Financial Crisis Signals the End of Reaganism

reagan.JPGIs the end of the Gipper upon us?

The federal bailout of American International Group, Fannie Mae and Freddie Mac, plus the sell-offs of Bear Stearns, Countrywide Financial, Merrill Lynch and the bankruptcy of Lehman Brothers have brought strong calls for re-regulation of the U.S. financial industry. It could presage a major turn in economic history.

According to Nobel Prize-winning economist Joseph Stiglitz:

The globalization agenda has been closely linked with the market fundamentalists -- the ideology of free markets and financial liberalization. In this crisis, we see the most market-oriented institutions in the most market-oriented economy failing and running to the government for help. Everyone in the world will now say this is the end of market fundamentalism. In this sense, the fall of Wall Street is for a market fundamentalist what the fall of the Berlin Wall was for communism -- it tells the world that this way of economic organization turns out not to be sustainable.
The birth of market fundamentalism can be traced back to Ronald Reagan, a market champion who ousted inflation hawk Fed Chief Paul Volcker in favor of free market advocate and Ayn Rand acolyte, Alan Greenspan. Thus began the wild party.

Its celebrants were bipartisan. Democratic president Bill Clinton signed a bill ending the Glass-Steagall Act which ended the separation of investment from commercial banks. Rulers were loosened or not applied for all kinds of financial rocket science such as derivatives, swaps, mortgage-backed securities and so on. Money flowed.

Now, even Republican presidential candidate John McCain has signed on to re-regulation. Voters worried about their 401 (k)s might forget that McCain staunchly followed the Reagan line and backed deregulation or little regulation for years. Barack Obama has been more consistent in his views on fixing the financial system.

To be sure, there's a bit of sound and fury in this. One day Treasury Secretary Henry Paulson is drawing a line in the sand for Lehman Brothers and the next day he's erasing it with a bailout for AIG. Moreover, there are limits to how much the federal government can afford such bailouts. A recent injection of capital from central banks around the world will help, but it fails to address real problems.

One hopes Stiglitz is not right. If he is, we'll be quoting songwriter Leonard Cohen: "I've seen the future, brother, and it is murder."