Can Liberals Save Capitalism (Again)? Seven Decades after the Great Depression, Democrats Have Their Work Cut out for Them

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IN A FEW SHORT WEEKS, AMERICA'S POLITICAL ECONOMY has been stunningly transformed. The Bush administration, the Republican Party and three decades of conservative ideology are facing a potential rout. Yesterday's conservative cliches are today's political embarrassments. Americans are getting a vivid if painful education about the limits of the marketplace and the salutary role of government. It will be a very long time before anyone can say with a straight face that markets always work better than governments. But market fundamentalism has been so ascendant for so long--politically, culturally, financially--that this is only the very beginning of an ideological sea change. It remains to be seen whether liberals will manage to save capitalism from itself, for the second time in the past 70 years.

President Bush is suddenly in trouble. As I've observed elsewhere, his is now a Cinderella presidency. He was abruptly transformed from dubious and untested pretender into steely wartime leader, only to be suddenly turned back into a bumpkin. And how utterly fitting. Bush's own financial biography, on a pettier scale, epitomizes the corruption that now threatens the whole system. His Wall Street speech of July 9, intended both to reassure investors and get ahead of the Democrats, was one of his weakest ever. The Dow responded to his platitudes by plunging nearly 500 points in two days. Rhetorically, the speech lacked passion and conviction. Politically, the president was crippled by his need to walk a fine line between condemning wrongdoing but not attacking the larger Republican corporate culture. Substantively, the speech stopped far short of embracing even modest reforms and settled instead for pieties. And personally, Bush irrevocably symbolizes the tawdriness of crony capitalism, right down to his insider self-enrichment based on the sale of fraudulently inflated Harken Energy stock. Could one ask for a better foil?

Republicans in both houses have already outflanked the president by embracing far tougher remedies. Bush and Vice President Cheney, who urged the president to deliver an even weaker speech, are far behind the curve. For the first time in this presidency, and in many respects for the first time since the Republicans took over Congress in 1994, liberal Democrats are setting the national agenda--an agenda of reining in market excesses to save the larger economy.

We don't know yet whether the stock market has reached the kind of tipping point where downward spiral just feeds on itself and savages the real economy, 1929 fashion. At best, the market is likely to be severely depressed for a long time. Even after a nearly 40 percent drop in the broad stock market, price-earnings ratios are still high by historic standards. Moreover, every time another corporation restates its earnings, the real ratio of its stock price to its true earnings goes higher and the stock sinks lower. Accounting standards have been retroactively toughened, in a fashion that perversely deepens the stock market's woes. As corporations get new auditors, the new accounting firms are determined to show that they are tougher than their disgraced predecessors.

Neither is it clear whether even the toughest of remedies can repair the real economic damage that has already occurred. With investors gulled by stock touts and phony corporate reports--themselves the fruit of the antiregulatory mania--trillions of dollars of investment capital went to uses that will never recoup earnings. So the stock market plunge is more than a crisis of confidence. It's a belated appreciation of economic reality.

IF THIS SOUNDS FAMILIAR, IT SHOULD. MUCH THE SAME thing happened in the 1920s, and of course it was the liberals who then dragged a primitive, corrupted and vulnerable capitalist system, kicking and screaming, into the modern mixed economy. It's astonishing that we now have to do it again. …