Tuesday, December 30, 2008

Capitalism Under Fire?

In this portion of the economic cycle, we typically see all sorts of causes and reasons for fault. This time, its no different...

We've seen "the fall of the U.S." theories...

As if Things Weren't Bad Enough, Russian Professor Predicts End of U.S.

Its an interesting theory, but pretty light on the substance. This guy fails to take into consideration the actual climate in America.

And of course "the death of free-market capitalism" calls...

Laissez-Faire Capitalism Should Be as Dead as Soviet Communism

Again, awfully light on substance. Its so easily to rip on free-market capitalism during recessions, but people often forget about the wealth created by capitalism which probably is the reason the writer had a job to begin with. Some like to have it both ways. Its easy to tear down a system when its vulnerable, but it isn't really the system, but rather those manipulating it. We don't really have free-market capitalism, but rather a government that works for special interests.

Here's a good opinion piece that digs through this argument, and makes some valid points:

Capitalism Is Worst System Except for the Rest

Here are some important quotes from this piece:

Before you can declare free markets a failure, you have to establish that they exist, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago.

“We do not have free markets in credit in the U.S. or anywhere else that I know of,” he says. “The price of short- term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit” at the precise level that a free market would.

All sorts of unintended consequences flow forth from central bankers’ fixing of a short-term rate. Hold the rate too low, and it leads to a misallocation of capital into, say, housing or dot- com stocks. That’s what happened in the late 1990s and again in the early part of this decade.

“We are now experiencing the economic and financial market fallout from (Alan) Greenspan’s interference with the free market,” Kasriel says.

One supposed nail in capitalism’s coffin is the assertion that deregulation created the problems. This is curious, given that banks, which are at the root of the credit crunch, are among the most highly regulated institutions.

“There is a small army of people overseeing the banking industry,” says Paul DeRosa, a partner at Mt. Lucas Management Corp. in New York. And yet “we’ve had a banking crisis every 15 years since 1837. The number of people devoted to regulation doesn’t seem to matter.”

Regulators from the Federal Reserve, Securities and Exchange Commission, Office of the Controller of the Currency and New York State Banking Commission are “on the premises 365 days a year,” he says.

The regulatory structure may have been antiquated and overlapping. That’s no excuse for the regulators to be caught napping.

Censuring the free market is a way of deflecting blame from the true source, according to Dan Mitchell, senior fellow at the libertarian Cato Institute in Washington.

“The genesis of the problem is bad government policy,” Mitchell says, pointing to everything from easy money to “affordable lending schemes” to the “corrupt system of subsidies from Fannie Mae and Freddie Mac” to the tax code’s favorable treatment of debt (the interest is deductible) versus equity.

Fannie’s and Freddie’s generous campaign contributions (anywhere else, these would be called bribes) encouraged Congress to look the other way as the two housing finance agencies used their implicit government guarantee to increase their leverage and buy riskier mortgages.


To me, this is an important piece of the puzzle. Clearly there were some major mistakes made, and they will change the landscape of the financial industry forever, but lets think twice before we declare capitalism dead.

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