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Saturday, February 12, 2011

Wall Street Banks and Autocratic Regimes: Subject to the Domino Effect?

"In Beirut, gunfire broke out and crowds of people waved Egyptian flags. In Yemen, they gathered in front of the Egyptian Embassy chanting, 'Wake up rulers, Mubarak fell today.' In Gaza, they fired shots in the air and set off fireworks. . . . [However,] in a telling sign of the divide between the rulers and the ruled, the region’s leaders, presidents and monarchs remained largely silent." This depiction by The New York Times of ripple effects across the Middle East in the wake of the resignation of Egypt's Mubarak in February, 2011 intimates the hoped-for and feared possibility that the popular unrest could spread.  Moreover, the entire world, which had been been glued to the events unfolding in Cairo, wondered if a domino effect might be in store in countries under autocratic rule. Indeed, The New York Times wrote of a possible domino effect quite explicitly: "The popular uprising that started . . . in Tunisa had claimed its second autocratic government, this time in the largest country in the Arab world. With more protests planned in coming days, some governments were clearly worried they could be next." But do autocratic governments fall like dominos?  That is, is revolution contagious? Fawaz Traboulsi, a prominent Lebanese writer and columnist, thought so in the days following Mubarak's resignation. “All the regimes are shaking now . . . They are becoming more and more fragile. This is just the beginning.” In Bahrain, King Hamad Bin Isa al-Khalifa apparently thought so too, for he ordered the equivalent of $2,650 be given to every Bahraini family a few days before a planned "Day of Rage" protest. “Arab people discovered their ability to make change,” said Nabeel Rajab, a human rights activist in Bahrain. “And with Egypt in the leadership once again, the change will reach all the Arab world.” In Yemen, President Ali Abdullah Saleh announced he would suspend constitutional amendments that allow him to remain in his office for life. He also raised salaries for the military and civil servants and cut income taxes in half. In Algeria, the government promised to lift the state of emergency that had been in effect since 1992. To be sure, nineteen years is a rather long time for an emergency.  Such efforts can be likened to building up wetlands or widening a beach to take the wind out of the hurricane out at sea should it hit. In other words, it appears that there was "revolution watch" in effect for the Middle East in the wake of the fall of the Egyptian regime. One might reasonably question, however, whether revolutions are contagious.

It could be that autocracy itself had been weakened by the success of the protests in Egypt.  On the other hand, there had been revolutions before and dictatorship was not evicerated from the face of the earth. The belief that the Tunesian and Egyptian revolutions were the start of a wave that would flood all autocratic powers in the Middle East (or the world) might also consider that even autocratic states differ in their respective internal conditions. To use the hurricane analogy, some beaches are better protected than others. If the unrest in Tunesia and Egypt were linked in such a way that other countries could be impacted internally, the ensuing domino effect could perhaps be compared to that among Wall Street banks in September 2008.  The collapse of Bear Stearns, Lehman Brothers, and Merrill Lynch as independent or viable going concerns contained a momentum that was beginning to bring down Morgan Stanley and threaten even Goldman Sachs when the ex-CEO of Goldman Sachs at Treasury effectively pushed for the construction of a fortified sand-dune (TARP) a.k.a. an infusion of funds into the remaining banks from the U.S. Government and the Federal Reserve.  As a result, the force of the strengthening winds ceased to intensify and began to diminish, leaving the economy in a long rainy season (i.e., a recession and a subsequent nearly jobless recovery).

In the wake of the fall of the Egyptian regime, were the other regimes in the Middle East like Morgan Stanley and Goldman Sachs after Lehman Brothers declared bankrupcy?  In other words, are autocratic regimes subject to a "run on the bank" in another? If so, there would still be a notable difference between the big banks and the governments.  Namely, the banks were deemed too big to fail, while the autocratic rulers were deemed too powerful to rule. That is to say, the continued viability of the Wall Street pillars was deemed essential to the world economy, while it was thought in the wake of the Egyptian regime of Mubarak that the world was better off less one autocratic regime. Hence there would not be likely to be a TARP program arranged to prop up dictators. Even with this difference noted, I contend that both big banks and big dictators are too big to exist in a world that values freedom and individual rights. Perhaps we ought to have been cheering the domino effect on Wall Street just as we cheered the fall of the Tunesian and Egyptian dictators. In both cases, destabilization that could lead to the collapse of the global economy and civic order would of course need to be avoided.  However, I contend that the U.S. Government could have intervened to maintain order on Wall Street by assisting as the big banks split into pieces, none of which being too big to fail and thus more in the public interest than retaining the big banks as such.  In the case of public autocratic regimes, their demise and replacement can typically be handled domestically, as in the cases of Tunesia and Egypt, rather than by an international organization such as the U.N.

In general terms, the "run on the bank" in Tunesia and Egypt may or may not be contagious in its nature, yet a consideration of the possibility of a domino effect can remind us of the domino effect that we witnessed in September of 2008 on Wall Street. Making this connection might prompt us to ask whether autocratic governments and big banks aren't both too big to exist. In other words, the collapse of one badly run bank after another and the subsequent need to deal with the question of such banks as going concerns can perhaps be likened to the collapse of one badly run government after another.  Was the world finally noticing around the end of the first decade (and the beginning of the second) of the twenty-first century that enormous concentrations of private capital (and thus power) and of public autocratic authority were not necessarily givens, and thus could, and perhaps should, be taken down? In other words, were long-standing givens finally seen as replacable?  The world was stunned when huge investment banks that had been around for more than a century were suddenly collapsing, just as the world was stunned when the government of the largest Middle Eastern country suddenly fell after two weeks of popular protests. Pillars, even those that are thought vital, can indeed fall, and the world can discover through the experiences that they are not essential--and they might even be bad for the public good. Surely this is the sense of the free world concerning autocratic governments, yet we are less convinced concerning the danger in continuing to allow banks too big to fail to continue to exist as they have for decades. In both cases, the domino effect may be natural and good, provided it is managed so public order does not collapse in the process.