Whither Capitalism?
As money flows from government coffers to corporate bank accounts, regular individuals still face the economic crisis’ ever-tightening grip. Layoffs, reduced wages, and personal bankruptcies have become common. Corporate welfare has reached its pinnacle as governments around the world ignore public concerns, and instead focus on subsidizing financial institutions and large car companies. Deranged economists, with their misunderstanding of Keynes, support the propping up of inefficient businesses. And no one appears to be infuriated about the fact that taxpayers are bearing the burden; we regular guys are effectively letting Wall Street fat cats have their cake and eat it too. Has this columnist gone mad, or have we stepped back towards oligarchy?
It is the conventional wisdom now to claim that governments should pump money into the financial system to keep the juices of credit flowing voluptuously from Wall Street to Main Street. The irony is that financiers, and governments to some extent, are responsible for this entire mess. This massive wealth transferal from taxpayers to the wealthy is foolish, wasteful, and potentially disastrous.
Supporters of the conventional wisdom will no doubt have their qualms with this view, yet like all adherents to dogma their opinions are predictable. They argue that since we are facing a liquidity crisis, not bailing out businesses will lead to an even worse recession than we are currently facing. This argument assumes that subsidizing financial institutions is the only thing that can be done to prevent economic collapse. While it is true that doing nothing may cause Financial Armageddon, it is certainly not true that funding inefficient companies will prevent one.
The claim that we are in the midst of a liquidity crisis is a claim without substantial evidence. If one follows data for U.S. loans per month to businesses and consumers, for example, one sees that the amount of loans has been increasing over the past decade, and that the recent economic downturn only caused a mild reduction in lending, as is to be expected with any recession. Those who stand by the view that this is a liquidity crisis would topple over if they saw the data. The true nature of the financial crisis is yet to be fully understood.
Secondly, the cry to regulate is running through the air like crazed hyenas on ecstasy. It manifests in the form of mindless chatter from clueless pundits who know nothing about financial history: if one puts regulations in place, they may not stay in place. This fate befell the Glass-Steagall Act, which created legal barriers between investment banks and commercial banks as a response to the 1929 stock market crash. Yet financiers found loopholes in the legislation, and from 1987 onwards, the Act was gradually eased with the result that in 1997, Bankers Trust became the first U.S. bank to acquire a securities firm. Regulation is as flimsy as the paper it is written on.
The shocking thing about the Glass-Steagall Act’s demise is that government was complicit with deregulation. Ronald Reagan tore down the walls of regulation, and encouraged others in his administration to do the same. The Federal Reserve was swept up in the euphoria and in 1987, against Chairman Paul Volker’s wishes, voted to ease the Act’s regulations. Indeed, the later Gramm-Leach-Bliley Act repealed much of the Glass-Steagall Act, opening the gates to financial madness.
Financial institutions, car companies, and other huge corporations are never going act prudently and follow regulations if governments cater to corporate fancies. The term “moral hazard” describes scenarios in which parties protected from risk behave differently than they would behave if they were completely exposed to risk. Businessmen like to see themselves as risk-lovers, but what risk is present if governments bail businesses out of their mistakes? Thus companies act erratically, with the confidence that if they mess up, the government will save them.
That leaves us with the question of what is to be done. There is no doubt that governments must do something. We have already established that subsidizing financial institutions is not the answer. The real solution, clearly, is pure Keynesianism, not the adulterated kind economists of the conventional persuasion are addicted to today. That means government spending in infrastructure and social security: bailing out individuals, not the banks.
Infrastructure spending offers nations the opportunity to put unemployed men and women back to work, proudly contributing to the strength of a country’s long-term economic well-being. One need only walk down a city street to discover that while people may hold much private wealth, our public wealth is nonexistent; it is no use owning a Lexus if roads and parking spaces are sparse and in poor condition. The public needs roads to transport goods, schools to educate future scientists and doctors, and a strong police force to enforce law and order. The economic crisis therefore offers government the opportunity to build public wealth, which will support the long-term health of the economy.
Instead of using a few trillion dollars to rescue corporations, it is more viable to rescue individuals. Governments should thus ensure that social security is able to weather the storm. Unemployment insurance and job assistance programs must be improved. The U.S. government could also expand Medicaid, ensuring that every poor American is fully covered, not just forty percent of them – and there are going to be many more poor Americans if this recession continues on.
Recent events convey hope. President Obama recently criticized Wall Street bankers for giving themselves $18.4 billion in bonuses in 2008. Obama and Treasury Secretary Geithner’s economic plan involves investments in schools, alternative energy, and healthcare. Obama has also ordered the creation of a website, recovery.gov, so that the public may track government spending. It appears that he understands what the economy is truly composed of: people. Not cold financial intermediaries.
Conventional thinkers miss this: economic science recognizes people at the cusp of all economic action. It recognizes that if you do not punish firms for making poor decisions, then they will simply repeat their mistakes while taking taxpayer money. It acknowledges that while a well-functioning financial sector is important to the economy, finance is not the economy. People are at the heart the economy, for without people there would be no economy to speak of. One need not be an economist to recognize that bailing out individuals is more economically reasonable than bailing out the banks, even if it does leave a few Wall Street tycoons with less money in their wallets.
From 1929-1933, the United States was experiencing extreme horrors of The Great Depression. The conventional view at the time was that government should concentrate on balancing the budget, not spending to save the economy. It was only when the depression became unbearable that the conventional wisdom lost its appeal, and economists realized that deficit spending was necessary to save millions of lives from poverty. We find ourselves in a similar predicament today. Let us hope it does not take long for us to realize that the conventional wisdom is dead wrong.