The return of capitalism

Rich Lowry:

THE gloating didn't last long.

A few weeks ago, German Finance Minister Peer Steinbrueck proclaimed that "Anglo-Saxon capitalism" is "finished." He stuck it to the hated Anglo-Saxon capitalists just in time - before he got too distracted by the exigencies of managing a $681 billion program to re-finance distressed German banks.

Germany's second-largest commercial-real-estate lender, Hypo Real Estate, apparently didn't realize risky practices during the great credit bubble were inherently un-Germanic. Its loans exceeded its deposit base by 8-1 or more, and the German government had to swoop in with a $67 billion rescue as it neared collapse.

The same kind of overleveraging, risky loans, toxic securities and real-estate bubble that has rocked the US financial system infected Europe - which is why European schadenfreude quickly turned to desperate and (until now) poorly coordinated attempts to shore up Europe's banks.

So far, only one country has been taken down by the financial crisis, and that is poor little Iceland, brought to its knees by bank failures. The end of Norse capitalism?

The rush to declare the death of the system of sophisticated finance and robust free-market economics pioneered in Britain and exemplified by the United States has many motives. Euro-bureaucrats have always hated its out-of-control dynamism. Democrats here at home pile on in hopes of creating an overweening Euro-style regulatory state, while conservatives proclaim the advent of socialism in horror at the scale of government intervention in this crisis.

The $700 billion bailout bill provides the headline number for a sprawling response. The Federal Reserve pulled off a coordinated interest-rate cut with other key central banks, made $600 billion available in "swap lines" to other central banks and began loaning directly to businesses. The Federal Deposit Insurance Corp. increased its guarantee of deposits from $100,000 to $250,000. A massive guarantee of all interbank lending could be next.

All of this isn't socialism, but emergency measures to preserve credit, the lifeblood of capitalism. The Wall Street axiom that "the markets can stay irrational longer than you can stay solvent" applies particularly to banks, which can't exist without market confidence. The architect of the US economic system, Alexander Hamilton, acted just as aggressively to prop up the banks during a panic in 1792, although on a much smaller scale.

In so doing, he saved the US financial revolution that fueled the young country's economic rise. By the 1820s, the United States caught up to England in per-capita output.

Hamilton intuitively understood the rules for handling a panic that were formulated late in the 19th century by British writer Walter Bagehot, editor of The Economist: "The holders of the cash reserve must . . . lend to merchants, to minor bankers, to 'this man and that man,' whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them."

Financial panics aren't new - as economic historian John Steele Gordon has noted, they've occurred about every 20 years throughout American history.

Neither are financial bailouts. The savings and loan and the Long Term Capital Management bailouts didn't denote the end of American capitalism. If the Treasury and the Fed, along with their counterparts around the globe, have acted quickly and boldly enough, they will have forestalled economic calamity in a way ur-capitalists Hamilton and Bagehot would have approved of.

The robust stock market recovery yesterday suggest that a lot of capital is returning to the market place. It did not just disappear as many had suggested. The European socialist had a very short gloat.


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