One of the more fascinating things of late is the sheer speed at which unshakable beliefs and rock-solid tenets are evaporating, the pace at which sacred cows are being slaughtered left, right and center, without so much as a quiver of the knife. Free market mechanisms innocent of government meddling are all well and good, it seems, only as long as convenient. Come the crunch, Fed chairman Ben Bernanke began to intervene in the marketplace without cease, flooding the banks with liquidity and dramatically lowering interest rates.
Bernanke has all but abandoned the principle of maintaining price stability, though he pays it lip service from time to time. The Fed even prevented a private investment bank from collapsing and muscled through the deal that rescued it (JPMorgan buying Bear Stearns) as fast as possible.
Presidential hopeful Hilary Clinton has been seriously suggesting that in parallel with infusing $30 billion to beef up Bear, the government buy homes in danger of being seized, or extend cheap loans to homeowners to rescue them from the sidewalk. Her ostensibly logical argument is that if the Bear shareholders are rescued and Bear's debt-holders are spared the loss of their entire investment (using taxpayer money), then the little man deserves a hand too.
Advertisement
You could dismiss that incomprehensible proposal as a campaign blip. That doesn't mean she's disseminating empty promises: the point is that mere months ago, no politician would have suggested anything of the kind. Government housing companies like Amidar are the stuff of developing nations, not America, yet proposals of this ilk are a sign of the times. Thus we see events like the protest outside the Bear Stearns offices a few days ago, demanding help for mortgage-borrowers too: Help Main Street, not only Wall Street and its fat cats.
U.S. Treasury Secretary Henry Paulson, a Wall Streeter himself, is preaching for a regulatory crackdown on financial circles, though he's part of the administration that promoted deregulation of the financial markets.
These steps, and fears of recession and the fall of the dollar, force policy shapers the world over to toe the American line and abandon old habits. The Bank of Israel too has reversed policy and is cutting interest rates and intervening in the forex market.
The conventional wisdom is that these earth-shaking changes are transient, a mere reaction to extraordinary circumstances, to the financial crisis and credit crunch, and that it will all be over in a few months. Then we can have our principles back. Right?
I disagree. Suspicion of forecasts is healthy but I predict that these changes are just the beginning. Change begets change and the changes in concept, emanating mainly from America, will ripple throughout the world of economics in the years to come.
So far the steps have been financial and monetary: the central bank cut interest rates, infused liquidity and orchestrated rescue missions. There has been no change on the real front - government budgets, taxes, trade and labor laws and all those things that influence the little man's day to day life.
Why? Because financial and monetary decisions are a matter of a stroke of a pen and opposition is scanty. Real changes take time and encounter huge opposition. The thing is, monetary solutions have little impact. You can't just solve an economy's problems quickly with a sweep of the pen, by cutting interest rates or injecting cash. It just doesn't work like that. If life were that simple, we'd never reach the stage of recession.
Avigdor Kaplan, health-care manager turned insurer, put it well: Bernanke's actions were like giving aspirin, and the antibiotic therapy will come later - after the elections.
If I were an American sacred cow, I'd be trembling on my hooves, specifically about my fate after the elections. Sacred cows tend to be immune in the pre-election buildup, but afterward? It's anybody's call. Let us examine some of the sacred cows facing the shochet.
Wouldn't you know, that underlying assumption didn't work out. The equation refused to balance, as the unbelievably huge U.S. trade deficit shows. American demand for cheap imports and raw materials such as oil was hugely greater than the world's demand for the clever products that America exported. The dollar's exchange rate shows this too, day by day, as America's productive base eroded and manufacturing jobs morphed into low-paid service positions. No wonder that America wants to change the rules. That's what losers do, they change the rules and declare: New game.
America faces a process that we Israelis know well. We call it "economic decrees." The America the day after will be a new one, with new rules. That's the way it goes in a changing world.
Haaretz.com, the online edition of Haaretz Newspaper in Israel, offers real-time breaking news, opinions and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.
