Capitalism as this country knew it ended on Sept. 15, 2008, when Lehman Brothers went bust, but will the version that replaces it be better and more crisis proof?
Matthew Bishop, American business editor and New York Bureau chief for The Economist, presented his thesis and posed the question during the second installment of the Great Decisions lecture series Thursday in the Scheide Music Center on the campus of The College of Wooster.
The title of his talk came from his new book with co-author Michael Green, “The Road from Ruin: How to Renew Capitalism and put America back on Top,” which was published Jan. 26.
Bishop presented five “wrong turns” (to follow the road motif of his book) and offered four ideas to move toward solutions.
Given the worse economic collapse since the Great Depression, Bishop said this country has come to a point where “we need a new set of ideas.”
Although it feels like the economy has never been here before, bubbles and bursts have been around for centuries, Bishop said. He spoke of the tulip bubble from the 1630s in Holland when tulips infected with a virus created rare bulbs.
Speculators drove up the price of these bulbs, and then they came crashing down. There was the South Sea Trading Co. bubble in 1720, the Great Depression in the 1930s, the stock market crash in 1987, known as Black Monday, the Japanese bubble and the ensuing “lost decade” as the country struggled to recover, and the dotcom bubble and bust in the 1990s.
The first wrong turn is to assume bubbles are wholly negative, he said. They usually are associated with some type of innovation that proves to be immensely beneficial. The tulip mania of the Netherlands led to the futures market, the South Sea bubble led to the establishment of public debt and paper money, he said.
Bubbles generally happen because something new and good happens, but there is not an understanding of how to value it, Bishop said.
The derivatives and subprime loans that were part of this latest economic collapse will likely be seen as a good thing down the road, he added, noting some people were allowed to purchase homes that might not have been able to do so otherwise.
“It’s just unfortunate that it got out of hand,” Bishop said.
Another wrong turn is assuming the government must avoid bailing out financial institutions, according to Bishop. History shows when a banking system collapses, there is a much more disproportionate impact on the economy, he said. There was not a bailout after the 1929 crash; instead the message was to liquidate, he added.
While it might not be politically popular in this climate, Bishop said the government should have reacted differently to Lehman Brothers.
The third wrong turn is a temptation to address symptoms rather than dealing with the underlying causes.
“This is a global crisis,” he said, not just an American problem. Until everyone is operating by a similar set of rules, Bishop said people can expect there to be imbalances among the countries.
A fourth wrong turn is to believe the economy will always recover on its own. He spoke of the paradox of thrift in which families increase spending and reduce spending at a time when the economy needs more spending.
Bishop said the economy needed a massive stimulus to stop unemployment, saying it would have been even higher than 10 percent had not the government intervened.
It is not a “low-cost” option, created massive debt and presented new challenges, but Bishop said he believes the reaction was the right one.
The fifth and final wrong turn explored in his book is rushing into regulation without a proper analysis.
Richard Seaman, president of the Seaman Corp., said he felt Bishop presented a good analysis of the kind of wrong turns and had good ideas to approach. However, Seaman said Bishop should have focused more on government’s culpability in the economic crisis, noting Fannie Mae and Freddie Mac, government-backed institutions, hold $5.3 trillion in liabilities against $70 billion of capital.
“We need to look at more than Wall Street,” Seaman said.
Frank Rasmussen, president of the Great Decisions board, said he did not think the United States had the credibility or the leverage to establish a global institution. He believes an answer will have to be found outside of Washington, D.C., in places like Wooster.
By Bobby Warren – the-daily-record.com
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