Sol Sanders Archive

The great debate (for those who know about it)

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Simply stated, the question is, how far can life’s events be controlled by human ingenuity?

The financial crisis of 2007-8 has been interpreted in some quarters as requiring rewriting the rules of the road, domestically and around the world. Others see it as an inevitable revisit of the business cycle — if in a more severe manifestation — inherent in a relatively free system, one that has produced enormous progress but that by its nature is implicitly risky.

That “the Washington consensus” — free markets, representative government and human rights — is moribund has been proclaimed far and wide as one fallout from the crisis. (In some benighted quarters the suggestion comes to replace it with “the China model” — state crony capitalism enforced by political repression.)

A garland was laid on the libertarian bier in early April when the International Monetary Fund reversed course and blessed national controls on capital flows. In part, the shift reflects newer players asserting themselves as rapidly growing members of the world economic club. The IMF move reinforces their efforts to cope with the inflow of “hot money” and “the temptation” of foreign direct and indirect investment.

As always, politics intrude. IMF chief Dominique Strauss-Kahn is coyly flirting with running next spring as the Socialist candidate against conservative French President Nicolas Sarkozy. (Mr. Strauss-Kahn’s wife, journalist Anne Sinclair, hints he will — perhaps following an earlier ugly IMF sexual harassment scandal.) His speech on the eve of this week’s IMF annual meeting, advocating “globalization with a more human face,” could be seen as the flip side of a just-issued French Socialist Party manifesto emphasizing investment. The Socialists, turning their back on traditional French xenophobia, want to woo foreign money.

Earlier, former Fed Chairman Allan Greenspan, seen by some as the villain in the crisis, laid out the U.S. argument. He detailed how recent Obama-backed Democratic efforts in Congress to slap new controls on Wall Street had already gone awry. Mr. Greenspan summed up thus: “The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems.”

Former House Financial Services Committee Chairman Barney Frank, left holding the legislative bag while his former collaborator Sen. Christopher Dodd snuggles into Washington’s most plush lobbying sinecure as Hollywood’s representative, responds that transactions can be vetted by the very digital revolution that made them possible in the first place.

Ah, but neither argument gets at the crux of the problem.

Any examination of what the Chicken Littles originally thought was world economic collapse traces back to government intervention, not to the absence of regulation. It was Congress that insisted — in a move originally opposed by banks until they saw the green of Fannie Mae and Freddie Mac’s unlimited government backing — that lenders disregard traditional mortgage standards. And Lehman Brothers penchant for Washington hand-me-down bureaucrats, rather than old-fashioned merchant bankers, to direct its affairs played a role in its demise, one that tripped the international financial debacle.

Brazil, one of the chief beneficiaries of this recent era, faces the issue ahead of others. It has just announced a second round of capital controls, now indirectly endorsed by the new IMF dictum. Squeezing off inflows to stem the rising price of commodity exports, a large percentage going to China, may simply be encouraging the savage rape by subsidized Chinese imports of what has been a rapidly growing, world-class manufacturing sector in Brazil, denying domestic producers access to capital.

Mr. Greenspan’s parting shot sums up this essence for Brazil and the rest of us: Given the greatest growth in world history during a period of relatively laissez-faire capitalism, are we now willing to risk its regeneration by increasing government interference?