There has been a massive devaluation of our stock. To be sure the Dow Jones Industrial Average fell over 53 percent from a high of 14,165 on October 9, 2007 to 6,678 on March 9, 2009. And the stock of companies previously considered blue chip have fared even more dramatically worse: Citibank has lost over 95 percent of its stock value in little more than year. As Marx and Engels first noted, all that is solid melts into air. But it is not just the value of companies and stock markets that is plummeting; so is the intellectual stock of ideas that underpins the present crisis. Three ideas in particular are worthy of some note.
The first is the idea of small government. In his first inaugural address delivered on the west front of the US Capitol on January 20, 1981, Ronald Reagan said, “In this present crisis, government is not the solution to our problem; government is the problem.” No American president, or indeed any government leader this side of sanity, would use the same or similar words to address the present crisis. There is now recognition that markets left to their own devices can wreak havoc as well as bring economic growth. There is a sense that government is the problem solver of last resort when markets fail to work. Just as in the Great Depression of the past, so in the Great Recession of the present, we discover again that governments are important and have a vital role in economic growth and management. This recognition does not answer the question of what precise role the government should play. The continual reference to a New Deal is in many ways a clinging to the past. The original New Deal maintained monopolies, kept prices high and while it did reduce employment, it was always tinged with a narrow economic nationalism that needs to be avoided in the present circumstances of such a linked global system. So let’s have a new term to mark a new beginning, perhaps Global Compact or a nod to an even older reference, The New Social Contract.
New Deal Poster
The second idea that has lost value is the notion that deregulation is the cure for our ills. Markets are always embedded in cultures, societies and states, so there is really no such thing as a pure market. The call for deregulation was really a demand for an overturning of government oversight, mandated standards and systems of control. In the wake of the economic meltdown these now seem like good things; it as if we have rediscovered previously undervalued stocks that are holding their value in the present crisis.
The third idea is that financial globalization, especially the free flow of capital, is a good thing that needs to be encouraged by little or no controls. Unfettered, unregulated flows, especially of the more exotic credit swaps, hedge bets and futures trading, have been creating major problems for years. We had a preview of their inherent instabilities. There was the case of Nick Leeson, a trader in Singapore who brought Barings Bank to collapse with not very smart trades in Japanese stock index futures. In 1995 his losses reached $1.4 billion and the bank was declared insolvent. Then there the futures trader Jerome Kerviel who in 2008 cost the French bank Societe General $7.14 billion, about a fifth of its total capitalization. Both incidents were designated as problems of rogue traders whereas in fact they reflected, embodied, and predicted systemic failings of the entire system. We cannot say there were no warnings.
In the wake of all rapid devaluations we need to re-evaluate our intellectual stock portfolio. The blue chips of small government, deregulation and the unregulated flow of capital are failing and falling. We need to invest in some new, or in many cases old and undervalued, ideas that may give us a better return and create some longer lasting value.
