Shock Therapy on Wall Street: What's Next?

Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear. Times of fear generate high unemployment. Times of greed are likely to be times of destabilizing inflation.

- Economist Brad DeLong

On September 19, the US stock market received a gift from the Federal Reserve Bank in the form of a half percent interest rate cut, twice the amount most analysts expected. The move followed another week in which the debt crisis rolled over financial institutions worldwide and people's lives like an out of control freight train.

Why?

There is panic in high places. They know this crisis is far more serious than most of us realize, and that the interest rate cut will not address the subprime problem or bring relief to the millions facing foreclosures and a tighter economic noose around their necks.

It will, say many financial wizards, lead to higher inflation, which is a way of making our money worth less. The dollar's status as a currency took another whack.

One analyst in the New York Times called it "shock therapy," the very term writer Naomi Klein explores in her new book on "disaster" capitalism showing the link between the shock therapy once doled out in mental hospitals, shock and awe bombing, shock interrogation techniques whose aim is to "disorient" prisoners and shock strategies used in economic policy that has devastated so many countries in which it was tried.

Now it has come home to the US - the country that has been exporting it overseas. On a recent Democracy Now show, Klein explained:

The history of the contemporary free market was written in shocks…. Some of the most infamous human rights violations of the past thirty-five years, which have tended to be viewed as sadistic acts carried out by anti-democratic regimes, were in fact either committed with the deliberate intent of terrorizing the public or actively harnessed to prepare the ground for the introduction of radical free-market reforms.

The only difference here is that, so far, there have been no serious reforms proposed and the market is anything but free. With its interest cut, the Fed bails out and rewards the very institutions that were profiting on ill gain profits from predatory lending.

In some countries, people are starting to stir. Americans remain too caught up in the primaries and the war on one end, and the new wave of OJ mania on the other to take action against the looting of their pocket books. We are becoming a shell-shocked nation.

A CHEER FOR THE PEOPLE

We saw customers at a credit-starved mortgage bank in London lining up in the streets to pull their money out and the Bank of England pumping money in just a day after warning others, in the name of "moral hazard" rules, not to bail out lenders.

The Times of London carried a cheer by Libby Purves for those demanding their money arguing, "salute the queuers for their nerve, patience and admirable impermeability to patronizing advice." For how dare the stuffed suits, financial and political (and indeed journalistic), use expressions like 'Don't panic' and 'Keep calm'. The withdrawers are perfectly entitled to choose who looks after their lavishly pretaxed savings. Some of them actually need money right now - like the chap on the news who wanted to pay his builder - and others just prefer not to rely on an institution that goes begging to the 'lender of last resort'.

By their presence on the streets, most of it not at all panicky in demeanour, the queuers utter a resounding raspberry to the financial industry and its political masters. It is time someone did." (When Will Americans do something similar? One weak but promising shift in the political wind: Obama's recent speech on Wall Street.)

"EXTRAORDINARY" SAYS THE ECONOMIST