DE BORCHGRAVE: Confusion reigns supreme

COMMENTARY:

Confusion reigns on all fronts about the business and financial worlds the business school graduate is about to enter. Democratic capitalism is questioned, redrawn, drawn and quartered in everything from the Financial Times and the Economist to Chicken Little books about the sky falling. Kevin Phillips saw the perfect economic storm coming in “Bad Money,” and he has updated his best-seller with “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.”

Bloomberg was among the first to blow the whistle when it reported, “Never in the history of Wall Street have so many earned so much in so little time.” In 2006, Goldman Sachs’ top trader, Mark McGoldrick, 48, turned down a $70 million year-end bonus; he thought he was worth more and quit to form his own hedge fund. Another trader, two years out of business school, bought himself a $150,000 red Ferrari 360 convertible. Goldman Sachs’ year-end bonus pool that year: $16.7 billion.

The far left is elated, as it always saw capitalism as the enemy of the working class, ignoring Winston Churchill’s famous maxim: Socialism is the “equal sharing of miseries,” while capitalism is the “unequal sharing of blessings.” The left wing of the Obama team looks enviously at the womb-to-tomb Swedish model, the world’s most egalitarian system of social democracy. But this would never pass muster on Capitol Hill. America is still the world’s most vibrant entrepreneurial society.

Then there is the example of the rest of Europe, with variations on the same cradle-to-grave theme but where huge income disparities are tolerated and transnational tax dodging is de rigueur for the wealthy.

Liberal-turned-conservative neocon columnist Charles Krauthammer, who is to the right what Paul Krugman is to the left, says President Obama is committed to “radical health care, energy and education reforms” that are central to a “social democratic agenda” that will Europeanize America’s economy.

Former Secretary of State Alexander Haig views Mr. Obama’s move toward socialism as “dangerous.” Stanislav Mishin, writing in Pravda, says, America’s “descent into Marxism is happening with breathtaking speed, against the backdrop of a passive, hapless sheeple, excuse me dear reader, I meant people.”

First, Mr. Mishin explains, Americans were “dumbed down through a politicized and substandard education system based on pop culture, rather than the classics. Americans know more about their favorite TV dramas than the drama in DC that directly affects their lives.” Now, he concludes, America is headed down the same spiral as Germany’s Weimar Republic after World War I.

Mr. Obama, in his Notre Dame commencement speech, “took his campaign theme of Change to a whole new level,” writes Arianna Huffington, “telling … us that we find ourselves at a ‘rare inflection point in history’ where the size and scope of the challenges before us require that we remake our world to renew its promise.”

As Mrs. Huffington sees it, Mr. Obama “offered a devastating teardown of an economy that left millions behind even before the crisis hit … where greed and short-term thinking were too often rewarded at the expense of fairness, and diligence, and an honest day’s work.”

But Europe’s liberal social democracy models have lost much of their allure. There is a reject phenomenon in America for huge social insurance systems that generate high taxes and low take-home pay.

Mr. Obama plans to file the rough edges of capitalism with big increases in spending on health care, the environment and education. But Congress can see piles of new debts, unfunded liabilities and a shrinking tax base in the private economy. Yet the president’s plans require major tax increases. That means Congress will kick the can down the road while the administration borrows $100 billion a month from the Treasury. And next year’s midterm congressional elections are bound to blunt Mr. Obama’s crusading sword.

Financial institutions in the United States, the European Union and Japan face asset write-downs of more than $4 trillion. The 16 European countries that use the euro will shrink by 4 percent this year; Germany by 5.4 percent as global demand for its high-value goods (autos, machinery) has collapsed. The recession is deep and widespread among all 27 EU member nations, the worst since World War II. Millions have lost jobs and homes (18 percent unemployment in socialist-governed Spain; 11.8 percent for the EU as a whole). Hit even harder is the developing part of the planet, where hunger and malnutrition are increasing as incomes fall and unemployment rises.

Before the financial tsunami, the world already was struggling to meet eight Millennium Development Goals by 2015. Now, those targets are pie-in-the-sky. According to the Rome-based World Food Program (WFP), about 6.6 million child deaths already are related to malnutrition since the predatory subprime mortgage scandal triggered a global economic and financial unraveling. WFP needs some $6 billion to meet the urgent hunger needs of 100 million people.

Though our current difficulties often are described as capitalism’s worst crisis in 70 years, when World War II started in Europe in 1939, that is wide of the mark. There is nothing wrong with capitalism - except for some capitalists. Free-market fundamentalism spawned the naked greed of brilliant young traders who had never experienced a major recession. Financial instruments at the expense of production - derivatives, hedge funds - were their thing. Leveraging became contagious and spread to executive suites. Insider trading and lax oversight, aided by the extraordinary opacity of modern finance, were commonplace. Regulatory agencies ignored the signals. Some regulators even joined forces with those anointed by the Midas touch.

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