Animal Dispirits – A doctor with the wrong prescription for capitalism.

Written by By THEODORE ROOSEVELT MALLOCH published in “The Weekly Standard

How to Revive Capitalism and Put America Back on Top
by Matthew Bishop and Michael Green
Crown Business, 384 pp., $27

Three weeks ago, high in the wintry alpine resort of Davos-Klosters, Switzerland, the world’s elite convened under the auspices of the World Economic Forum. Everyone sipped schnapps and talked about the future of the globe under the banner, “Rethink, redesign, rebuild.” And the book they all were reading was this one, written by an editor of the Economist and his researcher.

The operative word in the title is “from,” and the twin goals of this overly ambitious work are to “revive capitalism and put America back on top”—large goals indeed. According to Bishop/Green, capitalism ended on September 15, 2008, when Lehman Brothers fell. It is now a question of what will replace it. Showing off their blame-game proficiency, Bishop/Green enlist Time’s list of 25 people they love to hate, with Richard Fuld, Lehman’s last CEO, rated number one. The thesis here is that we can learn from the booms, crashes, and bubbles of the past; there were four big mistakes; Henry Paulson is a rogue; the problems are bankers, speculators, regulators, and politicians.

This book is cynical and trite, and the best thing to be said for it is that Bishop/Green do not believe the answer is more Marx. But they come close when they claim that the financial system is a “giant Ponzi scheme.” There are the five lessons of history and the four road signs ahead that, yes, will lead us to “a better kind of capitalism.” Davos phrases abound: Rethink economics, redesign governance, put values back in business, promote financial literacy. Full of suggestions, most of them half-baked, Bishop/Green suggest that the most pressing challenge is for the dollar to “relinquish its role as the world’s reserve currency.” Greed, we are told, is not good. And since easy populism would be a mistake, Bishop/Green show us the three roads ahead: Denial—where we do nothing; government control; and their preferred route, from ruin to new prosperity.

Here is a sample insight: “At times of panic credit markets have a tendency to freeze.” Here is another: “The bubble forms when expectations exceed reality.” Cue the applause from the civics class. Pondering the Goldman Sachs scandal, Bishop/Green defend the too-big-to-fail argument: Their hope is that we can “find ways to deter financial institutions from taking on excessive risks.” Excessive risks, sure; but all risks? They applaud the public rescue of banking and government-inspired guarantees (bailouts), and their mantras are “print more money” and, when in doubt, “strengthen regulatory measures.” We also need much more “coordination” to defeat systemic risk. Did Keynes really get it right? Is Big Government good government? Do markets always fail when left to their own devices?

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Taking on the dismal science of economics, Bishop/Green plead for a “new paradigm.” The “animal spirits” of the market are not good and must be tamed. Citing Alan Greenspan’s mistakes (“he should have known better”), they rely on the authority of George Soros. Stakeholder capitalism enters left stage; behavioral economics is less arrogant. With improved statistics, and Nicolas Sarkozy’s new Commission on Measurement of Economic Performance and Social Progress, we can modernize accounting and have a perfect global solution—a super-International Monetary Fund. Besides dumping the dollar, the world must also have “international consensus” since the United States had been naughty and “learning to share power and give up control can be difficult.”

In the new Bishop/Green economy, an all-powerful Global Central Bank will run money, ignoring notions of national interest; but like gun ownership, the spread of capital will also need to be controlled. Aid is critical, since poverty remains in the world—but only “aid that works.” Foreign aid doesn’t work, it is here acknowledged, but we need more anyway. The problem is a lack of “collective action.” The authors’ notion of “philanthrocapitalism,” based on shareholder democracy and the overthrow of boards (especially the bad ones), will end cronyism, overcompensation of hungry CEOs, and lousy governance. And it will finally give us corporate social responsibility—Bill Gates’s version of “creative capitalism”—where we all “give back” and invest entirely on a social basis. To hell with profit. All we need is the political will, since “ultimately the public is to blame.” Why? Because it is financially illiterate. Journalists should be reeducated and made more “skeptical.”

For in the end, money is the great taboo; it’s what leads to subprime lending. Realizing that money is the “root of all evil,” a “competent economic citizenry” will fight the inherent flaws of capitalism because “the people were angry and scared.” If we don’t fight capitalism, we are warned, we could end up with a Chinese-style authoritarian capitalism. We can’t do “business as usual” any longer, and most certainly America, who started all this money madness, cannot dictate since the United States is no longer a “hegemon.”

It’s interesting to note that, through all the sermonizing and flagellation, short shrift is given to the classical virtues and to thrift. Instead, the underlying credo here is the need for more confidence in global government, since finance is an imperfect tool for managing risk in an uncertain world. But the market is up since September 2008; TARP funds are nearly repaid; financial reforms are on the way, and so are the Wall Street bonuses, as large as ever. Maybe we’re not on the road to ruin? Maybe we will adapt and muddle through?

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