Two new books and an article in Wired are making more people aware of the doomsday system constructed by the Soviets during the 1980s, when they feared an American nuclear attack. Perimeter, nicknamed "the Dead Hand," went operational in 1986 and guaranteed that even if the leadership was killed and all command-and-control systems disrupted, the Soviets would still launch an all-out nuclear counter-attack. Like Skynet of the Terminator movies -- Linda Hamilton, call your office. And "the dead hand" is still operational, although Moscow officially won't discuss it. It's a good thing nothing ever goes wrong with complex systems.
As we observe a one-year anniversary nearly every day of some calamity from last year's Great Panic, I can't stop that feeling of grating ambivalence. Yes, Messers Bernanke, Paulson and Geithner averted a collapse of "the global financial system" and perhaps averted another Great Depression. That's the story line and even I buy it most of the time. But now the too-big-to-fail banks have gotten even bigger. The derivative boys are back at work. Promised re-regulation is being gutted. The pain has fallen on average Americans and the American taxpayer.
It's almost as if "the global financial system" built its own Dead Hand doomsday machine. So the question becomes: Did we avert apocalypse last fall and winter, fortunately shutting down this fearsome device. Or did we actually arm it by our actions. In other words, should we have called the bastards' bluffs in late 2008?
The conventional view is that Washington had to act aggressively as the subprime cancer moved into the overall financial system, exposing just how vulnerable it was to all the "innovations" and swindles cooked up during the deregulation years. The argument comes from the details: Should the Fed have acted faster? Did it exceed its authority on this or that specific detail (See David Wessel's In Fed We Trust for an excellent overview).
But that's not the only view. I remember hearing a veteran of the investment business say at the time: "Let 'em go down. If the average American is going to lose his house over that, then why should we save Wall Street?" This person is a politically moderate brainiac -- not a Ron Paul or Ralph Nader supporter, no seer of black helicopters. Still, I tended to discount it. Now I wonder if the view had real wisdom.
The policy moves that stopped the Great Panic have given "the financial services industry," "the global financial system," even more control over the American government and economy. Over our destiny. As Wessel makes clear, Bernanke was willing to do whatever it took to avoid what this Great Depression scholar saw as another looming depression. Unfortunately, that has meant setting precedents that Washington -- American tax dollars, and ultimately future living standards -- will stand behind this system.
That's disconcerting for a couple of reasons. In the 1930s, the FDIC guarantee was to depositors, not to banks. FDR mercilessly sorted out the bad banks and let them fail, taking their clueless or greedy shareholders with them. Then the Congress enacted the Glass-Steagall Act to regulate banking, prohibiting commercial banks from engaging in the kind of speculation that helped cause the crash of 1929. Investment banks were regulated by the new Securities and Exchange Commission. Now, we live in the aftermath of the repeal of Glass-Steagall, years of a lapdog SEC (and Fed), and one more enormous change. The "banking" system is hardly what most Americans think when they hear the term. It is highly complex, opaque even to the experts, with layers of unregulated players in the so-called shadow banking system, gambling with exotic, little-understood derivatives and dangerously interconnected. The bankers are highly compensated for making high-risk bets. This combination helped cause last year's panic and its fundamentals are little changed -- oh, there is the fact that speculation is now backed by the full faith and credit of the federal government. No wonder many experts say today's situation is more dangerous than before -- and we're on the hook for all this.
The second problem is how the panic exposed how much of the American economy had become 1) making money off of derivatives of structured investment vehicles of counter-party insured bundled other derivatives, sold and resold, repackaged again and again, that somewhere down the chain of fraud and swindles were once connected to a real asset or a real dollar. And, 2) spending money we don't have and aren't actually making -- because income inequality is at 1929 highs and most Americans have seen their pay stagnate for years -- through the magic of bubbles and credit. And, unfortunately for you Screwed Joe & Jill Sixpack -- that part of the deal is now over. And, by the way, you've been foreclosed and fired. Now you're one of six seeking every open job (a record). By the way, the banks are raising your fees.
And all we get is Bernie Madoff in the hoosegow? Bernie's a piker compared to the enablers of the great collapses last year that have cost us trillions and will be a dead-weight dragging us under for decades to come. Not one of them has gone to prison. Nor have the ones who deregulated banking in the 1990s been intellectually discredited. The "system" keeps functioning, going back to business, setting the table for the next collapse.
The time to have avoided this reckoning was years ago. Free-market capitalism only works when the market is kept healthy, honest and competitive through regulation. When checks and balances exist. No monopolies, cartels or highly consolidated industries. Dispersed power and pluralism, so workers and small companies get a fair shot. A progressive tax system. And trade deals where both sides play by the rules. Instead, we built crony capitalism and got the inevitable results.
But here's an interesting counterfactual history exercise: What if Wall Street, the big banks and all the shadowy "counterparties" had been forced to eat it? What if the trillions would have been deployed to ease the pain for the American people and then reconstruct a real economy? A real economy that made real things of productive value for the world, and one that provided middle-class jobs and security. Our Chinese creditors? They would have felt much better about the security of their Treasury bonds if they were backed by a solvent government and a productive economy. The capital markets would always be with us, but after a catharsis of actually having to pay the price for their swindles, they would have bounced back, chastened and sober -- and then faced a 21st century Glass-Steagall. What if?
But the people guiding American policy -- under both Presidents Bush and Obama -- are creatures of the "global financial system's" status quo. Yes, many members of both parties, especially the Republicans, are bought and paid for by the financial lobby. As bad, they are prisoners of the conventional wisdom. To them, it is vital to rescue "financial services" (and throw in GM and Chrysler because we can't lose Michigan next election). Meanwhile, China is trying to corner the world market in real things, from sustainable energy to rare earth metals. Europe makes high-speed trains and advanced solar energy equipment -- while maintaining a civilization with pensions and universal health care. We have our derivatives.
If you would have deliberately set out to construct a scenario that would bankrupt America and ensure our eclipse in the world, you couldn't have done better than this (and add a war or two).
The Dead Hand.