The Rediscovery of Character

The obituaries for James Q. Wilson, the eminent social scientist, generally emphasized his “broken windows” theory on how to reduce crime. That’s natural. This strategy, which contributed to the recent reduction in crime rates, was his most tangible legacy.

But broken windows was only a small piece of what Wilson contributed, and he did not consider it the center of his work. The best way to understand the core Wilson is by borrowing the title of one of his essays: “The Rediscovery of Character.”

When Wilson began looking at social policy, at the University of Redlands, the University of Chicago and Harvard, most people did not pay much attention to character. The Marxists looked at material forces. Darwinians at the time treated people as isolated products of competition. Policy makers of right and left thought about how to rearrange economic incentives. “It is as if it were a mark of sophistication for us to shun the language of morality in discussing the problems of mankind,” he once recalled.

Wilson worked within this tradition. But during the 1960s and ’70s, he noticed that the nation’s problems could not be understood by looking at incentives. Schools were expanding, but James Coleman found that the key to education success was the relationships at home and in the neighborhood. Income transfers to the poor increased, but poor neighborhoods did not improve; instead families disintegrated.

The economy boomed and factory jobs opened up, but crime rates skyrocketed. Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one. Some sort of moral norms prevented them.

“At root,” Wilson wrote in 1985 in The Public Interest, “in almost every area of important concern, we are seeking to induce persons to act virtuously, whether as schoolchildren, applicants for public assistance, would-be lawbreakers or voters and public officials.”

When Wilson wrote about character and virtue, he didn’t mean anything high flown or theocratic. It was just the basics, befitting a man who grew up in the middle-class suburbs of Los Angeles in the 1940s: Behave in a balanced way. Think about the long-term consequences of your actions. Cooperate. Be decent.

He did not believe that virtue was inculcated by prayer in schools. It was habituated by practicing good manners, by being dependable, punctual and responsible day by day.

Wilson lived in an individualistic age, but he emphasized that character was formed in groups. As he wrote in “The Moral Sense,” his 1993 masterpiece, “Order exists because a system of beliefs and sentiments held by members of a society sets limits to what those members can do.”

Wilson set out to learn how groups created a good order, why that order sometimes frayed. He worked patiently and meticulously. The phrase “we don’t know” rings throughout his writing. He was quick to admit ignorance in the face of knotty social problems.

When Wilson started talking about character, he was surprised that many in the academy regarded him as an archconservative. Why should character talk be conservative? But he accepted the label and responded gracefully. Some conservatives in the academy respond to their isolation by becoming combative and extreme. Wilson’s rule was that conservatives should respond by being twice as productive and four times as nice.

In “The Moral Sense,” he brilliantly investigated the virtuous sentiments we are born with and how they are cultivated by habit. Wilson’s broken windows theory was promoted in an essay with George Kelling called “Character and Community.” Wilson and Kelling didn’t think of crime primarily as an individual choice. They saw it as something that emerged from the social psychology of a community. When neighborhoods feel disorganized and scary, crime increases.

Over the years, Wilson argued that American communities responded to the stresses of industrialization by fortifying self-control. Thanks to the temperance movement, for example, adult per-capita alcohol consumption fell from 7.1 gallons a year to 1.8 gallons a year between 1830 and 1850.

But America responded to the stresses of the information economy by reducing the communal buttresses to self-control, with unfortunate results. Occasionally, when there was sufficient evidence, Wilson recommended policies that might reverse this slide. In one 1998 Public Interest essay, he promoted ideas to strengthen the family: create publicly supported, privately operated group homes for teenage mothers; increase adoption; investigate ways to increase preschool programs; create a G.I. Bill for young mothers — if you take care of your kid now, the government will pay for training later; create a religious United Way fund to increase the role of religion in American society.

Wilson was not a philosopher. He was a social scientist. He just understood that people are moral judgers and moral actors, and he reintegrated the vocabulary of character into discussions of everyday life.

How Romney Advocated Obamacare and Lied About It

Daily Intel Home

Pay no attention to the plan behind the curtain!

In 2009, Mitt Romney had a problem. He was running for the Republican presidential nomination, and the towering achievement of his governorship in Massachusetts — health care reform — had been embraced by President Obama. Romneycare played almost no role in Romney’s 2008 presidential run, but the emergence of the issue onto the national agenda threatened to link Romney with a president Republicans had already come to loathe.

His solution was simple. He seized upon the one major difference between his plan and Obama’s, which was that Obama favored a public health insurance option. The public plan had commanded enormous public attention, and Romney used to it frame Masscare as a conservative reform relying on private health insurance, and against Obama’s proposal to create a government plan that, Romney claimed, would balloon into a massive entitlement. Andrew Kaczynski collects several televised appearances and one op-ed in which Romney holds up Masscare as a national model.

This tactic backfired when Obama had to jettison the public plan, and Republicans came to focus on the individual mandate as the locus of evil in Obamacare. What was once a Republican idea in good standing was now, suddenly, unconstitutional and the greatest threat to freedom in American history.

This left Romney in an awkward spot.

It’s hard to run for president as the advocate of an idea that your party considers the greatest threat to freedom in history. His response was to simply revise the past, much as he did with abortion. Romney now claimed he had never advocated a federal version of his Masscare program. Here’s Romney at the December 11 GOP presidential debate:

Speaker Gingrich said that he was for a federal individual mandate. That's something I've always opposed. What we did in our state was designed by the people in our state for the needs of our state. You believe in the 10th Amendment. I believe in the 10th Amendment. The people of Massachusetts favor our plan three to one. They don't like it, they can get rid of it. (COUGH) That's the great thing about (COUGH) a democracy, where individuals under the 10th Amendment have the power to craft their own solutions.

The coughs are in the original transcript, for what it’s worth. I’ll leave it to the psychiatrists to say whether we ought to read anything into them.

And here’s Romney at a January 23 debate:

My health care plan, by the way, is one that under our Constitution we're allowed to have. The people in our state chose a plan which I think is working for our state.

At the time we crafted it, I was asked time and again, "Is this something that you would have the federal government do?" I said absolutely not.

I do not support a federal mandate. I do not support a federal one-size-fits-all plan. I believe in the Constitution.

This is clearly untrue. Romney, as Kaczynski has shown, repeatedly held up the Massachusetts model in 2009. For instance, from the USA Today op-ed:

There’s a better way. And the lessons we learned in Massachusetts could help Washington find it. ..

For health care reform to succeed in Washington, the president must finally do what he promised during the campaign: Work with Republicans as well as Democrats.

Massachusetts also proved that you don’t need government insurance. Our citizens purchase private, free-market medical insurance. There is no “public option.” …

Our experience also demonstrates that getting every citizen insured doesn’t have to break the bank. First, we established incentives for those who were uninsured to buy insurance. Using tax penalties, as we did, or tax credits, as others have proposed, encourages “free riders” to take responsibility for themselves rather than pass their medical costs on to others. This doesn’t cost the government a single dollar.

The remarkable thing is that none of Romney’s opponents challenged these demonstrably false claims. If you check the transcripts of the debates, Romney simply lies about what he advocated, and then everybody lets it go.

Among other things this underscores the sheer incompetence of his opposition. Kaczynski  is an excellent researcher, but it’s not as if he had to comb the ends of the Earth to find these nuggets. He culled them from such sources as USA Today and Meet the Press. Every opposing campaign either failed to look up this basic stuff or failed to train the candidate to understand it. Romney is now on the verge of escaping with the party nomination having embraced a program his party considers inimical to freedom itself and blatantly lied about having done so without any major opponents pointing this out. It’s pretty incredible.

Grantland

A tournament to determine The Wire's greatest character

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Did we mention that our esteemed editor-in-chief hung out with President Obama last week? Because that totally happened. Just two regular guys, discussing Linsanity, Blake Griffin's jump shot, what it's like to pitch a baseball while wearing a bulletproof vest, and — as the conversation wound down — The Wire. Asked to name the greatest Wire character of all time (let it never be said that Grantland does not ask the tough questions!), the Commander in Chief didn't hesitate: "It's gotta be Omar, right? I mean, that guy is unbelievable, right?"

Oh, indeed, Mr. President. Over the course of five seasons, The Wire populated its fictionalized Baltimore with more indelible, vibrantly flawed characters than any TV metropolis this side of Springfield (which also had its share of cynical cops, dirty politicians, and lovable substance-abusers). And yet, even in that context, it's hard to argue that Omar Little — the proudly gay, profanity-averse, Honey Nut Cheerios-loving trap house stickup man played by Michael K. Williams — doesn't still stand alone, like the cheese. (Word to Cheese.) If The Wire were the X-Men, Omar would be Wolverine; if The Wire were M.O.P.'s recorded output, he'd be "Ante Up (Robbin Hoodz Theory)." To paraphrase the President, if you were to rank the show's characters in a March Madness-style bracket, "He's got to be the no. 1 seed."

This gave us an idea. What if we actually did subject the key players of the Wire-verse to rigorous bracketological inquiry? If we played corner boys against dock workers, murder-polices against hoppers, and craven politicos against enigmatic not-actually-Greek human traffickers, in matchups as arbitrary and occasionally unjust as life and death on the mean streets of West Baltimore, would the king stay the king?

This week, we're going to find out. And we're probably also going to make David Simon mad, again. Behold: Grantland's first-ever TV bracket. Thirty-two characters. Six days. We let Fox Sports columnist Jason Whitlock vote, because that dude likes The Wire more than Simon likes wearing a Kangol to keep his head from exploding when he thinks about U.S. drug-control policy. And we let the President play, too, because this is America, man.

The tournament begins right now, on Grantland's Facebook page. In the words of Stringer Bell, "Get on with it, motherfucker."

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Taking the long view

INSIDE a remote mountain in Texas, a gargantuan clock is being pieced together, capable of telling the time for the next 10,000 years. Once the clock is finished, people willing to make the difficult trek will be able to visit the vast chamber housing it, along with displays marking various anniversaries of its operation. On a website set up to track the progress of this “10,000-year clock”, Jeff Bezos, who has invested $42m of his own money in the project, describes this impressive feat of engineering as “an icon for long-term thinking”.

That description applies just as much to Mr Bezos himself. The founder and chief executive of Amazon has often ruffled investors’ feathers by sacrificing short-term profits to make big bets on new technologies that, he insists, will produce richer returns for the company’s shareholders in future. He laid out this philosophy in his first letter to shareholders, penned in 1997, which was entitled “It’s all about the long term”.

Some of these gambles have paid off handsomely, transforming Amazon from an online retailer of books and other physical products into a technology behemoth with $48 billion of revenues in 2011 and strong positions in fields from cloud computing to tablet devices. They have also enhanced Mr Bezos’s reputation as a technological seer. “In the last few years there has been a re-acceleration of the rate of change in technology,” he says. His impressive ability to identify and profit from the resulting disruptions means he is widely seen as the person best placed to fill the shoes of the late Steve Jobs as the industry’s leading visionary.

Mr Bezos’s willingness to take a long-term view also explains his fascination with space travel, and his decision to found a secretive company called Blue Origin, one of several start-ups now building spacecraft with private funding. It might seem like a risky bet, but the same was said of many of Amazon’s unusual moves in the past. Successful firms, he says, tend to be the ones that are willing to explore uncharted territories. “Me-too companies have not done that well over time,” he observes.

Eyebrows were raised, for example, when Amazon moved into the business of providing cloud-computing services to technology firms—which seemed an odd choice for an online retailer. But the company has since established itself as a leader in the field. “A big piece of the story we tell ourselves about who we are is that we are willing to invent,” Mr Bezos told shareholders at Amazon’s annual meeting last year. “And very importantly, we are willing to be misunderstood for long periods of time.”

More recently, financial analysts have grumbled about the company’s wafer-thin margins and the hefty investment it is making in its Kindle range of e-readers, the most advanced of which, the Kindle Fire, is a fully fledged tablet computer. Amazon’s move into hardware with the original Kindle, launched in 2007, was another unexpected move. The devices have proved wildly popular, but Mr Bezos has kept details of sales figures and profitability secret. The assumption is that Amazon is trading short-term profits in order to establish its dominance in the booming e-book market. But nobody really knows. “Investors are paying a lofty premium for a company whose investment cycle is going to extend a decade and which offers limited visibility,” says Colin Gillis of BGC Partners, a brokerage firm.

Such remarks do nothing to sway Mr Bezos, who is convinced that rapid technological change creates huge opportunities for companies bold enough to seize them. “There is room for many winners here,” he says. But he believes Amazon can be one of the biggest thanks to its unique culture and capacity for reinventing itself. Even in its original incarnation as an internet retailer, it pioneered features that have since become commonplace, such as allowing customers to leave reviews of books and other products (a move that shocked literary critics at the time), or using a customer’s past purchasing history to recommend other products, often with astonishing accuracy.

The view from the garage

Amazon’s culture has been deeply influenced by Mr Bezos’s own experiences. A computer-science graduate from Princeton, he returned to his alma mater last year to give a speech to students that provided some fascinating insights into his psychology as an entrepreneur. He explained that he had been a “garage inventor” from a young age. His creations included a solar cooker made out of an umbrella and tin foil, which did not work very well, and an automatic gate-closer made out of cement-filled tyres.

That passion for invention has not deserted Mr Bezos, who last year filed a patent for a system of tiny airbags that can be incorporated into smartphones, to prevent them from being damaged if dropped. Even so, in the 1990s he hesitated to leave a good job in the world of finance to set up Amazon after a colleague he respected advised him against it. But Mr Bezos applied what he calls a “regret minimisation framework”, imagining whether, as an 80-year-old looking back, he would regret the decision not to strike out on his own. He concluded that he would, and with encouragement from his wife he took the plunge as an entrepreneur. They moved from New York to Seattle and he founded the company, in time-honoured fashion for American technology start-ups, in his garage.

This may explain why Mr Bezos is so keen to ensure that Amazon preserves its own appetite for risk-taking. As companies grow, there is a danger that novel ideas get snuffed out by managers’ desire to conform and play it safe. “You get social cohesion at the expense of truth,” he says. He believes that the best way to guard against this is for leaders to encourage their staff to work on big new ideas. “It’s like exercising muscles,” he adds. “Either you use them or you lose them.”

Amazon’s unexpected move into cloud computing is a good example. The company had developed ways to allocate computing capacity flexibly in order to deal with the mountains of data being generated by its retail operations. This led to the idea that the same know-how could be used to solve similar problems at other companies, too, and Amazon Web Services (AWS) was born. It is now used by hundreds of thousands of firms, ranging from start-ups such as Spotify, a music-streaming service, to established companies like Ericsson, a Swedish telecoms giant. The firm does not break out AWS’s revenues, but Gartner, a consulting and research outfit, has estimated that they exceeded $1 billion in 2011.

Mr Bezos is coy about where he might place more big bets in future, but there have been persistent rumours that Amazon might launch a smartphone, possibly as soon as this year. With Amazon’s video-streaming and music services, Mr Bezos clearly has Netflix and Apple in his sights. And in recent weeks there has been speculation that Amazon is toying with the idea of opening a bricks-and-mortar shop to promote sales of the Kindle, by letting customers try it in person. The success of Apple’s hugely profitable chain of retail stores shows that even in the era of e-commerce, there are some things people prefer to buy the old-fashioned way.

If Amazon does one day move into bricks-and-mortar retail, it would not be the first time that Mr Bezos had taken a leaf from the book of Jobs. Like Apple’s visionary leader, he has a strong sense of showmanship, which was on display at the carefully choreographed launch of the Kindle Fire last year. Mr Bezos can also be an intense and demanding manager. But most importantly, he shares with Mr Jobs an innate understanding of the importance of thinking about high-tech products from the customer’s point of view.

Keeping it simple

During the design of the original Kindle, for example, Mr Bezos insisted that the e-reader had to work without needing to be plugged into a PC. That meant giving it wireless connectivity. But he also wanted it to work everywhere, not just in Wi-Fi hotspots, and without the need for a monthly contract. This prompted the Kindle team to devise a new business model, striking deals with mobile-phone operators to allow Kindle users to download e-books without having to pay network fees. The ability to download books anywhere does not simply make life easier for users; it also encourages them to buy more books. The Kindle is an e-reader, but it is also a portable bookshop.

Similarly, with the Kindle Fire, Mr Bezos recognised that a tablet computer designed chiefly for consuming entertainment content is no use unless there is plenty of such content available. For many other tablet manufacturers, the question of getting content onto their devices seems to be an afterthought; but Amazon, like Apple, has assembled an ecosystem of books, apps, video and music to accompany its device. Moreover, Amazon can use cross-subsidies from the sale of digital content to keep the price of the Fire down, something that rival tablet-makers who do not sell content cannot do. Once again, Mr Bezos is playing a long-term game in the hope of establishing the Fire as the main rival to the iPad.

Not all of his bets succeed. Who remembers Amazon Auctions, for example, or Amapedia, Amazon’s attempt to build a Wikipedia-like user-generated product directory? Even more numerous are the bets that Mr Bezos has placed on new initiatives that have yet to prove their worth. Amazon has branched out into own-brand products, has set up specialist e-commerce sites in several premium markets and is dabbling in moviemaking and television production.

Perhaps his most outlandish bet is that on spaceflight. Blue Origin is one of several start-ups aiming to open up space travel to paying customers. Like Amazon, the company is secretive, but last September it revealed that it had lost an unmanned prototype vehicle during a short-hop test flight. Although this was a setback, the announcement of the loss revealed for the first time just how far Blue Origin’s team had advanced. “So little was known about Blue’s status that the amount of progress it had evidently made further enhanced its reputation,” says Mike Gold, an executive at Bigelow Aerospace, another space start-up. In a post on Blue Origin’s website, Mr Bezos said the crash was “not the outcome that any of us wanted, but we’re signed up for this to be hard.”

Staying on top in the fast-changing world of technology is hard, too. Mr Bezos is bound to be the target of more criticism as his company’s hefty investments in new areas continue to put a dent in its bottom line. His next move could be into smartphones or a video-streaming service that competes with Netflix, but it is just as likely to be something entirely unexpected. By being unusually patient, he hopes to create businesses that rivals will find harder to assail. As the investments in both Blue Origin and the 10,000-year clock show, it is the challenge of reaching for distant horizons that really makes Amazon’s boss tick.

Inside Power, Inc.

The sales revenues of the world's largest company, Wal-Mart Stores Inc., are higher than the GDPs of all but 25 countries. At 2.1 million, its employees outnumber the populations of almost 100 nations. The world's largest investment manager, a low-profile New York company named BlackRock, manages $3.5 trillion in assets -- greater than the national reserves of any country on the planet. In 2010, a private philanthropic organization, the $33.5 billion-endowed Gates Foundation, distributed more money for causes worldwide than the World Health Organization had in its annual budget.

The statistics are eye-popping, but this is no parlor game. Over the last century, the world's biggest private-sector organizations have come to dwarf all but the largest governments in resources, global reach, and influence. At the same time, even wealthy countries are now struggling with overwhelmed bureaucracies, budget crises, and plummeting confidence in government. And governments everywhere are compromised by the limitations of their own borders in an era when the issues that affect their people are increasingly transnational.

Striking the right balance between private and public power is the fundamental challenge of our age. Find the sweet spot -- prudent regulation, empowering citizens to compete, fostering economic dynamism, and fairness for all -- and your society will thrive in the 21st century. Get the equation wrong, and the results will be measured in social instability, diminishing prosperity, and declining ability to shape your destiny. Choices that seem entirely domestic in nature will have massive geopolitical consequences.

In the United States, it is the defining political issue of the moment. Is government too big, a burden to society, and a threat to individual liberties? Or is it too ineffective a protector of average people, co-opted by big business and moneyed interests? Is it contributing to the general welfare, or is it institutionalizing inequality, serving the few -- the 1 percent -- rather than the many?

In Europe, such controversies also roil furiously but are joined by an intense argument over how much power individual countries should pass on to a collective European Union, and about whose interests are best served by such collaborative governance -- a departure from the traditional idea and role of the nation-state. Ask a German and a Greek this question, and you'll get vastly different answers. 

In China, the public-private tug of war is visible at every level of a society reinventing itself at such a breathtaking pace that stability and growth often seem as irreconcilable as they are essential to each other. It is a challenge faced elsewhere in the emerging world, from the pitched battles between Russia's oligarchs and its political leaders to the ongoing social tumult in the Arab world, where the uprisings of the last year have been as much against cronyism and governments that have served the economic interests of elites as they have been for individual freedoms and opportunities.

We must get this balance right. A decade and a half ago, the United States was celebrating the triumph of American capitalism and the defeat of state power by the forces of the marketplace. It was a victory dance on the graves of communism and socialism. But it is clear today that the party was premature.

Companies Aren't Just People -- They're Actually Whole Countries.
Employees vs. populations.

We have since gone from a battle between capitalism and communism to something even more complex: a battle between differing forms of capitalism, in which the distinction between each is in the relative roles and responsibilities of public and private actors. As the freewheeling market model promoted by Washington is reeling from self-inflicted wounds, other approaches are gaining ground. Rising models are vying with one another for influence -- from Beijing's "capitalism with Chinese characteristics" to the "democratic development capitalism" of India and Brazil, from Northern European economies with strong fiscal discipline but also a strong public-private compact to the small state "entrepreneurial capitalism" of places like Israel, Singapore, and the United Arab Emirates.

In the United States and in other countries that have adopted the U.S. model, the sense that the heavy thumb of the economically empowered rests on the legal, legislative, and regulatory scales fuels complaints that the balance has tilted too far in favor of private power. Inequality has grown in terms of both economic outcomes and apparent privileges of a super-empowered elite within -- and beyond -- the law. Nothing has illustrated flaws in the American system so well as the recent financial crisis, in which a few big institutions shrugged off regulation, abused their freedoms, persuaded the government to bail them out (but not their victims), and then managed to forestall real reform and return to almost all the practices that got them in trouble in the first place. The result is a backlash seen in everything from Occupy Wall Street to nationalist protests against globalization. 

The world needs a new framework that reflects this new reality. Most countries have had so many of their sovereign prerogatives stripped away or diminished that their real authority is not what it once was. Take basic pillars of state power like controlling borders, printing money, enforcing laws, or projecting force. All have been irreversibly changed. Thanks to the Internet, modern transportation, and globalization more broadly, states can no longer see, quantify, or manage much of what crosses their frontiers. Only a few countries produce truly tradable currencies, while the quantities of privately issued instruments of value, like derivatives, vastly outstrip the world's supply of government-issued cash. Global companies now have the ability to shop venues when it comes to tax and regulatory regimes, simply shifting locales if governments impose legislation they don't like. And fewer than 20 countries have any real ability to project force beyond their borders for any extended period of time.

Meanwhile, a big company like ExxonMobil, with sales around $350 billion in 2011, operates in more than twice as many countries as a significant, wealthy country like Sweden has embassies. In 2010, Sweden's defense expenditures were about one-sixth of Exxon's budgeted expenditures. The energy behemoth has more free capital to distribute worldwide, plays a much bigger role in the economic lives of more countries, and mobilizes more resources to influence political outcomes than do the Swedes. Ask yourself: Which entity, Sweden or Exxon, probably has a greater impact on the outcome of global climate talks? On the adoption of environmental policies worldwide?

Comparing the sizes of companies with those of countries is a fraught business, with imperfect metrics, but consider this: The 1,000th-largest company in the world has annual sales greater than the GDPs of 57 economies. That company, Owens-Illinois, makes glass bottles; its sales exceeded $7 billion in 2010, more than the GDPs of Benin, Bermuda, Haiti, Kosovo, Liechtenstein, Moldova, Monaco, Nicaragua, Niger, Rwanda, Tajikistan, and dozens of others. In fact, of the world's 500 largest companies, according to Fortune magazine, all 500 would rank among the top 100 economies on the planet. (GDP is a complex, if misleading, value-added metric, and it does not directly compare with a company's sales. But the comparison does give a sense of scale.)

The phenomenon of corporate power is, of course, hardly new. The British East India Company ran the Indian subcontinent and managed one of the world's largest armed forces; Andrew Carnegie and Henry Ford built small cities for their thousands of workers, complete with employee housing and schools. Over the past century, however, the state-like roles of companies have grown and changed, becoming more common and more complex as multinational corporations themselves have grown bigger. Today's corporations often conduct something very much like their own foreign policy. They launch active political advocacy campaigns, such as ExxonMobil's lobbying to kill U.S. acceptance of the Kyoto Protocol. They undertake significant security initiatives, as in the company formerly known as Blackwater's defense contracting during the Iraq war. They also provide health care, training, shelter, and other functions that states ought to but can't or won't provide.

The result is societies that are profoundly out of whack, with far too much power in the hands of massive, often distant corporate entities that are only accountable, fundamentally, to their shareholders. Meanwhile, the public is seeing that the increasingly weak institutions designed to give them a voice are unable to meet some of the most basic terms of the social contract, as the issues that need to be addressed are effectively beyond their jurisdiction.

This is not a call for revolution. If the bloodshed, social experimentation, and ideological polarization of the 20th century have offered us one lesson, it is that extreme solutions do not work when we try to square public and private power. No society can flourish without a balance between the two. For some Americans, it may be unsettling to realize that we have lost some of our ability to influence how that balance is struck. But for the majority, the disenfranchised who make up today's 99 percent, the hybrid capitalism likely to emerge from the current competition in the global marketplace of ideas may well be a fairer, more sustainable alternative.

Financial Crisis Amnesia

By TIM GEITHNER

Four years ago, on an evening in March 2008, I received a call from the CEO of Bear Stearns informing me that they planned to file for bankruptcy in the morning.

Bear Stearns was the smallest of the major Wall Street institutions, but it was deeply entwined in financial markets and had the perfect mix of vulnerabilities. It took on too much risk. It relied on billions of dollars of risky short-term financing. And it held thousands of derivative contracts with thousands of companies.

These weaknesses made Bear Stearns the most important initial casualty in what would become the worst financial crisis since the Great Depression. But as we saw in the summer and fall of 2008, these weaknesses were not unique to that firm.

In the spring of 2008, more Americans were starting to face higher mortgage payments as teaser interest rates reset and they could no longer refinance out of them because the value of their homes stopped rising—the leading edge of a wave of foreclosures and a terrible fall in house prices. By the time Bear Stearns failed, the recession was then already several months old, but it would of course get much worse in coming months.

These problems were partly the result of amnesia. There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require.

When the CEO of Bear Stearns called that night, it was not because I was his firm's supervisor or regulator, but because I was then the head of the Federal Reserve Bank of New York, which serves as the fire department for the financial system.

The financial safeguards in the law at that moment were tragically antiquated and weak. Neither the Fed, nor any other federal agency, had the necessary comprehensive authority over investment firms like Bear Stearns, insurance companies like AIG, or the government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Regulators did not have the authority they needed to oversee and impose prudent limits on overall risk and leverage on large nonbank financial institutions. And they had no authority to put these firms, or bank holding companies, through a managed bankruptcy that wound them down in an orderly way or to otherwise adequately contain the damage caused by their failure. The safeguards on banks were much tougher than those applied to any other part of the financial system, but even those provisions were not conservative enough.

A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity. The derivatives markets grew to more than $600 trillion, with little transparency or oversight. Household debt rose to an alarming 130% of income, with a huge portion of those loans originated with little to no supervision and poor consumer protections.

Chad Crowe

The failure to modernize the financial oversight system sooner is the most important reason why this crisis was more severe than any since the Great Depression, and why it was so hard to put out the fires of the crisis. The failure to reform sooner is why the crisis caused gross domestic product to fall at an annual rate of 9% in the last quarter of 2008; why millions of Americans lost their jobs, homes, businesses and savings; why the housing market is still so far from recovery; and why our national debt has grown so significantly.

For all these reasons, President Obama asked Congress to pass tough reforms quickly, before the memory of the crisis faded. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by the president on July 21, 2010, put in place safer and more modern rules of the road for the financial industry. Yet only four years after the financial crisis began to unfold, some people seem to be suffering from amnesia about how close America came to complete financial collapse under the outdated regulatory system we had before Wall Street reform.

Remember the crisis when you hear complaints about financial reform—complaints about limits on risk-taking or requirements for transparency and disclosure. Remember the crisis when you read about the hundreds of millions of dollars now being spent on lobbyists trying to weaken or repeal financial reform. Remember the crisis when you recall the dozens of editorials and columns against reform published on the opinion pages of this newspaper over the past three years.

Are the costs of reform too high? Certainly not relative to the costs of another financial crisis. Credit is relatively inexpensive and growing across most of the U.S. financial system, although it is still tight for some borrowers. If the costs of reform were a material drag on credit growth, then loans to businesses would not have grown faster than the overall economy since the law passed and its implementation began.

Are these reforms complex? No more complex than the problems they are designed to solve. And, it should be noted, most of the length and complexity in the rules is the result of the care required to target safeguards where they are needed, not where they would have a damaging effect.

Is there some risk that these reforms will go too far with unintended consequences? That depends on the quality of judgment of regulators in the coming months as they flesh out the remaining reforms. But our system provides considerable protection against that risk, with the rules subject to long periods of public comment and analysis and with room in the law to get the balance right. The greater error would be for Congress or the regulators, under tremendous pressure from lobbyists, to once again exempt large swaths of the financial industry from rules against abuse.

These reforms are not perfect, and they will not prevent all future financial crises. But if these reforms had been in place a decade ago, then the rise in debt and leverage would have been less dangerous, consumers would not have been nearly as vulnerable to predation and abuse, and the government would have been able to limit the damage that a financial crisis could have on the broader economy. President Obama, along with Sen. Chris Dodd and Rep. Barney Frank, deserves enormous credit for pushing for tough reforms quickly.

My wife occasionally looks up from the newspaper with bewilderment while reading another story about people in the financial world or their lobbyists complaining about Wall Street reform or claiming they didn't need the Troubled Asset Relief Program. She reminds me of the panicked calls she answered for me at home late at night or early in the morning in 2008 from the then-giants of our financial system.

We cannot afford to forget the lessons of the crisis and the damage it caused to millions of Americans. Amnesia is what causes financial crises. These reforms are worth fighting to preserve.

Mr. Geithner is secretary of the U.S. Treasury.