Fin de siècle

After several tumultuous days, it is now becoming fairly obvious that Congress will pass some form of bailout packagefor Wall Street, despite widespread public opposition. What this means is that a Republican administration is about to take part in the most dramatic economic intervention in U.S. history, one that flies in the face of traditional conservative economics, and which bears more than a little resemblance to European-style Social Democratic norms.

It also means we are seeing the definitive end of the Reagan era and its policies, which tended to favor free-market forces over government regulation. This is, perhaps, as it should be. Ronald Reagan was first elected in 1980, which was 28 years ago. The policies espoused by President Reagan in 1980 are no more suited to today's conditions than the policies of Dwight D. Eisenhower in 1952 would have been to the conditions of 1980--or the policies of Calvin Coolidge in 1924 would have been to Ike's time.

In short, we have reached the end of an era. The question now is simple: what will the next era look like?

There are no easy answers, particularly six weeks before a presidential election. There are a lot of things that can change between now and Election Day, both in the political world and in the world of Wall Street. To answer the question requires that we first take a look at two lessons that we have learned, somewhat painfully, in the last several days.

The first lesson is that free markets cannot be trusted to regulate themselves, because human nature, and therefore human greed, has not changed. It's like leaving children alone in the house with a box of chocolates on the coffee table, and expecting them to eat their broccoli. Without oversight, you will continue to see bad decisions being made by people who should know better, because they cannot help themselves in the face of so much money (this, by the way, is also an excellent argument for making sure that congressional oversight is built into any bailout plan). Our first task, therefore, is to figure out a way to guard against the greed.

The second lesson is that the government will always step in to prevent disaster, because it is in the public interest to do so, the alternative possibly being Great Depression II. What this means in the short term is that we will bail out the same people who were carrrying money away in buckets when times were good. This will require government money--i.e., our tax dollars--to be spent on companies that pocketed literally billions of dollars. Since the public will be subsidizing the losses, a way should be found for the public to benefit from any profits that may later arise as a result of the bailout, as otherwise we have privatized the profits but socialized the risk.