October Demise

October is shaping up as a banner month for fans of systemic breakdown. In Washington last week, the neo-Puritan Republican Congress voted to define the criteria for presidential impeachment down to the level of lying to cover up an affair. Not to be outdone, the financial system emerged from the very same week looking even more loony than its political counterpart, with major investors in full flight from - well, from investment. In the annals of our capitalist democracy, it's hard to think of another week when both our capitalism and our democracy seemed so addled.

On Capitol Hill, the Republicans pushed through an open-ended investigation of l'affaire Lewinsky and related (or unrelated) matters, which they justified by repeatedly invoking the precedent of Watergate. Judiciary Committee Chairman Henry Hyde, wrapping up the case for unlimited hearings, argued that in each instance what mattered was the issue of presidential cover-up, since the precipitating events were uniformly unimportant: "Watergate," he told us, "was about a third-rate burglary."

The problem with this argument is that it is based on a first-rate historical distortion. The break-in - an attempt to photograph documents and install bugging devices at the Democratic National Headquarters in the Watergate complex - may have been third-rate in execution, but it was intended as political espionage of the first magnitude. Indeed, what Richard Nixon was covering up was an elaborate plot to subvert the Democrats' ability to wage an effective presidential campaign against him, including dirty tricks that so succeeded in wounding their most electable candidate, Senator Ed Muskie, that he dropped out of the race. The third-rate burglary resulted in some first-rate prison time for its perpetrators, including the general counsel and the security chief of Nixon's re-election campaign. And the subsequent cover-up that Nixon ordered dragooned the CIA into misleading the Justice Department investigators.

As to the precipitating crime in the Lewinsky affair - there isn't one. The events that Bill Clinton was plainly bent on covering up (not by misusing the CIA but by lying under oath) were personally embarrassing and politically damaging, but not even Kenneth Starr has alleged that the orals in the Oval were illegal.

Indeed, as a subject for investigation, the Lewinsky case raises questions that if anything are the opposite of those raised by Watergate. In deciding what to do about Watergate, the Rodino-led Judiciary Committee of 1974 agreed on what the law said and differed over the meaning of the facts. When the Supreme Court ordered the release of the tapes containing the "smoking gun" - Nixon's order to have the CIA obstruct the investigation - all 38 members of the Judiciary Committee agreed that this met the legal criteria for an impeachable offense.

In the current controversy, by contrast, the Hyde-led Judiciary Committee pretty much agrees on the meaning of the facts, and splits along party lines as to what the law is. To dramatize this very point, Judiciary Committee member Howard Berman, the San Fernando Valley Democrat, offered a wily substitute resolution last week that stipulated to the accuracy of all the allegations in the Starr Report, and called upon the committee to first determine if any of them rose to the level of an impeachable offense. This, of course, would have cut short the Republicans' fishing expedition, and it failed on a party-line vote.

Over the past few days, however, it's become clear that the GOP's determination to subject the nation to a full-fledged presidential-impeachment process has engendered two distinct backlashes. The first is public: New polling by the Washington Post, conducted after last Thursday's House vote to authorize hearings, shows that support for the Republican Congress is in clear decline. Two weeks ago, a Post poll of likely voters uncovered equal levels of support - 47 percent to 47 percent - for Democratic and Republican House candidates. In a new poll conducted this past weekend, however, the number of likely voters who said they'd vote Democratic rose to 51 percent, while those who said they'd vote Republican declined to 42 percent. In a year as fluid, not to say crazy, as this one, this may just be this week's epiphenomenon. Or it may be, in a replay of their 1995 government shutdown, that Gingrich & Co. are self-destructing once again.

The second backlash against the impeachniks is occurring within the American elites. Pundits ranging from Charles Krauthammer on the center-right to Thomas L. Friedman and E.J. Dionne Jr. on the center-left to John Kenneth Galbraith on the left - among numerous others - have all taken to the op-ed pages over the past week or two with the same message: The world is melting down. We stand at the brink of the worst financial crisis since the Great Depression. This is no time to preoccupy ourselves with a glorified sex scandal.  

It's an argument with which I enthusiastically agree - save in one particular. From what I've seen over the past several weeks, I'm not sure that there's anyone in Washington who, even if they preoccupied themselves solely with the financial crisis, would have the slightest idea what to do about it.

Here, in admittedly telegraphic form, is a brief history of the Current Economic Mess:

The devaluation of the Thai currency in the summer of last year led to a massive flight of private Western capital from a range of Asian nations that institutional investors feared could no longer generate profits. For its part, the International Monetary Fund (IMF) required these nations to raise their interest rates with the intent of restoring investor confidence (which hasn't happened) and with the effect of inducing steep recessions or, in the case of Indonesia, a cataclysmic depression. U.S. and European companies that export heavily to Asia have seen their exports heavily reduced.

The weakening investor confidence in emerging markets also threatened to cause mass capital flight from the economies of Latin America. When Russia defaulted this summer, however, investor flight turned to investor panic. The hedge funds, mutual funds, brokerage houses and banks that daily disperse trillions of dollars into untold thousands of investments began to concentrate those dollars into a relative handful of very safe investments. The entire financial edifice that American business has erected over the past 20 years - the bond and equity markets in which corporations and real estate trusts and mortgage brokers now raise most of their money - began to sway as investors unloaded their securities and bought into the safest bond of all: United States Treasury notes. By early last week, the financial press was proclaiming a credit crunch the likes of which hadn't been seen since the early '30s: No one was buying up private-sector bonds anymore; nothing was being financed. By late last week, the papers were noting that mortgage rates, long in decline, had taken their steepest upward leap in decades.

Finally, and totally in keeping with the manic-depressive logic of a panic, a run on U.S. Treasury notes broke out last week as well. The only safe investment, apparently, was no investment at all. By week's end, all the investment community wanted was cash in the bank.

At the rate we're going, don't be surprised to learn that Goldman, Sachs and Co. has taken its money out of the bank and stuffed it under the mattress.

The sickening slide of the past year, not to mention the dizzying drops of the past week, poses three fundamental challenges for U.S. and European economic policymakers: First, how to keep the domestic credit crunch from plunging us into a domestic recession. Second, how to keep the global credit crunch from plunging us into a global depression. And third, what basic alterations should be made to global and domestic economic structures to keep this from happening again.

By a curious and gloom-inducing coincidence, as Congress was deliberating on the impeachment inquiry last week, the world's finance ministers, augmented by Messrs. Clinton and Greenspan, came to Washington for the annual meeting of the World Bank and the IMF - and to chart a course that would end the economic crisis. By week's end, it was impossible to say which group was more inadequate to its chosen task.

Consider, for instance, the nonresponse of both the administration and the Federal Reserve to the sudden credit crunch and the likelihood of domestic recession. Earlier this month, the Fed reduced its prime rate by just one-quarter of a percent: clearly, not enough to kick-start the investment community. The administration's intransigence, if anything, has been even more profound. As both Clinton and Treasury Secretary Robert E. Rubin see it, the $70 billion surplus that the federal government ran this year is the capstone of their legacy: a monument that marks the end of the three decades of deficits the government ran up while inflation either loomed or descended over the economy.

Problem is, the specter stalking the economy today isn't inflation. It's deflation, the absence of credit, and the slowing, perhaps the cessation, of growth. And the one thing the federal government could do to get growth going would be to put that $70 billion back into circulation - either through a progressive tax cut or a targeted spending program. Yesterday's monument has become today's tombstone, but the administration still seems to be fighting the last economic war.

As to averting a global depression, the administration and its newly assertive European counterparts seemed headed in opposite directions. The administration still defended the IMF last week - more particularly, the Fund's insistence on keeping capital flows unrestricted and requiring nations in distress to raise interest rates to recession-inducing levels. For their part, the Europeans - in particular, the French socialists and just-elected German social democrats who will dominate the new European Monetary Union - were increasingly critical of the IMF's bailout strategies and the general idea that money can flow in and out of nations without any regulations or restrictions. Instead, they aligned themselves with World Bank leaders who insisted that more attention must be paid to preserving the living standards of Russians and Indonesians than to repaying Wall Street creditors in bailout plans. They also called for broadening the U.S.-dominated governing structure (and thereby changing the policies) of the IMF - a proposal to which the administration was notably cool.  

Finally, as to long-term solutions to global instability, there seems to be a growing gap between Bill Clinton's rhetoric and the actual policies of his administration. At a "Third Way" conference he attended with British Prime Minister Tony Blair last month in New York, and then again last week in Washington, Clinton called for a global Keynesian order: for creating social safety nets in developing nations, for creating as a monitor of global capital flows the kind of regulatory agencies that now monitor the nation's security markets. (Of course, as the saga of Long Term Capital Management makes clear, we really don't monitor many of our newer security markets at all, but that's another story.)

Clinton makes a compelling case. After all, the only nations in human history to have created middle-class majorities were the nations of Western Europe and North America during the decades following World War II, when Keynesian economic policies, social safety nets and widespread unionization combined to ensure that prosperity was widely shared. Unfortunately, many of the free-trade policies that Clinton's own administration has promoted - in particular, writing property rights but not worker rights into trade agreements - undermine the growth of the very institutions he rightly notes are needed to create economic stability. The free flow of capital that his administration champions can - and has - undercut that stability even more.

In fairness to the administration, solutions to the world economic crisis are in short supply from any source. That should come as no surprise. The creation of stable Keynesian economies at the national level required such middle-class-creating institutions as large-scale union movements and political parties promoting social-democratic policies. The force required to create a global Keynesian order - a transnational union and political movement - exists in an embryonic stage within the European Union, and elsewhere doesn't exist at all. The globalization of finance has left the political world far behind, struggling within parochial perspectives and jurisdictions while investment recognizes no borders or national allegiances. And, as of last Friday, no safe haven for investments.

The financial system - at least for now, for October - is no longer financing. While the political system - at least for now, for October - is pushing ahead with a partisan impeachment proceeding that a majority of Americans plainly oppose.

November, anyone?


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