‘Problem with the US economy was government’s failure to control systemic risks it itself helped create’
SOME THOUGHTFUL, moderate American liberals are becoming increasingly worried about potential developments in a post-presidential election United States. That’s strikingly reflected in a leading editorial comment in The Washington Post of 20 October. Significantly, that was the same day The Post formally, though totally predictably, endorsed Senator Barack Obama’s bid for the White House.
Its lead comment – “Is capitalism dead?” – made more measured sense than anything else I’ve read in the mass inquest on the current global economic/financial crisis. It noted: “As financial panic spread, reality seemed to announce the doom of US-style free markets and President Bush’s ideology. But this is wrong, in two ways. The deregulation of US financial markets did not reflect only the narrow ideology of a particular party or particular administration.”
The newspaper added, vitally: “The problem with the US economy, more than lack of regulation, had been government’s failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of free markets but a crisis of distorted markets.”
The Post reminds most deregulation came, with huge bipartisan support, in the two presidential terms of Bill Clinton in the Nineties. It observed: “We’ll never know how this newly liberated financial sector might have performed on a playing field designed by Adam Smith. That’s because government intervention of all kinds, from the defence budget to farm supports, shaped the business environment.”
Then comes the key point made by The Post: “No subsidy would prove more fateful than the massive Federal commitment to residential real estate – from the mortgage interest rate deduction to Fannie Mae and Freddie Mac (public/private sector bodies created under the Democrats in the Sixties to promote widespread private home ownership) to the Federal Reserve’s low inter- est rates under Alan Greenspan.” It added: “Government support for housing was well intentioned. But when government favours a particular economic activity, however validly, it must seek countervailing controls to ensure the sustainable use of public resources.
“That is why banks must meet capital requirements in return for Federal deposit insurance. But Congress did not apply that sound principle to Fannie Mae and Freddie Mac. They were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee.” The Post stressed: “The result was that taxpayers had to assume more than US$5 trillion of their obligations.”
Leading US economics commentator Robert Samuelson puts more flesh on those bones. He observed: “Congress allowed Fannie and Freddie to operate with meagre capital. Congress also increased the share of their mortgages that had to go to low- and moderate-income buyers from 40% in 1996 to 52% in 2005.” Samuelson concluded: “That promoted sub-prime mortgage lending.”
In the immediate clamour, internationally and within the US, for a much greater, permanent role for Government in the financial sector, there’s a danger that all those soundly based reservations will be tossed aside. That’s why even some strong Obama supporters have long-term concerns about an over-mighty Democratic Party, much as they would still naturally prefer it to Republican governance.
But all the evidence at this stage points not only to comfortable election success for Obama but to a massive triumph overall for the Democrats, vitally including outright control of both the House of Representatives and the Senate.
However, it’s precisely that prospect that troubles some Democrats, especially those who know their American history. It’s the group that’s aware of the mostly unknown or forgotten “1937 recession”. The mix of causes of that severe economic downturn – which sent unemployment soaring and cut real gross domestic product nearly back to the level when Franklin Roosevelt won the presidency in 1932 during the “Great Depression” – is debatable.
But one factor that played a core role, certainly accepted by Roosevelt, was that vengeful anti-business, anti-capitalist sentiments loudly voiced by many Democrats in Congress between 1933 and 1936 greatly deterred new private fixed investment and much enterprise generally.
The current band of happy-but-uneasy Democrats just hope there will be no re-run of that. Elections in the US, as in virtually all mature democracies, are generally (but not always) overwhelmingly determined by centrist “swing” voters. They turn away from parties that are thought to have gone too far down a particular ideological route.
Clinton lost control of Congress in the mid-Nineties by pressing the party ideology pedal too hard. But then he learned and eased back.
The hope of moderate Democrats is that Obama, as president, will pursue the more conciliatory and politically wideembracing tack that he’s adopted since overcoming Hillary Clinton. That would also be best for the world generally.
Then – maybe – the US, Europe and Asia (and ideally Africa, too) can sing from hymn sheets with some central similarities. ¤