Parts to Wholes: the Socionomic Systems Nexus

Leadership and Response

Playing Frisbee on a Precipice There are 3½ weeks to go. Life, and political campaigns, can turn on a dime. But I think it just turned on a lot of dimes. There was an October surprise, and it has all but certainly decided the race. On the left, a smug triumphalism is setting in. On the right, anger rises: the finger pointing is about to begin. In parts and pockets of the middle, we have Americans who aren't thinking about politics because they're busy trying to imagine what a modern depression would look like and wondering, for the first time ever, if it is possible that they may wind up living in their cars. A friend caught the mood in a jollier way, quoting an old comic: "I have enough to live comfortably for the rest of my life, as long as I'm hit by a bus tomorrow." Both campaigns, in the closing stretch, seem not fully worthy of the moment. We are in crisis—a once-in-a-century event, as we now say. And what we got from the candidates, in this week's presidential debate, was a bunch of gummy meanderings—smooth, rounded sentences so full of focus-grouped inanities that six minutes in viewers entered a kind of trance in which we almost immediately gave up on trying to wrest meaning from what was being said and instead focused on mere impressions. The look of things. The men on the plane, the pseudo-tough political operatives who surround both candidates, sometimes grouse, in private, that it's all symbols now, all mood, all about the visual. But they have some real responsibility here. They send their candidates out to speak such thin gruel, such spat-out porridge, that we are struck dumb, and left daydreaming about the fact that Mr. Obama's suits are always slate gray and never seem to wrinkle, and Mr. McCain tonight seems like a rabbity forest creature darting amid the hedgerows. As to what they will do about the crisis, Mr. Obama will raise taxes on the rich and help us weatherize our homes, while Mr. McCain favors "energy independence" and buying up mortgages. On the causes of the crisis they spoke of insufficient regulation, or high spending. But these were not the great causes. Neither party has clean hands. Or rather, both parties have dirty hands. Here is the truth, spoken by the increasingly impressive Sen. Tom Coburn: "The root of the problem is political greed in Congress. Members . . . from both parties wanted short-term political credit for promoting homeownership even though they were putting our entire economy at risk by encouraging people to buy homes they couldn't afford. Then, instead of conducting thorough oversight and correcting obvious problems with unstable entities like Fannie Mae and Freddie Mac, members of Congress chose to . . . distract themselves with unprecedented amounts of pork-barrel spending." That is the truth. And yet at the debate, when one citizen-questioner invited both candidates to think aloud about the responsibility of our representatives in Washington, they both gently suggested she was cynical. She was not cynical. She was informed. Why would anyone trust either candidate to help dig us out of this if they can't speak frankly about what got us into it? One had the sense this week that our entire political class is playing Frisbee on the edge of a precipice, that no one is being serious enough, honest enough, that it's all too revved, too intense, and yet too shallow.

A Deepening Leadership Crisis Yesterday’s stunning rejection by the House of Representatives of the financial rescue plan represents one of the clearest signs yet of the deepening leadership problem we are facing as a people. The pleas of a President, Congressional leadership, the business community, the press — all were ignored and defied by a majority of Members in the House. The opposition was especially intense among House Republicans, even though the most urgent pleas came from fellow Republicans in the executive branch. Those who voting against a rescue, in my judgment, should be held accountable by voters at the polls this November if the country now endures greater hardships. But we should recognize as well that the reason so many voted against the package was that the public has been against it — and in turn, the public has not been persuaded because it has lost trust in our national leadership. And THAT is a serious problem for a democracy — one that deserves more extensive debate about why the breakdown in trust and what can be done about it. At Harvard’s Center for Public Leadership, which I have the privilege of directing, we have taken public surveys in each of the past three years measuring confidence in our nation’s leadership. Our surveys have been done in partnership with U.S. News & World Report as well as Yankelovich. The results haven’t been pretty. In the fall of 2005, some 65% said we have a leadership crisis in the country. By 2006, the number had risen to 69%. And last fall, no less than 77% declared there was a crisis of leadership. Moreover, 79% said the United States would decline unless we get better leaders. Please note that this survey did not reflect just an unhappiness with President George W. Bush. It was widespread across 12 different institutions and leadership groupings. Only the military and the medical profession were given relatively high marks this past fall. Strikingly for purposes of understanding these past few days, the institutions and groups with the lowest levels of confidence were smack in the middle of this financial meltdown. Four of the five lowest rated groups in the index were business, Congress, the executive branch, and the press. No wonder the “leaders” of these institutions had so much trouble persuading the general public about the seriousness of our financial mess. What we see today then is a leadership vacuum. And in particular, we are experiencing an interregnum in Washington, a moment when the highest office in the land seems vacant and we are awaiting a new national leader.

The Git  'er Done  Boys

A Professor and a Banker Bury Old Dogma on Markets For the last year, as the nation’s economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention. A longtime student of the Great Depression, Mr. Bernanke was acutely aware of what could happen without a decisive move. Finally, the moment that called for action arrived late Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear the turmoil gripping Wall Street was only growing worse and that ad hoc solutions were not working. Talking into a speaker phone from his ornate office, Mr. Bernanke told Mr. Paulson that it was time to adopt a comprehensive strategy that Congress would have to approve. Mr. Paulson understood. Reluctant in recent days to send Congress a plan that lawmakers had warned had little chance of quick passage, he had worried that a rejection would only further shock the markets. But during two conference calls Wednesday night and Thursday morning, he agreed that they had no choice. “It just happened dramatically,” Mr. Paulson said in an interview on Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.” Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat. Befitting their roles and personalities, Mr. Paulson has become the public face of their team — he plans to appear on four Sunday talk shows — while the less visible Mr. Bernanke provides the historical underpinnings for their strategy. Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

A Short Banking History of the U.S. We are now in the midst of a major financial panic. This is not a unique occurrence in American history. Indeed, we've had one roughly every 20 years: in 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987 and now 2008. Many of these marked the beginning of an extended period of economic depression. How could the richest and most productive economy the world has ever known have a financial system so prone to periodic and catastrophic break down? One answer is the baleful influence of Thomas Jefferson. To Jefferson, who may not have understood the concept of central banking, Hamilton's idea was what today might be called "a giveaway to the rich." He fought it tooth and nail, but Hamilton won the battle and the Bank of the United States was established in 1792. It was a big success and its stockholders did very well. It also provided the country with a regular money supply with its own banknotes, and a coherent, disciplined banking system. But as the Federalists lost power and the Jeffersonians became the dominant party, the bank's charter was not renewed in 1811. The near-disaster of the War of 1812 caused President James Madison to realize the virtues of a central bank and a second bank was established in 1816. But President Andrew Jackson, a Jeffersonian to his core, killed it and the country had no central bank for the next 73 years. No small part of the reason that an ordinary recession that began in the spring of 1929 turned into the calamity of the Great Depression was the inability of the Federal Reserve to do its job. It was completely reorganized in 1934 and the U.S. finally had a central bank with the powers it needed to function. That is a principal reason there was no panic for nearly 60 years after 1929 and the crash of 1987 had no lasting effect on the American economy. In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress's attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out. While it will be painful, the present crisis will at least provide another opportunity to give this country, finally, a unified banking system of large, diversified, well-capitalized banking institutions that are under the control of a unified and coherent regulatory system free of undue political influence.

Tools and Outlook

We Have the Tools to Manage the Crisis Today, the financial crisis has reached a critical point. The sharp decline in the stock market and its volatility dramatically make the point. More important if less visible, the flow of credit through the banking system and the financial markets is seriously impaired -- even in part frozen. For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. Important state and local governments face deficits they may be unable to finance. Recessionary forces are apparent in other important countries and exchange rates are unstable.Those are facts. They are the culmination of economic imbalances, a succession of financial bubbles and financial crises that have been building for years. It's no wonder that confidence in markets, banks, and financial management has been badly eroded. Without effective action, fear might take hold, threatening orderly recovery. Fortunately, there is also good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust. None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them. To that end, the immediate and critical need is determined, forceful and persistent leadership -- extending across administrations and Congresses. Both the public and private sectors must be involved. The inevitable recession can be moderated. The groundwork can be laid for reconstructing the financial system and the regulatory and supervisory arrangements from the bottom up. The extraordinary interventions by the government (and taxpayer) should be ended as soon as reasonably feasible. That rebuilding will be the job of another day -- of a new administration here in the U.S., of finance ministries and central banks working together. It must draw upon the strength of the now chastened private sector. It will require more understanding of the risks embedded in so-called financial engineering and of the perverse compensation incentives that have exalted risk over prudence. There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs -- and financial crises -- will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.

We must lead the world to financial stability. Strong banks, unfrozen markets, greater transparency and international supervision are the four keys to recovery. The banking system is fundamental to everything we do. Every family and every business in Britain depends upon it. That is why, when threatened by the global financial turmoil that started in America and has now spread across the world, we in Britain took action to secure our banks and financial system. The stability and restructuring programme for Britain that we announced this week is the first to address at one and the same time the three essential components of a modern banking system - sufficient liquidity, funding and capital. So the Bank of England has pledged to double the amount of liquidity it provides to the banks; we have guaranteed new lending between the banks so that we can get the banks lending to each other again; and at least £50 billion will be made available to recapitalise our banks. We will take stakes in banks in exchange for a return and will guarantee interbank lending on commercial terms. And at the heart of these reforms are clear principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders. But because this is a global problem, it requires a global solution. Indeed this now moves to a global stage with a range of international meetings starting this week with the G7 and the IMF and, we propose, culminating in a leaders meeting in which we must lay down the principles and the new policies for restructuring our banking and financial system all around the globe. When I became Prime Minister I did not expect to make the decision, along with Alistair Darling, for the Government to offer to take stakes in our high street banks, just as nobody could have anticipated the action taken in America. But these new times require new ideas. The old solutions of yesterday will not serve us well for the challenges of today and tomorrow. So we must leave behind outworn dogmas and embrace new solutions.