In the pantheon of political and economic commentators, there is perhaps no one who writes so lucidly with such utter calm and reasonableness as Fareed Zakaria. His columns aren't Cracker Jack boxes bursting with goshwow revelations. They're mugs of warm milk that go down nice and smooth, filling you with a kind of zen peace and a dozy satisfaction that everything is going to be alright. He can be Obama with a pen and history PhD. He can be Thomas Friedman without the metaphors. And when undozy times call for undozy measures, he can be wrong.
In his Newsweek cover story "The Capitalist Manifesto" Zakaria lays out a typically measured and comprehensive-feeling case that the United States is going to need more capitalism to grow after the recession. That's right, of course, but certainly we haven't gone through hell and back without lessons, right? Zakaria writes:
Banks that are too large to fail should also be too large be leveraged at 30 to 1. The incentives for executives within banks are skewed toward reckless risk-taking with other people's money. ("Heads they win, tails they break even," is how Barney Frank describes the current setup.) Derivatives need to be better controlled.
Well that's all for lessons. Zakaria pulls back the lens to reveal a panoramic shot that doesn't fully criticize or defend capitalism or finance or regulation: he rationalizes it all. And so besides mustering a modicum of support for some extremely broad regulation ideas, Zakaria is ready to move on. Financial crises happen, he says. From the Dutch tulip bubble of 1637 to the dot-com mess of 2000, it's always the same thing. The bubble bursts, the bubble soap gets all over everybody and causes a huge mess, but time hoses down our soapy clothes and we emerge smelling fresher than ever, in a financial sense, or something.
It's classic Zakaria. And like drinking hot milk when you're tired and have a cramp, it might relax you in the short-term, but it's not helping you in the long run. We need a new lesson in how to restructure a financial system that, for two decades, has dealt with crises by only lowering interest rates. We need a new lesson in how to build a regulatory structure that properly identifies risk identities and exposure. Instead Newsweek treats us to one more lesson in why financial panics are just froth on the wave of progress.
I don't think it's controversial to say that Zakaria can be something of an elitist. Not that there's anything wrong with that (some of my best friends are elitists!), but there is something wrong with the policy prescriptions that stem from his brand of elitism. It's a brand that was first elucidated in Zakaria's sterling neo-aristocratic critique of democracy The Future of Freedom, which begins with a strange quote from The Odyssey. Odysseus orders his men to tie him to the mast to keep him from obeying the Sirens' song, which is luring him to ship-wreck. The elegant metaphor is unpacked in the book: Odysseus is the government, the people are the Sirens, the men are the elites. The masses often scream for government to do things that would steer their ship into cliffs (think Prop 13), but we need elites to bind government to its duty to steer rather than be steered.
That epigraph occurred to me reading Zakaria's grand solution for financial reform, which is the return of self-regulation. Here's Zakaria in his own words:
The failure of self-regulation over the past 20 years--in investment banking, accounting, rating agencies--has led inevitably to the rise of greater government regulation. This marks an important change in the Anglo-American world, away from informal rules often enforced by private actors toward the more formal bureaucratic system common in continental Europe. Perhaps the state should not set the pay of the private sector. But surely CEOs should exercise some judgment about their own compensation, and tie it far more closely to the long-term health of the company.
There's a need for greater self-regulation not simply on Wall Street but also on Pennsylvania Avenue. We get exercised about the immorality of politicians when they're caught in sex scandals. Meanwhile they triple the national debt, enrich their lobbyist friends and write tax loopholes for specific corporations--all perfectly legal--and we regard this as normal...
I had two immediate reactions to this. The first was I wasn't sure what Zakaria was talking about. Asking Wall St. and Penn. Ave to self-regulate more effectively is the stuff of prayers, not policy. CEOs should ask for less money. OK, I agree, but it's pretty clear that CEOs do not.
My second reaction was that Zakaria is still fixated with the epigraph of his first book. In the current incarnation of the Odyssey myth, our elites -- "in investment banking, accounting" -- are Odysseus, capable of self-regulating and outlasting the Sirens' calls, which beckon them to excesses. In Zakaria's upotia of self-regulation, they'll know when to tie themselves to the shipmast.
But Zakaria has the metaphor backwards. He knows that in capitalism, the system putting wind in our sails is also singing us to ship-wreck. That means that Wall Street, Odysseus, the ship and the Sirens are all the same. Left to their own devices, there is only swift sailing and crashing into cliffs. The ones who need help now are the "men," who are our regulators. They're the ones charged with keeping the ship at sea by tying their captain to the mast when the Sirens emerge. And they're going to need a better rope than Zakaria has to offer.