June 01, 2010

Paul Cella article in Christendom Review

The banking crisis of 2008 is of continuing interest to me in part because it challenged my free market assumptions. Large and small financial institutions operating freely in an interconnected global market had developed highly leveraged instruments that served as the financial equivalent of nuclear bombs. Which, of course, were gleefully held over the head of the U.S. taxpayer in '08 such that a Democrat president (!) bailed them out.

Instead of "laughing all the way to the bank" you can say the banks were laughing all the way to U.S. Treasury. But just as the bomb has made a nuclear war nearly unthinkable, so too did these highly leveraged institutions make letting them fail seem unthinkable.

Paul Cella proposes that Alexander Hamilton's work in creating a "commercial republic characterized by liberty" has become compromised, perhaps fatally so. An excerpt:
In the American constitutional order, particularly as molded by the teaching of Hamilton, Madison and Jay...the commercial republic is refashioned as federal structure and presides over a welter of private interests emanating from the natural passions; despotism is checked by the very factionalism which previous writers had imagined were productive of those “countless calamities” that beggar modern states. Liberty is secured, not by those constitutional “parchment barriers,” about which Publius is generally scornful, but by the rough and tumble of private enterprise engaged in by men pursuing their own interests and desires.


For what was disclosed back then, in late 2008, when the upheavals of the financial world crashed into every living room, was nothing less than the transformation of the American political economy, and with it the American constitutional order. The commercial interest, with its constitutional role as an inadvertent bulwark against majoritarian or factional despotism, was captured by a particular faction of it—namely the financial interest. And the wreck of finance capitalism presaged the crumbling of that bulwark and, thus unfettered, the ascendance of that despotism.

In a word, the American Republic would no longer be that; it would be, instead, something closer to a plutocracy.


What if, for example, the financiers, intoxicated with their own cleverness, alienated from the true sources of property and prosperity, commence to erect vast conduits of financial infrastructure by which capital from all around the world, all chasing fractionally higher yield, might come pouring into various American debt markets? What if this adventure in abstractions ultimately disrupts the equipoise of the US economy so severely that the natural market correction cannot be endured, because for policymakers to approach it according to a principle of laissez faire would be to risk total ruin? What if, faced with so awful a choice—ruin or socialism—policymakers were obliged to replace the private capital that long had fueled this riot of speculation, which by late 2008 lay in smoldering ruins—what if, I say, they were obliged by prudence to substitute for this private capital the public capital of the commonwealth?

We have at least the outline of an answer to these hard questions, and it ain’t pretty. Free enterprise has been dealt a series of savage blows, many of them self-inflicted. A broader swath of the American economy was absorbed into the machinations of the state over the course of the grueling days of fall 2008 than perhaps in all of prior US history. Taxpayer capital was staked to support a dizzying array of markets. Ruined firms were saved, and then, after the panic, turned loose to carry on with their speculations. Finance capitalism was further concentrated; few actors among it felt the bite of market discipline. Risk was socialized at the highest levels of sophistication by instruments and maneuvers so arcane that to describe them requires almost another language. Meanwhile, small enterprise was left to wither and perish. For a year and more now, finance firms have been making a killing by borrowing money short-term from the Federal Reserve at near-zero interest rates and lending it long-term to the Treasury at 2 or 3%. That’s a trade a child could get rich on.

In a word, the answer to the hard questions may be that we have had the misfortune to witness the degradation of [Alexander] Hamilton’s noble work, his painstaking formation of a commercial republic characterized by liberty, into a much baser form of political arrangement: plutocracy, an aristocracy of alienated wealth, characterized by insolent speculative gain. Instead of patriotic statesmanship grounding prosperity in the security of property, we shall have idle elitism, grounding narrow interest in sophistication and the abstraction of property.


William Luse said...

Thanks for linking to this. The first time I read it my jaw dropped at the complexity of the arrangements, which seemed to me a form of gambling, huge bets based on *nothing.* Money from nuthin'. Except the world can't work that way, can it?

TS said...

No it really can't. It can operate for awhile that way, Bernie Madoff-ly, but will collapse sooner or later.