Understanding Our Crises

As Robert J. Samuelson sees it this morning in the Washington Post, our crises are three, and this is a good way to look at it, if you are an engineer and accustomed to breaking problems down into their constituent parts. In fact there are organic connections among all the three parts of the current crisis, and the fact that some pieces of some parts lie outside the control or even the persuasion of our government, does not mean they are intractable. Corrective action must understand that they are part and parcel of the same problem with the world economy, which can be boiled down for popular consumption, if you want, to a single word—confidence—or, if you prefer, trust. But, boiling things down sometimes leaves an ugly residue. Take for instance the problem at the heart of the economy, the freeze of credit, the freeze of trust, belief, credere. Bankers have lost their courage and moxie and are standing pat on huge cash reserves upwards of a hundred times as large as are normal and prudent. Bankers are afraid to make any move that would cost them their jobs or risk their companies. Any loans they make to the industrial sector face a severe downturn in both personal and corporate buying, so the loan will probably be more risky two months down this road than now and, perhaps, go bad, if things get much worse ... which they will if lenders do not regain their courage. This is a downward spiral of confidence and belief and credit. So, the problem was cast yesterday in the New York Times as a dance around the question of nationalization of a large number of banks, a dance because there are not yet enough corpses rotting in the streets to hide the stink bomb of "socialism." There will be plenty of corpses soon enough as the fourth quarter 2008 results are read and the first quarter of 2009 portent for a second and resounding collapse of consumer credit is foreshadowed by accelerating layoffs. Nationalization of the banks is necessary, in the same sense that defibrillator paddles are necessary to shock a heart back into action. It is not "socialism" or "communism," it is emergency medical attention. The banking industry is special, just as the heart is special. We don't have redundant systems in our bodies for pumping our life blood and we don't have a redundant system in our economy. When the muscle fibers of the heart stop coordinating with one another, they have to be shocked back into coordination. When the banks are not working together they are working against the survival of our economic organism. They have to be taken over by a stronger authority and re-coordinated. It is our economy and our culture, so we have the right and—obviously—the duty to save ourselves! But, beyond this we need to begin to dispel the fogs of cant ideology about nationalization and socialism. We have to understand that the least understood problem of common ownership for the common good is governance. The Union of Soviet Socialist Republics, a socialist country, did not have a functioning democracy and could not invent one. There was no tradition of democracy and self-governance in a country, which in 1917 was barely two generations out of a serfdom that included 80% of the population, an emancipation that was still being paid for by former serfs right up until the war began in 1914! Russian socialism was governed by not a democracy but a dictatorship of the Bolsheviks. There are many reasons that it worked out this way for them, but none of those reasons are present in the United States today, none! Nationalization of the banks (or a significant number of major banks) will not result in a dictatorship of or by the federal government in Washington. It will mean the re-imposition of standard rules of prudent lending and investing by each nationalized bank. The bankers, who see the benefit of nationalization and believe that the sooner they do it the shorter will be the period of nationalization for them, will survive. Some will not see it and will not survive. Some banks are in very deep trouble and will go further into the depths this year. It may be necessary for the common good to hold these banks for a longer period. If so, then the interest of the people, us, needs to be considered, since profitability of the bank raises the question of whose profit it is. In the short term, say, three months, the profit can be calculated roughly and applied to renewal of bailout funds, but for longer periods, a more formal relationship should be established. The public must have a formal equity interest in the bank and the revenue must accrue to the public's benefit. This is not so difficult to arrange. There will be nay-sayers that claim that nationalization is "socialization" and that all the bugaboos of socialism apply. As a student of socialism and communism entailed by my formal studies of Russia and the Soviet Union, I cannot think of a bugaboo that is more prevalent than the one about loss of initiative among personnel working for a socialized concern. I cannot see, however, that temporary nationalization produces this supposed decline in initiative, since the overwhelming incentive is to become un-nationalized as soon as practicable. Yes, the decision to un-nationalize a bank depends on a majority of those nationalized returning to normal lending and investing practices, and so it is to the benefit of a given bank to spur other banks into normal practice. The question of the supposed "sanctity" of property will be raised, suggesting that nationalization amounts to the theft of bank investors' investments. Believe me, bank investors' money will be accounted for and each investor will retain his or her fractional share of the net worth of the bank company. They will gain if the net worth improves and vice versa. It is in the common interest (and therefore the government agency interest) that banks improve. For banks that for reasons of management's prior bad decisions must be liquidated, the shareholders will lose. There was always a risk. Perhaps these investors will learn to demand more competent management in the next company in which they invest. Americans are woefully unprepared for an open discussion of socialism. Their knee-jerk response to the word is decidedly negative and yet they understand public libraries, public roads, public utilities, and much else in daily life that is fundamentally socialistic. You see, what Americans do not yet understand is the value of the Commons, the air, the water, the public health, the public law, particularly that public permission given to enterprising people to carry out their enterprise. Americans need to understand their own sovereignty and its relationship to the economy that emerges under that sovereignty. They need to understand that entrepreneurs rely on the commons for support, for physical and legal infrastructure and that the the commons has not been getting fair value for what it gives. Perhaps the coming exercise in temporary nationalization of banks will help clarify this for them. We hope! JB