Can't Government Leave the Market Alone?

Oct. 3, 2008 — -- What if the current mortgage/credit crunch is not just an isolated financial crisis, but, in fact, the signal for the death of one era, and the (painful) birth of another?

If that is the case, it goes a long way towards explaining the bizarre nature of what we're seeing going on in Washington and on Wall Street … and suggests that we need a whole different set of solutions.

Living out here in Silicon Valley, the heartland of American innovation, it's hard not to be appalled by the events taking place 3,000 miles away in the seats of American finance and government -- and hard not to fall back on the 'pox on both their houses' attitude that polls say is increasingly common among American voters.

From where I sit, the United States government has embarked on two pieces of social engineering in the last few years. One was to make oil as expensive as possible to drive people to greater use of alternative energy sources -- because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right because anything less would be unequal and racist.

None of us voted on these decisions -- indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy and both have sparked national, and now international, crises.

Once they became crises, both were blamed on "greedy capitalism," instead of what they really were: legislative interference into market forces.

Fine. We've been through this before, and no doubt we will see similar, government-induced crises again -- inevitably accompanied by administration officials and our elected representatives pointing at everyone but themselves.

But what makes this particular economic crisis so appalling, at least from this vantage point, is the sheer scumminess, corruption, short-sightedness and general incompetence of everyone involved. At least in the business world, especially in the take-no-prisoners world of high-tech, that kind of venality and ineptitude either gets you fired or kills the company; by comparison, in Washington, it puts you in charge of the recovery effort.

Nobody in this mess has covered himself or herself in glory.

President Bush seems to have had the right instincts on this, but as a lame duck who long ago burned up all of his public support, he mostly seems dithering and toothless. The Democrats declare that the nation is at risk, then go about as usual turning the bailout bill into another -- yet another -- partisan pay-off scheme to fund the next round of crisis-creating social engineering.

Corruption in Washington

It is a measure of just how corrupt the Dems have become that Sen. Chris Dodd and Rep. Barney Frank, who perhaps more than anyone in Washington, are responsible for this crisis -- not only are allowed to keep their committee seats, but run the press conference on the bailout.

The crowning moment, of course, comes just before the vote on the bailout package when Speaker Nancy Pelosi decided, putting the needs of her country first, to use the podium to attack the Bush administration and the GOP.

The Republicans, as we all heard, maturely responded to Pelosi by banging their little fists on the floor and refusing to play anymore. Wah-wah-wah. Remember when Republicans were the outsiders in D.C.? Now they are such corrupt Washington insiders that, like a group of palace courtiers, they are willing to put the entire U.S. economy at risk over protocol and etiquette.

As for the two presidential candidates, the less said the better. Sen. McCain, sensing a great PR opportunity to show that he is both a leader and a Beltway Pharisee, blasted into Washington, made a lot of noise, accomplished little, and was all but run back out of town. Sen. Obama, who appears to be up to his neck in Fannie Mae "contributions," did as he always does: said a few platitudes, (metaphorically) voted "Present" and took off as quickly as he could.

Meanwhile, while this absurdity is going on, the stock market tanks, and the U.S. economy loses $1 trillion.

It is impossible not to look upon all of this as kind of a vast, predictable pantomime. The same people who created the mess are honored for (sorta) getting us out of it, a few scapegoats go to jail, the real perpetrators not only escape punishment, but are often rewarded, a bunch of regular people get screwed (lose their jobs, go bankrupt), and a whole lot more end up paying the bill for 2 million failed mortgages that never should have been granted in the first place.

The American people know this, which is why:

1) They aren't taking this current crisis as seriously as pundits say they should -- after all, if our elected officials can play politics against their enemies, and take the time to lard the bailout bill with pork, why should they?

2) They have nominated for president two candidates who -- ostensibly -- represent "maverick" attitudes and "change."

The Economic Crisis

To my mind, what makes this economic crisis different from ones in even the recent past is that it has exposed the fact that there are, apparently, no real leaders left in Washington -- that the intellectual capital in the national capitol has fallen to a new low, if that's possible. Most of all, it shows that we can no longer look to D.C. for leadership into the rest of the 21st century.

Marxists and statists of all stripes are, as one might expect, rubbing their hands in glee and declaring this the final death crisis of capitalism. But I think just the opposite is occurring. What we are, in fact, seeing are the final death throes of governmental social engineering. As I noted two weeks ago, we are in a kind of Mentos-in-coke world right now -- where, thanks to tech, the sheer speed of transactions and the enormous breadth of response, almost any outside influence can quickly turn the whole economy (or culture) into an explosive brew.

As it happens, out here in Silicon Valley, we have been conducting our own social engineering experiments. Three, in fact, have been at least as sweeping as Freddie Mac's changing of mortgage eligibility rules. One of them has been to wire the entire world in a huge, high-speed global information grid (the Internet). Another has been to restructure the entire entertainment industry and its pricing model (the iPod). And the third has been to empower the citizenry to form groups based upon common interests, rather than the limitations of physical proximity (Web 2.0 -- social networks).

Here's the thing. All three of these multibillion-dollar projects have been pay-as-you-go, driven largely by individuals and companies that assume their own risk. They have instantly rewarded smart decisions and punished bad ones, they are tested every millisecond against human nature (i.e., the marketplace), they are biased towards efficiency over seniority, and most of all, they are voluntary.

And they are all succeeding.

We will get out of this current financial mess -- not by government fiat, but because entrepreneurs and smart corporate executives and hard-working everyday people will innovate us out of it. They will come up with the new financial instruments that restructure this debt, the new technologies that will generate the wealth to make up for this loss (as they did after 9/11) and ultimately create more jobs than are right now being lost.

And if Washington really wanted to help Americans (and there is no indication right now that it does) it would, the instant it passes the bailout bill, get to work -- not adding more regulations in response to this crisis, but stripping away the destructive ones we created after the last big one.

A good place to start would be Sarbanes-Oxley, which brilliantly keeps wealth out of the hands of regular workers (by keeping start-up companies from going public), all while costing, by my reckoning, $200 billion over the last six years.

Lessons for Washington

If the last two weeks have taught us anything, it is that Washington is not going to get fixed, no matter who is elected. The world is moving on. Seven-hundred-thousand people are joining, via the Web, the global economy each day. If the prognosticators are right, we are now only 1,000 days or so from crucial turning points in the world economy (the next billion consumers, universal wireless broadband, nanotech, thinking machines, etc.)

A new era -- with new rules, new winners and new losers -- is coming up on us fast, and we need to get ready for it right now. Our national leaders just had their chance to prove they were prepared for this new era -- and they have failed miserably. We now have to look elsewhere for leadership … and quickly.

Tad's Tab

There are some impressive things on Flickr. But nothing compares to the time and talent that went into "Excelsior 1968." To create this imaginary high school yearbook, illustrator John Martz redrew cartoons for every picture in his mother's high school yearbook -- 330 unique drawings. Check it out here.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.