Wednesday morning, I attended a Roosevelt Institute conference, on the theme “Make Markets Be Markets“. It was an enjoyable affair, with a bunch of smart, well-known speakers saying things I broadly agree with, mostly on financial reform. A wrinkle I had not really expected was how frequently, and rather charmingly, the name of the gentleman after whom the Institute is named would be invoked. FDR, and the 1930s generally, were very much with us that morning.
I have much to spout on the subject of financial reform; I am several posts in arrears on that. But by the end of the conference, I was fascinating myself with a little thought experiment.
Suppose the good guys win. Better yet, suppose they had never lost. Suppose banks had never ventured beyond conservatively prudent lending; that there had been no housing, internet, or credit bubble. Forlorn cul-de-sacs surrounded by mouldering homes were never cut from the Arizona desert. Webvan and pets.com were rejected straight off by investors rather than soaring against all reason then dying in an unreasonably sudden collapse.
In a world without bubbles and, let’s not mince words, in a world without fraud in substance if not in law, would we, or how could we, have enjoyed two decades of near “full employment” and apparent growth? Without all the internet companies that were forseeably destined to fail, without all the housing construction, without all the spending by employees whom we know now and should have known then were not actually participating in economic production, without all the spending by people feeling rich on stock or housing gains that would eventually collapse in their or someone else’s arms, what kind of economy would we have built?
These are not questions that answer themselves. They are unknowable counterfactuals.
But we do know something about the 1930s. In 1930, Keynes famously proclaimed “we have magneto trouble”, with the implication that the then incipient depression was due to a kind of remediable, technical failure. Less famously, Keynes was wrong. The post-war economy that finally put paid to the Great Depression was an economy different in kind from that of the go-go 1920s. One piece of that was financial sector reform: there were the securities acts and the FDIC and an astonishing forty years without major banking crises. But there was also a new age of mass production and mass unionization in the US (the so-called “Fordist era“), and the vast existential project of reconstruction in Europe. The Bretton Woods system fixed exchange rates and was intended explicitly to prevent the sort of unbalanced international capital flows that preceded the Great Depression. The postwar United States had an agricultural sector that was largely centrally planned, Fannie Mae (FNM) and Social Security, and especially the Wagner Act which put the coercive power of the state behind exclusionary labor cartels, but which more than any other single thing made possible mass affluence based on income rather than credit. These were radical, inconceivable changes, combining “socialist” central-planning and redistribution with “fascist” collusion between the state and large corporations in support of national aims. Keynes was right, of course, that the “resources of nature and men’s devices [were] just as fertile and productive” in 1945 as they had been in 1929. But the “delicate machine” we had “blundered in control of” was replaced, not repaired. The new model mixed the technologies of the original gizmo with very novel and foreign elements in a design influenced both by the history of the Depression and an emerging great-power conflict. (See this excellent piece by the Roosevelt Institute’s Mike Konczal.)
It is entirely unclear that, absent these changes, the US economy would have “recovered”, even with financial sector reform and the deleveraging of household balance sheets. Sure, depressions never last forever, but it is plausible that the US would have fallen into a spiral of booms and busts and class warfare absent the political choices that defined the postwar economy. And note that they were political choices — a “free market” never would have delivered and sustained for decades a pervasively unionized workforce. They were, for better and for worse, the work of Franklin Delano Roosevelt.
I don’t mean to underplay the importance of financial sector reform. A continually malfunctioning financial sector has brought the American economy to underappreciated ruin and left us with an overhang of unfulfillable promises that may engender conflict for decades. Further, the financial sector has generated the rump of a crony capitalist class which threatens to set us on the Argentine path. We have to fix the financial sector.
But we cannot fix the financial sector without addressing the problems and contradictions which we depend upon financiers to paper over. This never was just a financial crisis. It was, and is, an economic and political crisis, and we are only a very short way down the path towards resolving it.
p.s. While I do favor restrictions on international capital flows, I don’t favor (I’m actually quite hostile to) unionization as a means of delivering widespread affluence. I am not arguing that we should rehearse the political bargains of the mid-20th century. I am arguing that we had better come up with new bargains, that excising the tumors of parasitic finance is necessary but nowhere near sufficient to getting us out of the trouble we’re in.