IN THE 1980s Gore Vidal observed of Reagonomics: “The US government prefers that public money go not to the people but to big business. The result is a unique society in which we have free enterprise for the poor and socialism for the rich.”
His epigram has been repeatedly recalled this week following the nationalisation of American International Group, the world’s biggest insurer, coming shortly after the similar rescue of the Fannie Mae and Freddie Mac housing companies and of the Bear Stearns bank.
“Socialised capitalism” is Robert Reich’s description.
“Gains privatised and losses socialised” was the more pointed comment by Nouriel Roubini, professor of economics at the Stern School in New York University. He is known in the economics trade as a “permabear” because of his repeated claims over the last six years that a financial system based on self-regulation, non-deposits, highly leveraged subprime housing debts and globalised derivatives trading was unsustainable and would collapse.
Now that he has been proved correct he has suddenly become known to wider circles of people desperate to get some expert perspective on these events. How does this crisis compare to previous ones? Is it a systemic failure or a conjunctural one arising from the Bush administration’s deregulation policies (which continued those of the later Clinton administration)? Could it lead to another depression like the 1930s? What alternatives are there to the policies followed this week?
Roubini is unusual among economists in combining comparative, historical and mathematical analysis, giving him a broader appeal to policymakers and the mass public. In an interview with the New York Times magazine on August 18th, he described himself as more a realist than a pessimist. He argues that the AIG should have been bankrupted rather than nationalised, and the $85 billion of taxpayers’ money loaned to the firm could have been used instead for debtor-in-possession financing. This would have allowed for a more fair process for allocating losses between shareholders and short-term and long-term creditors of the firm. Nationalisations like this are prejudiced in favour of those responsible for the trouble in the first place.
He is scathing about the Bush administration’s actions. In his column for the online RGE Monitor, he wrote: "Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez-faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades.
“So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.”