not economically. Those are not my words. Nor are they the word's of op ed writer Roger Cohen, although appear in his column today, entitled The Fleecing of America. They are the words of the man as important as any other in solving the current crisis, House Financial Services Chairman Barney Frank of MA. And the context in which Frank offered them is important, and thus where I want to start:
I asked Frank why Paulson and Ben Bernanke, the Federal Reserve chairman, did not get more foreign support. "I think it’s a perverse pride thing," he said. "We don’t ask for help. We’re the big, strong father figure. But let’s be realistic: we’re no longer the dominant world power."
So what does that mean? Damned if I know, but it is part of what I think we need to explore.
We have the lead responsibility for one is potentially the downfall of the entire international financial system. As I write this, shortly after 5:30, Asian markets were up, but after the FTSI opened up a tick in London, European markets are down, perhaps waiting to see how the various parties will address this. The parties here. Let me quote again from Cohen:
Let’s be clear: this is an American mess forged by the American genius for new-fangled financial instruments in an era where the mantra has been that government is dumb and the markets are smart and risk is non-existent. The responsibility for undoing the debacle is chiefly American, too.
But we live in such an interconnected time that we cannot isolate major financial problems to the economy of a single nation: we are all interconnected, which is perhaps why Jon Alter's words to Keith Olbermann last week are so appropriate" "We are all socialists now." Governments have to intervene, the market is insufficient to correct itself - if it ever was.
I will return to what Cohen offers anon. But I find myself remembering my reading Adam Smith back in college, and recalling that his primary gig was as a moral philosopher. OF greater importance, I remember that one necessary precondition of the functioning of markets as he conceived them was perfect information. We can argue whether American markets, for financial instruments, industrial products, or consumer goods, ever came close to such an ideal. There can be no doubt that the explosion of unregulated derivatives abandoned any notion of perfect information, as removed as they were from the underlying assets: those buying or selling could have no concept of the value of assets which supposedly secured the paper. It did not matter whether it was packages of loans or credit swap defaults - trillions of dollars were committed with no way of determining the real value of what was thereby obtained, by purchase or by guarantee.
Keeping that in mind, I ponder this: as we acknowledge the need for some intervention to prevent what could be a total meltdown in no more than on to three sessions, should not we be insisting on greater information that the dearth that led in part to our current crisis? Even was we reregulate and assume greater government - and hence societal - responsibility for risks already incurred, do not we have a desperate need to know all, to insist on recapturing improperly gotten benefits by those who, having more access to information than the people from whom they obtained their beneifts, had an unfair advantage and hence should not be entitled to what are now clearly ill-gotten gains, even if thanks to the Phil Gramms of the world what they did might have been technically legal?
And one more thought before returning to Cohen. Paulson opposes limits on executive compensation on the grounds that we need the cooperation of the corporations in bailing them out. Excuse me? Shouldn't the choice be whether the accept such limitation or risk losing what they already possess with the possibility not only of disgorging ill-gotten profits but also of facing additional fines and criminal sanctions? If the administration can pull out a Gold act from the 1930s to attempt to manage the situation, I am sure creative legal minds can find ways to confront the greedy bastards who bear a large responsibility for what has happened. The attitude that they were smart and the rest of us were stupid is illustrative by itself of how Smith's principle of perfect information did not exist, and should be grounds for seeking appropriate recompense for bailing them out.
Now back to Cohen. It was not just US institutions peddling mortgaged-backed securities, the pin that when pulled exploded the grenade of our overly securitized finances. Plenty of overseas banks fed at that trough. And in part the bailout of AIG came because of screaming of finance ministers from other nations.
And other nations should have skin in the game. As Cohen quotes Barney Frank,
""I don’t think the European Central Bank should be free to spend the Federal Reserve’s money and not put any in."
After all, the US has helped bail out the Russian economy a number of years ago, and during Rubin's tenure as Secretary of the Treasury we led in saving the Mexican economy. Now other countries are the ones with massive reserves, China with $200 million in a sovereign wealth fund and $1.8 trillion in the Central Bank, and Brazil with more than $200 billion. Cohen thinks we must acknowledge this reality:
The world has changed in the past decade. There’s been a steady transfer of wealth away from the United States in a shift most Americans have not yet grasped. But there has been no accompanying transfer of responsibility. New powers are free-riding as if it were still the American century.
We have a hard truth to face. We are no longer in a position where we have sufficient resources to fix the world. Hell, we lack sufficient reserves to bail out our own economy unless we get meaningful cooperation from other nations. In part this is because of our own arrogance. That arrogance is most clearly seen in our aggressive - and expensive - continued intervention in Iraq, at an increasingly staggering cost to the American taxpayer. But it has also been evident as we have leaned on other nations to protect our political and military figures from appropriate sanctions under international law. And it has certainly be evident in our unwillingness to do much beyond attempt to impose our way of doing things upon the interrelated economic structure of the world. Perhaps that is why some in other nations might be tempted to let us stew in the ever-hotter juices of our own making.
Our financial houses, government, business and personal, have not been in order for several decades. This is not just something that has occurred during the past 8 years, although the problems have certainly been exacerbated. We have fueled our lifestyles with borrowing - on credit cards and home equity, by the government selling bonds to China to by oil from the Persian Gulf, on a level of military expenditures that almost every other country has been wise to give wide berth. Now? We can not impose militarily, nor can we do so economically. We must achieve cooperation or else risk domination, at least economically.
Our current political rhetoric does not reflect this new reality. That is true of both presidential candidates. It is true of both political parties. And it is far too true of the major voices of pundits and editorial pages.
We're no longer the dominant world power - and I have to wonder: if we still refuse to accept that reality will it be possible for us to truly fix the problems that have caused the current crisis?
Peace.