an expansion of complex financial instruments.

With the U.S. government's current push toward intervention and the soul-searching over the role of deregulation in the crisis, the stage appears to be at least temporarily set for a more restrained model of free enterprise, particularly in financial markets.

"If you look around the world, China is doing pretty good right now, and the U.S. isn't," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "You may see a push back from globalization in the financial markets." [my emphasis]

For the last two decades or more, China has been regarded by American conservatives as a sort of honorary capitalist country because of its relatively good relations to the US and its de facto alliance with the US in offsetting the power of the Soviet Union.

And it's certainly true that China has allowed greater private business ownership and less regulation than was the case during the days of Soviet-style "Stalinist" economics. But, as James Galbraith pointed out in Rich World, Poor World The American Prospect 04/08/06 issue) about China:

What is the Chinese secret? The other day, the distinguished Russian economist S. Menshikov put it to me this way, “Well, it’s because they are communists, you see.”

More precisely, China has adopted markets without capitalism; it has not had broadly open, speculative markets for capital assets and land. The result is that you usually have to make something in order to get rich. So companies produce and produce, flood the markets with goods, accept low profit margins, improve quality, and hope to strike gold by exporting to the West. If they have losses, as they often do, these may be covered by borrowing from China’s rotten, state-owned banks, protected by capital control. Workers thrive on the glutted market for goods. Meanwhile, the richer local governments finance themselves with land rent and spend the proceeds on infrastructure at an incredible pace. The system looks like capitalism to the naked eye. But it is not capitalism; it’s an outgrowth of what was there before. What was communism has become, one might almost say, Galbraithian - private affluence, with much less public squalor than one finds elsewhere in the Third World. [my emphasis]

Put in a slightly different way, China was foolish enough to trust their economic development to the notion that there could be a "free market" in capital.

A free market in automobiles is one thing. People can actually gather meaningful and reasonably complete information on the market in which they are interested. They can look around to see what cars they find attractive, they can look at the cars at the dealers and test drive them, they can talk to other car owners and hear their experiences, and they can research more systematically compliled information from Consumer Reports, Car and Driver and numerous other sources.

But when you're talking about exotic sub-prime mortgage derivatives that even the investment bankers who created them apparently didn't understand, it's a whole different story. The notion that the purchasers - even other financial institutions - have the full relevant knowledge about the product that "free market" theory assumes just doesn't apply in the real world with such products. More generally, even before the current mortgage-induced financial meltdown, many developing countries like Argentina had rejected the idea that they should make their own economies completely dependent on the daily whims of the international capital markets.

The most darkly amusing part of Faiola's article is this one:

... World Bank President Robert Zoellick was questioned by reporters about the "confusion" in the developing world over whether to continue embracing the free-market model. He replied, "I think people have been confused not only in developing countries, but in developed countries, by these shocking events."

Yes, we're pretty much all "confused" about the virtue of continuing to have a clearly self-destructive financial system.

Tags: financial system, joseph stiglitz