AMERICAN STYLE CAPITALISM GOES WAY OF DINOSAUR?

- October 19, 2008

This last month has served as an asteroid strike upon the global economy. Individuals, corporations and local governments have lost trillions of dollars. Even whole countries are on the verge of bankruptcy. There is no speedy renewal. To the contrary, the question is whether American style capitalism is on the way to extinction? If not extinction than there appears to be a hurried evolution in the global economic genealogy.

WORLD BLAMES U.S. FOR CRISIS

This global economic crisis has had its roots in US housing. The mortgages underlying such housing went bad. The securities and a variety of "derivative" products created by bundling such mortgages have either lost value or more accurately have lost their liquidity and marketability. (Perhaps, most did not even understand such derivatives). A loss of confidence was instigated, and institutions became reluctant to buy and sell or lend to each other. (Many of the institutions who originally invested in such securities were global as well as US). Soon, the globe was spiraling into a credit crunch and liquidity crisis. Well, that is the rather uncomplicated rationalization, but whether the nuances are adequately taken into consideration, the US is perceived as the epicenter.

Further, US regulators are perceived as having been lax in originally permitting such easy mortgages and not having adequately regulated the creation and mutation of mortgage backed securities and derivatives. Perhaps more accurately, the US government was late in reacting properly to this crisis at its core. When US leadership did react, the crisis was at least rhetorically addressed as a purely or largely internal matter.

REST OF GLOBAL COMMUNITY TO FEND FOR ITSELF

The rest of the world was left to largely fend for itself. Some states even stand on the brink of financial collapse. Iceland is asking for loans from Russia. Hungary, and its currency, is similarly devastated.

The far right commentators and legislators in the United States also attributed the collapse to lax mortgage lending, from fraudsters to "unsuitable borrowers" generally implying low income. They insisted that the free market, allowed to flow its course, would unwind and fix the crisis. Ironically, it is this type of insistence upon purist capitalism that also may mean it demise.

GOVERNMENT INTERVENTION COMES TO RESCUE, FROM U.K.

Accurately or not, it is Gordon Brown's UK government that has been credited with inventing the remedy for this crisis. The government investing in and taking some control over financial institutions is not a particularly novel concept, except perhaps in the United States. Nonetheless, it is the return to direct government charge over financial institutions and particularly the infusions of hundreds of billions through equity purchases that has apparently calmed domestic and global credit and capital markets. In the complex realm of credit derivatives and swaps, perhaps only the lingering hand of government protruding into banks could produce the impression of a steady grasp of the crisis.

THE NEXT STEP: FROM TEMPORARY INTERVENTION TO LASTING HOLD

French President, Nicolas Sarkozy, and EU Chief, Jose Maria Barroso, came for an impromptu visit to Washington this past weekend. While President George W. Bush was their host at Camp David, it was the Europeans' purpose to set the course for a series of "reforms."  Of course they knew that Bush's lame duck presidency had no ability to deliver on any promise, except for further discussions.

A SERIES OF "FINANCIAL FORUMS"

The agenda is lengthy and certainly likely to become more complex. At least some of the European leadership has already indicated their focus, and there is also jockeying among the "continentals" regarding who will set the tone for the EU and thus effectively for the rest of the globe in the dialogue soon to become negotiations with the United States. Some of the topics already put on the rhetorical table:

1.     More stringent regulation of capital markets;

2.     Enhanced global regulatory authority;

3.     Review of "rating agencies" role, and probably greater regulatory constraints with global perspective, (the major rating agencies are US based).

EVOLVE OR GO EXTINCT!

The US will have to make accommodations, if for no other reason than to maintain leadership. The purists of American style capitalism will resist, but they are defying something already well under way. Ironically, it was the purists' initial laissez-faire attitude toward homeowners and the crisis that has now only exposed the weakness of their arguments. 

RECOGNIZING THAT WHICH THEY ENDEAVOR TO TAME

However, the issue is not so much a lack of as it is asymmetric regulation. It is difficult to contend that the free markets have performed either adequately or that they have been free of undue influence, if not speculation than panic. Goldman Sachs and Morgan Stanley have already decided to evolve into more regulated bank holding companies, as JPMorgan, Citicorp, Bank of America and Wells Fargo. On the other hand, a whole new breed of financial market players, hedge funds, has taken hold. They are not even so much a new breed as a broad range of aspirants, some dieing out while others are prospering from the chaos in the jungle, at least for the time being. For them, it will be a battle to maintain yet unrecognized dominance, while for the would-be-regulators it will be a struggle to recognize that which they endeavor to tame.   

Muhamed Sacirbey

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Author of the article is a former Vice-President of Standard & Poor's.

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