Where There Is No Vision

I have very little understanding of the nuts-and-bolts of the current financial crisis. One thing that the media covering the crisis could talk about more clearly (except maybe I think some of them don’t understand this issue and others do understand it and are very frightened about it) is the credit crunch and its possible consequences. This is the part that I think many Americans are not picking up on very clearly. It almost doesn’t matter why lenders stopped lending: the key thing is that they aren’t.

This doesn’t necessarily mean the bailout plan is the solution, as I read it, because it’s not entirely clear that this bailout or any bailout will affect this part of the problem.

Thinking about this crisis historically, the question I have is whether this situation is really best compared to a classic “bursting bubble”. I don’t think it is, though the collapse of the housing market is one of the things that precipitated this situation. If it were just another conventional popping of a speculative bubble, then I think it might be right to conclude that after some economic pain for those most exposed to that speculation, things would settle down and get back to some version of “normal”. This situation looks to me more like one of those much rarer conjunctures where some of the fundamentals underlying a political economy are in the throes of a significant transformation, where “normal” is about to pass through an alchemical process. Sometimes in cases like that, no institution that can actually restore the old normal, because by the time a wrenchingly transformative crisis is visible, it’s too late.

Sometimes it’s possible in those kinds of convulsions to engineer some new structure to rise out of the ashes. Sometimes it’s not. This is the political vulnerability that the bailout plan suffers from most. The plan wants to save a dying patient, and so the planners have all the impatience of an emergency room surgeon with questions about whether the patient will be able to resume a healthy life afterwards. Sometimes that’s what everyone really needs to know: what will happen after? The bailout planners need to operate on two levels now: medicine for the dying, but also a long-term vision for a better, stronger patient if emergency measures succeed now. Absent that, a lot of the public, not to mention some politicians, seem to prefer a DNR tag.

Somebody–and I take it for granted that it won’t and can’t be George Bush or most of the Republican leadership–needs to talk comprehensively about the regulatory and institutional world down the road a bit, well beyond little fripperies like highly qualified and targeted limits to executive pay. What, for example, is the government willing to do in order to insure that there are safe havens for investment where you are not an unwitting counterparty to some firm’s heedless risks? What limits are we going to put on the right of individual firms or even a whole economic sector to put our nation or the world all in profound danger? How will we impose legal or economic consequences on risk-takers in the future so as to change the way they evaluate their personal and institutional exposure to high risks? We’ve been very free for three decades to dictate strong economic and political medicine to the clients of development economics. Who’s going to step up and talk about what kind of prescriptions we’re going to have swallow ourselves? It’s past bedtime for the political infants now. Grown-ups only.

I want to hear the same things now that I want to hear about the Iraq War: less “when will you withdraw” and more “what will you do to change the way we go to war in the future”? I don’t hear anyone really talking in those terms about the financial crisis, except for vague blather about regulation and making a few heads roll here and there.

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2 Responses to Where There Is No Vision

  1. nord says:

    Due to the fact that it is an election year, you won’t hear the thoughtful quiet discussion of those issues. Too much is at stake (politically), and both sides feel that they can score easy/cheap political points on the issue. Personally I don’t think the issue divides Rep/Demo too easily, but that is how the media, aided by politicians, has tended to view this.

    My 2 trillion: you have to correctly define the problem in order to evaluate changes. IMHO, that depends on who wins in November – they will write the narrative of what went wrong and therefore what the solution is.

    Is the problem that broker-dealers failed and because of counter-party risk, etc. the Fed, Treasury and gov’t had to organize a bailout?

    Is the problem that over-eager lenders, aided by over-eager home appraisers, builders, lent money to over-eager buyers who wanted to “flip” a house for a quick buck?

    Republicans and democrats have a role in both of these problems. Regulatory arbitrage was a big part of the problem that neither party wants to discuss – broker-dealers getting an easy ride from the SEC or mortgage brokers/lenders totally avoiding the existing banking regulation system through securitization. Fannie and Freddie have a large role and paid a pretty penny for their years of lax regulation from OFHEO – they got away with a lot of stuff than Sarbanes Oxley would have prevented had fannie and freddie not be exempted by Congress.

    Tell me who wins in November and I’ll tell both what the narrative will be and what the prescriptions will be 😉

  2. Timothy Burke says:

    I agree that the political class as a whole has a common hand in this, but honestly, I really feel the Administration and much of the Republican Party rank-and-file have some special culpability along several lines.

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