It Seemed to Be Working

Those who are closely following events in the United States right now, and more so those who are visiting there, will notice not only the depth of the financial crisis and the fact that it is taking place just a few weeks before the presidential elections. This powerful drama is accompanied by a feeling that the U.S. and the global economy are at a watershed both practically and ideologically.

The past 20 years have been characterized throughout the world, but especially in the U.S. and Britain, by a number of principles that were enshrined as sacred truth. Those who disputed them were considered ignorant or charlatans, bewitched by obsolete formulas of socialist thinking. The ideological prophet of this school was Milton Friedman, and its political leaders were Margaret Thatcher and Ronald Reagan. In the name of these principles it was determined that the economy works best when no limits are imposed on market forces; that government intervention damages market efficiency and the standard of living; and that if there are market failures and ups and downs, they will correct themselves if market forces are allowed to operate freely. There will be casualties, but government intervention will only make matters worse. "Government bureaucracy" became a dirty word and the enemy of the people. Reagan put it this way: "Government is not a solution to our problem; government is the problem."

Based on this ideology, which could be described by the extreme term "market fundamentalism," far-reaching privatization was implemented in industry and in commercial companies (which could sometimes be justified), but also in health, education and welfare services, and even prisons; regulation was reduced and sometimes even abolished. This regulation had been instituted following the 1929 crash - it limited the activities of banks and other financial institutions, but also reined in their tendency to take risks with the money of their clients.

The Bush administration symbolized the hegemony of this idealism, to the extent that even in the realm of security and warfare, fields generally directed by the political sovereign, functions were transferred to civilian contractors. In Iraq, for example, there are nearly as many civilians employed by private U.S. army contractors as there are U.S. troops.

Indeed, the system seemed to be working. In recent years the stock market made huge profits; tens of thousands became rich, CEOs earned tens of millions of dollars a year in salaries and bonuses, and millions of people were swept up in a get-rich-quick mania caused by low interest rates, generous credit and new financial instruments - the kind that allowed banks, for example, to give generous mortgages to whomever came along, and to fob off sometimes questionable loans onto other institutions as a new kind of promissory note. All under the umbrella of unbridled individualism.

Now the bubble has burst. More than 1.5 million American families have lost their homes in the mortgage crisis; investment banks that were the pride and joy of the American economy - Merrill Lynch and Lehman Brothers - went bankrupt; two major mortgage banks have been nationalized by the federal government to prevent their collapse; and the largest insurance company in the world needed tens of billions of dollars from the U.S. Treasury to prevent it from failing.

This is the moment when the crisis becomes a watershed: When the president asks Congress to approve $700 billion to buy up the dubious loans of the banks and the investment houses to prevent their collapse, it turns out that the market cannot stabilize itself; if the economy is left to market swings at a time of crisis, the result will be global economic crisis; and in the end only the government can bail out the economy and its citizens' money.

Bush, the icon of the free-market economy and the vision of easy riches, begged Congress, in his speech to the nation, to pass his salvage plan, which means that the state and not the market is what ultimately guarantees citizens' well-being. His statements almost sounded like socialist heresy when he said the question was not whether government intervention was needed; the question was whether the right thing would be done. The United States is not going back to Roosevelt's New Deal, which saved the American economy in the 1930s, and it is not going socialist. Clearly the government does not have to manage the economy, but it is also clear that a market economy is not efficient at correcting itself, and that it needs government intervention.

All those who arrogantly dismissed every other position but their own, and thought they understood how the world worked, have pushed the economy to a crisis unrivaled since the 1930s. Now they should acquire some humility and shed their excessive self-confidence. Economics 101 in universities in the West, and in Israel, will now have to listen to other voices, and finance ministers will not be able to say, "for example, in America...." The unbrided market has proven itself to be a god that failed.