Back in March, in a post called Savage Capitalism, I wrote the following.
A picture of what is really going on in the Shadow Banking System is beginning to emerge. It makes the coming slump much more troubling than those of the last 50 years. To begin with, we never had such large opaque pools of capital and derivatives before. The Growth of Credit Default Swaps (above) to more than $47 Trillion in the last two years is just one indication.
The Darwinian Laissez Faire world Alan Greenspan and Milton Friedman celebrated has failed us. We need to throw out our “End Of History” narratives that said the free market democratic capitalism represented the final step in political organization. I am not saying a command economy of the Fascist or Communist model is any solution. What I am saying is that we essentially need to reinvent capitalism in a way that tames the animal instincts that Ayn Rand (Greenspan’s intellectual mentor) celebrates.
Yesterday Larry Fink of Blackrock made a very clear statement that, “Any institution that manages over $5 billion should be regulated, whether it’s public or private, an insurance company, bank or private equity fund.”We have to bring the “shadow financial system” of off balance sheet SIV’s, hedge funds and private equity out into the light of transparency.
The second thing we have to realize is that the government will be a lot more enmeshed in the economy, not less. Rush Limbaugh and his band of brownshirts can rail all they want about “creeping socialism”, as this report from the frontline Republican Panic attack shows.
And Thursday, at a campaign town hall in Wisconsin, one Republican brought the crowd to its feet when he used his turn at the microphone to offer a soliloquy so impassioned it made the network news and earned extended play on Rush Limbaugh’s program.
“I’m mad; I’m really mad!” the voter bellowed. “And what’s going to surprise ya, is it’s not the economy — it’s the socialists taking over our country.”
Roubini makes clear some of the steps that will be needed. They all involve large sums of government investment.
a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
– massive and unlimited provision of liquidity to solvent financial institutions;
– public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
– a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
– a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
Fortunately as was evidenced by this morning’s oversubscribed Treasury Bill auctions, the world still wants to buy our government debt. The next twelve months will be very painful as America and the world rethinks what a fair economic system should look like. There will be lots of finger-pointing from Europe, Latin America and Asia towards the U.S. concept of capitalism and its role in the global recession we are about to enter. We need to be open to new ideas as to what the balance between markets and the public good actually is.