In America today the truth is often easily seen: statements of the obvious or about the inevitable attract the loudest criticism. So it was at the start of the financial crisis, when Rahm Emanuel, Obama’s chief of staff, told a conference of top corporate chief executives in November 2008.
“You never want a serious crisis to go to waste. … Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.” (Source)
The opportunity to enact reforms provide a silver lining to the darkest clouds of a crisis. People briefly recognize the necessity of change, however painful. Iron-strong political coalitions become vulnerable. The public briefly pays attention to our political plumbing.
In September 2008 I said we were on the brink of a disastrous crash in the US economy, and three things were necessary to prevent it (each link goes to a post with detailed recommendations).
- Stabilize the financial system.
- Stabilize the economy.
- Arrange long-term financing for steps #1 and #2 with our foreign creditors.
We did the first, but in a manner that I (naively) didn’t expect. We provided no-strings aid — trillions of dollars in cheap loans, free guarantees, and asset purchases — to the financial sector. With no reforms. Now, as the recession fades, Obama attempts to make minor reforms — and finds this difficult. We’ll have an opportunity to do better in the inevitable next — and similar — crisis.
We did the second, much as I (and others recommended), although on a smaller scale. The major omission was to provide credit to small businesses; the failure to do so made this recession longer and deeper than needed.
The third recommendation was the most important to restore long-term stability to the system. The global financial structure has many large, deep cracks. To name just two:
- Massive imbalances in capital flows — resulting from hot money flash flooding in and out of nations, and large secular current account surpluses. The best known is the US as a debtor, OPEC and Asia as creditors. But also within the European Union.
- Plus grossly inadequate regulation of banks. No surprise, as the banks puppet’s (OECD central banks) write the regulations.
Only coordinated international action could fix these problems. But in the rush to spend trillions to bail out their banks and large corporations, the major nations had no time for to start this long difficult process. So it was in the Great Depression. A decade-long depression plus WWII eventually taught the wisdom of building the web of international organizations that supported the incredible prosperity of the last 50 years.
Now the world has outgrown that structure. This crisis, of which the current Greek crisis is just another phase, should prove that to anyone paying attention. Will we continue to attempt ad hoc bailouts, or attempt to solve the underlying problems? The course of the 21st century might depend on our actions during the next year or so.
Afterword
- For more about these things see the FM reference pages about the financial crisis and end of the post-WWII era.
- For more about this website, see the About the FM website page.
- Send emails to fabmaximus at hotmail dot com (note the spam-protected spelling).
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