Fashions go in cycles: Tapered trousers and flares may alternate, along with wide and narrow ties, or long and short hemlines. But it is rarely the case that the old comes back in exactly the form it held previously. And so it is now with the global financial system. Although massive state investments in private enterprise have definitely made a comeback, the realities don’t necessarily mean what the rhetoric might suggest — at least to those who look for precedents from an earlier time.
I saw this cycle firsthand as a civil servant in the United Kingdom. For 35 years after World War II, the “commanding heights of the economy,” such as coal, steel, electricity and gas, telecommunications, and aviation were state owned. Then, in the 1980s and 1990s, we rolled back the boundaries of the country’s public sector through an extensive privatization program. In the end, out of a dozen public enterprises, only the Royal Mail remained in state hands — and the government is still trying to sell that.
From the 1980s onward, the prevailing philosophy around the world was that regulation was a disagreeable necessity. It needed to be trimmed back, lightened up, and based more on principles than on rules. Particular regulations were often justified as corrections for market failure, but the overall body of regulation was itself seen as a market failure: The costs were not borne by those who imposed them. So left to itself, regulation would tend to expand beyond the optimum and needed to be cut back constantly.
Although each country had chosen its own point on the continuum between free markets and state control, almost universally the direction of travel was toward the free market end of the spectrum. The Chinese, the Russians, and even the French all kept moving in that direction.
Then came 2008. The events of last year have profoundly shaken many people’s faith in free markets. There has been extensive state intervention in many countries, including the U.S., the U.K., Germany, the Netherlands, and Ireland. Governments have acquired full or extensive ownership of banks and shadow banks, providing them with huge sums of state assistance. Other sectors, such as housing construction and motor vehicles, have been given support. There has been revulsion among the public at some of the remuneration packages that have been exposed, leading to a desire for heavier regulation of many financial industry practices.
It is natural to wonder: Does this new era of greater state control and regulation mean that capitalism as we know it is finished? Will it reemerge in some very different form? When the dust of the economic crisis settles, could a new order genuinely come to pass in which governments, either by choice or by accident, become major stakeholders (or “state-holders,” as financier Robert Gogel has called them) in business?
Some observers are salivating over this possibility; others are already protesting against it. And there is talk of more countries adopting the Scandinavian model of an expanded welfare state.
There are good reasons, however, to be skeptical that any of this will happen. Although there will be new regulatory regimes throughout the world, there is little or no chance that the government will end up permanently owning and running the banks, and still less of its owning industry at large.
The Limits on State Ownership
To understand why, let us look at the financial system as it is emerging today. All the rhetoric from political leaders, those who are putting bailouts into practice, refers to those interventions as “temporary public ownership.” The recent U.K. Banking Act uses that phrase explicitly. The U.S. Treasury Department has regularly referred to the objective of selling back the assets it is acquiring. At American International Group (AIG), this process has already begun.