‘Puter’s not particularly smart. Or handsome, either, for that matter. But it seems to ‘Puter, sitting smack in the middle of this financial crisis, that America hasn’t given capitalism a chance to work yet.
Capitalism assumes that there will be swift and certain repercussions for corporate acts, both good and bad. That is, where a company performs exceptionally well, shareholders are richly rewarded. Where a company flames out, shareholders see their investments disappear. These consequences provide a self-regulating mechanism that keeps markets honest. Good businesses succeed, bad ones fail. And, perhaps most importantly, investors bear the consequences of their choices.
In the last year, we have seen the government become more and more involved in the private sector. The government claims to want to prevent some of the sharper edges of capitalism from “harming” Americans, and by extension, the world. A noble sounding cause, but one that will ultimately cause more harm to America than it prevents. The harm results from preventing capitalism from completing its cycle: destroying bad businesses (and investors) so that good ones may rise and thrive.
The Obama Administration’s intervention in the market is a misguided attempt to remove risk and its consequences from the capitalist system. But risk is the sine qua non of capitalism. Without risk, there is no downside to investors, no possibility of total loss of their investment. Thus investors are not dissuaded from making foolish investments by fear of loss. In fact, government intervention reducing natural risk encourages riskier investment, as investors know the government will make them whole. Economists call this moral hazard, and it destroys capitalism.
Preventing businesses from failing (AIG, Citigroup, Bear Stearns, etc.) only rewards incompetence and penalizes success. JPMorganChase by all accounts did a great job in running its business. Yet how is JPMorganChase supposed to fairly compete with a government subsidized Citigroup? It can’t do so, over the long haul. Americans would be justifiably outraged were European nations propping up their industries at our expense (cough, AIRBUS, cough). But here, there is little outcry when our government is picking winners and losers among our businesses.
Our extant American capitalist system has numerous mechanisms to resolve this crisis left untried. For example, allow companies to fail and work through the bankruptcy system to restructure or liquidate. This would have saved taxpayers billions of dollars it will never recover from GM and Chrysler. Shareholders also hold significant corporate powers including control over the board of directors and thereby the bylaws. Shareholders could use their powers to band together and limit executive compensation without the need for government interference. Also, regulatory agencies already have significant powers to prevent the regulated from engaging in risky business transactions. For example, government regulators could have prevented (through rulemaking) insurance companies from being involved in any manner with non-traditional investments such derivatives, credit default swaps, interest rate hedges, etc. This would have prevented AIG’s financial products unit from dragging the insurance unit down with it when the house of cards finally fell.
‘Puter understands the government’s argument that without its intervention late in the Bush Administration and continuing full throttle into the Obama Administration, there may have been a worldwide financial collapse. However, is it not also plausible that permitting the market to work itself out would have gotten us through this ungodly mess more quickly, and without the necessity of creeping nationalization of our financial sector? ‘Puter thinks our fear, willfully encouraged by both Bush and Obama, got the best of our intellect.
‘Puter’s not certain the Bush and Obama Administrations did not proceed correctly. They certainly had many rational bases for their actions. However, it seems to ‘Puter, that the Bush and Obama Administrations cannot be certain either that letting the capitalist system work would not have worked out at least as well in the long run.
We’ll never know because our government never gave capitalism a chance to work out its excess. Instead, our leaders abandoned capitalism, determining that interventionism and its accompanying moral hazard was a better course.