The article is adapted from her book After the Fall: Saving Capitalism from Wall Street and Washington.
The popular narrative after the financial system’s 2008 collapse held that capitalism had failed. But capitalism didn’t fail.
The meltdown was a result of 25 years’ worth of government failure to understand its proper role in markets. Since the early 1980s, government hasn’t been a fair regulator but an arbitrary rescuer.
In 2008, the markets finally forced the government’s hand, exposing the whole state-subsidized, too-big-to-fail financial sector, built up over a quarter-century of bailouts, as impossible. Without adequate market discipline — including regulation of exotic financial instruments so that markets could discipline financial firms without causing economic disaster — the nation got the opposite of free markets: wholesale socialization of the financial industry to prevent a replay of the 1930s.
Could free markets have sorted out the mess without extraordinary government action? Only by destroying the remains of the financial system and putting tens of millions of people out of work. The government may have staved off depression, but it severely damaged elements upon which free markets depend, including failure and fairness.
Monday, January 4, 2010
Recommended reading: "Saving Capitalism," the January cover story at Research magazine, by Nicole Gelinas. Excerpt: