economic intellectual reassessment

As venerable financial institutions bite the dust with increasing frequency and the market jumps around like a hopped-up Charlie Kelly, bloggers are trying to make sense of the broader ramifications of the financial crisis. First, Henry from Crooked Timber weighs in:

[W]hat is utterly startling to me is that . . . the claim that the state shouldn’t be directly involved in running the economy – is under serious threat too. I genuinely hadn’t expected this to happen. As the NYT notes, countries like France are using US actions as a way to justify state involvement in picking and supporting national champions. In a couple of years, perhaps we’ll see a new version of ‘le Plan’ (I’m half-joking here – but only half-joking). As Tyler says:

The economic fallout from these events is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.

Mark Blyth’s book, Great Transformations has a theory of the relationship between economic crises and economic ideas. Very roughly speaking, when a crisis occurs that is difficult or impossible for the prevailing wisdom to explain or deal with, intellectual entrepreneurs have an opportunity to create a new (partly self-reinforcing) collective wisdom. We’re most likely in just such a crisis now. Which set of intellectual entrepreneurs are going to succeed in reshaping a new collective wisdom – economic nationalists like Sarkozy and Putin, social democratic globalizers like Dani Rodrik, or some other crowd entirely – I have no idea.

Jim Henley thinks the national liquidity crisis could be what finally gets us out of Iraq.

Reading casually into the ongoing financial meltdown this week, I keep coming across the bottom-line explanation that the world’s, and particularly America’s, financial institutions just don’t have enough assets to cover their obligations. The dollar seems to be Wile E. Coyote now, or a less sagacious mark than Dummy 2 in the flashlight joke - tiptoeing in midair with nothing under it while gravity clears its throat and prepares. The various central banks are trying to keep it going because the various central banks have a whole freaking lot of them. But the translation of the bottom-line explanation is that the world, and particularly America, are not nearly as rich as most of us thought. Sorry! And I’m not just saying that! I can’t see how that doesn’t mean pretty much all the central banks are going to want to sneak their way out of dollars if they can. I think it’s one of those prisoner’s dilemma things.

Meanwhile, as part of Uncle Sam’s attempt to keep the whole contraption going, the Federal Government has taken on massive, massive liabilities from Fanny and Freddy and AIG and who knows what else is coming.

Things move quickly in a crisis, and now we have an idea of "what else is coming," and it doesn't look good (as John Quiggen puts it, a "US government asset purchase on a scale that will make all past nationalizations look puny.")

Jim then discusses the principal components of the federal budget.

Social Security and Medicare have - nominally - their own funding mechanism. The US is probably not going to default on the debt. Nobody in power is going to want to compound possible Depression-level demand shocks by cutting entitlements or even safety-net spending. That big red wedge [Ed.: military spending] is where the savings are to be had. Because so much of war funding has been tucked into "emergency" appropriations, the big red wedge is probably even bigger. Sorry, American Enterprise Institute, it’s over. (NB: In this case, I am just saying that - the "sorry" part.) We are about to become, fiscally, Britain after Suez and the USSR after 1989. We don’t have the money ourselves, and foreign capital will be looking for the exits. In particular, the Chinese have no long-term incentive to pay us to maintain a military that threatens China. (Short-term incentive? Sure. In the short term, complications arise.)

In five years US military spending is going to be half what it is now, one way or the other. We could have planned a graceful disengagement even a few years ago, but nobody with the power to make it happen was in the mood. Now? I suspect it’s going to be hard no matter what. I have bottomless faith in our ability to make it harder, but why go to all that trouble?

So let's do our pocketbooks a big favor and bring the troops home from Iraq and Afghanistan! As Jim says, pretty soon, we may no longer have a choice.

I'm not quite as sanguine--I think it'll take more than a major financial crisis for Americans to decide that spending ridiculous amounts of money to invade and occupy other countries, with great loss of life on all sides, is a bad idea. But hope (in reason and common sense) springs eternal!

Finally, Roberto Lovato sounds a cautionary, but somewhat hopeful, note:

The big dividend for us, especially the poorer among us, are increasing numbers of cops, national guard, heavily-armed immigration agents and other big gun-toting types whose primary function is serving and protecting-big business. Remember: the CEO’s and their military-industrial partners knew how much funny, fake money was on their balance sheets before we did (and we still don’t know how bad things are!) and surely started laying the policing-military groundwork to “protect” their interests long ago, but did so under cover of “the war on drugs”, “getting tough on immigrants” and “defending the homeland,” to name but a few of the more well-known excuses for militarizing society before the meltdown.

In any case, ou also can get a sense of Roubini’s approach from the MSNBC interview below. Note , for example, the enormous difference between the flubby tone and outlook of the corporate talking heads and Roubini’s diamond-cutter talk as when he predicts that upwards of 700 banks, maybe even including such giants like WAMU, will go belly up before this unprecedented economic threat subsides. Let us hope it subsides soon and brings about a new economic day. Just wanted to signal alert on an economic crisis I think will also be accompanied by even more repression if history holds any lessons. This abject, dangerous failure of and increased state violence prophecied by the Free Market Religion should serve to remind us that it’s High Time to dust off our own sacred books containing the ancient knowledge of self-determination, self-defense and bottom-up socialism. So, pay close attention to this tragic economic development as the seeds of perdition and possiblity are contained therein.

We know that in times of stress, the government's preferred diversionary tactic is to hype fears of outside attack. The powers that be will be looking for another October surprise to bail them out of this mess for another four years. (Remember this? "Bin Laden certainly did a nice favor today for the President.")

Will Americans fall for the con once again this fall? If so, perhaps it's not much of a con after all, but simply a plan of action that the average voter knowingly supports. But the world community will be moving on, whether or not the U.S. can get its act together.