I wish I knew who was the American President who, confronted with a meddling bureaucrat, said “Don’t just do something. Stand there!” Perhaps it was Calvin Coolidge, perhaps the only U.S. President who was also a translator of Dante. In any event, I have thought often of that sage advice this last week or two while contemplating the spectacle of the duly elected representatives of this great country strut and fret their hour upon the stage as (or so we were told) financial catastrophe threatened to engulf the world.
It is part of the genius of the American political system that it can withstand mediocrity or worse in high places. As Alexander Hamilton [oops. Imeant James Madison!] noted in Federalist X, “enlightened statesmen will not always be at the helm,” and any democratic system worth its salt must provide for the ascendency of obtuse, petty, grandstanding partisan hacks. The 110th Congress of the United States, its approval rating hovering somewhere south of 10 percent, shows that Hamilton [that is, Madiosn, see above] did not plan in vain. Did we really elect these people to represent our interests? What were we thinking?
Of course, it is not only feckless members of Congress who have been provoking such bemused questions. The steely-salt taste of contagious panic has elicited all manner of silliness. Probably the stupidest trope to emerge is that the present financial panic somehow “discredits” capitalism, at least American capitalism, and that the economic fantasies of Karl Marx are set to make a comeback. You hear the former from such exalted personages as the German foreign minister and Nicolas Sarkozy, the President of France. Capitalism should be “regulated,” insists President Sarkozy, neglecting the detail that Capitalism is already very highly regulated. It needs to be “refounded” on a “moral basis,” he and the German foreign minister say, forgetting that a mechanism for the production of wealth is a mechanism for the production of wealth, not a family, church, court, or legislature.
Step back for a moment from the question of whether the trillion-dollar “bailout” is a good idea. I admit to having grave doubts about it, especially when we saw a three-page document mushroom into a 451-page pork sandwich (honey glazed with sweeteners) at the hands of the Senate yesterday. But leave that to one side. Perhaps this expensive effort at first aid–or is it life-saving CPR?–was justified, though if it is time, if it is a little breathing space for companies with “distressed” balances sheets, that was needed, why not begin be relaxing the “mark to market” accounting rules that have just enacted one of the most spectacular financial disappearing tricks in the the history of money? An asset that was worth a $1 billion yesterday is not worth $0 today, and to pretend that it is just because there is not a buyer right now, today, is an example of financial pedantry if not financial terrorism.
In 1982, the Dow Jones Industrial Average stood at 700. That’s seven hundred. Over the next 25 years, the engine of democratic capitalism went into overdrive. There were hiccups and recessionary spells–in 1987, remember, the market lost some 25 percent of its value in one day–but from 1987 to the day before yesterday we saw the greatest, and longest, period of sustained economic growth in history.
The current pandemonium on the Wall Streets of the world is not due to a failure of the free market. It is due to a failure to observe the rules of the free market. In The Wealth of Nations, Adam Smith noted the paradox, or seeming paradox, of capitalism: that the more individuals were left free to follow their own ends, the more their activities were “led by an invisible hand to promote” ends that aided the common good. Private pursuits conduced to public goods: that is the beneficent alchemy of capitalism. Friedrich Hayek’s fundamental insight, enlarging Smith’s thought, is that the spontaneous order created and maintained by competitive market forces leads to greater prosperity than a planned economy. But in recent years the “invisible hand” that adjudicates among competing interests to produce the most efficient channels of economic growth has increasingly been replaced by the heavy hand of government-sponsored social engineering. One especially onerous one is in the form of the Community Reinvestment Act, which, in its fully-developed, post-1995 form, was a gigantic wrench tossed into the engine of capitalism that stymied the orderly evaluation and pricing of risk. It’s one thing to give Chris Dodd or Barack Obama a sweetheart mortgage for favors rendered. It’s quite another to force banks to issue more than $1 trillion of risky mortgages to people with bad, or no, credit history and then prop them up with taxpayer guarantees through the agency of entities like Fannie Mae and Freddy Mac.
So much of the health of a capitalist economy resides in a seemingly intangible but obviously very real commodity: confidence, the psychological enabler of risk. The financial news has been full of stories about the “flight to safety” on the part of individuals and institutions. The irony, of course, is that the flight is only a time-buying maneuver. The “safety” sought is ultimately dependent on the dynamism of the whole, which means that today’s safe investment is tomorrow’s prelude to financial uncertainty if not, indeed, financial panic. Simple prudence may have dictated the initial flight to safety. But hoarding is both an unattractive personal quality and, ultimately, an imprudent financial strategy. There is a lot of cash sloshing around the world’s economy now. It’s time to put it back to work.
I mentioned the Danish philosopher Søren Kierkegaard in my title. I had in mind a passage from his anatomy of despair, The Sickness Unto Death–not, I have to admit, one of the world’s cheeriest volumes. But in his description of a certain form of defiant despair, Kierkegaard says something that I think has pertinence to our current situation. The species of despair he has in mind here (for despair, like most human follies, comes in manifold varieties) shows itself as a revolt “against the whole of existence.” “It is,” says Kierkegaard,
as if an author were to make a slip of the pen, and that this clerical error became conscious of being an error . . . . [I]t is then as if this clerical error would revolt against the author, out of hatred for him were to forbid him to correct it, and were to say, “No, I will not be erased, I will stand as a witness against thee, that thou art a very poor writer.”
An unproductive attitude, I think you will agree. But does it not illuminate something about the emotional weather on Wall Street?