I'm not talking about what Republicans are calling socialism. I'm talking about nationalising General Motors, or all of the big three, and permanently socialising the "utility" portion of the banking system, to start with. General Motors has now lost more money than it has made in its entire history. All of the big three are likely to go down, surviving only on a drip feed of public money. According to Nassim Nicholas Taleb, the banking sector, because of its tendency to take extreme but hidden risks that periodically blow up the banks, has never made money in its history, although bankers have gotten rich. Today, many, perhaps most, of the big US and British banks are insolvent and can only survive through repeated emergency transfusions of public funds. This will keep them barely alive as zombie banks unable and unwilling to lend and expand credit, eating away at the rest of the economy and creating the real risk of another depression.
The market with its perversely mismatched incentives, which encouraged banks to take huge long term risks to generate the short term illusion of spectacular profits, doesn't have a way out of the banking crisis. Even if good assets and bad assets can be separated by the creation of "bad banks" or "good banks", and complex insurance schemes devised to pay for future meltdowns, as long as there is a mismatch between the private incentives of bankers which encourage the hiding of systemic risk, and the public interest in maintaining a solvent, well-functioning saving-and-lending banking utility, all such schemes structured to preserve the semblance of banking as a "private sector" activity will encourage only greater creativity and deviousness in the hiding of risk and gambling with public money: privatising the profits and socialising the risks. The answer, as Taleb and others have argued, is to permanently socialise the utility component of banking and leave the gambling to the "experts".
The trouble in the auto sector is of a different character. The Big Three are myopic, inflexible companies in structural decline. Left to the fairy tale concept of a free market, they would all be dead by now. And that is the way they are heading. The problem is that North America can't afford to lose all those jobs now, and there is nothing obvious to replace them. Consumer demand is crashing, for cars and almost everything else. A collapse in the US auto sector could drive the North American economy -- and with it, the world's -- into a full blown multi-year slump.
Fortunately, this is a time in which we urgently need innovation, and massive industrial and infrastructure renewal, and it just can't be deferred. Infrastructure is crumbling everywhere and we are perilously behind on fighting and adapting to global climate change. We need to revolutionize energy production, housing, and transportation. The Big Three have shown they are spectacularly unable to rise to the challenge of producing green cars. Again, there is a misalignment of short-term profit interests and longer term social goals. Here are some ways out of the hole:
*Regulate carbon efficiency standards. Don't waste time on pricing schemes. We don't have time to experiment with wonky incentive schemes, and we know what needs to be done. Regulation will do it faster.
*Nationalise GM, or all three of the Big Three, and put the new entity on a war footing to produce a green car to meet the toughest new regulatory standards.
*Invest in a massive, country-wide plan to retrofit all housing stock by 2020 to make it as close to carbon neutral as possible, and mandate all new housing to meet the toughest energy efficiency standards, like the German passivhaus.
*Invest heavily in developing and rolling out renewable energy projects, emphasizing wind and solar.
*Invest in a serious upgrade of intra-urban and inter-city public transportation.
All of this will create jobs and demand at a time when demand is cratering and no jobs are being created. And it will begin to tackle the crisis that is bigger and more urgent even than the financial crisis: global climate change. Another case where the incentive schemes of capitalism encourage taking extreme risks with our collective future for the sake of private wealth. At some point maybe we can say that capitalism is the problem.
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