Some thoughts on the financial crisis

A few thoughts on the financial crisis:

-Europe's fractured response to the crisis is a snapshot of why the Euro's viability as a new primary reserve currency is weak. Uncoordinated and competing regulatory/financial authorities across the bloc undermine the short to medium term confidence in the common currency. As Peter Garnham notes in the FT today, investors are questioning the ability of European governments to respond to the spreading crisis in a coordinated manner. On Tuesday, this lack of confidence led the Euro to its largest one-day decline against the USD since 2001.

-Wake up America, higher taxes are on the way. Period.

-While I believe that, as imperfect as it may be, the Emergency Economic Stabilization Act of 2008 (Paulson Plan) is needed to prevent a total global economic meltdown, there is something oddly pleasing about the House's rejection of the plan. The majority of Americans are against the bailout plan, specifically the notion of bailing out Wall Street while mortgage relief for the average citizen is resisted and bankruptcy laws that are perversely skewed in favor of creditors (yes, those same creditors) remain unamended. Now, the last thing elected representatives should do in a time of crisis is pander to the emotions of their constituents, or make decisions on the basis of electoral considerations (which, by the way, is the primary Republican impetus for voting "no"). Controversial, unpopular policies are sometimes necessary, and the Paulson Plan is undoubtedly one of those. But a "no" vote does seem to reflect the genuine sentiment of the American people, and at the very least has bought some time to include the much-needed (in my opinion) individual mortgage relief and bankruptcy changes.

-Finally, GWB's televised address to the US people last Wednesday was pretty unremarkable, and the choice to stand in the same doorway as he did on the eve of the Iraq war did little to boost his credibility. But one passage struck me as truly powerful in both context and significance. For the first time in my life, I listened to an American president defend free market capitalism. Not promote it, or highlight its virtues relative to an alternative model, but actually defend its very existence. He said:

"Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back."

On this topic he is, and it is strange to say this given the messenger...both eloquent and correct. In the past few weeks, the "anglo-saxon" capitalist model has come under fierce rhetorical attack, especially from Germany, Russia, and of course France. To this point, France and its banking sector have weathered the storm perhaps better than any major western power. Sarkozy has called for an international conference, a la Bretton Woods, to construct a new "regulated capitalism".

Surely, unfettered finance and blanket deregulation have produced disastrous consequences for the global economy. Even the massive wealth creation they have facilitated is problematic, with income inequality rising across the western world. "Re-regulation" is desperately needed, and, in my opinion, beneficial in the long run. But the free market is still the best, worst option we have (to channel Churchill). It has brought more individuals out of poverty than any system in history, and it is the most flexible, dynamic economic model the world has ever seen. Despite the current political and financial climate, it is not a zero-sum game.

We are undoubtedly heading "towards a new paradigm on global markets and authority", and this is good. But let us not abandon capitalism just yet.