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Investing and Economics Blog

Not Understanding Capitalism

The day the dream of global free- market capitalism died

The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart below). This is moral hazard made visible. The Fed decided that a money market “strike” against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable.

The intellectually depravity of such claims were obvious well before. Two problems make that truth less important. First, few actually believe in intellectual rigor any longer. Second, huge payments to politicians from those wishing to receive special favors from the government work (not very surprisingly). So given the lack of intellect and the alternative of just rewarding those that pay you huge sums of money it is no surprise politicians turned against capitalism and instead gave favors to a few that paid them well.

Maybe the latest huge bailout will change how things are done. I doubt it. New rules will be put in place. Plenty of people will pay politicians plenty of money to assure their methods of subverting the intent of those rules are allowed to continue. To change things you would need to vastly improve the intellectual rigor of decision making. That is unlikely, but if it happens it will be plenty obvious from how debate is carried out.

It is not that difficult to understand. Poor policy is effectively tax on the system. There is a tax on China’s economic well being to pay for the level of corruption they have. There is a tax on the USA economy to pay for the favors granted those that pay politicians a great deal of money. There is a tax on India for the missed opportunity to educate millions of children well. Each country gets to chose what burdens it chooses to carry. And those burdens simply reduce the overall economic wealth available to be distributed to the participants in the economy.

The most likely source for good moves in the right direction are a few well intentioned, knowledgeable and powerful people that truly value the rewards of capitalism to society. They may then establish measures that make it more difficult to subvert the economy for person gain. Yes today those actions are less likely to be direct transfers of wealth from one person to another (say in the form of extortion) which is why some intellect is required to examine the issues. Unfortunately the intellect of the powerful players in these decisions is often quite lacking.

When the current crisis is seen as some isolated problem created by investment banks that is evidence that the “solution” is lacking. It is treating the current symptom of failed leadership and thinking that fixes something. First, even the “band-aid solution” that will be adopted will likely be amazingly easy for the investment banks to get around in no time. Second, the behavior of the investment banks is not the root cause of this problem. The limited understanding of capitalism will continue to result in poorly managed systems. And so long as the public chooses to elect people that are more concerned with pleasing donors than leading a country these instances will repeat over and over. Exactly which private interests are rewarded while the whole is harmed will change but otherwise the process will just repeat over and over.

There is one difference for the USA today than from 1950-2000. Other countries are making themselves more and more capable of supporting and gaining the advantages of capitalism. And therefore I think the consequences of poor decisions have the potential to cause more serious problems.

Related: Estate Tax Repeal (Killing Capitalism) – Why Pay Taxes or be Honest – Mania in Financial Markets – Private Equity Finds Paying Politicians Cheaper Than Paying Taxes – Fed Continues Wall Street Welfare – More Government Waste – China and the Sugar Industry Tax Consumers

March 31st, 2008 John Hunter | 6 Comments | Tags: Economics, Financial Literacy

Comments

6 Comments so far

  1. Monopolies and Oligopolies do not a Free Market Make at Curious Cat Investing and Economics Blog on June 19, 2008 8:49 pm

    The government role was to assure that the market stayed very close to perfect competition (though obviously perfect was a high goal)….

  2. Looking at the Chicago School of Economics at Curious Cat Investing and Economics Blog on December 26, 2008 12:58 pm

    […] system for economic development. Unfortunately, as I have written before, too many decision makers don’t have the slightest clue about economics. They accept simplistic views just like scientifically illiterate people accept simplistic claims […]

  3. Myths About Adam Smith Ideas v. His Ideas at Curious Cat Investing and Economics Blog on January 23, 2009 2:43 pm

    “The notion that Smith had a ‘theory’ of ‘an invisible hand’ leading all players in markets to act in pursuit of their self-interests and raise annual output and annual employment is a myth…”

  4. Buying Favors from Congress at Curious Cat Investing and Economics Blog on April 13, 2009 12:59 pm

    It is no surprise that paying politicians lot of money gets you favors: Politicians Change rules for Big Donors…

  5. Curious Cat Management Blog: Why Congress Won’t Investigate Wall Street on April 30, 2009 10:23 pm

    The economy declined 6.3% in the fourth quarter of last year and 6.1% in the first quarter of 2009. And we have paid several hundred billion to bail out bankers…

  6. Manufacturing Driving USA Recovery at Curious Cat Investing and Economics Blog on February 23, 2010 9:21 am

    […] been averted in the short term. But the failure to take seriously the huge risks failed policies (bought by special interests from politicians) put our economy in leaves us at great risk for future problems. The ability to avert disaster so […]

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