Hirsh: Can Obama Save Capitalism?

Few measures of presidential performance have been more overused than the first 100 days. The term was invented, of course, to describe Franklin Roosevelt's remarkable flurry of programs and initiatives after his Inauguration on March 4, 1933. That was a uniquely dire moment in American history, the darkest period of the Great Depression. In Roosevelt's first 100 days, he not only saved the American economy but probably capitalism itself. How? By restoring it to health with a large dose of socialism. It was a supreme irony, considering how FDR was demonized by the right later on, that the president Republicans angrily called "That Man in the White House"proved to be capitalism's greatest savior.

The first "100 days" has rarely been so significant since. But the immediate period after Barack Obama's Inauguration on Jan. 20—which takes place almost exactly 75 years after FDR's—will likely be singularly relevant once again. The global economic crisis remains so pressing, and the solutions offered so far seem to fall so short, that President Obama will have no choice but to "hit the ground running," as he promised in his first news conference last week. In fact, Obama will have to do far more than that. Though he is trying very hard to be a pragmatist and a postideological president, it may well fall to Obama not just to rescue the world economy, but to save capitalism, as FDR did.

Obama's challenge is different, and in some ways more complex. The Bush administration, of course, has already administered the dose of socialism by partially nationalizing banks and bailing out Wall Street. Now, it seems, everyone wants a bailout, including Detroit's Big Three. Obama's job will be not just to figure who gets what, and on what terms, but rather to set new rules for the future global economy. It will be his task, in other words, to lead the conceptual counterrevolution against an idea that has dominated the globe since the end of the cold war but is now in the final stages of flaming out: free-market absolutism.

It was not a new idea; indeed, it was very similar to the thinking that led to the Depression and made Herbert Hoover such a disaster as president, and which FDR had to correct. In its modern incarnation, the reign of free-market absolutism began as the Reagan Revolution. The idea was simple: markets always work better than governments. For nearly two decades, the facts on the ground seemed to bear this idea out. The deregulatory '80s were a boom time. The '90s were better. And the collapse of the Soviet Union in December of 1991 seemed to prove, once and for all, the unworkability of "statism" and so-called command economies. Coinciding with the era of huge public deficits in the West, this seemed to apply the coup de grace to Keynesian economics, at least as an intellectually acceptable practice. Free-market absolutism went from being a mocked, maverick ideology—something identified in the '60s and '70s with Barry Goldwater and William F. Buckley—to a kind of national secular religion.

Then the phenomenon went global. Around the world, as well as in Washington and on Wall Street, free-market fervor produced an infectious passion for deregulation, especially in the early '90s. On the advice of the U.S.-dominated IMF and World Bank, and under the tutelage of young free-marketers, newly reformed nations began dancing to the tune dictated by the victor of the cold war. Foreign-exchange controls were lifted worldwide, and in an astonishingly short period of time, a stream of private capital began circling the globe, fed by giant mutual, pension and hedge funds and freed to roam at will by a worldwide telecommunications and computer network. This created bubble after bubble, mania after mania, like the Asian financial contagion of the late '90s and then the dotcom frenzy. But we managed to survive them, and we only deepened our addiction to surplus capital from abroad. The globalization of finance allowed Americans to live beyond our means for decades as other countries underwrote our rampant, zero-savings consumerism.

But like most revolutions, free-market absolutism finally overreached. The subprime mortgage bubble has been unlike any other, far more systemic and devastating. Overmortgaging and selling off our very homes to the rest of the world—the last product left on our national shelf, as it were—was the final evidence of how deeply addicted we had become to easy money from abroad. Many of the most dire effects of this economic disaster remain to be addressed. Through unregulated growth, unregulated mergers and acquisitions and an unwarranted faith in a self-regulating market, our economy is now dominated by behemoths in many sectors, each making the claim that they are "too big to fail." Now we are stuck with them. Once Wall Street's creditors were saved, the nonbanks and the credit-card companies stepped in for their own big bonus from Uncle Sugar. Now Detroit's Big Three are expecting the same, each of them making the case, as a top General Motors executive once infamously did, that what's good for the country is good for GM, and vice versa.

This is apparently what Treasury Secretary Hank Paulson was referring to Wednesday when he said that the source of the current crisis went way beyond a lack of regulation and other mistakes. The real problem, Paulson suggested, must be traced to the nature of the grand post-cold-war bargain itself. American consumers overbought from other economies, and these economies in turn accumulated vast surpluses from which they plowed money back into Wall Street, thereby supplying profligate Americans with the finance to both spend as much as we wanted to as consumers and sustain ourselves as the lone superpower. Previous eras of world stability and peace had relied on workable international structures like the Congress of Vienna or the Bretton Woods agreements. Now the world has been relying on a global Rube Goldberg machine. As Paulson warned: "If we only address particular regulatory issues—as critical as they are—without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet."

This is what Barack Obama must now sort out. He will have to walk a razor's edge. He must confront the obvious—that overgrown multinationals like GM or Citigroup must be fundamentally restructured—without sending the economy into a further downward spiral. He must also accept that there are a lot more voices at the table than in FDR's day. The G20 summit planned for this weekend—probably George W. Bush's last presidential act, even if a lame duck one—will showcase how eager other countries are to influence the global economy (especially French President Nicolas Sarkozy, who declared recently: "Can we, those of us in the rest of the world, go on financing the deficits of a leading world power without having any say? The answer is clearly no."). And while the capitalist system isn't as broken as it was when Roosevelt took office—we seem to have avoided the worst mistakes that caused the Great Depression, mainly the massive failure of the banking system—the various bailout and stimulus plans offered so far still feel like desperate attempts to stabilize the Titanic.

Over the coming years the Obama administration must decide on some as-yet-undefined "third way" between untrammeled free-market capitalism and a new kind of government oversight that works—but which will never again become the statism that failed so miserably in the previous century. It will be Obama's job to act as a kind of cosmic broker between the end of one historical era and the beginning of another: the post-free-market era that he will now preside over. This may well be the defining task of his presidency, perhaps even more important than what he decides to do about energy, Iraq, Iran or "the war on terror." "We don't have a moment to lose," Obama said last week. Let's hope he gets it right, because failure will be very costly.