As City Journal went to press, the Wall Street super-storm had obliterated much of the modern financial-services industry, shut down global credit, and driven investors from markets in a Depression-era-like panic, with government officials promising trillions in loans and spending to try to quell the fear. In fact, we delayed the issue—the first time we’ve done so since our post–September 11 issue seven years ago—to expand coverage of the crisis.

Forgoing arcane debates over the role of “mark-to-market” accounting and credit-default swaps in the crisis, our lead story, “Storm-Proofing the Economy,” looks to the big picture. Nicole Gelinas—who had previously warned in our pages that Wall Street’s profit model was perilously flimsy—explains what caused the financial disaster and what regulators must do to ensure that it doesn’t happen again. Policymakers, she shows, failed to understand the degree to which a new “shadow” banking system had eclipsed the carefully regulated banking system of old. The next president and Congress must devise and implement regulations that will make this shadow realm more transparent—and allow the kind of big, complex financial firms that emerged within it to fail without harming the rest of the economy, much as the FDIC lets commercial banks fail in an orderly fashion. Gelinas’s brilliant essay shows how America can begin to rebuild its shattered financial sector.

The disaster will have a particularly sobering effect on City Journal’s drunk-spending, heavy-taxing home state, argues E. J. McMahon in “New York State’s Fiscal Reckoning,” the second part of our cover package. Addicted to massive tax revenues from a Wall Street that now no longer stands, the Empire State faces a rough withdrawal. In the short term, it will require unprecedented spending restraint and budgetary triage. Over the long haul, New York will need something more radical still: the permanent shrinking of its bloated, prosperity-draining public sector.

Many observers, especially in Europe, have described the Wall Street devastation as the end of Anglo-American capitalism and U.S. global leadership. Marx is back—or at least European social democracy. Not so, says Guy Sorman in “America at Work,” which concludes our package. The U.S. economy, thanks to its democratic principles, cultural openness, and remarkable creativity (nowhere more evident than in the revolutionary new biochemical science that Peter Huber describes in “Curing Diversity”) will continue to lead the world, Sorman argues—as it has since 1820, a decade before Alexis de Tocqueville first arrived in America seeking the meaning of democratic modernity.

Even as the financial crisis deepened, the presidential race roiled America. The Democratic candidate, Barack Obama, joined by the U.S. Conference of Mayors and by many liberal editorial pages, has called for vast new government spending on public schools, crime prevention, job training, and community organizing to heal ailing U.S. cities. In “We Don’t Need Another War on Poverty,” senior editor Steven Malanga shows how potentially destructive such “tin-cup urbanism” could be. Far from forward-looking, it reanimates the stale notion that cities are feeble victims of Washington neglect—this after hundreds of billions of federal dollars have been spent on struggling cities over the past decades, with little good to show for it.

A far better approach, says Malanga, would take inspiration from reform mayors like Rudolph Giuliani in New York and John Norquist in Milwaukee, who in the nineties rejected the old nostrums and began coming up with their own homegrown solutions to city problems—innovations that slashed crime and welfare rolls, gave kids in rotten schools more options, and in general showed that cities can master their own futures. The feds can still help cities, in Malanga’s view, but in ways that encourage urban empowerment instead of victimization. Thus, a new urban agenda: work to reintegrate ex-cons, spread the successful crime-fighting methods of the NYPD, push for proven school curricula and greater school choice, grow the market supply of affordable housing, and improve the nation’s decaying transportation infrastructure. In an uncertain and worried time, it’s an invigorating dose of common sense—an invocation of American can-do spirit.

—Brian C. Anderson


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