Capitalism in an Apocalyptic Mood

Skyrocketing oil prices, a falling dollar, and collapsing financial markets are the key ingredients in an economic brew that could end up in more than just an ordinary recession. The falling dollar and rising oil prices have been rattling the global economy for sometime. But it is the dramatic implosion of financial markets that is driving the financial elite to panic.

And panic there is. Even as it characterized Federal Reserve Board Chairman Ben Bernanke's deep cuts amounting to a 1.25 points off the prime rate in late January as a sign of panic, the Economist admitted that "there is no doubt that this is a frightening moment." The losses stemming from bad securities tied up with defaulted mortgage loans by "subprime" borrowers are now estimated to be in the range of about $400 billion. But as the Financial Times warned, "the big question is what else is out there" at a time that the global financial system "is wide open to a catastrophic failure." In the last few weeks, for instance, several Swiss, Japanese, and Korean banks have owned up to billions of dollars in subprime-related losses. The globalization of finance was, from the beginning, the cutting edge of the globalization process, and it was always an illusion to think that the subprime crisis could be confined to U.S. financial institutions, as some analysts had thought.

Some key movers and shakers sounded less panicky than resigned to some sort of apocalypse. At the global elite's annual week-long party at Davos in late January, George Soros sounded positively necrological, declaring to one and all that the world was witnessing "the end of an era." World Economic Forum host Klaus Schwab spoke of capitalism getting its just desserts, saying, "We have to pay for the sins of the past." He told the press, "It's not that the pendulum is now swinging back to Marxist socialism, but people are asking themselves, 'What are the boundaries of the capitalist system?' They think the market may not always be the best mechanism for providing solutions."

Ruined Reputations and Policy Failures

While some appear to have lost their nerve, others have seen the financial collapse diminish their stature.

As chairman of President Bush's Council of Economic Advisers in 2005, Ben Bernanke attributed the rise in U.S. housing prices to "strong economic fundamentals" instead of speculative activity. So is it any wonder why, as Federal Reserve chairman, he failed to anticipate the housing market's collapse stemming from the subprime mortgage crisis? His predecessor, Alan Greenspan, however, has suffered a bigger hit, moving from iconic status to villain in the eyes of some. They blame the bubble on his aggressively cutting the prime rate to get the United States out of recession in 2003 and restraining it at low levels for over a year. Others say he ignored warnings about aggressive and unscrupulous mortgage originators enticing "subprime" borrowers with mortgage deals they could never afford.

The scrutiny of Greenspan's record and the failure of Bernanke's rate cuts so far to reignite bank lending has raised serious doubts about the effectiveness of monetary policy in warding off a recession that is now seen as all but inevitable. Nor will fiscal policy or putting money into the hands of consumers do the trick, according to some weighty voices. The $156 billion stimulus package recently approved by the White House and Congress consists largely of tax rebates, and most of these, according to New York Times columnist Paul Krugman, will go to those who don't really need them. The tendency will thus be to save rather than spend the rebates in a period of uncertainty, defeating their purpose of stimulating the economy. The specter that now haunts the U.S. economy is Japan's experience of virtually zero annual growth and deflation despite a succession of stimulus packages after Tokyo's great housing bubble deflated in the late 1980s.