Thinking About the Long Term

Daniel Drezner asks an important question: "Is this the beginning of a norm shift in the global economy?"

He thinks not, yet (quoting verbatim):

It’s tempting to say yes, but I have my doubts. The last time the United States intervened on this scale in its own financial sector was the S&L bailout — and despite that intervention, financial globalization took off. The last time we’ve seen cordinated global interventions like this was the Asian financial crisis of a decade ago — and that intevention reinforced rather than retarded the privilege of private actors in the marketplace. In other words, massive interventions can take place without undecutting the ideological consensus that private actors should control the commading heights of the economy.

The good professor then goes on to make the true, but politically unpopular, point that the dollar and the US market are still outperforming most of the rest of the world.

He makes an important point. This isn't the first financial meltdown for the US, nor for the world. When the same thing has happened elsewhere, the real economy essentially shut down. That still could happen, but there's reason to believe it won't - unemployment, GDP growth, and inflation are all still somewhere between "not bad" and "ok." Like a good skyscraper, or a defense in football, the system so far is in bend-don't-break form.

Financial crises, like poverty, will always be with us - tulips in the 15th century, mortgage-backed securities today.

There is absolutely a need to figure out what is going on in the markets, fix it, and stop this particular crisis from happening again. But it's a bit early to start declaring the end of an era of free financial markets and capital flows. The flexibility of the system, the strength of the private sector, and, yes, the relative lightness of the government's role in normal times have all contributed to its ability to act as effectively as it has in these more interesting times. And these factors are some of what separates the US' current situation from the crises that brought so many developing countries to their knees throughout the 1990s.