Wednesday, January 28, 2009

Don't blame capitalism for the credit crunch

The number of writers and pundits, and politicians who blame "extreme-capitalism" and "greed" for the credit crisis is astonishing. And it follows that their remedy for the crisis must be less capitalism. This means less economic freedom, more taxes, more regulation and in many cases, nationalising huge industries.

Gordon Brown, Kevin Rudd, Sarkozy and Obama have all used these words. Alan Greenspan said he was surprised by the investment banks "failure to self-regulate". Krugman, Stiglitz and other Keynesians are blaming lack of regulation and unhampered free markets.

Last night, I read the opening chapter to Milton Friedman's "Free to Choose", which presebted a defebce of self-regulation and the pursuit of self-interest with one simple and elegant statement :
"self-interest does not mean myopic selfishness".

Politicians seem to blame mistakes, errors and risk taking as being something unique to capitalism. But this couldn't be further from the truth. Under capitalism, you suffer the consequences for making mistakes and errors. And you get rewarded for responding to market conditions quickly and dynamically, and changing your plans as soon as the business landscape changes.

In fact, with a proper framework, one would conclude that politicians and regulators are much more guilty of short term selfishness and mistakes than the entrepreneurs and industrialists who are captains of industry. Looking at the past 12 years, it is beyond any doubt that governments screwed up badly and created this mess.

Now you have more than a few businesses that lost spectacular amounts of investor's money by taking risks or failing to disclose their details- Madoff, Merrill Lynch, General Motors, Bank of America, Bear Sterns and more.

But so what ? Under capitalism, these businesses and their shareholders would be liquidated as punishment for their errors. The crisis would be short and sharp. What happens if government steps in, or if government was already the owner and guarantor of the business (such as Fannie Mae) ?

The losses are passed on to the taxpayer, and future generations of tax payers. And that is what we have seen with trilion dollar bailouts.

Given the global government interventions and ongoing bail-outs of the banks, it would be safe to rename Wall Street to the Federal Department of Wall Street.

In this point in history, the remedy for the crisis is surely going to be more painful and hazardous than the actual problems itself.

Every central banker - Bernanke, Paulson, Trichet, Mervyn King, Glenn Stevens - all prescribe monetary stimulus as a remedy. We also see every single treasurer fall into line, and prescribe fiscal stimulus.

Mike Shedlock aptly describes this resurrection of failed theories as the Fiscal Insanity Virus.

The British economy has a higher level of government spending and control than some of the former Soviet states did at the fall of communism.

And all these central banks that keep inflating the supply of money which creates the boom-bust cycle - since when is that part of the free market ? In fact central banks are one of the main platforms of the communist manifesto !

I say that the mainstream is entirely deluded if they think free markets caused the crash.