"Well, here's another nice mess you've gotten me into, Ollie." So might Stan Laurel summarize the position of the average citizen in the global financial crisis. In a similar vein, government officials, legislators and regulators around the world are busy pointing the finger, reminding us of the terribly important speech they gave three years ago, of the seminal letter that they wrote warning of the coming problems in exact detail, or how their one warning of "irrational exuberance" should temper a multi-year policy of inflating the bubble.
I don't know enough of the facts to apportion blame, and, in any case, it is not something I find particularly constructive as there are always many volunteers for this duty, informed or not. Instead, I focus here on what may be part of the solution - on how we might begin to go about rebuilding the economy. I write from a US perspective, but many of the initiatives would work in any economy.
Some commentators have declared the "death of capitalism" or the equally fatuous "Marx was right." I believe neither to be correct. Capitalism or free market economics does not and need not mean no government and no regulation. Only in the extremely oversimplified world of good vs. evil or black vs. white need the global economy be divided between socialism on the one hand and a complete laissez faire capitalism on the other. While the "War on Terror" and much recent economic policy has seemed to reflect just such a Manichean world, calm analysis suggests that government can play a constructive regulatory role within the context of an otherwise free market. Ironically, over the last six weeks the US Government has intervened in a more direct fashion in the economy, nationalizing banks and preparing to bail-out entire industries, than many "Big Government" proponents have ever dared suggest.
So, once the financial system is stabilized and credit markets can return to their primary lending function, there should and I believe there will be a major overhaul of the US financial regulatory landscape. Much of the current legislative framework dates from the 1930s and most subsequent rulemaking has just been layered on top (eg, 1970s tender offer rules bolted onto 1934 Act). It is also high time to sort out the regulatory alphabet soup of SEC, CFTC, FED, OTS, FDIC, and their myriad state counterparts.
However, before we create a new and more effective regulatory framework for Wall Street (which can involve less but better regulation and fewer regulatory bodies but ones with clearer mandates), we need to revive Main Street. At this point a painful recession lasting 12 to 18 months seems unavoidable. Each time we tried to avoid the harsh medicine before (e.g., bursting of tech bubble, asian crisis) we simply reinflated a new bubble (in this case primarily housing, but also energy, commodities). This simply stored up the problems for a later day, but I believe there are good policy decisions that can still be made which will shorten and lessen the impact of this global recession.
First, it is very good timing that the US will elect a new President this week. Regardless of who wins (remember, as CEO of Thomson Reuters I keep my political loyalties private), there is a chance for a new start. I would recommend that prior to even the inauguration in January, the President invite (forcefully) the entire Congress to a special weekend offsite meeting. They can all go the Greenbrier Hotel in West Virginia which was chosen in the 1950s as the secure location to which the seat of government would move in the event of a nuclear emergency - we have one now but of a different making. At this meeting, the President should call on members of both parties to sacrifice for the national good and lay aside partisan politics for the remainder of the year (I am an optimist, not a fantasist to believe it could be permanent).
Once the new administration and Congress were in place they should supplement the huge amount of monetary stimulus that has been applied with an ambitous fiscal stimulus plan - a New Deal for the 21st Century. Sure we have a terrible budget deficit, and yes, such a plan will make it worse over the short- to mid-term, but we need to substitute governmental demand for the consumer and corporate demand that will be lacking until we emerge from recession. So, for example, if the automobile industry is in terminal decline, don't just throw good money after bad, why not pre-order 25,000 Volt electric vehicles and pay up-front - at $40k per car that would be a $1billion injection. A drop in the bucket perhaps and more seriously a potential misallocation of capital, but it would do more to keep real workers in their jobs.
The current administration seems to have only a single destination for fiscal stimulus: large military programs, many of which appeal more to members of Congress than to career military leaders. The new President might direct Federal spending to two large and needy infrastructure programs. First, the Nation's highways, bridges, tunnels, ports and railways, and second, the digital highway. The US Interstate System is showing its age, and the country seems to have skipped the era of fast trains like the Japanese Bullet or French TGV entirely. Meanwhile, in the digital economy, while Korea, Japan and others build-out 10gb true broadband networks, the US still defines "broadband" as 256kb.
It does not take a genius to figure out that digital and physical highways coupled with significant investments in educating a future workforce and keeping them healthy are key to not only stimulating a return to growth but also long-term economic prosperity. Will these investments add to Federal deficits? Of course, but at least these are investments (if executed well) and not just spending. I believe the American electorate is not maniacally anti-tax or anti-government - it is, reasonably enough, anti tax with no return on the money spent and anti bad government. The genius of the Founding Fathers was not to resign themselves and the Nation in perpetuity to a small government because all of our leaders could be assumed to be incompetent, but to give the power to the electorate to choose a President, Congress and state governments that would govern wisely.
It is high-time - perhaps the perfect time - that we fulfilled this legacy.