Monday, September 29, 2008

This economic crisis represents the death of _____

A lot of people are trying to fill in the blank about this economic crisis. What is it that we're seeing here? Is something fundamental changing about the way our economy works? Are certain ideas being discredited? Will we see a major realignment of the relationship between capital and government?

I think the ____ should be filled with the phrase "laissez-faire capitalism." This financial crisis represents the death of the idea that markets, left to their own devices, will be able to create a stable and prosperous economy. There's a clear line of demarcation here. When markets are well-regulated by a competent and prudent government, capitalism is at its most stable. When regulations are stripped and markets are left to run rampant, we get into a system of hills and valleys - each hill smaller, and each valley deeper, until we witness a major crash such as this one.

If anyone has been proven wrong today, it is Ayn Rand. In some ways, it's even Adam Smith. Those economists who insist that leaving the market to its own devices is the best way to achieve the broadest measure of prosperity need to turn in their badges and go home.

If anyone has been proven right today, at least in part, it's actually Karl Marx. Shocking, isn't it? Yet Marx predicted exactly this kind of catastrophe as a natural consequence of the anarchy of the marketplace and the top-heavy structure it creates. With laissez-faire capitalism, as the rich get richer, and the wealth piles ever higher at the top, the workers at the bottom actually doing the work to produce the wealth find their incomes stagnant amid rising prices. Eventually, the workers can't hold the system up, and we have a crash.

In this case, the marketplace was housing. As housing prices went ever higher, and lending standards became ever more lax, the working class became less and less able to pay for the mortgages that they had purchased. Combine people buying too much house with unscrupulous and downright devious lending practices, along with traders buying these bad loans as "securities," and disaster became inevitable.

Traders suddenly realized that the "securities" that had been holding them up above the fray were worth nothing, and the structure of the housing market collapsed.

As in all of these crashes, the capitalist class will walk away with nary a scratch, often with millions of dollars in severance packages. Meanwhile, those of us at the bottom will find jobs gone, wages slashed, and credit markets closed to us. Prices will rise, unemployment will skyrocket, and we'll enter another one of the capitalist system's inevitable black holes.

Unfortunately, simply handing $700 billion to the people who caused this crash isn't a solution to this problem. Without major fundamental structural change to the way Wall Street does business, this kind of crash will happen again. The only way to prevent us falling into another black hole is for government to take an active role in shoring up the market, to create sensible regulations that set up a level and fair playing field.

The major consequence of a free market is that the market is free to fail, and without government regulation, it inevitably will. That's what happened in the Great Depression, with the Savings and Loan scandal in the 1980s, with the tech bubble in the 1990s, and that's what's happening today.

Thus, the idea whose death we are witnessing is the "Reagan Revolution" - the idea that if you drown government in a bathtub, the water will overflow and quench the thirst of the masses. To put it another way,

The era of "the era of Big Government is over" is over.