Friday, October 3, 2008

Gerard Baker Tries to Calm the Cassandras

In his Times of London column ("That rubbish they talk about the credit crunch"), Gerard Baker addresses some of the more hyperbolic reactions to the credit crisis and the rescue package passed today, including the claims that the rescue represents an inexorable turn from capitalism to socialism. Worth reading in full, but here is an excerpt:

[The financial crisis is] a vast drama, with consequences that will ripple steadily from immediate economic hardship to changes in short-term political fortune to a broad recasting of the way our economies and societies work.

But that's not enough, apparently, for the drama queens and kings of our political and media establishments. Hastily, they've constructed a grand historical narrative in the last couple of weeks, composed largely of overarching myths that are in danger of hardening into conventional wisdom.

So at the risk of being accused of missing the historical boat, let me try to take a few of them on.

Capitalism has failed and the US has embraced socialism

This one has adherents, surprisingly, on both sides of the Atlantic. In Europe, the birthplace, etymologically speaking, of Schadenfreude, the Germans and French have been eagerly stamping on the grave of Anglo-Saxon capitalism. In America they've found unlikely allies among a bunch of hardline conservative Republican politicians and commentators. These latter-day Bourbons claim the Bush Administration's $700 billion bailout plan for banks will rank with the October Revolution and Mao's Long March as seminal events in the history of human serfdom.

Let's take the latter claim first. Seven hundred billion dollars certainly sounds like a big chunk of the economy to be placed in the hands of the Government. It could, spent wisely, get you some way to the top of the commanding heights of America's $14 trillion economy.

But I doubt the Hank Paulson plan would win him plaudits with Marx and Engels. For starters, acquiring the financial equivalent of a junkyard is not quite what socialists have in mind when they urge nationalisation.

In any case the actual outlay will not be anything like $700 billion. The Government is merely proposing to use that money to buy the putrid assets that now clog the balance sheets of banks. When the frozen credit markets thaw, it will sell them back. It's unlikely the whole exercise will cost more than a couple of hundred billion dollars, which represents about 1.5 per cent of the US economy.

Capitalism's Cassandras might also want to consider that the crisis the current mess most closely resembles is the Swedish banking collapse of 1991-92. I don't remember Sweden being reviled in those days as a model of heartless capitalism.

The unpleasant truth is that financial excesses occur quite frequently in the capitalist system and always require modifications to it, not its abolition.

One hundred years ago, John Pierpont Morgan singlehandedly rescued a financial system near collapse. The experience led directly a few years later to the creation of the Federal Reserve, America's central bank (greeted then, by the way, by the same sort of extremists, as a harbinger of socialism). In the 1930s the Depression resulted in reforms that changed but did not destroy the free market. In the early 1990s the Government spent a couple of hundred billion dollars bailing out the savings and loans industry. That didn't noticeably undermine capitalism.

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