Toward a New International Capitalism
"This is a decisive moment for the global economy," President Bush declared yesterday in New York as leaders from the 20 largest economies headed toward Washington for an emergency meeting on the unfolding global economic crisis.
It's not only a decisive moment for the economy, but it's the most decisive moment for American-style capitalism since July 1944, when, after 22 days of negotiation at a remote lodge in the White Mountains of New Hampshire, leaders of 44 nations emerged with the blueprint for a new world financial order based on the principles of free markets, free trade and the free flow of capital.
Although things have evolved considerably since that confab at Bretton Woods, the United States has remained the world's most successful economy, and the rest of the world has moved, by reason of its example and its prodding, toward an embrace of its economic model.
Now that is about to change.
As the president acknowledged in his remarks yesterday, the United States, which has gone from the world's largest creditor to its largest debtor, can no longer expect to dominate the institutions of international finance and will have to share power and influence with rapidly developing countries that generate more of the growth and have more of the world's capital.
Just as significantly, the rest of the world -- if not a majority of Americans -- is now convinced that the raw, unregulated, laissez-faire capitalism most closely associated with the American model has serious flaws and does not reliably produce the best outcome.
From the Latin American debt crisis of the 1980s to the Asian financial crisis of the 1990s to the Internet craze at the turn of the century to today's economic conflagration, the past 20 years have provided ample evidence that uncontrolled flows of private capital have created massive booms and busts that have overwhelmed the financial system and destabilized the global economy. The booms have misallocated capital, widened the gulf between rich and poor, and eroded the norms of behavior that had contributed to social and political harmony. The busts have brought financial hardship and ruin to innocent businesses and households and saddled governments with huge debts that will take generations to pay off.
In spite of these failings, President Bush remains largely in denial, an unrepentant cheerleader for American-style capitalism. As he sees it, the current crisis does not reflect any fundamental flaw in the American model but instead results from individual failures by lenders, borrowers, financial firms and regulators that can be minimized in the future, not through more regulation but through smarter regulation. And while he gives rhetorical support to the notion that international institutions may need to be updated and strengthened to deal with the crisis that might arise, he also makes clear that reform should not come at the expense of U.S. sovereignty or freedom of action.
Up to a point, Bush's defensiveness is understandable, given the comforting belief in many countries that lax American regulation and Wall Street greed were the sole causes of their own economic misfortunes. Anyone with a passing acquaintance with the real estate bubbles in Ireland and Spain, the stock market bubbles in China and India, and the loose lending practices by banks in Iceland and Russia would appreciate how misguided that view is.
But there is also no denying that American-style capitalism has been undermined by its own success. In its present incarnation, it rewards manipulation over innovation and speculation over genuine value creation, resulting in massive misallocations of capital and the accumulation of unheard-of wealth in the hands of money managers and top corporate executives who are more lucky than they are skilled. No longer is it the entrepreneurial capitalism of Google and Amazon and Nucor Steel that animates the American imagination -- it is the financial capitalism of Enron and Drexel Burnham Lambert, of Goldman Sachs and the Blackstone Group, of publicly traded real estate investment trusts and multibillion-dollar hedge funds. Here in the United States, they have sucked up a disproportionate share of talent and capital, distorted compensation systems, and helped to perpetuate the false notion that companies exist solely to enrich their investors and investment bankers. And now, through the marvels of global financial markets, they have spread their toxic culture and products to economies across the globe.
As they arrive in Washington, the challenge for global leaders is to find a way to tame a financial system that has not only corrupted American-style capitalism but also brought unwelcome instability to the global economy. The flaw in the old "Washington consensus" is that an unfettered flow of investment capital, particularly among countries with different currencies, is not the idea. While product and labor markets work remarkably well when they are left open and lightly-regulated, experience has now demonstrated that a different approach needs to be taken toward financial markets, which suffer from imperfect information, an abundance of moral hazard, and a tendency toward herd behavior and speculative excess.
Creating a new architecture and regulatory framework for the global financial system is complicated and wonky and won't win anyone the next election. After the Asian financial crisis in 1998, there was a lot of brave talk about updating the old Bretton Woods institutions, but petty politics and an improving economy got in the way, and nothing was ever done. Perhaps this time, the prospect of another global depression will focus the minds of world leaders and lead them to create a new model of capitalism that everyone can live with.
Steven Pearlstein can be reached at email@example.com.