End of an Era

by Amando Doronilla, of the Philippine Daily Inquirer

WRITING for the Financial Times (Sept. 20-21), Chrystia Freeland said that on Sept. 15, 2008, “the era of Ronald Reagan officially came to an end.”

The sunny confidence in the superiority of the American way, she said, “has been undermined now not only by Guantanomo and Abu Ghraib but also by the fact that this financial crisis has its epicenter on Wall Street, not Mexico City or Mumbai.”

She added: “Even more importantly, after nearly three decades when the prevailing promise was to make government smaller’ … the focus now will be on making government better, and probably bigger.” She marked Sept. 19 as “the first day of a new era of re-regulation.” That day revealed how terrified America had become, she said, “when Hank Paulson, secretary of treasury, proposed the creation of a monster agency to buy up potentially hundreds of billions of dollars of bad debt… [His plan] which would have sounded terrifyingly radical a week earlier seemed so obviously necessary it won instant, bipartisan support.”

She was referring to the plan, announced by US President George W. Bush over the weekend, to ask Congress for authority to buy $700 billion in toxic assets clogging the US financial system and threatening the economy in what was billed as the largest bailout since the Great Depression. The plan has been hailed as the “largest economic rescue in modern times” that could redefine “Washington’s role in the marketplace for years.”

The International Herald Tribune reported that the architects of the plan—Paulson and Ben Bernanke, chairman of the Federal Reserve—“have cast aside the [Republican] administration’s views about regulation and government in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.” In justifying the overturning of conservative orthodox creed on the hands-off relationship of the state with private business, Bernanke was reported as saying, “There are no atheists in foxholes and no ideologues in financial crises.”

The week that “changed Wall Street forever” opened on Sept. 15, Monday, when Lehman Brothers, the fourth-largest Wall Street investment bank filed for bankruptcy protection, after US Treasury and Federal Reserve officials refused to bail it out following three days of furious negotiations conducted amid attacks on its share price and rumors it would collapse. On the same day, its rival Merrill Lynch agreed to be bought by Bank of America. On Sept. 16, the US government announced an $85-billion emergency loan to rescue American International Group, saying that the failure of the insurer could hurt the already delicate markets and the economy. The Federal Reserve’s bailout of AIG came nine days after the government nationalized two other giants of the financial system, Fannie Mae and Freddie Mac, which have been hit hard by the collapse of the US real estate market.

Agence France-Presse reported that through these bailouts, the federal government “would become the biggest hedge fund on the planet.”

In a variation on the theme of a sharp turn away from unfettered free-market capitalism, Asian economists put their own twist. “What we’re seeing today is what I call the end of the Reagan revolution: the ideology that the best form of government is the least form of government,” Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy in Singapore, told reporters in Manila last week. He said the financial turmoil showed the need for proper government regulation, but it also raised questions on the quality of regulators. “We’ve come full circle,” he said. “We now realize that you need actually good governance and good regulations and you cannot just let the market run the show.”

This perspective comes from a country with a fetish for regulatory rules good in the administration of its capitalistic system.

In Europe, where governments are more interventionist than the US government, there were questions about whether the US conventional model had been undermined by the financial crisis. The International Herald Tribune quoted Ron Chernow, a leading American financial historian, as saying, “We now have the irony of a free-market leading Republican administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.”

“From the opponents of free markets in Europe and elsewhere, this is a wonderful opportunity to invoke the American example,” said Mario Monti, the former antitrust chief of the European Commission. “They will say that even the standard-bearer of the market economy, the United States, negates its fundamental principles in its behavior.”

Monti said that past financial crisis in Asia, Russia and Mexico brought government to the fore, “but this is the first time it’s in the heart of capitalism, which is enormously more damaging in terms of the credibility of the market economy.”

In France, where the state has a strong interventionist role in the economy, officials pointed to the paradox of what they considered as “essentially the nationalization” of the largest American insurance company. The French state supports the creation of “national champions” and protects select companies from the threat of foreign takeover.

“Today the actions of American policymakers illustrate the need for economic patriotism,” said Bernard Carayon, a member of the National Assembly representing President Nicolas Sarkozy’s center-right governing party UMP.