When Lehman Brothers and American International Group collapsed in mid-September 2008, it was like the fall of the twin towers seven years before. Symbols of American financial prowess had crumbled to dust, betokening a world shaken to its very foundation.
Important as the crisis is in its own right, it is the response of the government—its way of molding into stone in ten days measures that will have consequences for ten years—to which I draw attention. After 9/11/01, the mind of the Bush administration was made up quickly. They were going to war, first with Afghanistan, then with Iraq. Public discussion of alternatives, and criticism of the administration, was virtually non-existent in the mainstream media. Most Americans have reconsidered the Iraq War and think it was a big mistake. But we’re still there.
The mood now is different, but there is the same essential dynamic, in which great crisis produces the demand that something be done immediately, foreclosing the opportunity for deliberation. It follows inexorably that the executive must be entrusted with the details, because circumstances change and confidentialities must be preserved. Voila! There you have your ill-considered, secret, untransparent decisions, made in a rush, entailed upon the subsequent generation. The collective response is something like: We Need to Act! No Time to Think!
This is hardly the model of republican deliberation for which American political institutions were once renowned. It is very unbecoming to a polity that purports to respect constitutional values.
The phenomenon is probably best seen as a rather grotesque form of “path-dependency,” that is, the idea that where you end up depends on where you start. Paul Krugman got a Nobel Prize for his variations on that proposition, demonstrating that for some industries small initial advantages can make a big difference. But Krugman was thinking about how industries achieved a competitive edge. The concept of path-dependency is equally relevant to how polities reach dysfunctional decisions. The September/October 2008 decisions of the US Treasury and Federal Reserve will cast a very long shadow.
Chalk up another cause for depression.
Q&A with David Einhorn
6 hours ago