Peter L. Bernstein, a financial consultant, economic historian and the editor of the Economics & Portfolio Strategy newsletter posed a significant question in Saturday's NYT: What’s Free About Free Enterprise?:
A huge bailout plan is being hammered out in Washington precisely to avert this kind of economic calamity. The plan is needed, and it needs to be put in place quickly. But at the same time, we need to ask how the financial system came to require a rescue of this magnitude.
I don't see how any rational person could look at this mess and not see the grimy fingerprints of deregulation as well as lax enforcement (and the naked greed which fuels both) all over this present crisis.
Naturally, a plan of this magnitude has stirred a storm of commentary, but two important potential results deserve more attention than they have received.
The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.
The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that "the risk of not acting would be far higher," we should be aware of the secondary effects of what we are getting into.
Bernstein focuses more on the moral hazard because, of the twin potential results this crisis presents, it's the one that is probably easiest to quantify.
Once the federal government declares, "Thou shalt not fail," there are no limits to how far future risk-takers will go. Who will see any need to pay attention to the possible consequences for the government’s budget, the market for its bonds, the taxpayers, its creditors and, indeed, the whole economic structure?
Bernstein echoes the sentiment expressed by the Hartford Courant's Rick Green the day before when he toured the seized 7,328-square-foot, mid-century mansion of Wall Street "uber-swindler" Michael Lauer during the fed's open house in preparation for a tax forclosure auction.
So on the rotting, moldy deck, next to the crumbling outdoor bar, I struck up a conversation with a neighbor, a man also curious about greed.
"No names!" said the chatty physician who lives next door. "It's guilt by association."
"I don't like these excesses, the money to be made at any price. It reminds me of the '80s," he offered. "When they do something like this, what are they thinking? Deceiving people is not right."
And, I wondered, are we somehow rewarding this greed when we fork over $700 billion to bail out the reckless, risky behavior of Wall Street?
Isn't that the open question on the minds of the huge majority of my fellow Americans right now?
Bernstein concludes with a crucial question:
As we move into the future, and as the crisis finally passes into history, how will we deal with this earth-shaking blow to the most basic principle of our economic system? I do not know how to answer that question. But we need to ask it.
My answer would be that we do what this great country has always done and keep or invent what works and toss what doesn't work.
I see no reason why unfettered free market economics ought to be any more sacrosanct than human slavery, forced child labor or the legal status of women as mere chattel, to do with as men saw fit, used to be.
If Ivan Boesky and Sam Waksal, Bernie Ebbers and Dennis Kozlawsky, Andrew Fastow and Jeff Skilling, Michael Lauer and the Rigas boys have taught us nothing else, they've taught us that greed is not good. The legal distinction between securities fraud and allowed arbitrage of the type which precipitated this current crisis is moot in the real world economy where it's always the little guy who gets stuck paying the bill when greed outstrips common sense. After all, insider trading and other assorted forms of securities fraud weren't always illegal. And even when they were the feds often studiously looked the other way, as Ivan "greed is good" Boesky knew only too well.
Former Securities and Exchange Commissioner Harvey J. Goldschmid, now a law professor at Columbia University puts it succinctly,
"We've got to have the most dramatic rethinking of our regulatory structure since the New Deal".
As James J. Cramer noted almost exactly five years ago in New York magazine,
Somewhere, though, in some high school or middle school, another generation is oblivious to the scandals and the crimes. A decade and a half from now, I suspect, we’ll be due for a new tsunami of crime, as these prosecutions fade in memory or fail to get embossed into the brains of those too young to pay attention.
That's exactly what will happen if we fail to learn the lessons of the last 20 years.
It's time to stop playing the insane Republican game of Deregulation Russian Roulette. As the old lay definition says, trying the same thing over and over expecting different results is insane.