Carlos Yu proposed five possible failure modes for the American system of governance. We have discussed the proliferation of veto points and the glorification of the military on this blog. Since we began, worry about veto points has gone mainstream. The best (or at least most entertaining, while remaining intelligent) piece about America’s political dysfunction is by James Fallows; I highly recommend it. Meanwhile, nobody worries about a military coup ... although it is a little worrying that somebody as grounded as Mr. Fallows felt the need to discuss the possibility.
The third failure mode was, “The monetary and regulatory agencies might be too slow or too unwieldy to deal with unexpected changes in the global economic system.” It would be hard to find any sign of that in the last year. I sat through a number of seminars where all we did was try to figure out what was going on with the Fed’s balance sheet as it tried creative way after creative way to rescue the financial system. The regulators fell down before the crash, but that was the fault of a bad administration following bad legislation and the general zeitgeist. I won’t go so far as to exculpate them, but it wasn’t like they were sitting down as the world crashed down.
That said, I would not discount the possibility of this failure mode. Consider that the Federal Reserve under Chairman Bernanke appears to have ruled out raising the target rate of inflation. He also seems to have ruled out further quantitative easing. (Which is, I think, trying to do the same thing without making an explicit announcement.) One can make a very good argument that this decision is going to prolong the Great Recession and ruin millions of lives.
OK, that isn’t a failure mode. Not yet, at least. But we have seen the movie before (in 1929-32) and in other times of trouble I could easily see it becoming one yet again. At the very least, it could worsen the effect of other political failings. It certainly isn’t helping now.