We’re at an identifiable moment in the pattern of technology revolutions, as laid out by
Instant gazillionaires abound. We hear about the end of history. This force is very seductive on so many levels – including democratization of access to the means of production. In that environment, belief is, to all intents and purposes, irresistible. When half a billion people in India and China alone are entering the middle class in a wave that makes the Industrial Revolution look like a warm-up, who is going to try to stop it? Oligarchies and oligopolies that have heretofore been, in Simon Johnson’s word, “genteel,” now strap on a six-gun and look around for mines to claim. (Johnson’s Atlantic piece is a must-read.)
However, the laws of physics eventually prevail, the bubble bursts and a crash ensues. It’s happened after every major technology revolution since the start of the Industrial Revolution. Lots of people who took unwise risks lose their shirts – as well as millions more who barely had a shirt to their name.
But the thing is, the technology really was revolutionary, and now it’s been built out, just waiting to be exploited in genuinely profitable and socially beneficial ways. The canals don’t get unbuilt, nor do the railroads, nor does the electric grid – and now, the same applies to global broadband and
What will now ensue is a period of two or three decades in which businesses, communities, governments, nations and individuals leverage that new planetary infrastructure to transform work and life. This is the period when the excesses of the Wild West reign of financial capital are replaced by the more sustainable investments of production capital – coming not from financial services firms, but from companies that actually make something, actually deliver services, actually create value.
Finally, this is also when a new sheriff rides into town. This is when society reasserts its authority, when rules are put in place to ameliorate the gross discrepancies in wealth and power and the carelessness that exploded during the first phase. This is when trusts are busted, when the New Deal is dealt.
The main problem, in other words, isn’t business generally. It’s finance. Not that all other businesses were kosher – but they weren’t the center of the systemic problem.
Now, it must be admitted that even during the Wild West era, financial capital could be said to have performed a salutary function. It dissolved the castle walls of many oligopolies, many ancien regimes. This is the heyday of Gordon Gecko, when “greed is good.” But it’s only good provisionally, not permanently, and not in consistent doses. After the crash, it’s the job of government to come in and rein in those cowboys. This is when investment shifts from regime-dissolution to institution-building. This is when "innovation" stops being used to describe financial instruments, and starts being used to describe useful goods and services – including social goods and community services. This is when we imagine and establish new rules of the road, new ways to ensure sustainability and fairness. This is when the middle class gets expanded. Until the next revolutionary technology comes along, and the cycle begins again.
President Obama and his economic team, for all their impressive brain cells, clearly don’t understand this moment. They’re stuck inside the wrong paradigm, on the wrong side of history (or, at least, of its current cycle). This is paradigmatically clear in the president’s answer to critics of his financial policies (emphasis mine):
[T]here have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.
Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.
As Big Tent Democrat put it, “that is one of the worst answers I have ever heard. It makes me question if Obama even understands what the problem is.”
Indeed, I'd say it's beyond question. I'd say it's dispositive. It would be hard to be more wrong than this. Taking a Hippocratic approach when a paradigm shift is underway is 180 degrees off. As everybody with an ounce of sense understands, if you are going to err in a moment like this, you should err on the side of doing too much, not too little. We’re at a moment of tectonic shift, not of rearranging deck chairs -- much less surveying those chairs and deciding that they're in a rather nice arrangement already. The economy needs massive stimulus, the infrastructure needs to be used for profit and for progress, and the rules of the road need to be rewritten to favor those who build things, and rein in those who ride waves.
To put it very simply: The financial services industry needs to and will become a regulated utility. It’ll be like Con-Ed, a ward of the state. Salaries will be regulated, stability will be the primary value, transparency will be mandated and “innovation” will be frowned upon. Innovation, in the next couple of decades, will shift to other sectors – primarily IT, biotech, nanotech and services – where actual value is being created. It will also be found in the so-called “public sector,” though that will be far more diverse than simply government agencies. (The world of what have been called NGOs is about to get a whole lot larger and more interesting.)
Now, a proper understanding of these basic realities would not make the job at hand a cinch – but it would make it a hell of a lot clearer and easier. In trying to hold onto the fantasy that the financial services industry of the 1980s and ‘90s can continue in approximately its present form, Geithner, Summers and Obama himself are like adherents of Ptolemaic cosmologies after Copernicus. They’re furiously adding epicycles to their heavenly map, making things more complicated, not less… and adding huge, unnecessary costs and pain for millions. As Matt Taibi put it in his J’accuse, “The Big Takeover,” which appeared in Rolling Stone, Geithner seems bent on creating a “so-called ‘bad bank’ that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in.”
Massive… opaque… bureaucratic. Sounds like those medieval epicycles Thomas Kuhn described in The Structure of Scientific Revolutions, doesn’t it? This is what all dying paradigms look like. They degenerate through Baroque to Rococo until they die under the weight of their own complication and inelegance.
We needed a president who understands this paradigm shift, and who could lead it. That’s not what we’ve got. We were told that his own lack of decisiveness or expertise wouldn’t matter, because he would surround himself with great advisors. Well, we’ve seen how that’s worked out. Joseph Stiglitz gets it. Nouriel Roubini gets it. Jeffrey Sachs gets it. Simon Johnson gets it. Bill Black gets it. William Greider gets it. Martin Wolf gets it. Robert Reich (belatedly) gets it. Kevin Phillips gets it. And of course Paul Krugman gets it (too many columns and blog posts to pick one). The list goes on and on. But it does not, quel dommage, include our actual leaders.