Socialism, we are told, is the naiveté of youth, and a fallacious economics the United States has luckily spurned. The late Seymour Lipset, an well-known academician, penned a book in 2001 entitled It Didn't Happen Here: Why Socialism Failed in the United States.
Alas, nobody ever told the leaders of American finance. Whereas the old style of socialism elected no more than a handful of mayors and congressmen, Washington has now embraced a new variety that could not be more different in its class consciousness and privileged sponsorship.
I am talking, of course, about the collectivization of financial risk being promulgated by the Federal Reserve Board and the U.S. Treasury Department and applauded in pin-striped precincts from Park Avenue to Pacific Heights. Described as Wall Street Socialism by the gauche and more precisely identified as the "socialization of risk" by sophisticates, the new fashion leaves the profits of finance in private hands as of yore. It is only the "risk" -- of collapsed currencies, flawed speculation, busted hedge funds or the greedy misjudgments of large banks or brokerage firms -- that is quietly taken up by government entities and all too often shifted to taxpayers who do not understand the pompous phraseology but know full well that Washington will never bail out their hardware store or the widget plant where their son works.
This has been going on for decades -- a major reason why finance has grown and prospered so much compared with most other industries. But it's only been so boldly and shamelessly embraced in the last few weeks. The Federal Reserve insists that "inter-connections" require rescuing large institutions that might knock down other entangled financial dominoes. However, these would not have been so cocky or so inter-connected in their web-spinning if the Fed had not allowed so much greed and gamesmanship for so long. Ex-Fed Chairman Alan Greenspan is often singled out as a culprit, but most of what he did was what most of the financial sector wanted. They, too, loved making 4th of July speeches about the glories of free enterprise and free -- market profits while counting on the government to collectivize the perils of risk. Big, fat and dumb financial institutions could count on being big, fat and bailed-out.
There was a time in the annals of American finance when this kind of practice would have been unacceptable -- indeed, serious economists like Joseph Schumpeter recognized that "creative destruction" was part of a vital capitalism. Painful as the depression of the early 1930s was, its creative destruction so revitalized U.S. finance and enterprise that by 1950, the U.S. economy was the kingpin of the post-World War Two world, vital and vibrant.
Even the sharp 30% Wall Street correction in 1969-1970 turned out to be a financial purge that refreshed. In the period between 1969 and 1970, the twenty-eight largest hedge funds saw 70 percent of their assets disappear, and roughly one hundred brokerage firms were acquired or disappeared. Then came the 1980-82 period, when Federal Reserve Board chairman Paul Volcker broke the back of runaway inflation by putting the stock market and the U.S. financial system through the wringer with interest rates that hit a brutal 18 percent. Adjusted for inflation, the Dow-Jones Industrial Average lost some nearly half of its value between 1978 and its bottom in the summer of 1982. Business Week even ran a famous cover story on "the death of equities." However, far from falling into a grave, equities rose for two decades in what became the biggest bull market in American history.
But this is where Risk Socialism began to rear its head. The dangers of creative destruction in the marketplace were rejected. Bail-outs and government intervention became the norm. Big investors were upheld through everything from foreign currency bail-outs to the rescue of major banks. In 1998, the Federal Reserve arranged a bail-out of a well-connected hedge fund and now in 2008 it's katy-bar-the-door in Washington aid for the financially undeserving. And hardly anyone stops to figure out that the quarter-century suspension of anything resembling creative destruction or traditional market forces is the culprit. The inevitable chimera of economic collectivization is coming undone.
Will ordinary Americans pay much of the price? Almost certainly. Should they blame what happens on marketplace forces? No, because the historical operation of such forces has been stymied and suspended. Should they blame the political and financial proponents of Risk Socialism? Yes, because the longtime genius of American capitalism may be on its 21st century deathbed.
Kevin Phillips's new book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, was just published by Viking.