THE FINANCIAL MARKETS’ DEBACLE:  LESSONS LEARNED SO FAR?

• First, we have learned something about American capitalism.  In the book of Ecclesiastes 7:10 is this counsel:  “Do not say, ‘Why were the old days better than these?’  For it is not wise to ask such questions.”  I begin with this verse because I have heard countless commentators and others yearn for the good old days of Ronald Reagan.  That sentiment is certainly understandable.  But we cannot go back in history; to long for those “good old days” is not wise.  But we can ask, “What went wrong?”  As Francis Fukuyama recently observed, the Reagan revolution in terms of the economy was rooted in two propositions:  That tax cuts would be self-financing and that financial markets would be self-regulating.  Hence, Reagan instituted massive tax cuts and economic growth exploded.  The problem was that there was not a significant reduction in spending, so deficits—huge deficits—resulted.  That view on tax cuts continued into the Bush years and foreign investors and governments have been willing to hold American dollars, which permitted the US to amass huge deficits while enjoying significant economic growth.  The second pillar, financial deregulation, was pursued with an equal fervor.  Wall Street firms heartily bought into this view, as did the Democratic Party.  But as Fukuyama correctly argues, “. . . deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis.”  He goes on:  “Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people’s money.  The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well. . .”  An early warning was the Asian financial crisis of 1997-1998.  Nations like Thailand and South Korea, following American advice and pressure, liberalized their capital markets in the early 1990s, which created a speculative bubble, which eventfully burst.  Further, as America began to amass huge structural deficits, China and a number of other nations began buying US dollars after 1997 as part of a “deliberate strategy to undervalue their currencies, keep their factories humming and protect themselves from financial shocks.”  The result was staggering and mounting trade deficits that are simply unsustainable.  What lessons therefore have we learned?

1. We must be realistic as a nation.  Given the long-term nature of this financial crisis, Americans and their elected representatives must face the reality that a tax increase is inevitable.  Our current presidential candidates are engaged in the “fantasy politics” of talking about cutting taxes for 95% of all Americans!  How ludicrous!!!
2. We must examine the entire matter of regulation.  We must reestablish the trust and confidence that is the bedrock of a sound financial system.  But as Tom Friedman has argued:  “[Government] must regulate the excesses without smothering the underlying innovative, entrepreneurial and risk-taking attributes of our economy, which are what will ultimately bail us out. . .”

The Reagan revolution broke the 50-year dominance of liberals and Democrats in American politics and opened up room for different approaches to US tax policy and governmental regulation.  But the outworking of both of those “different approaches” led to excess and ethical failure.  So, the American model of capitalism and its free market must reinvent itself again.  We cannot go back to an era of creating more entitlements and dependency on government.  We must foster free trade and the free market, but in a way where government insures that all of this is occurring in an atmosphere of honesty, integrity and sound rules of economic engagement.  In other words, we need strong leaders who will tell us the truth, formulate reasonable and workable policies and cast a vision for our economy and the sensible role of the US government in that economy.  It all comes back to the immense vacuum of leadership currently in Washington, D.C.  But what are our presidential candidates talking about?  As Steven Pearlstein has correctly and poignantly observed:  “Rather than talking about sacrifices, the candidates [during the second debate] got into their most spirited exchanges while trying to outdo each other in proving that he would be the most aggressive and committed in cutting taxes for most households.”  Neither candidate is challenging the typical American household that perhaps we all have a role in creating this culture of debt; that perhaps all of us have been living beyond our means!  Neither candidate has shown sufficient urgency about the problems we now face as a civilization, nor familiarity with the scope and details of this crisis.  Both are thoroughly engaged in fantasy politics.  The American people are looking for leaders who are candid and honest in their assessment of our current situation.  Neither candidate is doing that.  Both are being manifestly dishonest and unrealistic.  Both seem to lack the ability to demonstrate a full grasp of how serious this crisis really is and provide the inspirational leadership needed to lead us out of this mess.  Both men are contributing to the cynicism and lack of trust in leadership so pervasive in America right now.  May God give us leaders who can lead with integrity, not fantasy and lies!  See Fukuyama’s helpful essay in Newsweek, (13 October 2008), pp. 28-32 and Thomas Friedman in the New York Times (12 October 2008).

• Second, this crisis tells us much about the united Europe.  Since much of Europe adopted the euro as its common currency, European leaders have pledged tight coordination of financial polices, as well as political integration.  But during the last few weeks, at the height of this crisis, some of the 27 nations that comprise the European Union (EU) have broken ranks, opting for polices that promote self-interest, not EU unity.  Indeed, Stephen Tilford, chief economist of the Center for European Reform, argues that “This is unprecedented.  It has exposed the limits of European integration and coordination when presented with a crisis of this magnitude.”  There is no EU finance ministry comparable to the Treasury Department in the US.  In short, the EU and its response to this massive financial crisis point out rather powerfully the dilemma of fostering a federated union of 27 nations while at the same time attempting to preserve the sovereignty of each of those 27 nations.  The EU economy as an integrated entity is massive with a GDP greater than that of the US.  But, the EU still lacks a unified will and purpose and this financial catastrophe points out the tension within the EU.  See Nicholas Kulish and Graham Bowley in the New York Times (8 October 2008) and Steven Pearlstein in the Washington Post (8 October 2008). 

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