Most economic commentators who parade before the CNBC cameras tell us that the market will come back because (1) recessions in the past have lasted so many months on average, and based on that we may expect a recovery in early 2010 (2) the Dow Jones Industrial average has in previous bear markets declined by such-and-such a percent, and based on that we are almost at the bottom. History is the great teacher, and history tells us that a new up cycle will soon make everything all right.
Readers of this blog know that for the past year I have been warning everyone to stay clear of the stock market. Go back, if you must, and reread The Fed Caves (8-18-07), The “What, Me Worry?” Economy (7-26-07), The Great Buying Opportunity (4-12-07), Overmalled (10-29-07), The Next Bubble (2-21-07), The End of the Game (7-14-08), and Calling a Spade a Spade (4-7-08). I am not an economist, so I got it right. Economists, almost by definition, worship economic history.
What makes this time so different? China, for one thing, makes it different. China not only as competitor, but as financier. The people who are hastily cobbling together the $700 billion bailout plan initially decreed that only U.S. banks could be bailed out. Then someone whispered that if we stiffed China and other sources of sovereign wealth they might be reluctant to lend money to us. Oops.
After years of hectoring China and Russia for an economic system that smothered innovation, they got the message. They and others decided to play the game, and they are good at it. They are not so good at human rights, so now we hector them about Tibet and Georgia. But not too loud, because we need their money (China) and oil (Russia).
A few years after Tiananmen Square, I found myself in Beijing, talking with a bright young college graduate who had been present at the student uprising. I wanted to know whether in her opinion the country could revert to the old system, stamping out entrepreneurism, “There is no chance,” she said. “There is no turning back now.”
So here we are, with China and Russia, two former communist adversaries, both racing down the capitalist track, while the United States is about to nationalize much of its financial system. They move to the right, while we abandon what is left of laissez faire and turn leftward. The Administration tells us that we have no choice, that if we don’t rescue the banks we face Armageddon. (The parallels with the “mushroom cloud” scenario that provided the rationale for invading Iraq are obvious.) High drama in Washington and New York, the stuff of action films starring Denzel Washington.
Congress will oblige, because most Congressmen accept the fact that they don’t understand the arcana of modern finance - but Paulson and Bernanke do. Hank Paulson is regarded as a financial guru, because he was once Chairman of Goldman Sachs, the largest and most successful investment banker on Wall Street. You might think, after recent events, that fact in itself would disqualify him, but you’d be wrong, unfortunately.
The situation is just as dire as Messrs Paulson and Bernanke paint it, but the solution they propose is a stake in the heart of capitalism. The United States has turned a corner, and, as my young Chinese friend said, there is no turning back. Who knows where it will lead, when retirees depending on “defined contribution” pensions find their nest eggs gone, when the government owns millions of foreclosed properties for which there are no buyers, when unemployment jumps because companies can no longer finance expansion, when hundreds of thousands of troops come home looking for jobs that aren’t there?
We are headed inevitably to a world where the government will be the employer of last resort, the financier of last resort, the health-care provider of last resort, the mortgage provider of last resort. This time it really is different.
