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diggIs capitalism dead or just flat-lining?
The world financial crisis shows that a system built on greed cannot work.
It
is 79 years since the Great Depression. Some fear that this week's
chaos in the financial world means that the curtains are rising on
Great Depression II. I don’t have a crystal ball, but I’m sure
the immediate future is grim. At the very least we are in for a long
and deep recession and our medicine will be very bitter indeed.
Clearly the style of capitalism which has dominated world markets for the last 20 years or so is flatlining. The question now is whether it is worth resuscitating. The answer must be Yes – but only if we jettison the “greed is good” ideology made famous by the slimy character Gordon Gekko in the 1987 film Wall Street. That was a movie. In real life it was the philosophy of Nobel Prize-winning economist Milton Friedman.
Friedman was probably the greatest economist of the 20th century. He influenced Ronald Reagan in the US, Margaret Thatcher in the UK, Brian Mulroney in Canada, and Paul Keating in Australia and his ideas led to critical economic reform in each of their countries. These economies were made stronger by following much of Friedman’s economic rationalism.
But at the heart of Friedman’s thought was the idea that greed is good, that greed works because it drives people to succeed. The reality, as we can now see, is that greed, in its truest sense, does not work.
A deadly sin
I have no doubt that greed is the cause of the current crisis. It was the greed of those who took easy money to buy houses beyond their means and the greed of bankers who lent to people borrowing beyond their means. The depth of this depravity can be seen in the Wall Street bankers who were collecting salaries over US$100 million per year even as their banks were collapsing.
Right now, even as the dominoes fall, disciples of Friedman are still contending that the culprit is not capitalist greed but excessive government regulation. However, while poor legislation and regulation may have contributed to the subprime mortgage market crisis that sparked the conflagration, it is absurd to suggest that the solution is merely a less regulated market.
Friedmanistas claim that the US subprime mortgage crisis didn't happen in markets like Australia and the EU because their consumers are more sophisticated. Nothing could be further from the truth. Australians and Europeans are not smarter; they were protected by more stringent regulatory frameworks. If foreign banks have been dragged into the American crisis, it was mainly because they had joined the orgy on Wall Street.
Less regulation may be a good thing; but good regulation trumps it any day. How many ordinary Americans have to lose their jobs and homes before the ideology of laissez-faire capitalism is finally debunked?
Greed needs to be kept in check. Governments the world over should take the matter of bank regulation more seriously. The US’s subprime mortgage mess was created by politicians pandering to the not-unreasonable desire of Americans to own their own homes. But Congressmen who are currently skewering greedy Wall Street bankers should have protected ordinary consumers aspiring to home ownership. Their negligence points to a failure of leadership that reaches to the very top of the American political totem pole.
Tough choices
So, should governments be putting together rescue packages like the US Federal Reserve’s US$800 billion one to save the banks? Aren't these rescue packages throwing good money after bad? After all, it was bad, even unethical, business decisions that have sunk the biggest financial institutions. If only that money were available now to help the people who are losing their homes, who face unemployment and who need to feed and educate their children.
But leaving the financial institutions that created the mess to stew in their folly is not a solution.
The viability of the world’s banking system needs to be ensured. If the banking crisis gets worse and more banks go under, it will be harder for businesses, big and small, to expand. Markets -- which ultimately thrive on confidence -- will shrink. That will mean more job losses and more pain. It could bring the world to Great Depression II, complete with soup kitchens and Hoovervilles. Right now, not bailing out the banks and other financial institutions is unthinkable.
Modern day capitalism may well be wanting. But – to paraphrase Winston Churchill’s description of democracy – it is the worst economic system except for all the others. The Great Depression played a part in the rise of communism, socialism, fascism and Nazism in the 1930s. That is, I am sure, not an outcome many would want from this crisis.
Saving the financial institutions that caused this crisis is the only way to keep the world from sliding into worse turmoil. But we have to learn from this calamity. Greed is not good. We need to inoculate our children against idolising Gordon Gekko. And we need to demand that governments regulate the markets more tightly . Capitalism works; but not when it is based on every man for himself. We need to find our way to a capitalism based on values and virtue.
Alistair Nicholas lives in Beijing where he runs a consultancy firm. He has been an economic researcher, political adviser, and Australian diplomat. In his consultancy he advises international corporations on business ethics and communications in China. He is the co-author of a study on the privatisation of welfare in Australia.
I think these words of St Paul, written 2000 years ago, sound still today very relevant in the light of the economic meltdown that has seemingly gripped the whole world. At the very basis of what is happening today is the fallen human nature of man who has exchanged its Creator for a creature, namely, money. Money and the craving for it in such an inordinate manner (greed) is, in the final analysis, the cause of this deplorable situation we find ourselves in. Here are the words of the Apostle of the Gentiles:
“Tell those who are rich in this world’s goods not to be proud, and not to rely on so uncertain a thing as wealth. Let them trust in the God who provides us richly with all things for our use. Charge them to do good, to be rich in good works and generous, sharing what they have. Thus will they build a secure foundation for the future, for receiving that life which is life indeed” (The first letter of the apostle Paul to Timothy).
Hello Alan I depart somewhat from your happiness about the USA being not as regulated as say Australia or the Western Europeans. Despite the sub-prime, there are also the hedge funds and all the speculative products that are also being recalled to sender. The bill from the derivative range of product still hasn’t returned to sender. I think once it does the stock excahnge will fall big time again. It may well then be a curve that cannot rise again; the ‘cat that doesn’t bounce’.
The old green catechism had it right re: bank nationalisation notbeingcontrary to Catholic social teaching. The neo-con view hammered by some American visitors to two Popes JPII and BXVI was rejected every time. Eternal credit grant until them re: their big N-O to the Americanist heresy and its neo-liberal economics.
There is no “full blown socialism” in Australia or Western Europe. We have had twenty years of currecny deregulation, massive sell offs of public assets; mergers of trade unions thus sidelining members;and also mergers of companies thus reducing competitions, and allowing increased power to the corporates. Which is probably right up the alley of cults who have well drawn up programmes to increased their own wealth and power.
Markets are only as good as the flourishing of small and medium businesses with a lot of government say over public utilities and monopolies that are seen as for the public good.
We have a new generation that has lost the collective memory of our parents’ generation and are suffering with a race to the bottom with loss of 38 hr full time jobs, loss of monthly rostered days off for staff, overtime money and other benefits for ordinary workers being scaled back to hourly rate casual arrangements.
It is more than sub-prime. It is al those other things aforementioned, that are accelerating balance of payments crisis, foreign debt and loss of national sovereignity. Bob Santamaria got it right. What is it that many just do not get?
Michael: I’m not sure, but it sounds like we’re in substantial agreement. Anyway, yes, the US is, happily, far behind most industrialized nations in the march toward full-blown socialism. A little socialism goes a long way. The current sub-prime lending problem was not caused by banks (unless you think of Fannie & Freddie as banks), but by regulators who implemented liberal/socialistic wealth redistributionist policies by penalizing banks if they did not make large quotas of ridiculously risky loans. The banks complied with the regulators, then Fannie & Freddie bought up those risky loans, thus meeting goals that triggered obscene bonuses for the fat cats at the top (Franklin Raines, Jamie Gorelick, Penny Pritzker, Jim Johnson, et al). This was not free-market, Friedman-style but “Crony” capitalism, i.e., “greed” empowered not by freedom but by government coercion. It was not greedy capitalists but greedy politicians who caused the disaster. The “bailout” is more of the same noxious stuff, benefiting and managed by many of the original culprits. Compared to this scandalous, outrageously expensive smoke & mirror show, free-market capitalism would indeed work like real “magic.”
The charge of socialism in the American context is over the top. The use of the word ‘socialism’ is used excessively in the USA say compared to in Australia or Europe where historically the latter nations have a heritage of more government intervention in a mixed economy along with a higher proportion of key industries that relate to essentials such as telcos, electricity, water, basic banking, post offices, jails- being in public ownership.
Many financial figures and politicians in the USA cannot have it both ways. If they didn’t introduce tougher regualtions upon bankers- their responsibilities and golden handshakes and bonuses etc than that would indicate a non-learning in the face of heavy evidence and the ned for human redress. The ‘leaving it to the markets’ if repeated ad nauseam after such events as the bursting of the speculative products and sub-prime gambling bubbles and the flow on to housing and jobs in the real economy- would be an appeal to magic and to irresponsibility. This is where neo liberal economics from academia and its acceptance by big business and its poisoning of workplace and general culture has led us all.
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“Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s. Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.” —Thomas Sowell
“Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism.” —George Will
AKH
Thank you, Boombeeshark!
I was very disappointed and on the verge of disgust and depression before I happily encountered your responses. The original article and the 12 successive comments seemed to be all written from the same naive and absolutely wrong-headed liberal/socialist point of view. Thank God, capitalism is neither dead nor flat-lining, but liberalism and socialism, unfortunately for all of us, are also very much alive.
The current “world financial crisis” is certainly more the fault of socialist attempts to intervene and tinker in the markets than with capitalism, even Milton Friedman’s capitalism, which has always worked much better than any other economic system that’s ever been tried. Capitalism still works very well, thank you, if the politicians will only try to keep their arrogant, misguided, ignorant, clumsy hands off it!
Here are some comments I find apropos, of the “world financial crisis” generally, and of our American piece of it particularly.
“Lots of other places—from Britain to Australia—took a hit in 1929 but, alas, they lacked an FDR to keep it going till the end of the Thirties. That’s why in other countries they refer to it as ‘the Depression,’ but only in the U.S. is it ‘Great’.” —Mark Steyn
“The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress’ move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future.” —Walter Williams
“It’s incredible how generous you can be with other people’s money.” —Star Parker
“So, yes, our recent financial turmoil does suggest failure—a failure to truly practice capitalism and a failure to accept and believe in the value, appropriateness and morality of a limited government and maximum personal responsibility.” —Larry Elder
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Sorry, that post is incomplete.
Secondly, the whole “greed is good” chant is very misleading. I understand the correct interpretion is more along the lines that people tend to maximise their own outcomes. So, for example, people choose a lower interest loan over a high interest loan. Nothing evil in that! Another example would be selling a product that results in a high commission, rather than a product with a low commission. Is there evil in that? What about complying with government legislation when you suspect the risk profile is not quite what is should be?
An additional complication is the very cosy relationship between the banking industry and the government bodies that attempt to regulate (and advise on regulation) for the banking industry.
If this analysis is correct, do you blame the banks for avoiding confrontation with the law, employees for wanting to keep their jobs, Clinton / Democrats for wanting to provide loans to lower income families? or Republicans for thinking the Democrats implemented a “bad” scheme but not able to reverse such a scheme?
The situation is a more complex than suggested and blaming the banks for a “greed is good” attitude is naive.
I would suggest a more fundamental flaw is a lack of character in the leaders of both political parties and the banking industry in general. This character would require politicians (both sides) to recognise “bad” legislation and act accordingly (yes, tell the public they are consuming “poisoned candy") and the banking industry to be more vocal in resisting such “bad” legislation.
All this becomes more difficult with the cosy relationships that develops between the government regulators and the banking industry when everybody seems to be making plently of money.
Unfortunately this article is not up to the normal standard I would expect from MercatorNet. It is too easy to make broad generalisations about greed, without understanding some of the causes of the current crisis.
Firstly, it is my understanding the current financial crisis stems from the Clinton years with legislation to ensure a greater percentage of housing finance went to lower income families. This legislation we later changed to allow greater access of loans to low income families (I think it was George Bush I), however, George Bush II later attempted to scale back these requirements. This change by George Bush II would have potentially saved the current crisis, but the proposed legislation was opposed and defeated. Some commentators suggested George Bush II wasn’t prepared to pursue this legislation (potentially highly unpopular).
“Good” financial regulation, improved regulation, will clearly be necessary to reddress some of the problems that have contributed to the current financial crisis.
Like all human action, however, the crisis has a moral side to it as well as the technical, economic and regulatory, aspects.
Regulation will only succeed if it is accompanied by cultural change. Less greed, certainly, but that is an imponderable. It would be more positive to find ways of associating financial behaviour to the sort of constraints on economic growth that are now being brought to bear by the needs of sustainable development. Sustainable banking has always been the way of good traditional banking, rather than growth come what may. Just because the computer models make sophisticated financial trading and expansion feasible is not a sufficient reason to practice them.
Liberal warrior : one needs a cottage to have an industry in it…
Each economic crisis from the Great Depression through to the Savings and Loans Scandals in the USA, to the huge losses suffered by Westpac fifteen years ago through to the latest sub-prime- all are examples of governments not learning from history. Governments have kept deregulating the financial system.
The heritage of wealth creation and of the public assets that have been privatised obviously shows that they are a success story for governments when they were in public ownership in the first place. What is it that people now DO NOT GET?
Greed, avarice, hubris, debauchery were words I merely read
but after seeing all this financial mess we are all in it’s more comforting to think words like: contentment with what you have; living within your means; “a thankful heart is a happy heart and an easy way to start “( from Veggietales); each day is a gift..hug your spouse and children..feed the hungry and poor. Thank you God for everything!
Perhaps in answer to Dwight Lindley’s question: I remember hearing that when the government in Tanzania put a ceiling of £"x" 000’s (maybe £50 or 100,000?) on personal earnings, some forty or more years ago, the country’s economy slumped. That seems to support Milton Friedman’s tenet that there can be some good in “greed”; so long that means “financial gain as one incentive”. As Pope John Paul II pointed out, I think in “Centesimus annus”, unbridled capitalism is an evil (as is Marxism). Competition seems to be good for various things: sporting achievement; work performance...; but it needs to be combined with fraternity, solidarity. There’s also an essential truth that we’re all children of God. It’s good, indeed essential, not only to appear to think that people, and their good, matter - in order to be a good manager or “highly effective person” -; but in fact, really, to think so.
Markets are an expression of our interdependence. You go to market, buy or sell, and come back, on average, better off than you would be if you’d stayed away. Trading is a voluntary activity, which human beings are adapted to take part in. None of this means it doesn’t need regulating.
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