The signs are pointing to a crisis -- and a crash for the GOP.
By Steve
Fraser
December 9, 2007
No one wants to utter the word
"depression." But the truth of the matter is that the
American economy may be entering a state of free fall. Every day
brings more bad news about the sub-prime mortgage debacle, about home
foreclosures, construction industry slowdowns, a credit drought for
consumers and businesses, oil price shocks and the open-ended
devaluation of the dollar. Where is it all leading?
Together
with the debacle in Iraq and the political implosion of the
Republican Party, this economic collapse could make the presidential
election of 2008 a turning point in American political history.
Conservatism first triumphed over New Deal liberalism thanks in part
to the same deadly combination in the late 1970s: a lost war and an
economic crisis. The Vietnam War plus stagflation and
deindustrialization gave us Ronald Reagan. Now history is returning
the favor, as the free-market conservative political order of the
last generation faces a systemic crisis from which there is no easy
escape.
Even the soberest economy watchers, pundits with
doctorates -- whose dismal record in predicting anything tempts me
not to mention this -- are prophesying dark times ahead. A
depression, or a slump so deep it's not worth quibbling about the
difference, appears to be on the way, if indeed it is not already
underway.
Start with the confidence game being run out of Wall
Street. The sub-prime mortgage crisis occupies newspaper front pages
day after outrageous day. Certainly, these tales of greed and
financial malfeasance are numbingly familiar. Yet precisely that
sense of deja vu -- of Enron revisited, of an endless cascade of
scandalous, irrational behavior affecting the central financial
institutions of our world -- suggests just how dire things have
become.
Once upon a time, all through the 19th century,
financial panics -- often precipitating more widespread economic
slumps -- were a commonly accepted, if dreaded, part of "normal"
economic life. Then the crash of 1929, followed by the New Deal
Keynesian regulatory state called into being to prevent its
recurrence, made these cyclical extremes rare.
Beginning with
the stock market crash of 1987, however (and followed by the collapse
of the savings and loan industry at the end of the 1980s and the
near-meltdown of Long Term Capital Management in 1998 that required
an emergency, government-assisted bailout), financial panics have
become ever more common again. Most notorious -- until now, that is
-- were the dot-com implosion of 2000 and the Enronization that
followed. Enron seems like only yesterday because, in fact, it was
only yesterday, which strongly suggests that the financial sector is
now out of control.
At least three factors lurk behind this
new reality. Thanks to the Reagan counterrevolution, there is
precious little left of the regulatory state -- the repeal of the
Glass-Steagall Act separating investment from commercial banking is a
prime example -- and what remains is effectively run by those who
most need to be regulated. (Despite bitter complaints about it in the
business community, the Sarbanes-Oxley Act, passed in the wake of the
big corporate and accounting scandals of recent years in an effort to
restore public confidence in the capital markets, has proved weak tea
indeed, as the current financial meltdown indicates.)
More
significantly, for at least the last quarter of a century the whole
U.S. economic system has lived off the speculations generated by the
financial sector -- sometimes given the acronym FIRE (for finance,
insurance and real estate). It has grown exponentially while, in the
country's industrial heartland in particular, much of the rest of the
economy has withered away. FIRE carries enormous weight and the
capacity to do great harm. Its growth, moreover, has fed a
proliferation of financial activities and assets so complex and
arcane that even their designers don't fully understand how they
operate.
Today's Wall Street fabricators of avant-garde
financial instruments are actually called "financial engineers."
They got their training in "labs" much like Dr.
Frankenstein's, located at Wharton, Princeton, Harvard and Berkeley.
Each time one of their concoctions goes south, like the bewildering
"security investment vehicles" that helped precipitate the
mortgage industry collapse, they scratch their heads in bewilderment
-- always making sure, of course, that they have financial life rafts
handy, while investors, employees, suppliers and whole communities go
down with the ship.
What makes Wall Street's latest crisis so
portentous, however, is the way it is interacting with, and
infecting, healthier parts of the economy. When the dot-com bubble
burst, many innocents were hurt, not just denizens of the Street.
Still, its effect turned out to be limited. Now, because of the
sub-prime mortgage meltdown, Main Street is under the gun.
It
is not only a matter of mass foreclosures. It is not merely a
question of collapsing home prices. It is not simply the shutting
down of large portions of the construction industry (which is
inspiring some of the doom-and-gloom prognostications). It is not
just the born-again skittishness of financial institutions that have,
all of a sudden, gotten religion, rediscovered the word "prudence"
and won't lend to anybody. It is all of this, taken together, that
points ominously to a general collapse of the credit structure that
has shored up consumer capitalism for decades.
The equity
built up during the long housing boom has been the main fallback
position for ordinary people financing their big-ticket-item
expenses, from college educations to consumer durables, from trading
up in the housing market to vacationing abroad. Much of that equity
has suddenly vanished, and more of it soon will. Also drying up fast
are the lifelines of credit that allow all sorts of small and
medium-size businesses to function and hire people. Whole
communities, industries and regional economies are in jeopardy.
All
of that might be considered enough, but there's more. Oil, of course.
Here the connection to Iraq is clear; but, arguably, the wild
escalation of petroleum prices might have happened anyway. Certainly
the energy price explosion exacerbates the general economic crisis,
in part by raising the costs of production all across the economy and
so abetting the forces of economic contraction. In the same way, each
increase in the price of oil further contributes to what most now
agree is a nearly insupportable level in the U.S. balance-of-payments
deficit. That, in turn, is contributing to the steady withering away
of the value of the dollar.
Finally, it is vital to recall
that this tsunami of bad business is about to wash over an already
very sick economy. While the old regime, the Reagan-Bush
counterrevolution, has lived off the heady vapors of the FIRE sector,
it has left in its wake a deindustrialized nation, full of
super-exploited immigrants and millions of families whose earnings
have suffered steady erosion. Two wage-earners, working longer hours,
are now needed to (barely) sustain a standard of living once earned
by one. And that doesn't count the melting away of health insurance,
pensions and other forms of protection against the vicissitudes of
the free market or natural calamities.
This perfect storm will
be upon us just as the election season heats up, and it will
inevitably hasten the already well-advanced implosion of the
Republican Party. The congressional elections of 2006 registered the
first seismic shock, and since then, independents and moderate
Republicans have continued to indicate in growing numbers in the
polls that they are leaving the Grand Old Party. The Wall Street
Journal has reported on a growing loss of faith among important
circles of business and finance. Hard-core religious right-wingers
are airing their doubts in public. Libertarians delight in the
apostate candidacy of Ron Paul. Conservative populist resentment of
immigration runs head on into the corporate elite's determination to
enlarge a large pool of cheap labor.
All signs are ominous for
the GOP. The credibility and legitimacy of the old order are
operating at a steep discount. Faced with dire predicaments at home
and abroad, they essentially do nothing except rattle those sabers,
captives of their own now-bankrupt ideology. Anything, many will
decide, is better than this.
Steve Fraser is a writer and
editor. His new book, "Wall Street: America's Dream Palace,"
will be published by Yale University Press in March. A longer version
of this article appears at Tomdispatch.com.