Transactions: Oct. 20, 2008

There are moments in the rush of events that are nearly beyond commentary. To write a weekly column, you need a solid perch. It doesn't have to be large; it just has to be secure enough to last, say, a few days. A year ago, in the early days of this metastasizing panic, that was easy; even those frantic weekend rescues, like Bear Stearns Cos. or the Sunday night when Lehman Brothers Holdings Inc. filed and Merrill Lynch & Co. sold itself to Bank of America, set us off on a new course that, while clearly accelerating, still allowed distance. Over the last few weeks, however -- phewww. Events swirled faster and faster. A few weeks ago markets suddenly became the kind of raging mob Elias Canetti likened in "Crowds and Power" to fire: undifferentiated, powerful, fast moving. "Fire spreads; it is a contagion and insatiable," he wrote. We were suddenly habitués of a Hobbesian landscape -- that's Hobbes, not Hobbit -- which is no fun at all. In the 1930s, of course, the free trade system broke down under a similarly ferocious assault -- "Liquidate! Liquidate! Liquidate!" famously declared Treasury's Andrew Mellon -- producing an impoverished world of armed national camps. So far that hasn't happened, except at the banks, which yanked up their drawbridges and hid beneath the covers. Come out, come out.

The radically insecure worlds of Hobbes and Canetti are vectors of power that can only be deterred by power. Which brings us to the role of the state. We should have seen this coming: In a world of such deep and intertwined markets, and huge market-oriented institutions, only governments provide what John Kenneth Galbraith -- remember him? -- in a slightly different context called countervailing power. We were living on borrowed time. What we saw a week or so ago was a real-time re-enactment of Hobbes' ascent from the state of nature to the Leviathan, to a kind of global Leviathan. The Crisis swamped debates that suddenly seemed to be indulgences: the state versus the free market, libertarianism versus socialism, market discipline versus regulation. These are legitimate issues, just besides the point -- at least for that moment. This helps explain the swift change in sentiment at Treasury, from resisting taking stakes in banks to openly moving toward nationalization.

Indeed, officials in nearly every advanced economy have reacted in roughly the same two-step way: They have been far more aggressive than their counterparts in the '30s to intervene and nationalize; and they have been far more open, despite bumps, to a coordinated response, which always requires a check on sovereignty, to save the global trading system. In his study of the Great Depression, Federal Reserve Chairman Ben Bernanke fingered such a global breakdown as the primary cause of the disaster. True, doubt lingers, fed by the fact that this contagion spread so quickly under the very eyes of the folks who are declaring victory. What if we are fighting the last war? What about our circumstance continues to elude us? It's like the age-old argument about cancer as a disease: Are all financial panics the same, or are they different? Why do we seem always a step behind? And what will the world be like when, for good or for ill, markets calm, either because governments reimpose order -- that's what's optimistically dubbed market stabilization -- or they burn themselves out?

Which takes us, as always, to politics. Markets tend to overcorrect because people tend to overcorrect, both on the upside and downside. The financial distress of the '30s produced the global mayhem of the '40s. There are folks out there -- how many is hard to say -- that reject free trade, that embrace unilateralism, a Fortress America, isolationism. But in our market-intensive world, those are marginal ideas, not economic and political doctrine. With the exception of random jihadists, this is not an ideological age (which was what Francis Fukuyama was getting at in "The End of History"); for all our leveraged excesses, we live in pragmatic times, grounded in economic "truths." The developed economies share certain tenets of interdependency and globalism. We may not care for the government of China, say, but the sort of millennial fever -- German Nazism, Soviet Communism, Japanese nationalism -- of the '30s is not part of our landscape. Whether we worship Milton Friedman or John Maynard Keynes, we have learned to expect liquidity, credit, growth, risk; the question is really, how much? In short, we're all merry trans-national consumers. And while that does not guarantee democracy, happiness, salvation or a retirement in Marbella, it does suggest there are reasons to stand together against the common threat. And so, once again, predictions that markets would be destroyed or that the state would wither are wrong. They live for each other.