Thinking About the Future of American Capitalism
Published on: March 13, 2009
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  • Eli Butnaru

    It is surprising that the author did not mention mark-to-market as a key component of the meltdown. At no point in our financial history, long term illiquid assets were re-assessed in a similar fashion as tradable and marketable securities. Any casual observer could conclude that trying to rapidly sell an illiquid instrument, independently of its worth, will likely command a discount.

    The author rightfully criticizes the Republican congress but fails to explain what the current denial of these congressmen fails to achieve. If congress is controlled by Democrats, why Republicans need to acknowledge that Reagonomics is a failure? Congress is currently run by Democrats in a similar expansive fashion that these Republican displayed. Restating history serves no purpose other than excusing the continued ineptitude of our public servants. It is that ineptitude of our regulators that created the biggest mess in our capitalist history. Deregulation has nothing to do with the miscarriage of duties.

    To point at the Reaganomic tenets as the cause of the destruction is similar to blaming a composer for a poorly performed symphony. In fact, ample evidence supports the opposite: that tax reduction is self-financing. Reagonomics have been extensively debated with few arriving at the conclusions that the author intends to explain, but fails to support.

    The author gravely fails to recognize that Greenspan, and the FED, are only able to manage the short end of the yield curve. It is the long end of the curve responsible for financing long term assets at prolongued low rates. Greenspan, or the FED, have not, and will never be, able to control anything other than short term interest rates.

    In the end, I was still hoping to read what the author proposed as the new capitalism.

  • Jason Monroe

    Concur with Mr. Butnaru, particularly with respect to the disparagement of Reagonomics. The evidence of GDP increase and, following a lag time, of greater tax revenue subsequent to tax cuts is demonstrable.

    Mr. Fukuyama and many others also represent the linkage between current account surplus/deficit positions in too concrete a fashion with respect to observed economic and consumer conditions. Contrasted to other areas where economic multipliers can be reasonably measured, this area is less than certain in terms of resulting effects. $ 10 billion more of US bond purchases by China will not necessarily drive $ xx billion of US consumer activity, but it will of course help finance the US Governments’ budget and affairs.

    Unrelated, going back a few months, the Fukuyama article of the commencement address he gave was an exceptionally good piece.

  • Lewis Beman

    One major requirement of the new capitalism is, as the author noted but did not expand upon, a change in the timeline of incentives. Annual bonuses for speculative enterprises–as all financial venture are–do indeed privatize gains at the now obvious risk of socializing losses. Is it possible to develop a tax system, perhaps paying bonuses into escrow accounts, subject to recapture in the case of subsequent bailouts.

  • David Airth

    The ‘new capitalism’ is going to be more cautious. It will be less unfettered and less laissez faire. It is going to be more mutual beneficial. That is not so hard to understand.

    Reaganomics is at fault here, with its supply-side economics, producing and building way ahead of demand. (Look at Las Vegas and Dubai.) One contributing factor to the economic meltdown is the excesses of production and finance, which saturated the market until it couldn’t absorb any more. It will take time to mop up the excess and thus it will take time for a recovery to take hold.

  • John

    Mr Fukuyama is basically correct about the underlying reasons for what has happened although I think he is being unduly pessimistic about the chances of recovery. The US, and world economy for that matter, is incredibly resilient. Clearly we’re not going to return to the bubble rates of growth we saw over the last eight years but that doesn’t mean we’re going to remain in permanent recession either. Since, as he points out, conservatives are basically in denial about what’s happened I suppose it’s to be expected that some of the posters here are still defending the tenets of Reaganism but they need to get their facts right. Supply side tax cuts under Reagan and Bush NEVER generated enough revenue to pay for themselves. This is a matter of record. Even most respected conservative economists have now backed off that claim. During both administrations in addition to the tax cuts there were huge Keynesian expansions of public spending that were in aggregate a much more important contributor to economic expansion than tax cuts, but even then never produced enough tax revenue to match expenditures and hence created the subsequent record deficits both administrations left behind. In short, supply side tax theory except at it extremes doesn’t work. I’m afraid it’s one of those dogmas the Republicans are going to have to break free of as they navigate their way back to reality.

  • Antonio Rodriguez

    I know this thread is pretty old but it’s nice to get some practice debating guys like Butnaru above.

    First, as far as mark-to-market being the cause in the meltdown, that’s a complete falsehood. The assets we are talking about at this point are impaired. Even if they were classified as “held to maturity” and kept at their book value on the balance sheet, they’d still have to be written down, under “lower of cost or market.” Since these are illiquid assets, determining the market for them is tough (particularly because the banks are scared of getting real price discovery). But everyone knows that the market price for them is far lower than what the banks paid. In other words, we still get the same problem

    Second, I think you misread the author’s point a little bit. At this time, because American’s are saving in an effort to deleverage, the federal government must pick up the slack in demand. In other words, austerity by the government is not a good thing, and Congress/the Administration must continue to be expansive. Republicans refinding their fiscal austerity will not work right now simply because of the collapse in demand.

    Finally, it’s just not true that the short end of the yield curve has no effect on the financing of long-term assets. Muni bonds for construction using variable rate debt use things like 1 month LIBOR as their index. Adjustable rate mortgages were indexed to 12 month T-bills and LIBOR, among other indices. If the FED starts buying up 12 month T-bills then they lower the yield- that’s as basic as it gets.

    Overall, I thought the article was well done, although like everyone else I would have liked to see it more forward looking. I think the poster David Airth got it right, capitalism with a more watchful eye

  • Abby

    Excellent article.

    This blind devotion to Reaganomics and unfettered free markets has not worked and will never work–it’s like leaving children unsupervised in a candy store.

    As someone wrote, the invisible hand remained invisible…

  • Paul French

    Mark to Market was not part of the problem. Derivatives were not illiquid assets. Derivatives were sold on the market on a daily basis until it was discovered that they were worthless.

    Why is it that Conservatives lament about the need to value assets higher than their actual worth? To do so only makes an insolvent institution viable, but only on paper.

    If their wish came true and accepted accounting practices were ignored to allow the value of those worthless assets to be overvalued. Those assets would be used as collateral to further leverage the company. Which would only make that company more insolvent.

    This would be like a person paying cash to buy a house. Only to see the house burn to the ground. Should that person be able to then borrow money based on the purchase price of that nonexistent house?

  • Hector Maquieira

    In reply to Buthnaru and Monroe regarding Reaganism…

    You must admit that at some point tax cuts don’t work anymore. If the government could levy no taxes then there would be no roads, regulation, infrastructure, military defense and the country’s economy would quickly collapse one way or the other.

    This disproves your idea that cutting taxes always results in long-term growth. At some point, clearly, cutting taxes is no longer optimal.
    Remember that Reagan lowered the tax rate to 42% and Clinton got it down to 39%. Bush lowered it to about 36% and the whole stack of cards fell apart…

    I posit that Bush’s tax cuts finally crossed the line to a point where it was no longer optimal to lower taxes.

  • T.G.

    The first commenter conveniently leaves out the fact that for 6 years the Bush Administration had the luxury of a GOP controlled Congress to rumber stamp his every move.

    Even when allowing for the Congressional Democrats willingness to play dead for those 6 years, how is the current debacle the sole fault of the Democrats?

    Based on the proposals coming from the Obama Administration we’re supposed to believe the that people who layed the foundation for the current debacle will be the ones to lay groundwork for our future economic recovery.

    This is what happens when you have a politics and an economy built on lies and snake-oil.

  • Nathan

    You shouldn’t lay all the blame for this at the feet of Americans. Irrational exuberance, believing you could get rich via cute ways (house flipping, mortgage backed securities, etc) and an unrealistic view of long term market fluctuations (Dow 36,000 anyone?) were not purely American traits; they are emblematic of modern societies worldwide.

    Being stuck in gridlock for three hours a day, sipping lattes, watching American Idol – these are the ‘benefits’ of a society without moorings dependent on ever decreasing resources (oil, American consumer market share) and ever expanding competition for those resources.

    You once wrote a book call ‘The End of History and The Last Man’ bout how people in modern, wealthy societies could lose their ‘elan’ to fight modern problems. You were right, except the problems are in people’s souls as much as in the world at large. Changing habits of consumption and adjusted ‘mark to market’ values of happiness and personal fulfillment should be considered as part of any long term solution.

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  • Lighthouse

    The evidence of GDP increase and, following a lag time, of greater tax revenue subsequent to tax cuts is demonstrable.

    No, it is not. The rise in GDP is illusionary, fueled by the Keynesian stimulus of deficit spending. The malinvestment of the debt issued to cover the deficits cripples the economy in the long term. Technically the malinvestment is not the fault of Reagnomics but a failure of Reagan/Bush public policy. An implementation error not a failure in the theory. But then again, according to some, so was the Soviet Union.

    Reaganomics is not cutting taxes and spending, it is cutting taxes without cutting spending and running up huge deficits. Cutting taxes and spending so that there are no deficits but government was smaller might work, or not. It is based on the assumption that the ‘free market’ will make better decisions about capital spending than government bureaucrat would. Of course we now know that to be ridiculous. Not that the government is good, just that industry is just as bad.

  • Julie Charles

    Tax cuts – to what? 95% is patently bad, and Reaganomics works there, but where do you stop? 0% income tax?

    “Tax cuts!” makes for a great bumper sticker, but it’s hollow without serious contextualization.

  • It should be possible to let banks go bankrupt and it should not be bankers to decide which industries are worth developing. The way bankers have made industrial development dependent on credit has led to a guided economy, guided not by vision but by short term profit chance for bankers. If wages and economic profits with all money transfers is taken out of the hands of bankers and banks offer their clients services for their money they do not directly need, banks may go bankrupt like any other business. Money transfer should be a nonprofit service, since it does not create anything and can nowadays be handled at very low costs electronically.

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