ALEX BERENSON ESSAY

In a Mood to Regulate … Maybe

IS THIS THE end of hypercapitalism?
For nearly a generation, the United States has driven growth by deregulating markets, lowering tax rates and promoting trade. Across wide swaths of the American economy - from airlines to banks to energy to telecommunications - Washington stood aside, believing less regulation would produce broad prosperity, even at the cost of greater income inequality.
Now, with the global economy weakening daily, Washington setting aside $700 billion to bail out financial companies and the Democrats likely to enlarge their majorities in the United States Congress, it may seem that America is shifting away from faith in markets and distrust of government.
In Europe, some political leaders, including conservatives like President Nicolas Sarkozy of France, have declared the death of laissez-faire economics.“A certain idea of globalization is drawing to a close with the end of a financial capitalism that imposed its logic on the whole economy,” Mr. Sarkozy said on September 25. “The idea that the markets are always right was a crazy idea.”
Whoever becomes president of the United States in January, lawmakers will be under pressure to strengthen financial regulation . Some critics of the bailout legislation complain that at the same time that it empowers the Treasury Department to buy hundreds of billions in troubled debt from financial firms, it fails to fortify oversight of America’s financial system.
But Americans are fundamentally suspicious of government in a way that Europeans are not, a cultural and political difference that stretches back centuries. Anyone expecting a major expansion of Washington’s powers after November - whether under a Barack Obama or John McCain administration - may be disappointed.
Americans are certainly weary of President Bush, whose approval rating fell to 22 percent in the most recent poll by CBS News, the lowest rating for any president since Harry S. Truman in 1952. But this poll, and others, also show that despite their anger at Mr. Bush and Wall Street, Americans are not necessarily ready to embrace liberal ideals such as stronger unions, significantly higher and more progressive taxes, and new trade barriers.
A long-lasting recession could change that dynamic, just as the inflation and severe recessions of the 1970s fueled the last major ideological shift in American politics with the election in 1980 of Ronald Reagan, a fervent apostle of lower taxes, free markets and deregulation.
But for now, the United States economy is far stronger than it was in the 1970s. The global credit crunch, swooning stock market and rising unemployment are frightening, but economists are still predicting a relatively mild recession. The unemployment rate, for example, has risen from 4.4 percent in March 2007 to 6.1 percent at the end of September, but it is far below the post-World War II peak of 10.8 percent in November 1982. And while the Standard & Poor’s 500 index of big stocks has fallen by nearly 30 percent since its peak in 2007, it had dropped nearly 50 percent between 2000 and 2002.
The relatively mild recessions of 1990 and 2001 did not shake Americans’ faith in free-market principles, said Robert D. Reischauer, president of the Urban Institute, a nonpartisan economic and social research organization. Mr. Reischauer directed the United States Congressional Budget Office between 1989 and 1994, when Democrats controlled Congress. Similarly, this recession will probably not produce a major shift, unless it turns out to be much longer and more severe than economists expect, Mr. Reischauer said.
“We’re basically a conservative country,” he said. “And one would expect that to be the case when one has as much stuff as we have to conserve.
Jeffrey Garten, a professor at the Yale School of Management in Connecticut who was an undersecretary of commerce in the Bill Clinton administration, said lawmakers are likely to impose stricter regulatory oversight on several industries - especially financial companies and markets. Having established itself, at great expense, as the financier of last resort, the government will no longer blithely accept banks’ assurances that they are safe, Mr. Garten said. Instead, Congress will give the Securities and Exchange Commission and the Federal Reserve new powers to oversee financial institutions, Mr. Garten said.
“The government’s going to be inside them,” he said. Mr. Garten also said he expected the Food and Drug Administration and Consumer Product Safety Commission to receive increased funding and stronger oversight powers. “The whole issue of food and product safety - it’s a total mess,” he said. “We are headed for an extensive regulatory re-think.
David Ruder, the former chairman of the Securities and Exchange Commission and now a professor emeritus at the Northwestern University School of Law in Illinois, said he also thought that much stricter financial regulation was necessary, both in the United States and internationally. “The events, even as they’re unfolding today, are revealing the need for much closer cooperation among financial regulators,” he said.
But, in a sign of the opposition that Democrats will face as they try to strengthen regulation, Mr. Ruder said that he did not think regulatory reform would be easy to implement, even in the financial sector. Even after receiving massive government aid this year, banks may fight stronger government oversight next year, he said.
The banking and finance industries are major political donors and powerful lobbying forces in Washington. Lawmakers who voted for the bailout received substantially more in contributions over their careers from the finance, insurance and real estate industries than those who voted against it, according to the Center for Responsive Politics, a nonprofit group in Washington that tracks political contributions.
“I’m scared about the next year but I’m very optimistic we’ll come out of this in good shape,” Mr. Ruder said. “We very well may come out of this horrible situation with a better version of American capitalism - it’ll be a little tamer; it’ll be a little more regulated.”
“But this country is built on an appetite for risk,” he added. “We don’t want to be France.