Democracy in America

Steven Malaga looks at the state of play in post-TARP America and asks a simple question: Whatever Happened to the Work Ethic?

What would Tocqueville or Weber think of America today? In place of thrift, they would find a nation of debtors, staggering beneath loans obtained under false pretenses. In place of a steady, patient accumulation of wealth, they would find bankers and financiers with such a short-term perspective that they never pause to consider the consequences or risks of selling securities they don’t understand. In place of a country where all a man asks of government is “not to be disturbed in his toil,” as Tocqueville put it, they would find a nation of rent-seekers demanding government subsidies to purchase homes, start new ventures, or bail out old ones. They would find what Tocqueville described as the “fatal circle” of materialism—the cycle of acquisition and gratification that drives people back to ever more frenetic acquisition and that ultimately undermines prosperous democracies.

And they would understand why. After flourishing for three centuries in America, the Protestant ethic began to disintegrate, with key elements slowly disappearing from modern American society, vanishing from schools, from business, from popular culture, and leaving us with an economic system unmoored from the restraints of civic virtue.

There's been a lot of talk in the air that the bailout last fall "worked" and that we averted a catastrophe thanks to the quick work of Ben Bernanke (note how GW Bush has once again been left out of the loop in being given credit for something that happened under his watch). I am not sure "averted" is the right word to use, as an actual catastrophe ensued before and after the TARP bailouts. Not only that, the moral hazard that has resulted, not to mention the inversion of social risk - America's prudent middle class is simultaneously bailing out the Masters of the Universe on the one hand, and the subprime borrowers on the other - has already made a hash of many of the unwritten rules of the social contract with the decline of the work ethic being just the beginning.

The history of the bailouts is already being rewritten to make them seem more palatable and the sole course of action available as of September 2008. We seem to already be forgetting that Bernanke and Paulson spent the better part of 2007-2008 assuring us that they had things under control, before suddenly appeared before Congress and announced that they needed $700 billion by the end of the week or the world would come to an end. People had been warning for years that the likes of Fannie/Freddie, AIG and Lehman Brothers were racing towards insolvency and yet everyone stood around looking surprised when they failed. Some "rescue." Worst of all, the bailed out have not suffered all that much. Many of the people running the firms that were bailed out are still on the job - a notable exception being GM's Rick Wagoner. Forget business sense. What kind of values are we instilling in society when a man can't lose his job when he destroys his company?

Elizabeth Warren put it best: if you think our world is comprised of a handful of banks that are "too big to fail," then of course the bailouts were justified. But if you think our world is comprised of 115 million households, then the bailout's efficacy is an open question. And it will remain open because of the too big to fail mentality that has been, essentially, foisted on us over our objections. If you are too big to fail, does that mean you will never go away? Will there always be a Citibank, just like there is always a State Department. Thanks to the abilouts, we now have "private" institutions like AIG, Citibank, GM, Fannie/Freddie, and Bank Of America that have been trapped in amber and are about as bouyant. We do not know yet what the endgame is: are we always going to own stock in GM? Are Freddie/Fannie ever going to exit their receiverships? Will AIG ever be able to stand on its own?

Most important, do we have any assurance that the sort of managerial abuses that brought these firms down will not happen again? I don't think so. Instead, the Bailed Out show every sign of returning to their old ways of generating asset bubbles to fuel short term growth at the expense of long term prosperity. As for the government, it has gotten too comfortable with the practice of passing hugely complex and expensive pieces of legislation without conducting hearings or even "reading the bill." This has been a corrosive experience for America's private and public sectors. That the rust has not become immediately apparent does not mean that we are being weakened from within.