This article originally appeared on Tom Dispatch.
What is Washington to do as the financial system collapses? Clearly, stark differences in approach as well as in public policy have already emerged. Bailout Bear Stearns and pump up the brokerage and investment business with new lines of credit. Nationalize Fannie Mae and Freddie Mac on the backs of the taxpayer–but let Lehman drown. Tell the financial community to save itself, after which Bank of America salutes and buys Merrill Lynch. Then, the Fed gets cold feet and decides it can’t let an institution the size of the insurance giant AIG go under as well. Washington is left staring into the abyss. The old rules no longer apply.
And that’s the point. At moments of crisis since the mid-1980s, the relationship between Washington and Wall Street has changed fundamentally, at least when compared to anything that would have been recognizable in the previous century. As a result, the road ahead is dark and unknown.
During the nineteenth century, Washington was generally happy to do favors for Wall Street financiers. Railroad tycoons, who often used those railroads as vehicles of extravagant speculation, enjoyed subsidies, tax exemptions, loans and a whole smorgasbord of financial fringe benefits supplied by pliable Congressmen and senators (not to mention armadas of state and local officials).
Since the political establishment was committed to laissez-faire, legerdemain by greedy bankers was immune from public scrutiny, which was also useful (for them). But when panic struck, the mighty, as well as the meek, went down with the ship. Washington felt no obligation to rush to the rescue of the reckless. The bracing, if merciless, discipline of the free market did its work and there was blood on the floor.
By early in the twentieth century, however, the savage anarchy of the financial marketplace had been at least partially domesticated under the reign of the greatest financier of them all, J.P. Morgan. Ever since the panic of 1907, the legend of Morgan’s heroics in single-handedly stopping a meltdown that threatened to become worldwide, the iron discipline he imposed on more timorous bankers, has been told and retold each time an analogous implosion looms.
Indeed, last week’s news carried its fair share of 1907-Morgan stories, trailing in their wake an implicit wistfulness. They all asked, in effect: Where is the old boy when we need him?
Back then, with Morgan performing his role as the nation’s unofficial private central banker, Teddy Roosevelt’s administration continued to keep its distance from Wall Street, still unready to offer salvation to desperate financial oligarchs. Not normally chummy with Morgan and his crowd, Roosevelt did cheer from the sidelines as the ¨ber-banker performed his rescue operation.
As it turned out, though, the days of Washington agnosticism about Wall Street were numbered. The economy had become too complex and delicate a mechanism and, in 1907, had come far too close to meltdown–even Morgan’s efforts couldn’t prevent several years of recession–to leave financial matters entirely in the hands of the private sector.