Last Resorts

Back on October 19, 1987 I was working in the New York Stock Exchange when the market crashed. Oh, I was just working in the archives, toiling away on some bit of exchange arcana, nothing really important, but I remember the excitement that started running through our corridors, as horror stories started passing by word of mouth. After the trading day was over, after 5 PM, I managed to get on to the trading floor, and watch the mounds of paper and everyone still running around in panic mode. (Usually by 5 PM the trading floor was primarily reserved for the janitors.) Well, I have been far from 11 Wall this week, but my heart belongs to Broad Street, and I want to be there so badly that I can taste it.

But of course I am not, and I can only sit back, awestruck, watching another Wall Street panic unfold, as usual, with terrifying rapidity, thudding from precipice to precipice as it plummets off one of those Wille E Coyote-type cliffs. It is not, this time, the market that has crashed, but it is the institutional framework that has governed our financial markets since the mid-1930s that has fallen apart. Investment banking, as we have known it, since the early 19th century, has suddenly and shockingly come to an end. There soon will be no more investment banking firms, just financial conglomerates. This seems to me to be good. Underwriting, the traditional function of investment banks, has become an ever smaller part of their business, as they engaged in risky speculations of all kinds, supported by a flimsy capital base. I say good riddance, they will not be missed, and anything useful they did can and will be undertaken by commercial banks, who have once again, for the first time, since the 1970s, emerged as the dominant force on Wall Street. The watchwords need to be deleveraging and reintermediation.

And existing financial institutions need to be blanketed with enough tight financial restrictions and enhanced capital requirements to make your head turn. Any institution that may at some point come crawling to the government for money needs to submit itself to the new order. All derivative markets need to closely regulated. And rather than just taking over all the bad debts of existing financial institutions, which is apparently what Secretary of the Treasury Paulson is proposing, why not just nationalize or quasi-nationalize all depository institutions? And set a strict limit, let total maximum compensation for any officer be no higher than $1 million per, for any federally regulated institution. And lets get everyone under the same regulatory framework. The end of state regulation of insurance companies surely should be at hand. There was nothing more pathetic this week than Gov. David Paterson allowing AIG to borrow $20 from its New York State regulated subsidiary, which was clearly against the interests of any New York State policy holder. What would have happened to that money, pray tell, if AIG had been allowed to declare bankruptcy?

For the first time since the great depression, there is, or at least should be a sense that unregulated capitalism doesn’t work, and that in the end, capitalism will always prove the worst enemy of capitalists. The free market in the end it cannot take care of itself. This might have been more convenient a few weeks from now, after an Obama victory, rather than having to try to deal with this during the rigors of the election stretch, but there you have it. When Obama takes office next January he should declare the equivalent of FDR’s bank holiday, and use this crisis, not to lurch from one ad hoc crisis plan to another, but to put in place a comprehensive system of financial reform during his first hundred days. The illusion that the free market can somehow alleviate government the responsibility of regulating the economy has been, I hope, forever punctured. Once again, we are all Keynesians, and some of us, perhaps, are not even afraid to again call themselves socialists.