The epic deflation of Wall Street rolls forward like a blood-spattered
steam roller, claiming more important victims. It takes down noble old
names like Merrill and Lehman Brothers, destroys the savings of large
pension funds and mom-and-pop investors, throws tens of thousands of
financial workers out of jobs.
But let's not dwell on the downside. This is the process Joseph A.
Schumpeter famously described as "creative
destruction"--capitalism's way of clearing away debris from the past
so that new flowers may bloom. In this drama, what is being swept away
is the monumental arrogance of celebrated financiers, also the
fraudulent gimmicks that created lots of new billionaires by selling bad
paper to the world's investors. A great bubble of wealth grew in the
canyons of Wall Street--a run-up of falsified financial assets that
lasted for roughly twenty-five years. Now the air is rushing out of that
balloon, no way to stop it.
In the long run, the destruction of concentrated wealth and power is
always good for democracy, liberating people from the heavy hand of the
status quo. Unfortunately, many innocents are slaughtered in the
process. As the US manufacturing economy was dismantled by downsizing
and globalization, the learned ones (Alan Greenspan comes to mind) told everyone to breathe
easy--ultimately this would be good for the workers and communities who
lost the foundations of their prosperity. Now that "creative
destruction" is visiting the bankers, we now observe they are not so
accepting of their own fate.
The destruction of Wall Street's girth and power is unavoidable, in any
case. To switch metaphors, Humpty Dumpty fell off the wall and not even
the king's horses in Washington can put him back together again. It
would have been far better if the federal government and national
politics had recognized the great deceptions of Wall Street and put a
stop to them before catastrophe unfolded. Since that didn't happen, we
are all now doomed to take a perilous ride--the economy, the country,
the world--and hope for the best.
However, we can look forward to the new order that emerges from the
wreckage. The financial wizards who have dominated politics and economic
orthodoxy for a generation are unmasked, their delusions failed. We have
an opportunity to think anew, at least to hope that governing elites in
both political parties will finally come to their senses or, better yet,
get out of the way.
Last weekend's events come down to this: the authorities in Washington
and Wall Street finally admitted what they persistently brushed aside
during this year of turmoil and government bailouts. The Federal Reserve
and Treasury treated the financial system's problem as "psychological"
and assumed they could manipulate investor confidence by pumping lots of
public money into the embattled financial firms and banks. Financial
markets are gripped by desperate psychology--fearful people fleeing from
the consequences of their own reckless behavior--but the core of this
crisis is real and will not yield to happy talk from the authorities.
The long-running inflation of financial values and phony accounting
allowed by deregulation created an unworldly sense of new wealth. It was
essentially false and is now gradually receding, coming back down to
something resembling honest valuations. As a result, the financial
system has lost as much as $1 trillion in capital, maybe twice that
much. Wall Street will not truly recover until it has replenished that
capital--most unlikely, given the worldwide skepticism of investors. Or
it may grow smaller--shrinking balance sheets and employment, resulting
in fewer firms and less economic influence over the rest of us. When the
blood dries, people will be able to see this is good news for the
republic--a chance to rebalance our society and politics--but the road
ahead is going to be rough and uncertain.
Last weekend, the Fed and Treasury Secretary took a modest step toward
acknowledging the truth. They implicitly admitted that their rescues
have failed. If the government continued its psychological approach,
bailing out the big boys one by one, the public's assets and public
patience would soon be exhausted. Now we shall see whether financial
markets worldwide can endure the stern doctrine of "creative
destruction" that was so confidently imposed on others.