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.