Steven Pearlstein discusses the new takeover of the economy by the federal government, drawing the inevitable political conclusion:
It would be hard to find a superlative that would overstate how much the parameters and contours of American economic policy have been reshaped over the past two weeks.
The degree of government intervention into the workings of the private marketplace is unprecedented. Three giant financial institutions taken over. Government purchases of vast quantities of hard-to-sell assets from banks, investment banks and anyone else whose demise might threaten the financial system. Trading outlawed in an entire class of securities. A government guarantee extended to a whole new category of investments.
Laws have been stretched until they are barely recognizable. . . .
But in terms of the political economy, there is little doubt we are witnessing a once-in-a-generation sea change. It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians. With Bear Stearns and AIG as their rallying cry, citizens will demand the same kind of financial security and protection as bondholders of big banks and counter-parties of hedge funds. Debates about the competitiveness of U.S. financial markets will focus less on how little regulated they are and more on how much protection and transparency they offer to investors. It will be harder to deny essential government agencies the talent, money and respect they need to do the job right.
An interesting comparison can be made between Hurricane Katrina and the current financial crisis, which symbolically has now stranded a number of rich investors on the roofs of their mansions, crying out to the government to be rescued.
When we look back, we may find that this crisis, like Katrina, was a turning point in public perceptions and expectations of government — about its competence in dealing with the inevitable crises that occur and its ability to take steps ahead of time to assure that the damage is limited and the most vulnerable are protected.
Uh, so we want the government that did such a good job handling Hurricane Katrina to handle the entire economic storm? That does not bode well. The point, though, is that big government is back in vogue.
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