In his latest report for STRATFOR, George Friedman convincingly argues that every economic crisis is political in its nature, and that solutions for it are political as well. What we see taking place in the U.S. Congress right now - the debate, etc. - is all political; those who supported the bailout tended to believe that the federal government would be able to control the current crisis, and believed that it was not too late to take action.

There is a first group that argues the current financial crisis already has outstripped available social resources, so that there is no market or state solution. This group asserts that the imbalances created in the financial markets are so vast that the market solution must consist of an extended period of depression. Any attempt by the state to appropriate social resources to solve the financial imbalance not only will be ineffective, it will prolong the crisis even further, although perhaps buying some minor alleviation up front. The thinking goes that the financial crisis has been building for years and the economy can no longer be protected from it, and that therefore an extended period of discipline and austerity — beginning with severe economic dislocations — is inevitable…

A second group argues that the financial crisis has not outstripped the ability of society — organized by the state — to manage, but that it has outstripped the market’s ability to manage it. The financial markets have been the problem, according to this view, and have created a massive liquidity crisis. The economy — as distinct from the financial markets — is relatively sound, but if the liquidity crisis is left unsolved, it will begin to affect the economy as a whole. Since the financial markets are unable to solve the problem in a time frame that will not dramatically affect the economy, the state must mobilize resources to impose a solution on the financial markets, introducing liquidity as the preface to any further solutions… This is the view of the Bush administration, the congressional leadership, the Federal Reserve Board and most economic leaders.

There is a third group that argues that the state mobilization of resources to save the financial system is in fact an attempt to save financial institutions, including many of those whose imprudence and avarice caused the current crisis. This group divides in two. The first subgroup agrees the current financial crisis could have profound economic consequences, but believes a solution exists that would bring liquidity to the financial markets without rescuing the culpable. The second subgroup argues that the threat to the economic system is overblown, and that the financial crisis will correct itself without major state intervention but with some limited implementation of new regulations.

I am not sure whether the second group is described perfectly, but the groups are described pretty well. As most of you will know, I supported the ‘bailout plan.’ Having said that, I do not believe that the market will not be able to overcome the current crisis. Of course it will be able to deal with it; it’s just that millions of lives will be destroyed if the government doesn’t help the market deal with this problem. The market can deal with it, but against a terrible price.

But the key issue is this: Are the resources of the United States sufficient to redefine financial markets in such a way as to manage the outcome of this crisis, or has the crisis become so large that even the resources of a $14 trillion economy mobilized by the state can’t do the job? If the latter is true, then all other discussions are irrelevant. Events will take their course, and nothing can be done. But if that is not true, that means that politics defines the crisis, as it has other crisis. In that case, the federal government can marshal the resources needed to redefine the markets and the key decision-makers are not on Wall Street, but in Washington. Thus, when the chips are down, the state trumps the markets.

All of this may not be desirable, efficient or wise, but as an empirical fact, it is the way American society works and has worked for a long time. We are seeing a case study in it — including the possibility the state will refuse to act, creating an interesting and profound situation. This would allow the market alone to define the outcome of the crisis. This has not been allowed in extreme crises in 75 years, and we suspect this tradition of intervention will not be broken now. The federal government will act in due course, and an institutional resolution taking power from the Treasury and placing it in the equivalent of the RTC will emerge. The question is how much time remains before massive damage is done to the economy.

Friedman is probably correct when he says that it is unlikely that society will support not doing anything. The same goes for politicians, of course. The impact of the crisis, if  not controlled by the government, will be gigantic. American society made the decision decades ago not to let that happen (again).

Then again, the ideological or political battle taking place in Congress and outside of it is very real indeed. What you can see is a difference in approach to government. Some more pragmatic, some more ideological. Some relying on the government to help society deal with the most serious problems, others relying on the market to deal with those problems, and again others who want to protect ‘Main Street’ but not Wall Street (as if the two can be separated that easily).