I regard the meltdown now under way on Wall Street as more than a financial crisis. It is a cognitive impairment. An entire generation of Americans and their political leaders has come to believe in free-market ideology so completely, and with such passion, that they literally cannot conceive that government may have a valuable, ongoing role to play in reining in the inevitable excesses of markets. (Some Republican were actually proposing tax cuts as part of the bailout solution.)

The Wall Street crisis is so intractable in part because we are afraid to transgress a deep taboo in modern American politics – the idea that government regulation and ownership may actually have positive effects. For decades, the corporate sector has cultivated a cultural consensus that government regulation represents a pernicious and costly “intervention” in “the market” – as if there were a bright line separating markets and government.

Photo by Marooned, via Flickr, licensed under a Creative Commons BY-NC-ND license.

With the zeal of an Orwellian propagandist, the corporate sector has aggressively marketed this catechism and required that politicians genuflect before it. Repeat after me: Markets = “freedom,” government = “the road to serfdom” and “socialism.” The idea of government owning equity in private firms is considered even more retrograde and repugnant.

With help from Milton Friedman and allied academics, the “Reagan revolution” brilliantly packaged the free-market philosophy into a simple, easy-to-understand political creed. Over time, reinforced by generous campaign contributions from business and think-tank treatises, this faith became the unshakeable conventional wisdom in Washington.

To suggest that markets require active oversight and intervention to function well, and to declare that social equity, the environment and democracy may sometimes need to trump some inviolate market “freedom,” was to brand oneself as an un-serious person. After all, such ideas had so little political credibility among the Alan Greenspans and Robert Rubins, not to mention Fortune 500 CEOs. For decades, there has been little political upside for being a straight-up champion of regulation.

That was then. Now the carefully cultivated ideological fantasies of free marketeers are collapsing ignominiously in the face of harsh market realities. Dare we consider the idea that markets exist in a social, democratic context? That markets must legitimately answer to citizens, taxpayers and democratic majorities?

As my colleague Chuck Collins explained here recently, our financial system is actually a commons – a system that can function only because there are elaborate, socially constructed institutions and rules to manage it. We have the SEC to assure fair trading in financial markets; courts and laws to resolve conflicts and punish cheaters; patents to reward inventors; and so on.

Exploiting the American ethic of individualism, the free-market vision has always held itself out as a naturally ordained “place apart,” a place where Ayn Rand-inspired individuals can become self-made heroes. People need not be answerable to anyone else, least of all government. This is an adolescent fantasy, one that willfully denies the role that other people and institutions play in our development and well-being.

However, so many Americans have oriented their thinking and identities around these sorts of libertarian fantasies that the brutal realities of the past two weeks are understandably inflicting quite a shock. The events don’t make sense. “This can’t happen!” Resistance and denial are natural responses.

In this sense, I think the Wall Street crisis is as much one of “cognitive confusion” and political disorientation as a genuine financial drama. Witness yesterday’s House rejection of the bailout, which saw staunch liberals joining hard-core Republicans in voting against the bailout, and less-senior members of both parties defying leadership. The new realities cannot be expressed within existing political configurations. Free-market dogmas are no longer credible, yet innovative alternatives are too underdeveloped and lacking leadership to attract a new political majority. We are living in an interregnum.

It seems as if a number of major structural problems that have been brewing for years, are coming home to roost at the same apocalyptic moment: the failures of deregulation, citizen distrust of Washington, President Bush’s shattered credibility after eight years of malfeasance, and the political and intellectual voids in liberal leadership – all occurring within five weeks of the “accountability moment” of an election.

This may be a good thing. It has focused the minds of politicians and prodded them to be more democratically responsive than ever. But paradoxically, the cognitive and political disarray has made it impossible to significantly alter or approve the highly flawed bailout plan (which itself was only a minor improvement over Secretary Paulson’s contemptuous “blank check” proposal).

We seem to be caught in a riptide of deep and conflicting forces that are demolishing the dominant political philosophy of the past generation. I’m wondering if we can work through our self-inflicted cognitive impairment to actually address the real financial dysfunctions, or at least buy some time. This is a perilous moment, but also one fraught with new opportunities.

Our sophisticated financial markets have been built over several generations and are regulated at taxpayer expense through oversight institutions such as the Securities and Exchange Commission.

NYC financial district photo by wallyg from Flickr Creative Commons lisence BY, NC, SA.

This “free marketplace” is often regarded as a private sector, detached from government. But these market mechanisms are part of the social commons. The stock market and the banking system are human-created societal assets, with rules and systems that ideally provide a credible and secure way to transact business. No one owns the “banking regulatory system.” We all own it. This market provides liquidity and credit, necessary ingredients to healthy commerce and life.

The stock market is just one of the ways in which a private enterprise benefits from society’s investment and infrastructure. An entire system of commons institutions foster trust and faith in the marketplace. This commons includes oversight by government and private trade associations, accounting practices, legal remedies to resolve conflict and punish wrong-doers, and patenting offices to protect inventions.

What happens when the oversight is weakened and trust and confidence in the marketplace are shaken? After the Enron and WorldCom scandals, millions of investors lost confidence in the accuracy of corporate accounting. A study by the Brookings Institution, Cooking the Books: The Cost to the Economy, estimated that the decline in investor confidence cost the economy approximately $35 billion. In the weeks after the June, 2002 disclosure of the WorldCom accounting irregularities, the stock market lost 28 percent of value.

But because our political system has been captured by finance capital, we didn’t make the urgently needed changes to strengthen accountability in the “financial market” commons. Now we are beginning what Charles Morris, author of The Trillion Dollar Meltdown,
calls, the “Great unwinding.”

Government and the nonprofit sector have an important role in ensuring that the financial markets are not turned into a speculative casino. Government oversight is how we protect this commons —and it is obvious that the speculators won the upper hand for the last decades. We should reclaim our financial market commons.

One important demand is that the abusers of the system pay the costs of the clean-up.
The public is deeply offended that we should use tax dollars to bailout Wall Street. This is a deeply “commons” impulse –and could lead to a progressive populist movement for taxing the very rich who benefited from the deregulated casino economy. Dedrick Muhammad and I wrote an article about how to raise $900 billion from very progressive sources: wealth tax ($200 billion), surcharge on income taxes over $5 million $105 B). See our article.