walter russell mead peter berger lilia shevtsova adam garfinkle andrew a. michta
Published on: May 24, 2010
The Top Ten Lessons of the Global Economic Meltdown

The world economy is like a person with a bad stomach flu; that horrible sick feeling keeps coming back.  In 2008 it was mortgage-backed bonds and the failure of Lehman Brothers; last year it was the worst recession since the 1930s; this year it’s the European financial crisis.  We still don’t know where this is going; there is plenty of good news out there.  The National Association of Business Economists is upgrading its growth forecast for the US in 2010; China remains strong; the IMF is upgrading its growth forecasts worldwide.  On the other hand, some of the world’s smartest investors are buying gold like there was no tomorrow, there is talk about a new global meltdown, and the world’s financial markets seem ready to plunge on the slightest whiff of bad news.

It is still too soon to tell whether we are in the recovery phase or whether the global economy is still getting sicker.  Already hundreds of millions of people around the world have lost their jobs, lost their homes, changed their retirement plans, pulled kids out of school and made other adjustments.  Even those who’ve kept their jobs and homes are suddenly aware how fragile prosperity is.  Government employees across Europe and North America wonder what will happen to their pensions; private sector workers are braced for new layoffs, and getting used to life in a more insecure and volatile job market than they once expected.

Allegory_of_Tulip_ManiaFlora’s Wagon of Fools, an allegory for the 1630s Dutch Tulip Bubble.

But even if we don’t yet know where the economy is headed, we’ve already learned some important lessons about where we stand and where we are headed.  Here are the ten most important so far:

1.  The American Century isn’t over.

When the crisis first hit, commentators and pundits around the world fell all over themselves to declare the “post-American world” and the “end of the American era” to argue that the financial market panic meant the collapse of American power.  This was junk commentary, the kind of mistake people make when they don’t take history seriously — or when they let their hopes and fears get ahead of the facts.  For more than 350 years, the big story in world history has been the rise and development of a global economic and political system based on liberal capitalism resting on the power first of Great Britain and now of the United States.  Those same 350 years of history have seen one financial panic, one economic crash after another.  The United States in particular has a turbulent financial history, and some of the worst crashes came during the 50 years after the Civil War when the United States established itself as the largest and most advanced economy in the world.  Fareed Zakaria has a piece in the Washington Post making the point that the US has come out of the crisis stronger than anybody expected; the fat lady hasn’t sung yet and the American era is still here.

2.  Liberal capitalism works.

If half the world’s commentators and pundits spent the last 18 months announcing the collapse of American power, many of the rest spent their time hailing the death of the American capitalist model: Piratical ‘Anglo-Saxon’ capitalism was obviously less effective than the more civilized, more humanistic model of, say, Europe.  Wrong again.  The crisis did what crises usually do: it tested the world’s companies, governments and currencies to see what they were made of.  The preliminary results of that test are now in, and the United States again looks surprisingly healthy.  The dollar held up well during the crash; when the chips were down investors still thought America was the best place for their money.  America’s flexible labor markets meant that a lot of people lost their jobs, but also that the recovery would start more quickly here.  The overwhelming lesson of the crash for Europeans is that they need to accelerate Europe’s slow and painful shift toward a more liberal form of capitalism.  Europe’s socialist parties in Spain and Greece are introducing hated liberal reforms because, as Margaret Thatcher put it long ago, “there is no alternative.”

3.  The rogue states are parasites.

It may seem unkind or gloating to say so, but the point needs to be made: the pathetic pretensions of regimes like the ones in Iran and Venezuela to some kind of world leadership have been cruelly exposed.  The governments of these countries are parasites on the global economy and far from representing alternatives to the global model, they are entirely dependent on capitalist success.  When the global capitalist system is booming, the price of oil goes up and Venezuela and Iran have the cash for subsidies at home and adventures abroad.  When the hated global system goes bust, Venezuela and Iran go broke.  The leadership of these countries are like adolescents criticizing the bourgeois habits of the parents they sponge off. Both Iran and Venezuela have immense potential to help shape world civilization and culture in the twenty first century, but to make that contribution they will have to use their oil wealth to join and help shape the world system, rather than using it to feed the egos and illusions of their leaders. 

4.  The old left is dead.

Not even a global economic crisis can breathe new life into the world of Marxian socialism.  Not only have most European countries moved to the right since the crash; the developing world has not seen any serious revival of ‘proletarian socialism’ in response to hard times.  The world’s surviving ‘communist’ regimes continue to hold power by claiming credit for the successful management of increasingly capitalist economies.  If you look hard, you can find a noisy fringe calling, say, for the nationalization of the banks or other old left responses to the crisis, and there are lots of places where people are protesting government austerity programs, but there is not a single free country in the world where serious political parties argue that socialist transformation will cure the economy’s ills.  Increasingly, the politics of resistance and protest come from the right (and that isn’t always a good thing).

Greek_Austerity_ProtestsGreek Austerity Protests

5.  Nobody really understands the world economy.

Sad, but true.  For all the math and the theoretical models, economics remains an intellectual discipline rather than a predictive science.  That is unlikely to change.  Just as all the computer models in the world can’t tell you what the stock market will do tomorrow, all the world’s economists working together can’t tell you when the next crisis will come — or what you can do to avoid it. At any given point of time there will be economists predicting a crash and economists predicting good times along with every variant in between; some of them are bound to be right but so far this looks more like timing and luck than the repeatable and testable result of demonstrably better methods.  The economics profession is full of dogmatic and pompous heretic hunters of all stripes, but as a group they are no better collectively at prediction than a similarly dogmatic and contentious group of medieval clerics.  This doesn’t mean that economics is bunk (any more than theology is bunk); systematic and rigorous reflection on human economic activity yields many useful insights and an education in basic economic ideas remains an essential piece of intellectual equipment for any serious person.

Economic outcomes remain hard to predict not because economists are stupid (they aren’t, by and large) but because the world economy is continually in flux.  Facts change; China rises, new industries emerge, under the influence of new economic ideas, central bankers and investors change the way they behave.  Investors and entrepreneurs have mood swings: too optimistic in 2007, too pessimistic in 2008.  All this change feeds back into the world system in unpredictable ways.  Economics can help us understand what is happening and give us more sophisticated tools for investigating the unknown — but it cannot protect us from uncertainty and risk.  The “unknown unknowns” will always be with us.

This means, among other things, that we are no closer to eliminating panics and crashes than the Dutch were in the wake of the Tulip Bubble.

6.  That goes double for financial markets.

Financial markets are even more volatile than the real economy.  Economists predict, with varying but rarely satisfying results, the behavior of the real economy.  Few are so foolish as to predict the behavior of financial markets (and those who do often lose a lot of money).  There are good reasons for this.  Psychology of course plays a major role in short term fluctuations, and crowd psychology is so far at least largely beyond our power to predict.  But there is more.  Change in financial markets has been accelerating dramatically with the improvement of computers, communications and software.  The avalanche of new securities products during the last twenty years transformed the way global financial markets work.  The crash set this process back for a while, but it is sure to resume.  Both borrowers and lenders are (and should be) always on the lookout for cheaper, more efficient ways to manage their portfolios and get the maximum results for the minimum cost.  Financial firms are, and should be, ready to help make this happen.  Over time, new securities products, larger trading volumes and complex hedging and trading programs change the nature of the financial marketplace.  There are new risks and new interconnections that, increasingly, neither regulators nor market participants fully understand.  As time passes after a crash, both regulators and market participants become more confident that the system is working, and there is a natural tendency for risk tolerance to increase even as risks are becoming harder to measure and price.  Sooner or later this leads to a new crash as unexpected vulnerabilities emerge; at that point everyone from regulators to speculators recalibrates and the predictably unpredictable cyclical process restarts.

Starting with the Dutch Tulip Bubble we’ve had about 350 years of financial crashes and panics.  They are unlikely to stop anytime soon — and each one that comes will take most people by surprise.

7.  The Battle of Financial Markets is over; the Battle of State Finance has begun.

“The Battle of France is over,” Winston Churchill said in 1940.  “The Battle of Britain is about to begin.”  We are at a similar juncture right now in the global economy.  The financial markets failed to withstand a series of speculative assaults.  The world’s governments rushed into the breach with large guarantees and bailouts.  Now the markets are testing the governments: will the Europeans really be able to bail out Club Med?  Beyond that, can the world’s governments armed with fiat currencies and facing enormous budget deficits provide enough credible stimulus to restart the world economy before fears of debt and default cause investors to lose faith in the ability of governments to manage the economic cycle?

The bad guys lost the Battle of Britain and we can hope that governments will survive the present downturn with their financial credibility intact.  However, it is now clear that governments do not have an unlimited power to bail out private firms or to stimulate the economy through deficit spending.  This is not only true of smaller governments like that of Greece; it may be true even of the United States.

This means that we have passed into a new economic environment, unlike anything we have seen since World War Two.  For the last sixty years, we have operated under the assumption that the world’s leading governments were ultimately sovereign when it came to the economy: that they could do whatever it took to fix economic problems.  In the future, we will be living in a world where this is no longer so obvious.  New, large and unpredictable risks now hang over the global economy.

8. The demographic crunch time is here.

For more than a decade we’ve been worrying vaguely about the consequences of demographic change for government budgets.  The problem is no longer abstract; the long-term deficits associated with rising entitlement spending in the US, Europe and even China are beginning to affect investor perceptions and to limit what governments can safely spend.  Across the industrial world governments now face a long-term fiscal squeeze.  For the foreseeable future, governments will be less able to respond to economic slowdowns with deficit spending.  While the global slowdown has temporarily dampened inflationary forces, the unfunded liabilities for pensions and entitlement spending will begin to affect interest rates and inflation expectations when and if the world recovers to something more like a ‘normal’ growth pattern.

Policy and politics will be dominated by efforts to raise retirement ages and otherwise adjust to an era of diminished government resources and rising demand for health and other services.  Governments that are unable to get their long term finances in order will pay an increasingly heavy price — especially in times of economic crisis when their markets will come under speculative attack and when their efforts to bail themselves out by increased spending will only undermine their global credibility.

9.  Culture matters.

The economic crisis has further dispelled the illusion that the post-World War Two western world had achieved a permanently prosperous, permanently stable social democratic wonderland.  The idea that liberal capitalism would produce a stable and secure world of low risk, rising living standards and increased economic equality has been proved wrong — at least for the time being.  Propelled by global competition and rapid technological change the west is shifting into a world of higher risk, faster change, less stability and more inequality.  This will be a difficult transition for all countries and cultures; for some it will be more wrenching than others.  The fragile social peace in some European countries will be tested by the continued erosion of the old social model.  The countries (in Europe and around the world) who are able to spend their energies exploiting the new possibilities of the new capitalist era will grow more rapidly than those who waste their energies fighting a rearguard action against it.  Ultimately the fast changers will become more prosperous and more powerful than the slow changers.  Historically, the English-speaking world has been a world of fast-changers; this is one reason English speaking countries have prospered so greatly in the capitalist era.  In the post-2008 world, the ability to roll with the punches and change with the times has become more important than ever.  Understanding the risks and rewards of investment and the future trends of world power and prosperity is increasingly linked to an understanding of the cultural forces in each country that make it easier for some and harder for others to take advantage of the emerging world system.

10.  The politicization of economic governance is dangerous business.

The economic system we’ve built depends heavily on a small number of global financial firms who necessarily enjoy close links to national governments.  Because of their power and their wealth (and also because they are sometimes ‘too big to fail’), these firms can potentially control the laws that govern their behavior and the regulators who enforce them.  In the United States there has been a lot of attention paid to the close relations between current and former executives at Goldman Sachs and the Clinton, Bush and Obama administrations.  The finance-government nexus in the US has its counterparts in other countries as well.  These close connections, and the obvious danger of conflict of interest, have gotten a lot of attention — as well they should.

But the problem of regulatory capture is much greater and more deeply entwined with our current economic structure than this one case.  The rise in the economic importance of the state during the twentieth century–however necessary and in many ways benign this role may have been at various points along the way–inevitably brings politicized governance and regulation in its wake in ways that make bubbles, panics and crashes both more destructive and more likely.

To take one important example, when government workers make up a substantial portion of the electorate, they can influence their own wages and pensions by voting as a bloc. They can — and they do.  California, Illinois and Greece have a lot in common.

But even this is just the tip of the iceberg.  The increased economic role of the state naturally and inevitably multiplies conflicts of interest and creates moral hazard.  American housing policy, widely and correctly blamed as a major contributing factor to the crisis of 2008, was an outstanding example.  The combination of interest groups — consumers who wanted cheap loans and rising house prices, banks who wanted a safe and profitable business model, contractors and other businesses with a stake in the home-building industry, cities and towns whose tax bases increase with rapid growth, advocates for the poor who wanted to improve the access of marginalized groups to the Great American Wealth Machine of home ownership — put them all together and there was an irresistible political force driving the United States real estate market and the financial system into more and more dangerous territory.  The housing bubble wasn’t an accident; it was the result of decades of national policy and we worked very hard and spent lots of money to make that bubble as big and as dangerous as it turned out to be.

“Vote yourself a farm!” was a slogan of those who campaigned for the Homestead Act that gave free farmland in the west to anyone willing to settle it.  Farm subsidies from the Homestead Act through price supports helped cause the Dust Bowl catastrophe and the great agricultural depression of the 1930s by encouraging over-investment in farming and the creation of marginal farmsteads.  The crash was more brutal because government support had inflated the bubble past what would otherwise have been its ‘natural’ size.

“Vote yourself a home!” has been our national motto for the last fifty years and today Americans are as addicted to the home mortgage deduction (and the even less justifiable deductions for second mortgages and home equity loans) as Greeks are to early retirement and government employment.  Political popularity makes the policies harder to change — but no less damaging and destructive.

There is no easy way out of these problems.  Global markets need sophisticated firms and large firms can manage risks and survive shocks that smaller ones can’t.  Civil servants do not and should not lose the right to vote when they take government jobs.  The decision to favor home ownership on social and political grounds is one that politicians can properly make, and there is a lot to be said for policies that have helped millions of American families acquire substantial equity over the years.

Yet it is clear that the mix of democracy and capitalism is a dangerous if necessary brew; after decades in which we failed to think the costs and risks through, we are now suffering the consequences of policies that create dangerously perverse incentives in both political and economic spheres.  Reducing damaging but popular forms of state intervention in the economy while ensuring the state retains the authority and the ability to provide the effective legal and regulatory frameworks without which no modern economy can flourish is the fiendishly difficult and delicate task which Europeans and Americans alike must now undertake.

[ Second photo courtesy of Piazza del Popolo.]

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  • Nancy

    nice recollection

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  • WigWag

    Wow, another brilliant essay from Mead! I hope he will consider packaging some of these blog posts into book form similar to what Tom Friedman of the New York Times did with his columns and his book “Longitudes and Attitudes.” If there is a sager commentator on the contemporary world scene than Mead, I don’t know who it is.

    I do have a slight quibble with this remark that Mead makes,

    “All this change feeds back into the world system in unpredictable ways. Economics can help us understand what is happening and give us more sophisticated tools for investigating the unknown — but it cannot protect us from uncertainty and risk.”

    While economics can’t eliminate uncertainty and risk, it can ameliorate uncertainty and risk. There’s a reason that the great recession of 2009 didn’t turn into a great depression; it’s because the modern economic profession understood the lesson taught by Keynes and acted accordingly.

    When the market crashed in 1929 the government did everything wrong; it actually exacerbated the crisis. While the stimulus provided by Roosevelt’s New Deal didn’t end the crisis it did make a dent and the aggregate demand provided by the massive deficit spending required for World War II ultimately proved that Keynes prescriptions were correct.

    During the recent crisis, Geithner, Summers and Bernanke did everything right. These economists, all steeped in the lessons taught by Keynes and other economists, deftly led the economy out of the woods.

    There’s a reason American banks didn’t fail, unemployment only reached ten percent not 20 percent and great American manufacturing companies like GM lived to fight another day. It’s because trained economists had learned the lessons of previous economic calamities and avoided repeating the mistakes of past eras.

    I think there are two takeaway messages from all of this; (1) Geithner, Summers, Bernanke and even Paulson deserve tremendous credit not the opprobrium directed their way far too often. (2) The economics profession has taught us how to temper the cycles of boom and bust inherent in the capitalist system. While that doesn’t eliminate risk and insecurity entirely, it does make the lives of millions of people better and more secure than they might otherwise be.

    “Bravo” for the economists!

  • Peter

    Excellent ten points, Mr. Mead.

    I’d also add that the era of political correctness is ending; it’s free ride is over.

    From here on out, political correctnessa and its accompanying thought police will have to do the impossibe — justify their dictates to the American public.

  • Luke Lea

    I wonder, Mead, are you familiar with the term “factor-price equalization”? Have you read Samuelson and Stolper’s (sp?) “Protection and Real Wages”? — which is written in plain Englshish and whose results Samuelson himself could hardly believe?

    And then there is Heckscher’s “The Effects of Foreign Trade on the Distribution of Income.” No need to read it though; the title says it all.

    Know what HO theory is? The principle of compensation as it relates to modern neo-classial trade theory? (See Caves and Jones, “World Trade and Payments” which is the classic introductory text on the subject –and accessible to boot!).

    Now maybe you already know all this stuff, but it doesn’t exactly show. Pardon my presumptiousness if I am out on a limb.

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  • Peter from NH

    An absolutely brilliant synopsis of the place where we are and where we are going….

  • noahp

    WigWag: “deftly” led us out of the woods.

    If only. I understand that there is basically no way out for California. They are stuck with paying exorbitant pensions for the next 20-30 years and cannot go bankrupt with a pension fund 500 billion under water!

    Now the Dems are pushing a bill to bail out union pension funds to the tune of 165 billion! I am wondering why my grandchildren owe union members anything!

    Geithner et al sold their professional integrity in the the form of implicit approval of fiscal policies that they surely know are unsustainable while useful idiots like Friedman openly pine for economic dictatorship.

    Neither you nor the estimable Mr. Mead seem to be truly aware of the fix we are in.

  • apetra

    So much of this has been obvious for years, nothing really insightful here.

  • hiscross

    I hope WigWap is joking, because (1) Geithner, Summers, Bernanke and even Paulson with the help of Keynes did do a thing right. Yes, it appears their policies worked, but the results are Not In. Governments do not operate like a business. They operate like some case study. That means they agree amoung them selfs that they are right, but can’t answer the question why their answers are always wrong. In objective practice, governments can’t produce, only take and waste. Keynes was classic cae of not believing his model didn’t work. The US recovered from the Depression in part because of WWII spending, but also because the war didn’t destroy it’s base like was the case in Asia and Europe. Once they recovered by the early 70’s, the US was no longer king. Keynes is a loser and only free markets, even with it’s up and downs can survive.

  • Karl Maier

    Excellent points
    Here are a few things to watch for
    1. The Tea Party movement is the right way to respond; limited government, cut spending, and goring the Blue Beast. (Anti-Trust the Labor Gangs)
    2. The neo-classical equilibrium model of the economy that the mainstream economists and bankers all use is not predictive, and therefore flawed if not outright wrong. Look to Steven Keen (who just won the Paul Revere award for predicting the Global Financial Crisis) and his work on the non-equilibrium model for the future of economics.
    3. Watch the M3 money supply (no longer tracked by the clowns at the Fed), as long as it is shrinking, we are deflating (now at 5%). Deflation is destructive, businesses go bankrupt, unemployment and foreclosures skyrocket. I would rather have double digit inflation than even 1% deflation, as inflation is a pain, but deflation destroys lives.

  • Dennis Byron

    “… If you look hard, you can find a noisy fringe calling, say, for the nationalization of the banks or other old left responses to the crisis, …”

    Like if you “look (real) hard” in Washington DC

  • FairTaxGuy

    Your statement, ” but there is not a single free country in the world where serious political parties argue that socialist transformation will cure the economy’s ills” ignores what President Obama has said, is saying, ans is doing. He is a flat-out advocate of Marxian socialism, and is trying to implement the framework for it during his presidency.

  • M. Report

    Flora’s Wagon of Fools

    Any Fool can steer a ship when the sea is calm.
    Any port in a storm, but ships were meant to sail.

    The crewmen are all rearranging the deck chairs;
    Is there a Captain on board ?

  • alceste

    Butal, but, alas! so true! But has anyone in the White House the courage to grab Obama by collar and force him to read Meade’s paper – I’m afraid that the White House is well on the wind-propelled panglosian wagon of fools of etatism and controlled economy -

  • Richard

    Forgot one lesson: Keynes was right.

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  • Mario

    Excellent summary but WHAT exactly makes America so able to muddle through the storms where others fail. It certainly can’t be that we are all unified in a common set of goals. The Constitution is the only thing realistically keeping us from tearing each other apart. Yet, other countries have Constitutions. I don’t know if they swear an oath to protect it like we do. Is it our spastic/elastic American language that keeps our imagination nimble and able to roll with the punches and make a better future despite adversity? More than a few foreign citizens are happy to help us fail. We do our level best to sabotage our own interests be it in education, finance, foreign policy, politics but somehow we end up STRONGER in spite of these problems. Did God really “bless America” THAT much like the the song says? Are Europeans really that wedded to unworkable ideas that they would rather commit mutual suicide rather than change course? I know. Lots of questions. But seriously, what essential thing makes America so damn different. Just luck?!? I’m sure de Tocqueville had plenty of ideas but sadly I haven’t read him.

  • MaxMBJ

    Keynes was right? Yeah, those bailouts and TARP money sure have been doing the job.

    Next time I play Monopoly I’ll start by dividing up all the bank’s money. That should stimulate some buying, eh?

  • AG

    A very thoughtful, Realist approach, well informed by behavioral finance and history. It’s sad that I am surprised by an essay like this. It just goes to show how much bull is out there…well done Mead

  • Truth Teller

    Great column. I can’t resist pointing out, however, that at the end of Point 1, you favorably cite a column by Fareed Zakaria, but earlier in the paragraph you heap scorn on those who declared that the “post-American world” was upon us.

    Now, let’s see. Remind me again who wrote a bestselling book with that title?

  • bluerider

    Amazing!…that Mead can delineate what he considers the most important lessons derived from the Great Recession, with nary a mention of the role of human greed in the fiasco. Shouldn’t that be the paramount lesson learned? Or maybe that we should reconsider whether or not the telos of neoliberal economic policy leads towards “the end of history,” to use Fukayama’s regnant term denoting capitalist utopia? And how can Mead assure us that liberal capitalism really does work, only to say a few steps later that NO ONE can understand the world economy and its financial markets? What if 2008 is a grim portent of greater economic calamities in the future? Amazing that Mead and many of the commentators are suffering from historical amnesia so soon after the trauma….

  • Dana H.

    This article contains some good insights mixed in with a fair bit of baloney. In the baloney category: “The idea that liberal capitalism would produce a stable and secure world of low risk, rising living standards and increased economic equality has been proved wrong.”

    Replace “liberal capitalism” with “the modern mixed economy welfare state” and the sentence becomes true. The problem today, both in the U.S. and abroad, is that there is far too little capitalism, which dampens crises, and far too much government intervention, which magnifies them.

    Here’s a good article on the subject from the Ayn Rand Center, entitled “Stop Blaming Capitalism for Government Failures”:

  • Lorenz Gude

    I grew up the son of a Keynesian economist in the 50s who’s major concern in the 30s was that America looked like it was going to end up fascist or communist. He was very pleased by the 50s with the results of what Keynes called a ‘middle way’ between the two. He credited Keynes and FDR with saving capitalism. Growing up with these ideas I couldn’t help but notice that both Bush and Obama have, like the proverbial generals, refought the last depression. Using every weapon in the Keynesian arsenal. And while I just don’t know how good or bad a job they have done it is obvious that they have not failed – yet – and even look like they could succeed.

    I believe that Keynes introduced what I call regulated capitalism and that since WWII it has succeeded in a variety of forms from American’s high octane capitalism to European social democracy and in many other variants such as Japan’s culturally unique cartel system to China’s post socialist state managed economy. (You can generally recognize a successful regulated capitalist economy by the quality of the cars produced.) What we are seeing now is the tendency of capitalist economies to collapse – not from inner contradictions like the struggle between social classes – but from what the much praised and maligned Alan Greenspan called ‘irrational exuberance.’ Like the Dutch experienced in 1630. Then there is the contribution of the darker side of human nature – the degenerative role of corruption. I think we are seeing quite a bit of that too.

  • Fred

    Re: “Civil servants do not and should not lose the right to vote ”

    The former is certainly true; the latter, however, is not proven. Just as we do not allow judges to render decisions in trials over issues in which they have a financial stake, it seems to be that it is quite defensible to demand that civil servants (and military personnel and welfare/social security recipients) are similarly recused from exercising the franchise in those elections which directly affect their finances.

    So military personnel could vote in local, but not federal, elections; city and county employees could vote in state and federal, but not local, elections; &c.

    This would, I think, go a long way towards dismantling the ‘vote yourself money’ culture.

  • Optimus Maximus

    Great article with one exception. There is one ecomomic model out there that is much more accurate and predictive than the Keynes model, with which the author and others seem so enamored, That would be the Austrian model as taught by Mises. Hagel and others. It gets little press because it advocates free markets and sound money, which severely limits the power of the Fed and State governments to spend beyond their means. Keynes should be throughly discredited by this pointin time, as his policies simply lead to misallocation of resources and delayed recovery..

  • Mark

    This is an excellent top 10 list, but I would note that while no individual understands any economy, the Austrian economists understand economic principles which is why they accurately predicted this crisis and they’re predicting we’re still going downhill.

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  • Dave L

    bluerider @ 0416 – I re-read F Fukuyama (End of History and the Last Man) recently. I wonder if Mr.Mead, or other economists, feel that liberal capitalism (as defined by Fukuyama) is, in fact, the acme of mankinds economic evolution?

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  • Thogwummpy

    Curiously, the number one lesson is absent: fiscal responsiblity should trump reckless government-mandated social engineering. I mean, HELLO!?!?! This whole mess started because the do-gooder progressives thru force of regulatory pressure on lending institutions, created a subprime mortgage bubble…thinking it “fair” to let low-acheivers end-run the system in order to buy houses they knew they couldn’t afford. That was the whole systemic cancer—with Fannie and Freddie (along with HUD) enabling the entire house of cards. Since this was the documented cause—why doesn’t Mead rank it the top lesson? OH…..that’s right….agenda.

  • Bill

    I agree with most of this, but would just question point #2 about liberal capitalism. Mead writes:

    “The crisis did what crises usually do: it tested the world’s companies, governments and currencies to see what they were made of. The preliminary results of that test are now in, and the United States again looks surprisingly healthy. The dollar held up well during the crash; when the chips were down investors still thought America was the best place for their money. America’s flexible labor markets meant that a lot of people lost their jobs, but also that the recovery would start more quickly here. The overwhelming lesson of the crash for Europeans is that they need to accelerate Europe’s slow and painful shift toward a more liberal form of capitalism. Europe’s socialist parties in Spain and Greece are introducing hated liberal reforms because, as Margaret Thatcher put it long ago, “there is no alternative.””

    Alright, perhaps the definition of ‘liberal capitalism’ is important here, but it seems to me that what was tested in the U.S. was the resilience of government more than companies, and I think the latter is much more reflective of the health of U.S. ‘liberal’ capitalism. Let’s face it – many companies would have failed without government intervention: banks, auto companies, AIG, etc. Moreover, the crisis trampled on much-heralded economic theories (e.g., efficient markets hypothesis) that had been the basis for capitalism’s pre-crisis triumphs; post-crisis, we are left to deal with the limits of economic theory and the limits of capitalism. As we debate a financial regulatory reform bill in the U.S., as well as proposals for global regulations, it seems to me that one major lesson of the meltdown is that capitalism – liberal or otherwise – brings with it excesses and risks that must be regulated by the state. Meanwhile, we are still a country – and a world (looking at you, EU) – of bailouts and phony capitalism.

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  • bluerider

    @DaveL: Well, I’m not familiar with the totality of Mead’s scholarship; all I could do is glean from what he says in his article. And clearly, Mead aligns his views with neoliberal economic policy. In lesson 2 Mead is urging Europe to march in lockstep alongside the US’ upon a neoliberal path (a mere year and a half after the global meltdown!). And Mead cites Thatcher’s declamation that “there is no alternative” to this. Thus a unilinear teleology is at play here, if indeed there is no alternative. This relates to neoliberal Fukayama’s claim: that the end of history is marked by “perpetual peace” owing to capitalism’s victory in its Manichean struggle against its opposite. However, this turned out to be, um.., premature, as Fukayama failed to take into account premodern forces (read: fundamentalism) emerging in a clash with postmodern capitalism (F. has since regretted his ‘end of history’ celebratory thesis).

    @Thogwummpy: dude, c;’mon now.. this whole “Cloward-Piven” business is utter nonsense. There is no shadowy network among C and P, ACORN, and Obama. Where is your empirical evidence? Or did Glenn Beck tell you this? haha. The C-P strategy was written 44 years ago. So….you’re telling me this has been planned all along since the 1960s? Any serious person with merely a scintilla of sophisticated brains can only laugh at this “conspiracy”. LMFAO….

  • Dave L

    bluerider@0636 – thanks your comment. In his book, I think Fukuyama made some allowance for the occassional ‘lapse’ in perpetual peace, although as you indicate, I wonder if he accounted for such virulent strains of ‘premodern forces’ at work in the world today. I was unaware he’d since regretted the conclusion of his thesis. I’ll research further.

    Re: C & P theory – it’s a helluva a conspricacy theory and does make for good entertainment, but seems to border on Kennedy assassination and various other conspiracy theories. Although I disdain their whole concept, I’d hate to give a couple of rabble rousing, 60’s commie, pinkos (granted – that’s over the top) credit for being that prescient and thus the progenitors of the undermining of the entire US capitalist system.

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  • WM

    Our government (and others) caused the crisis by means of enforcing a mark-to-market accounting regime onto the hapless global financial sector. The regulatory framework and other government interferences are the problem. There is no “balance” to be had between regulation and freedom. One is poison, and the other is food. Do you not understand this principle?

    Do not equivocate between laws and regulations. They are totally different animals. One is legitimate and necessary, and the other is not. And in the case of laws which violate individual rights, those are not legitimate or necessary, either.

    The financial crisis is proof that statism in all its forms is dangerous and must be abolished. If you wish to have a proper perspective on history, then view the Tea Party’s efforts with respect, not typical elitist dismissal, and see it as the transformational force which will bring about a safer, wealthier, happier, stable world.

    Let me remind you that everything else has been already been tried, and they have all failed. You have no right to resist laissez-faire now.

  • FS

    What is astonishing in this whole discussion, whether in Mead’s blog or in the comments, is that, aside from snide comments directed at government workers, there is no mention of how the suggested economic policies will affect the lives of people who are not members of the academic/government/financial elite. What history has shown is that free market fundamentalism espoused here has been an disaster for the rest of us.

  • bluerider

    @WM: with all due respect to your opinion, I fail to grasp how “enforcing a mark-to-market accounting regime” by the state (and others) is responsible for the global ec crisis. Who advanced this theory? Any eminent economists endorse it? Seems that such types of monocausal reasoning are severely reductive in the attempt to explain something that is very complicated. If the crisis serves as unimpeachable evidence AGAINST regulation, I’d like to learn about it…

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  • A Baxter

    Very good point that the meltdown does not mean that the leadership of America is over. The issue outstanding is how would this translate into the relations between the U.S., Great Britain and the other Western European allies. This issue was also covered in an article in the Wall Street Journal – “Obama and the ‘Special Relationship’” by William Inboden and Lisa Aronsson of May 19, as a follow-up to the Royal United Services Institute/Legatum conference on the topic “The UK-US Alliance: Still Special or just another Partnership?”. Below is the program of the conference, with similar issues raised.

    The UK-US Alliance: Still Special or just another Partnership?
    A RUSI-Legatum Institute Conference

    18 May 2010
    Royal United Services Institute

    Conference Programme
    0915 Welcome Remarks and Survey Launch
    Sir Paul Lever, Vice President, RUSI
    Dr William Inboden, Senior Vice President, Legatum Institute
    0945 Session One: UK Public Opinion: Political Will for Real Partnership?
    Has the gap over the Iraq War closed and how does the UK public view the US now? Do historically strong ties have a sustainable basis to continue?
    Have recent frictions further eroded ties between the two nations or is there renewed interest in the UK for a closer strategic partnership with the US?
    Does the UK share America’s global vision and do the two powers overlap in their foreign policy approaches? Does the UK see itself as closer to the EU or the US?
    Chair: Bronwen Maddox, Chief Foreign Commentator, The Times
    Speakers: Jeremy Shapiro, Senior Advisor, Bureau of European and Eurasian Affairs, U.S. Department of State
    Professor Peter Feaver, Professor of Political Science, Duke University and former Special Advisor to the National Security Council
    Sir Christopher Meyer, British Ambassador to the United States (1997‐2003)

    1130 Session Two: NATO at a Crossroads? Afghanistan and the Reform Agenda
    Do the US and the UK share the same level of commitment to NATO?
    How can NATO reform decision-making procedures to improve agility, flexibility and responsiveness? Can the consensus principle be re-considered at any level?
    Is it right for Afghanistan to dominate longer-term thinking for defence planning?
    What lessons should the US, NATO and the UK learn from operational experience in Afghanistan since the implementation of the new strategy?
    Chair: Professor Michael Clarke, Director, RUSI
    Speakers: Ambassador Kurt Volker, former United States Permanent Representative to NATO
    Professor Christopher Coker, Professor of International Relations, LSE
    Geoff Hoon, British politician, former Defence Secretary

    1400 Session Three: Renewing the Defence and Intelligence Partnership
    How does defence spending measure up against national priorities and how will cuts in the UK affect the special relationship?
    What lessons can be learned from the American QDR and what are the prospects for new thinking in a foreign policy-led UK Strategic Defence Review?
    How can the US and the UK improve defence co-operation after the Defence Trade Co-operation Treaty?
    What is the state of the intelligence relationship?
    Chair: Dr Alexander Mirtchev, Atlantic Council and Krull Corp.
    Speakers: Dr Edgar Buckley, Senior Vice President for EU, NATO and European Cooperation, Thales
    Sir David Omand, Vice President RUSI, previously Permanent Secretary of the Home Office
    Dr Kori Schake, Research Fellow, Hoover Institution and Former Director for Defense Strategy and Requirements, National Security Council

    1545 Session Four: Evaluating Leadership: Obama and the new British Government
    What will the relationship be between the new UK Government and the Obama Administration?
    Can the UK reject a ‘strategic shrinkage’ despite economic pressures? To what extent do the US and the UK still share global interests, responsibilities and foreign policy approaches?
    How can both sides freshen and deepen their alliance? Will the next UK Government be able to take on a position of leadership in Europe?
    Chair: Dr William Inboden, Senior Vice President, Legatum Institute
    Speakers: Dr Karen Donfried, Executive Vice President of the German Marshall Fund of the United States
    Lord Robertson, former Secretary General of NATO
    Dr Robin Niblett, Director, Chatham House
    Sandra Kaiser, Minister Counselor for Public Affairs, Embassy of the United States, London

  • Mark E.

    Yes, it’s a strange brew to mix capitalism and democracy, but an immutable force of nature, i.e., the survival of the fittest ultimately prevails. Thankfully, the fittest is not always the largest or strongest or wealthiest. And while everyone’s interests are rarely perfectly aligned, the fact that we can peacefully replace lousy politicians and bad CEOs make our system the most resilient in the history of the world. There is no end to human stupidity and greed, but so long as we have a free press, free elections, and reasonably free markets, we will endure.

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  • Sinner

    If you look hard, you can find a noisy fringe calling, say, for the nationalization of the banks

    In the UK and US the government most certainly did nationalise the banks!. In the US you just didn’t call a spade a spade.

    Of course, this has clearly made things worse, rather than better.

    Civil servants do not and should not lose the right to vote when they take government jobs.

    On the contrary, civil servants, welfare recipients and all other beneficiaries of taxes (except for police and military) must lose their right to vote or the integrity of the franchise is destroyed.

    As the Tea Party says:

    No Representation without Taxation!

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  • Bill Casper

    This list is interesting but simply diversionary The “leadership” of this nation has forsaken integrity,character and individualism, for academic mumbo jumbo, collectivism, social justice, and pc tolerance for the rude, the crude , the erudite, the pseudo-intellectual, and the maladjusted mediocre. We haven’t learned anything from this depression. The real question is whether or not our oppressors in Washington and Wall Street, can co-opt the US military, to fire upon American patriots when the second revolution begins against the ruling elite! That is the as yet unanswered question

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