Lloyd Blankfein's $500 million mea culpa for Goldman Sachs' role in the financial crisis drew some predictable derision. The Wall Street Journal's Mean Street column pooh-poohed it as a meaningless public relations exercise that would do nothing to quell public anger, and one that glossed over the reality that "Goldman Sachs exists solely to make profits for its employees and shareholders. The rest is just PR."
But readers of Harold James' wonderful recent book, The Creation and Destruction of Value, might draw a different conclusion. James has a more complex view of modern capitalism than that embraced by proponents of "shareholder value." The greatest danger of the crisis we are living through, he argues, is not simply the destruction of wealth, however unpleasant that may be. It is also the destruction of "value" in the moral sense of a system of trust and commitments, which allow modern capitalism to operate on a grand, global scale. Destroy that system of values, as happened in the Great Depression, and we are truly on the edge of the abyss. Goldman's profits will not be the only thing that suffers.
From the current vantage point--rising stock prices amid a weak economic recovery and double-digit unemployment--it is too soon to know whether the current crisis will be remembered as a financial shock that failed to throw off the trajectory of globalization, or if it marks the start of a more fundamental re-ordering. James, a professor of history and international politics at Princeton University, modestly and appropriately avoids trying to answer that question. But he asks all the right ones, offering a brilliant tour through the Great Depression and the current crisis.
The book opens with an obvious point too often forgotten by the economists who dominate public debate on these issues--that we have been here many times before. Globalization, James observes, has long had "a cyclical propensity to generate backlashes and collapses." Each collapse is followed by a rebuilding of stability, which persuades contemporaries that they have finally learned how to avoid the mistakes of the past, and that such stability offers unlimited opportunities for low-risk profits. Think Alan Greenspan and AIG Financial Products.
However short-sighted the pattern, it might be perfectly tolerable as long as the crises are not so severe that public faith in the economic system is shattered. And that has been the case for every modern crisis save the Depression. What was different about the Depression? It was not, James persuasively argues, the stock market collapse of 1929, which was a rather conventional bursting of a market bubble that could have been (though was not) dealt with effectively through monetary loosening.
The real catastrophe, he argues, came in 1931 with a series of bank failures in Europe that could not be contained, in part because of the lack of a lender of last resort to come to their rescue. Those bank failures precipitated a collapse of confidence that resulted in the proliferation of beggar-thy-neighbor policies regarding trade and immigration, a "de-globalization" that pummeled economies around the world and ultimately helped produce the conflagration of World War II.
Could the same be happening this time around? Certainly the bank failures and near failures, the freezing up of credit markets and the contraction of world trade show certain parallels. James is also skeptical, perhaps overly so, of the ability of governments now to avoid the mistakes of their 1930s counterparts and work cooperatively to chart a path out of the crisis. He exaggerates the relatively modest degree of trade protectionism and anti-immigrant sentiment that has surfaced.
He also underplays the accomplishments of the G20 nations in beginning, however tentatively, to address economic imbalances and financial regulatory weaknesses that contributed to the crisis. But he is unquestionably right that the scope of such cooperation is likely to be limited, perhaps too limited for the task at hand. And he argues persuasively that no single entity--not a debt-ridden United States, not a still weakly integrated Europe and not a rising but vulnerable China--is capable of playing the hegemonic stabilizing role that Britain did in the last half of the 19th century and the U.S. did in the last half of the 20th.
Where that leaves us, James argues in his compelling closing chapter, is with an "uncertainty of values." This is not just uncertainly over wealth--Are my job and income secure? Is my house still worth as much as I paid for it?--but, more worryingly, whether we can still trust in the rules of the economic game. The erosion of one can lead to the other. Uncertainty about monetary values can easily produce a credit contraction that prolongs economic weakness, causing people to question whether globalization can continue to deliver prosperity. The risks of such disillusionment are especially high among the middle classes that have a tentative hold on the trappings of prosperity and are most easily angered by its loss. It is among the middle classes that a damaging political backlash could take hold, and we have seen before in history the ugly forms that it could take.
Enter Lloyd Blankfein. As the chief executive of what has become the country's most important and visible financial institution, he appears to have recognized that few were likely to be persuaded by his earlier claim that Goldman was doing "God's work" and therefore its employees are each worth $700,000 a year. His new effort--an apology for past mistakes and a $500 million donation to help small businesses recover from the recession--could certainly be dismissed as cynical tokenism. But as James concludes in his book: "The only way of dealing with a collapse in values is to rebuild values." The failure of the corporate ethic that helped produce the current crisis "demonstrates the need for an ethic of personal responsibility that cannot simply be subsumed in some vague sense of corporate culture."
"Ethical questions have become again absolutely central to a firm's reputation, and to its ability to do business," he writes. "We are back in a world in which trust is a virtue that is required as a logical precondition of being an effective participant in markets."
Can such trust be rebuilt? Perhaps not, and certainly not quickly. But as this fine book warns, there is no alternative but to try.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.