Tossing Aside History, Conventions and a Few Cliches

Treasury Secretary Henry M. Paulson Jr. has adapted the Treasury's traditional powers to deal with the financial crisis.
Treasury Secretary Henry M. Paulson Jr. has adapted the Treasury's traditional powers to deal with the financial crisis. (Chip Somodevilla - Getty Images)
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By Steven Pearlstein
Saturday, September 20, 2008

Historic. Breathtaking. Revolutionary.

It would be hard to find a superlative that would overstate how much the parameters and contours of American economic policy have been reshaped over the past two weeks.

The degree of government intervention into the workings of the private marketplace is unprecedented. Three giant financial institutions taken over. Government purchases of vast quantities of hard-to-sell assets from banks, investment banks and anyone else whose demise might threaten the financial system. Trading outlawed in an entire class of securities. A government guarantee extended to a whole new category of investments.

Laws have been stretched until they are barely recognizable -- like the one, from the days of the gold standard, that authorizes the Secretary of the Treasury to buy and sell the precious metal, now used to authorize a wholly new insurance program for money-market funds.

Roles have been expanded well beyond anything that could have been imagined only weeks ago, like the central bank taking control of a giant insurance company.

And tossed aside have been long-standing conventions, such as the quaint ideal that independent agencies such as the Securities and Exchange Commission and the Federal Reserve should keep a proper distance from the White House and the executive branch.

The amount of taxpayer money committed, or about to be committed, to this rescue effort is simply staggering -- easily a trillion dollars, when all the loans, purchases and guarantees are added up. Although most if not all of that is likely to be returned to the Treasury, it still represents a massive shift of liability to the balance sheet of the U.S. government.

All that to save free-market capitalism from its own excesses.

It should tell you something about the critical condition of the financial system that both free-market zealots of the right and angry populists of the left are willing to put aside their ideology and commit themselves to speedy passage of legislation whose details they have yet to see, but the mere prospect of which drove the Dow Jones industrial average up 700 points over two days. Emerging from meeting Thursday night at the Capitol with top officials of the Treasury, the Fed and the SEC, congressional leaders looked like deer caught in the headlights of an oncoming eighteen-wheeler.

It is an exaggeration and a journalistic cliche to say that after the events of the past two weeks, the U.S. economy will never be the same. Despite the record volume and volatility on financial markets, stock prices and benchmark interest rates have pretty much returned to where they were. And in most households, and most companies outside of Wall Street, life goes on pretty much as usual. Moreover, officials have taken pains to emphasize that most of the recent initiatives are temporary.

But in terms of the political economy, there is little doubt we are witnessing a once-in-a-generation sea change. It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians. With Bear Stearns and AIG as their rallying cry, citizens will demand the same kind of financial security and protection as bondholders of big banks and counter-parties of hedge funds. Debates about the competitiveness of U.S. financial markets will focus less on how little regulated they are and more on how much protection and transparency they offer to investors. It will be harder to deny essential government agencies the talent, money and respect they need to do the job right.

An interesting comparison can be made between Hurricane Katrina and the current financial crisis, which symbolically has now stranded a number of rich investors on the roofs of their mansions, crying out to the government to be rescued.

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