Finance and irresponsibility

May 20, 2009|By ALLAN POWELL

On the first program of the new year of 2009 (Jan. 4), John McLaughlin, the feisty moderator of "The McLaughlin Group," made a bold prediction: American capitalism would undergo a significant alteration in the coming year. Since then, a literal "flood" of analysts have written columns of support for this thesis.

McLaughlin suggested the term "managed capitalism" to describe this altered politico-economic arrangement. This shift leftward, it is asserted, is the consequence of the failure of the free market economy which brought about massive financial aid dubbed "Wall Street Socialism" and "Corporate Welfare" by critics.

Kevin Phillips, a well qualified economic historian has authored a fine book which gives perspective on our current economic woes. In "Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism," Phillips lays bare the roots of this multifaceted economic meltdown. First on his list is the deliberate favoritism given to financial institutions to the detriment of the nation's manufacturing interests.


This was partly achieved by the Financial Services Modernization Act of 1999 that voided the legal separation and removed the restraints formerly required of banking, insurance and mortgage lenders. To appreciate the importance of this law one must understand that it is the closing chapter of a process that began in 1791 when Alexander Hamilton penned a now famous report to Congress. Hamilton made the case that it was in the national interest to give more encouragement to manufacturing because it was a more reliable source of internal development.

Hamilton's pleas were successful. Manufacturing overtook agriculture as a measure of national wealth. But in turn, manufacturing was replaced by the dominance of finance. In 1950, manufacturing accounted for 29.3 percent of the gross national product while financial services provided 10.9 percent. In 2005, manufacturing accounted for 12 percent of GDP while financial services reached 20 percent.

However, this rise to prominence was lacking in moral sensitivity or social responsibility. It is generally accepted society will now demand more transparency and accountability on the part of residents in the plush hall of finance. Mega banks may be then regarded as public utilities because they are too big to let fail. Housing loans will surely get more scrutiny and subprime loans will be a thing of the past.

Phillips embellishes the idea of a "managed economy" to mean "financial mercantilism" typically associated with European economies. Accordingly, there is more "socialization of risk" and a reduction of the "privatization of profit" in those economic structures that are a threat to economic stability when they fail.

Naturally there will be considerable resistance to such a turn of events. Those who shouted loudest about the virtues of a "free market" were the first in line to plead for government assistance when they faced ruin. They were vocal in deploring any raise in unemployment insurance, and any increase in minimum wages.

It is too early to predict the extent of any basic adjustments anticipated by John McLaughlin or Kevin Phillips. But, it is predictable that legislators are not immune to the pressure to reform those elements of our business transactions which threaten the stability of our economy. If our past experience can be used as a guide, we will be completely pragmatic and make just enough reforms to work through the present meltdown. Certainly, some re-regulation and new regulatory laws can be expected. Such is the ebb and flow which is natural to our economic evolution.

Allan Powell is a Hagerstown resident.

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