Creative Destruction on Wall Street
The epic deflation of Wall Street rolls forward like a blood-spattered steam roller, claiming more important victims. It takes down noble old names like Merrill and Lehman Brothers, destroys the savings of large pension funds and mom-and-pop investors, throws tens of thousands of financial workers out of jobs.
But let's not dwell on the downside. This is the process Joseph A. Schumpeter famously described as "creative destruction"--capitalism's way of clearing away debris from the past so that new flowers may bloom. In this drama, what is being swept away is the monumental arrogance of celebrated financiers, also the fraudulent gimmicks that created lots of new billionaires by selling bad paper to the world's investors. A great bubble of wealth grew in the canyons of Wall Street--a run-up of falsified financial assets that lasted for roughly twenty-five years. Now the air is rushing out of that balloon, no way to stop it.
In the long run, the destruction of concentrated wealth and power is always good for democracy, liberating people from the heavy hand of the status quo. Unfortunately, many innocents are slaughtered in the process. As the US manufacturing economy was dismantled by downsizing and globalization, the learned ones (Alan Greenspan comes to mind) told everyone to breathe easy--ultimately this would be good for the workers and communities who lost the foundations of their prosperity. Now that "creative destruction" is visiting the bankers, we now observe they are not so accepting of their own fate.
The destruction of Wall Street's girth and power is unavoidable, in any case. To switch metaphors, Humpty Dumpty fell off the wall and not even the king's horses in Washington can put him back together again. It would have been far better if the federal government and national politics had recognized the great deceptions of Wall Street and put a stop to them before catastrophe unfolded. Since that didn't happen, we are all now doomed to take a perilous ride--the economy, the country, the world--and hope for the best.
However, we can look forward to the new order that emerges from the wreckage. The financial wizards who have dominated politics and economic orthodoxy for a generation are unmasked, their delusions failed. We have an opportunity to think anew, at least to hope that governing elites in both political parties will finally come to their senses or, better yet, get out of the way.
Last weekend's events come down to this: the authorities in Washington and Wall Street finally admitted what they persistently brushed aside during this year of turmoil and government bailouts. The Federal Reserve and Treasury treated the financial system's problem as "psychological" and assumed they could manipulate investor confidence by pumping lots of public money into the embattled financial firms and banks. Financial markets are gripped by desperate psychology--fearful people fleeing from the consequences of their own reckless behavior--but the core of this crisis is real and will not yield to happy talk from the authorities.
The long-running inflation of financial values and phony accounting allowed by deregulation created an unworldly sense of new wealth. It was essentially false and is now gradually receding, coming back down to something resembling honest valuations. As a result, the financial system has lost as much as $1 trillion in capital, maybe twice that much. Wall Street will not truly recover until it has replenished that capital--most unlikely, given the worldwide skepticism of investors. Or it may grow smaller--shrinking balance sheets and employment, resulting in fewer firms and less economic influence over the rest of us. When the blood dries, people will be able to see this is good news for the republic--a chance to rebalance our society and politics--but the road ahead is going to be rough and uncertain.
Last weekend, the Fed and Treasury Secretary took a modest step toward acknowledging the truth. They implicitly admitted that their rescues have failed. If the government continued its psychological approach, bailing out the big boys one by one, the public's assets and public patience would soon be exhausted. Now we shall see whether financial markets worldwide can endure the stern doctrine of "creative destruction" that was so confidently imposed on others.