The Fall of America, Inc.

The problem is that Wall Street is very different from, say, Silicon Valley, where a light regulatory hand is genuinely beneficial. Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people's money. The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well (what economists soberly call "negative externalities").

Signs that the Reagan revolution had drifted dangerously have been clear over the past decade. An early warning was the Asian financial crisis of 1997-98. Countries like Thailand and South Korea, following American advice and pressure, liberalized their capital markets in the early 1990s. A lot of hot money started flowing into their economies, creating a speculative bubble, and then rushed out again at the first sign of trouble. Sound familiar? Meanwhile, countries like China and Malaysia that didn't follow American advice and kept their financial markets closed or strictly regulated found themselves much less vulnerable.

A second warning sign lay in America's accumulating structural deficits. China and a number of other countries began buying U.S. dollars after 1997 as part of a deliberate strategy to undervalue their currencies, keep their factories humming and protect themselves from financial shocks. This suited a post-9/11 America just fine; it meant that we could cut taxes, finance a consumption binge, pay for two expensive wars and run a fiscal deficit at the same time. The staggering and mounting trade deficits this produced—$700 billion a year by 2007—were clearly unsustainable; sooner or later the foreigners would decide that America wasn't such a great place to bank their money. The falling U.S. dollar indicates that we have arrived at that point. Clearly, and contrary to Cheney, deficits do matter.

Even at home, the downside of deregulation were clear well before the Wall Street collapse. In California, electricity prices spiraled out of control in 2000-2001 as a result of deregulation in the state energy market, which unscrupulous companies like Enron gamed to their advantage. Enron itself, along with a host of other firms, collapsed in 2004 because accounting standards had not been enforced adequately. Inequality in the United States rose throughout the past decade, because the gains from economic growth went disproportionately to wealthier and better-educated Americans, while the incomes of working-class people stagnated. And finally, the bungled occupation of Iraq and the response to Hurricane Katrina exposed the top-to-bottom weakness of the public sector, a result of decades of underfunding and the low prestige accorded civil servants from the Reagan years on.

All this suggests that the Reagan era should have ended some time ago. It didn't partly because the Democratic Party failed to come up with convincing candidates and arguments, but also because of a particular aspect of America that makes our country very different from Europe. There, less-educated, working-class citizens vote reliably for socialist, communist and other left-learning parties, based on their economic interests. In the United States, they can swing either left or right. They were part of Roosevelt's grand Democratic coalition during the New Deal, a coalition that held through Lyndon Johnson's Great Society in the 1960s. But they started voting Republican during the Nixon and Reagan years, swung to Clinton in the 1990s, and returned to the Republican fold under George W. Bush. When they vote Republican, it's because cultural issues like religion, patriotism, family values and gun ownership trump economic ones.

This group of voters will decide November's election, not least because of their concentration in a handful of swing states like Ohio and Pennsylvania. Will they tilt toward the more distant, Harvard-educated Obama, who more accurately reflects their economic interests? Or will they stick with people they can better identify with, like McCain and Sarah Palin? It took an economic crisis of massive proportions from 1929 to 1931 to bring a Democratic administration to power. Polls indicate we may have arrived again at that point in October 2008.

The other critical component of the American brand is democracy, and the willingness of the United States to support other democracies around the world. This idealistic streak in U.S. foreign policy has been constant over the past century, from Woodrow Wilson's League of Nations through Roosevelt's Four Freedoms to Reagan's call for Mikhail Gorbachev to "tear down this wall."