Is This the End of Capitalism?
Hardly, but it's a great excuse for the antiglobalization crowd.
By DANIEL HENNINGER
APRIL 2, 2009
Heads of state, perplexed finance ministers, inflated retinues and journalists from 20 nations arrived in London yesterday to address "the greatest financial crisis since the Depression." By 4 p.m. London time today they will hold a press conference and go home.
Is there any chance we can adopt this system for Congress?
Possibly the G-20 kept it short to minimize the potential ruin visited on London by the professional street fighters fronting the anti-capitalism mobs on global TV screens.
In truth, the G-20's goal was accomplished before the first plane landed. The mere announcement of the meeting brought forth a torrent of pent-up "global" agendas.
The German magazine Spiegel crammed all of them into one headline: "Can the G-20 Save the World?"
"Who is going to save capitalism?" the Germans asked. Many, it appears, have been waiting for their 15 minutes to offer the answer.
China wants a new global currency to replace the inflatable dollar. The managing director of the International Monetary Fund, Dominique Strauss-Kahn, has said the world financial system needs an "early warning system," which one guesses the rocket scientists at the IMF would provide. France's Nicolas Sarkozy wants a global "financial regulator." On Sunday the New York Times raised its hand to announce the crisis "has led to a fundamental rethinking of the American way as a model for the rest of the world."
Here's my two cents worth: Beware of real-estate salesmen.
The housing bubble that floated into view in 2007 is turning into the blob that ate the world. Real-estate mortgages and their derivative securities are a significant problem. That discrete problem, however, has been pumped up to an historic "crisis of capitalism."
Capitalism didn't tank the U.S. economy. Overbuilt housing did. Overbuilt housing tanked the economies of the U.K. and Ireland and Spain. If little else, we've learned that artificially cheap housing sets loose limitless moral hazard.
Virtually every white-shoe financial institution in the world, plus the Russians, stuffed their balance sheets with securities carved out of the dreams of real-estate developers. This plunge had less to do with capitalism than with psychosis, defined in textbooks as "a mental illness that markedly interferes with a person's capacity to meet life's everyday demands." For sane bankers that includes due diligence and risk management.
In a normal environment, the problems revealed by the crisis in mortgage finance would produce fixes relevant to the problem, such as resetting the ratios of assets to capital for banks and hedge funds, or telling the gnomes of finance to rethink mark-to-market and the uptick rule. More energetic reformers might consider Gary Becker's suggestion that as financial institutions expand in size, their capital requirements tighten, so that compulsive eaters like Citigroup can fit inside their capital base.
Nothing's normal about now, however. After the full folly of the mortgage plunge became public in September 2008, the broad credit markets locked up, stock indexes fell and the world's economies spiraled into a severe recession. The loss of savings and jobs has been brutal. Someone has to take the fall for this, and it had to be more than the boys in mortgage-backed securities.
Two signal events in history are shaping the politics of the current economic crisis: the Great Depression and the Reagan presidency (and in Europe, Thatcherism).
The Depression put in motion an historic tension between public and private sectors over who sets a nation's course. After 50 years of public dominance, Reagan's presidency tipped the scales back toward private enterprise. The economic life of the ensuing 35 years became "the American model." Every waking hour of this economically liberal era, the losing side has wanted to tip the balance back toward public-sector power. The opportunity to achieve that goal finally arrived -- with the great recession of 2009. Thus rather than fixing just what the mortgage crisis broke, the G-20 suddenly became a meditation on the "future of capitalism."
No surprise that the French and Germans, who for years have wanted to slow such American fast runners as Microsoft and Intel, came to London seeking ponderous new bureaucracies euphemized as a "new global financial architecture." It's been a long time since anyone thought to elevate the IMF as an economic driver.
Meanwhile, the new U.S. president is attempting to replace the American model of some three decades with the Obama model, which promises to grow the U.S.'s $14 trillion GDP (something else he "inherited") with government investments in national health insurance and renewable energy technologies.
I'm thinking that the two happiest G-men in London are Hu Jintao of China and Lula da Silva of Brazil. Their game is catching up with the West. It's a lot easier to play ball in the G-20 league if in the future the competition will be running in slow motion.
Write to henninger@wsj.com
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