Missing Links: After the Fall

The global financial meltdown is as surprising and unprecedented as the 9/11 attacks. Beyond that, the two calamities are very different; the financial crash will undoubtedly have broader consequences, hurting more people in more countries. Yet, 9/11 and its aftermath continue to offer a case study in some pitfalls to avoid when catastrophe hits.

Perhaps the most important lesson from 9/11 is that the U.S. reaction to the attacks had more profound consequences than the attacks themselves. Shocks such as 9/11 are bound to spark—indeed require—substantial governmental reactions, but the consequences of those reactions linger well beyond the initial event. This lesson will apply to the current crash: The laws, institutions, constraints, and incentives engendered by the bailout will mold our lives long after the effects of the subprime mortgage crisis have dissipated. The danger is that disproportionate or ill-conceived governmental responses may only exacerbate problems.

Consider the unintended fallout from the invasion of Iraq: an emboldened Iran, the Taliban’s resurgence, and the diminished ability of the United States to lead in times of global crisis. Moreover, as in Iraq, where the thorniest problems surfaced after a successful military takeover, post-bailout management will be critical. Iraq’s nightmare was amplified by mistakes made in the strategy, staffing, execution, and control of the post-invasion efforts. Similarly, the financial rescue could be fatally undermined by mistakes in the disbursement of funds or even in the staffing of the agencies in charge of implementing the bailout. One of the legacies of 9/11, for example, is the Department of Homeland Security, a bureaucratic behemoth that has become a textbook example of a failed reorganization doomed by vague congressional directives adopted in haste. A similar bureaucratic monster, driven by the same panicked impulses, may emerge as a result of this financial crisis.

Another lesson of 9/11 is that the United States will need all the help it can get from other countries to manage the crisis. Although both 9/11 and the crash of the subprime mortgage market took place on American soil, their international ramifications are enormous. And though American taxpayers will bear the burden of both the bailout and its fallout, the assistance of regulatory authorities from Britain to China will be indispensable. In fact, a lesson from 9/11 is that coordination at technical levels may be more important than the rhetorical statements of heads of state. After 9/11, while the U.S. Congress was replacing its cafeteria French fries with “freedom fries” and bashing France for its opposition to the war in Iraq, the intelligence agencies of the two countries were collaborating closely and effectively. The same was true of other intelligence services in countries whose leaders were making fiery speeches denouncing U.S. unilateralism. Technical collaboration of government bureaucrats—sustained over long periods and outside the media glare—will be as important to navigating this financial crisis successfully as presidential summits. The way that central bank managers in Beijing and Moscow coordinate actions with their counterparts in Washington and Frankfurt will be an important determinant of how we get out of this crisis.

One further parallel between 9/11 and the financial crisis is that public funds that had not been available for other important needs (healthcare, education, poverty) suddenly materialize. The gravity of the threat and the need to act quickly and decisively triggers a mind-set where it becomes acceptable—even desirable—to make decisions in which money is no object.

This disregard for budget constraints is a manifestation of another 9/11 lesson: the infatuation with “a new paradigm” and the disdain for old ideas and institutions. The conviction that a new reality has made previously cherished principles and ideas obsolete is dangerous. It leads to the assumption that all bets are off, old ideas are out, and completely new and untested concepts are indispensable. Bold, even reckless, ideas are sought and celebrated. This approach not only brought us the war in Iraq but also the Guantánamo Bay prison, the erosion of civil liberties, disdain for the Geneva Conventions, and the belittling of mechanisms normally used to control government spending as unacceptable bureaucratic nuisances. And now, the financial bailout will bring us the largest government-owned financial enterprise on the planet, drastic changes in financial regulations, and a banking system that will bear little resemblance to what it was just a few months ago.

The search for a new paradigm to replace pre-crash beliefs and institutions is leading many to conclude that American-style capitalism is now dead. “The idea of an all-powerful market without any rules and any political intervention is mad,” said French President Nicolas Sarkozy, adding that “Self-regulation is finished. Laissez faire is finished.” Henry Paulson, the U.S. Treasury Secretary, agreed: “Raw capitalism is a dead end.” Certainly, the crash revealed the need for more effective financial oversight and regulations. But their adoption will not mark the end of capitalism. Millions of Chinese, Indians, Brazilians, and others will continue to be more active participants in the global economy than ever before. And companies from Seattle to Taipei to Lyon will continue to innovate and invest, buy and sell.

Inevitably, the financial crisis will be seen as yet another sign that America is in decline: “The U.S. will lose its status as the superpower of the world financial system. ... The world will never be the same again,” the German finance minister told his parliament in late September. Almost the exact same words were uttered after 9/11. But though the world certainly changed, it did so in far fewer ways than the commentators had predicted. Yes, this financial crisis will deeply transform the global economy and will have deeper and longer-lasting consequences than 9/11. But it neither marks the end of capitalism nor the beginning of America’s demise.