zakaria, the capitalist manifesto (newsweek 22.6.2009)

8/14/2019 Zakaria, The Capitalist Manifesto (Newsweek 22.6.2009)

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PROSPERITY

THE CAPITALIST MANIFESTOGREED S GOODA SPECTER IS HAUNTINthe return of capitalism. Over the pastsix months, politicians, businessmenand pundits have been convinced thatwe are in the midst of a crisis of capital-ism that will require a massive trans-formation and years of pain to fix.Nothing will ever be the same again.'Another ideological god has failed," thedean of financial commentators. Mar-tin Wolf. wrote in the Financial Times.Companies will "fundamentally reset"the way they work, said the CEO of Gen-eral Electric, Jeffrey Immelt. "Capitalismwill be different," said Treasury SecretaryTimothy Geithner.

No economic system ever remainsunchanged, of course, and certainly notafter a deep financial collapse and a broadglobal recession. But over the past fewmonths, even though we've had an imper-fect stimulus package, nationalized nobanks and undergone no grand reinven-tion of capitalism, the senseofpanic seemsto be easing. Perhaps this is a mirage-orperhaps the measures taken by statesaround the world, chiefly the U.S. gov-ernment, have restored normalcy. Everyexpert has a critique of specific policies,but over time we might see hat faced withthe decision to underreact or overreact,most governments chose the latter. Thatchoice might produce new problems indue course-a topic for another essay-but it appears to have averted a systemicbreakdown.

There is still a long road ahead. Therewill be many more bankruptcies. Bankswill have to slowly earn their way out oftheir problems or die. Consumers will savemore before they start spending again.Mountains of debt will have to be reduced.American capitalism is being rebalanced,reregulated and thus restored. In doingso it will have to face up to long-neglectedproblems, if this is to lead to a true recov-ery, notjust a briefreprieve.

Many experts are convinced that the

(TO A POINT)BY FAREED ZAKARIA

ARTWORK BY MARK WAGNER

situation cannot improve yet because heirown sweeping solutions to the problemhave not been implemented. Most of uswant to see more punishment inflicted,particularly on America's bankers. Deepdown we all have a Puritan belief thatunless they suffer a good dose ofpain, theywill not truly repent. In fact, there hasbeen much pain, especially in the financialindustry, where tens of thousands ofjobs,at all levels, have been lost. But fundamen-tally, markets are not about morality. Theyare large, complex systems, and if thingsget stable enough, they move on.

Consider our track record over thepast 20 years, starting with the stock-market crash of 19BZ when on Oct. r9the DowJones lost 23 percent, the largestone-day loss in its history. The legend-ary economist John Kenneth Galbraithwrote that he us t hoped that the comingrecession wouldn't prove as painful asthe Great Depression. It turned out to bea blip on the way to an even bigger, lon-ger boom. Then there was the 1992EastAsian crisis, during the depths of whichPaul Krugman wrote in a Fortune coveressay, "Never in the course of economicevents-not even in the early years ofthe Depression-has so large a part ofthe world economy experienced so dev-astating a fall from grace." He went onto argue that if Asian countries did notadopt his radical strategy-currencycontrols-"we could be looking at . . . thekind of slump that 6o years ago dev-astated societies, destabilized govern-ments, and eventually led to war." Onlyone Asian country instituted currencycontrols, and partial ones at that. Allrebounded within two years.

Each crisis convinced observers thatit signaled the end of some new, danger-ous feature of the economic landscape.But often that novelty accelerated in the

years that followed. The rgBZ crash wassaid to be the product of computer trad-ing, which has, of course, expanded dra-matically since then. The East Asian crisiswas meant to end the happy talk about'tmerging markets," which are now at thecenter of world growth. The collapse ofLong-Term Capital Management in r99B-which then-Treasury secretary RobertRubin described as "the worst financialcrisis in go years"-was meant to be theend of hedge funds, which then massivelyexpanded. The technology bubble's burst-ing in zooo was supposed to put an endto the dreams of oddball Internet start-ups. Goodbye, Pets.com; hello, Twitter.Now we hear that this crisis is the end ofderivatives. Let's see. Robert Shiller, oneof the few who predicted this crash almostexactly-and the dotcom bust as well-argues that in fact we need more deriva-tives to make markets more stable.

A few years from now, strange as it maysound, we might all find that we are hungryfor more capitalism, not less. An economiccrisis slows growth, and when countriesneed growth, they turn to markets. Afterthe Mexican and East Asian currency cri-ses-which were far more painful in thosecountries than the current downturnhas been in America-we saw the pace ofmarket-oriented reform speed up. If, inthe years ahead, the American consumerremains reluctant to spend, if federal andstate governments groan under their debtloads, if government-owned companiesremain expensive burdens, then private-sector activity will become the only pathto create jobs. The simple truth is thatwith all its flaws, capitalism remains themost productive economic engine wehave yet invented. Like Churchill's lineabout democracy, it is the worst of all eco-nomic systems, except for the others. Itschief vindication today has come halfwayacross the world, in countries like Chinaand India, which have been able to growand pull hundreds of millions of people

N E W S W E E K . C o MN r


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PANICS, RASHES ND FULL.ILOWNDEPRESSIONSAT EALMOSTAS FAR BACKAS THEBIRTHOFTHEMODERNFINANCIAL YSTEM N THE NETHERLANDS ROUND1620.A FEWOF THEMOSTMEMORABLE ETBACKS:

out ofpoverty by supportingmarketsandfree rade.Last month India held electionsduring the worst of this crisis. Its powerfulleft-wing partiescampaignedagainst ib-eralization andgot their worst drubbing atthe polls n 4oyears.Capitalism means growth, but alsoinstability. The system is dynamic andinherently prone to crashesthat causegreatdamagealong the way. For about 90years,we have been rying to regulate thesystem o stabilize t while still preserving

: TULIPMANIA:Speculators: in he Netherlands id up: tu t i pbu lbs tod i zzy i nge ightsi before he nevitable rash.

thusly: "TWonations, the most commer-cial in the world, enjoying but recentlythe highest degreeofapparent prosperityand maintaining with eachother theclos-est relations, are suddenly... plungedinto a state of embarrassmentand dis-tress. In both countries we have wit-nessed the same lexpansion] of papermoney and other facilities of credit; thesame spirit of speculation .. the sameoverwhelming catastrophe." Obamacouldput that on his teleprompter oday.

LOUISIANAORBUST:Unwary nvestors re sweptawayby alesof outsizeprofi tsin France's ouisiana erri torv.

SOUTHSEAS FANTASY:London's outhSeaCo .goesdeep ntodebt o support tsctaimsof abulousPacificinds

with other people'smoney. "Heads heywin, tails they break even," s how Bar-ney Frank describes he current setup.)Derivativesneed o be better controlled.To call banks casinos,as is often done,is actually unfair to casinos, which arerequired to hold certain levels of capi-tal because hey must be able to cash na customer'schips. Banks have not beenrequired to do that for their key deriva-tivescontract,credit default swaps.Yetat thesame ime, we shouldproceedcautiously on massivenew regulations.Many rules put in place n the r93osstilllook smart; the problem is that over thepast$ years hey weredismantled,or con-sciousdecisionsweremadenot to updatethem. Keep n mind that theoneadvancedindustrial country where the bankingsystemhas weathered he storm superblyis Canada,which just kept the old rulesin place,requiring banks to hold higheramountsof capital o offset heir liabilitiesand o maintain ower evelsof leverage.few simplesafeguards, ndthe whole sys-temsurviveda massive torm.The simplest safeguardAmerican regu-

WHAT WE ARE EXPERIENCING IS NOT A CRISIS OFOF GLOBALIZATION AND ULTIMATELY OF ETHICS.

Many of the regulatory reforms thatpeople n governmentare talking aboutnow seem sensible and smart. Banksthat are too large to fail should also betoo large be leveraged at 3o to r. Theincentives for executiveswithin banksare skewed toward reckless risk-taking

its energy.We areat he start of anothersetof theseefforts. n undertaking hem, t isimportant to keep in mind what exactlywent wrong. What we are experiencingis not a crisis of capitalism. t is a crisis offinance,of democracy, f globalizationandultimately of ethics."Capitalism messed up," the Britishtycoon Martin Sorrell wrote recently, br,to be more precise,capitalistsdid." Actu-ally, that's not true, Financescrewedup,or to be more precise, inanciers did. InJunezooT when the financialcrisis began,Coca-Cola, epsiCo,BM, Nike, Wal-Martand Microsoft were all running their com-panieswith strongbalance heets nd sen-sible business models. Major Americancorporations were highly profitable,andthey were spending prudently, holdingon to cash o build a cushion for a down-turn. For that reason,many of them havebeen able to weather the storm remark-ably well. Finance and anything finance-related-like real estate-is anotherstory.Finance has a history of messing up,from the Dutch tulip bubble in 163Z onow. Theproximatecauses f thesebustshave been varied, but follow a strikinglysimilar path. In calm times, political sta-bility, economicgrowth and echnologiealinnovation all encouragean atmosphereof easy money and new forms of credit.Cheap credit causesgreed, miscalcula-tion and eventually ruin. PresidentMar-tin Van Buren described the economiccrisis of rB3Z n Britain and America

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THE PANICOF 1907:John D.Rockefelter nd J. P.Morgannarrowlyavert otat cotlapseafter a rader's [ [-judged et,

FIRSTFLORIDA AND RUSH:Rabid eve[opers, asycreditan dpatmydreamsmakea inebubbte-unti l . t ooos n 1925.

THEGREATDEPRESSION:The roaring 20 sscreech o ahatt,Nearl.y al.f f he 25,000U,S. anks ait before t 's over,

THE'NIFTY 0': In he1960s,WatIStreetswearsby hese50 targe-cap tocks.By hemid-'70s t swearsat them.

JAPAN SINKS:The burst ingola monster ea[-estate ubblep[ungeshe onceboomingcountry ntoa deep ecession,

ers did what theywere allowed to do underthe law. Politiciansdid what they thoughtthe system asked of them. Bureaucratswere not exchanging ash or favors. Butvery few peopleacted responsibly,hon-orably or nobly (the very word soundsodd today).This might sound ike a smallpoint,but it is not. Nosystem-capitalism,socialism,whatever-can work without asenseof ethics and values at its core.Nomatter what reformsweput in place,with-out commonsense,udgmentand an ethi-cal standard, hey will prove inadequate.Wewill neverknow where he nextbubblewill form. what the next innovationswilllook like and where excesseswill buildup. But we can ask hat peoplesteer hem-selves nd their institutionswith agreaterrelianceon a moral compass.One of the great shifts taking place nAmericansocietyhas beenaway rom theold guild system of self-regulation.Onceupon a time, law, medicine and account-ing viewed themselvesas private-sectorparticipants with public responsibilities.Lawyers are still called 'bfficers of thecourt." And historically they acted withthat senseof stewardship n mind, think-ing of what was appropriate or the wholesystemand not simply for their firm. Thatmeant advising heir clients against ime-consuming itigation or mindlessmergers.Elihu Root,a leaderof the New York barin the late rgth century,oncesaid, Abouthalf the practiceof a decent awyer con-sists n telling would-beclients that theyare damned oolsand should stop."It's not just the law that has changed;so have all the professions.Ever sincethe r93os, accountantshave been givena unique trust. "Who audits you?"askedSen.Alben Barkley during a 1933committee hearing. "Our conscience,"replied Arthur Carter, he headof a largeaccounting firm. But by zooz The WallStreet ournal was describing a differentworl{ in which accountants had gonefrom "watchdogs o lapdogs," elling cli-ents whatever hey wanted to hear.Bank-ers similarly once saw themselves asbeing stewards of capital, responsible otheir many constituentsand embodyingtrust. But over the past ew decades,heytoo becameobsessed ith profits and theshort term. uncertain about their ownfuture and that of their company. The

the number of peopledying as a result ofpoliticalviolenceofany kind has droppedsteeplyover hepast hreedecades.Then there is the end of inflation. Inthe rg7os,dozens of countries sufferedhyperinflation, which destroyed he mid-dle class. destabilizedsocieties and ledto political upheaval.Since hen, centralbanks have becomevery good at tamingthe monster,and by 2oo7 the number of6$)

OVER THE PASTQUARTER CENTURY MORE

THAN 4OOMILLIONPEOPLE ACROSSASIA HAVEBEEN LIFTED

OUT OF POVERTY.t:countries with high inflation had dwin-dled to a handful. Only one, Zimbabwe,had hyperinflation.Add to this the information and Inter-net revolutions,and you have a seriesofhistorical changes hat have produced asingleglobal system, ar more integratedand faster-moving han ever before.Theresults speak for themselves.Over thepast quarter century, he globaleconomyhas doubled every 10 years,going fromg3r rillion in1999 to $6s rillion in zoo8.Recessions avebecome amer than everbefore, averaging eight months ratherthan two years. More than 4oo millionpeopleacrossAsia havebeen ifted out ofpoverty.Between2oo3 and 2oo?,averageincome worldwide grew at a faster rate(3.rpercent) han in any previous periodin recorded human history. In zoo6 and2ooZ-the peak years of the boom-r2,4countriesaround the world grew at 4 per-cent a year or more, about four times asmany as 25yearsearlier.Many of thesecountrieshad more cashthan they knew what to do with. Chinasits on a war chest of more than gz tril-lion, while eight other emerging-marketnations have reservesof more than $roobillion. They've all looked to the safestinvestment hey could magine-U.S. gov-ernment debt. In buying so much debt,

they drove down the interest rate Wash-ington had to offer, which in turn madecredit in America cheap.So the effect ofall this moneysloshingaround the worldwas o subsidizeAmericans n their favor-ite activity: shopping.But it affectedotherWesterncountries as well, from Spain toIreland, where consumers and govern-ments oaded hemselves p with debt.Good times always make peoplecom-placent.As the cost of capital sank overthe past ew years,peoplebecamencreas-ingly foolish. The world economy hadbecome he equivalentof a racecar-fasterand more complex han any vehicle any-one had everseen.But it turned out thatno one had driven a car like this before,and no one eally knew how.So t crashed.The realproblem s that we're still driv-ing this car. The globaleconomy emainshighly complex, nterconnectedand im-balanced.The Chinesestill pile up sur-plusesand need o put them somewhere.Washingtonand Beijingwill have o workhard to slowly stabilize their mutualdependence o hat the systems not beingsetup for anothercrash.More broadly, the fundamental cri-sis we face is of globalization tself. Wehaveglobalized he economies f nations.Trade, travel and tourism are bringingpeople together.Technologyhas createdworldwide supply chains, companiesand customers.But our politics remainsresolutely national. This tension s at theheart of the many crashesof this era-amismatchbetween nterconnected cono-mies that are producing global problemsbut no matching political process thatcan effectglobalsolutions.Without betterinternational coordination, here will bemore crashes,and eventually there maybe a retreat rom globalization oward thesafety-and slow growth-of protectednational conomies.Throughout this essay, have avoidedtreating this economic crisis as a grandmorality play-a war betweengood andevil in which demon bankers destroyedall that is goodand true about our socie-ties. Complexhistorical eventscan rarelybe reduced o somethingso simple.But weare suffering rom a moral crisis, oo, onethat may ie at the heart of our problems.Most of what happenedover the pastdecadeacross he world was legal. Bank-

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zakaria, the capitalist manifesto (newsweek 22.6.2009)

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