THIS WEEK, I’ve invited a guest writer — an expert in the massive changes reshaping the American economy — to share several thoughts with us. Today, Dr. Jerry Davis of the University of Michigan Ross School of Business shares what he sees as the basic shape of this economic earthquake.
You may think that “earthquake” is too strong a word. To give you an idea of the seismic scale of these changes, Advertising Age magazine’s Jonah Bloom wrote on Monday: “I live down on Wall Street, and there is an inescapable sense that
these are end times for a business district that was the nerve center
of an empire just a decade ago.”
So, here is Dr. Davis’ “take” on what’s happening.
Please, as we always do, we welcome your thoughts. Tell us what principles you think are most important as our country tries to cope with these massive changes.
The current financial crisis
has brought a series of surprising reversals. The five major Wall
Street investment banks—formerly “masters of the universe”—are
now down to two. Fannie Mae and Freddie Mac, the two companies
behind $5 trillion in mortgages, went from private to public overnight,
at a potential cost to taxpayers of $200 billion. And the US government
took over the world’s largest insurer for another $85 billion.
This weekend the Secretary of the Treasury and the Chairman of the Federal
Reserve announced a plan, being debated in Congress this week, to buy
perhaps $1 trillion in mortgage-backed securities from American financial
Wall Street now runs through
the middle of Washington.
An administration committed to deregulation
and “free markets” is overseeing the largest intervention
into the financial markets in history, leaving politicians and their
appointees with unprecedented control over finance in the US.
As Republican Senator Jim Bunning of Kentucky put it last week, “The
free market for all intents and purposes is dead in America.”
The only precedent for this
kind of massive intervention was during the Great Depression, when the
Roosevelt Administration created a set of laws and agencies to stabilize
finance: the Securities and Exchange Commission for investment banks
and financial markets, Glass-Steagall and the Federal Deposit Insurance
Corporation for banks, and the Federal National Mortgage Association
for home lenders, among others.
But Roosevelt did not stop
at finance, because the Depression was not just a financial crisis.
Roosevelt created a set of institutions to create greater economic security
beyond Wall Street—including the National Labor Relations Board and
Social Security. These institutions addressed some of the insecurities
that came from an economy largely organized around a few dozen major
Today the economy is vastly
different than it was during the Depression: Finance is overwhelmingly
organized through markets, and the large corporations that used to dominate
the economy and its labor practices have either disappeared (Westinghouse,
ITT, the original AT&T) or substantially retrenched (US Steel, GM,
Ford). The US now has a service economy far more than an industrial
If Washington is already intervening
into financial markets, is it also time to think about updating our
other institutions for a service economy? Far more Americans work
in retail today than in manufacturing, and Wal-Mart alone employs more
Americans than the dozen largest manufacturers combined—while providing
far stingier wages and benefits. Is the current financial crisis
the right opening to re-imagine the Depression-era institutions that
provided economic security for most of the 20th century?
The Bush Administration sought
to re-invent these institutions through the “ownership society,”
which would have allowed individuals to entrust the retirement and health
savings to financial markets. In light of recent events, it is
safe to say that we will not be pursuing this approach any time soon,
and it won’t happen during Bush’s remaining months. But perhaps
the time is here for a more thorough rethinking of our government’s
role in making all of us safer from economic turbulence, not just those
that happen to work on Wall Street.
WHAT do you think should be done? What principles should the U.S. follow now?
HOW is this affecting you?
Click on the “Comment” link above, or if you prefer to drop us a quick Email,
you can do that as well. We’re also still inviting readers to sign up
for a couple of in-depth surveys Dr. Baker plans to conduct a little
later this fall. To take part in that effort, add your Email address to
the box in the upper left area of our Web site.