By Harold Meyerson
Saturday, October 18, 2008
THE ERA OF small government is over. Regulation is back. Governments
now control finance.
Amid all the mind-boggling developments of the past two weeks,
however, perhaps the greatest is this: government is going global.
Initially, the financial crisis that followed the bankruptcy of Lehman
Brothers appeared confined to the United States. Within days, however,
it had spread to Europe. Haltingly, governments on both sides of the
Atlantic began to develop national plans to shore up their banks and
unfreeze their lending. Ten years ago, such national solutions would
probably have sufficed. But when they were rolled out ten days ago,
they fizzled almost instantly, partly because they failed to inject
enough capital into a tottering financial system, but also because
their scope was merely national, while the economy they sought to save
had grown so global that national solutions no longer sufficed.
In Europe, a continental economy had emerged, but there was no truly
effective continental government to set its rules. When the crisis
hit, some nations guaranteed all their bank deposits while others did
not -- creating the prospect that depositors could take their euros
and put them in the nation next-door. At the same time, some banks
whose operations were spread over several nations were failing, and it
wasn't clear which European nations where such banks had branches
should bail them out, and to what extent, and under whose authority.
But even before the crisis hit, the mismatch between global
corporations and national governments was undermining the stability of
the system. Consider, for instance, the failure and de facto
nationalization of AIG -- a corporation of by-the-book U.S.-based
insurance companies undone by all the credit default swaps engineered
by its London-based financial products unit. Congress had decided in
2000 to exempt those swaps from regulation, but that's only part of
the story, since some of the unit's activities were subject to
governmental oversight. Though the unit was based in London, however,
it was regulated by the U.S. Office of Thrift Supervision, since AIG
owned a savings and loan back in the states, and by French banking
regulators, since AIG owned a bank in France.
If that sounds both Byzantine and ineffectual -- well, it was. It's
also emblematic, however, of the growing disjuncture between national
jurisdictions and a world economy. China now provides much of the
world with food, medical and industrial products, though its product
safety record doesn't inspire much confidence. U.S.-based airlines
perform maintenance work on their planes in Central America, where
labor is cheaper and safety inspections from U.S officials are
But it took the collapse of finance to force governments to confront
the limits of national power. Last weekend, the nations of Europe
realized that they all had to embrace the identical recapitalization
and deposit-insurance plan (devised by British Prime Minister Gordon
Brown) to restore confidence in the financial sector. By so doing,
they set a safety standard that the U.S., despite the ideological
reluctance of the Bush Administration, was compelled to adopt as well.
This epochal transition should come as no surprise to Americans,
because it echoes this nation's experience in the 1930s. Before the
New Deal, government in America was handled chiefly at the level of
the individual states, which chartered and oversaw banks and
corporations. In the banking crisis of 1932-33, a number of governors
ordered their states' banks to close to prevent bank runs, but these
closures did nothing to restore the public's confidence. Only when FDR
became president and ordered a national bank "holiday" and inspection
did the bank runs cease. The New Deal not only subjected what had been
a laissez faire economy to governmental regulation, but it shifted the
functions of government from the states, which had been unable to
manage an economy that had morphed from local to national over the
preceding 70 years, to Washington.
Now, emboldened by the provisional success of their cross-border
coordination, Brown, French President Nicholas Sarkozy and other
European leaders are calling for the convening of a global conference
to create some global rules of the road -- a Bretton Woods 2.0.
Prompted by the continuing financial instability, the Europeans want
to get started next month -- though if they want the American people
to buy into a new planetary level of governance, they need to wait
until the United States can be represented by an administration with
more popular support and legitimacy than Bush's.
More fundamentally, though, the authors of the new global compacts
must do more than write the rules and establish the transnational
institutions to regulate 21st-century finance. They need to put rules
and regulators in place to ensure the safety of the products the
global economy creates, and the safety and living standards of the
workers who produce them. It's time to globalize the New Deal.