

The world economy

Capitalism at bay

What went wrong and, rather more importantly for the future, what did not

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Readers' comments


DP Roberts

While Finance over the past 20 years became an end unto itself, many, especially US politicians, conveniently overlook the core catalyst of this crisis. Two Government Sponsored Enterprises, Fannie and Freddie, existed outside the scope of any meaningful regulation serving the government’s stated political agenda of increasing low-income and minority home ownership since the early 1990’s. Fannie was publicly traded for nearly 30 years , yet it was the only Fortune 500 company exempt from SEC reporting requirements until it begrudgingly complied in 1999. From Clinton’s appointment of the well-intentioned (?) but hapless Andrew Cuomo to head HUD through George W’s administration, these entities survived mammoth accounting scandals and brushed aside repeated attempts at regulatory reform with congressional complicity.The cause was just - increase home ownership among the poor - but the means to accomplish it - lowering lending standards and pushing it through the system utilizing government subsidized financial institutions - proved ruinous. Worse yet, these federally funded Frankenstein monsters broke free of their creators and ran amok in the secondary mortgage market and beyond. CDS contracts, for instance, were bought to hedge against the risks posed by subprime assets bearing Fannie and Freddie’s mark. US Bank Regulators encouraged local banks to purchase Fannie’s AAA rated preferred stock.In the rush to over-regulate the capitalist free-market system, let’s not ignore the socialist interlopers that Congress has wrought.


A different perspective might reconcile these views.Whoever takes the risk should set the terms. Why not government regulation if the citizen's money is being put at risk?If an insurance company can inspect a home and compel changes to reduce their fire risk, why can't the government scrutinize a company's operations to protect the the taxpayer? Indeed, many would call anything less dereliction.But it only works if the risk can be freely hedged. So, if Wall Street wants government off their back, all they should need do is refuse the government's money, or repay it in full.At that point they should be free to look for some other place to hedge their risk, taking their chances with another "insurer". It may be a stockholder, bank, or other entity, but they will also certainly set some terms.Governments should not close off this avenue, for it is a safety valve against excessive interference.Otherwise Wall Street and the Banks should stop bemoaning their lost freedoms. The ring is very hollow. They should bless the taxpayers, and cashier the governments at full value as soon as possible. Only then can they credibly argue for "free" markets.It's also the honourable thing to do. The taxpayers have rescued their sorry backsides from the swamp, and gotten quite dirty in the process. A thank you and offer to pay for the laundering is in order.


In order for capitalism to work, one group of people must capitalize upon opportunities, assets, skills of other groups of people. By and large, the North (developed world) has enjoyed abundance and wealth at the expense of the South (developing world). Of course, the argument can (and many times has been) made that the South enjoys prosperity and "progress" that would not have been possible if not for the capitalist system of the North. I maintain that investing in social capital as well as monetary capital will help to strengthen the bonds of society, however; in a global capitalist society,Greed is the grease that operates the machine, and I don't think the world will ever run out of that.


Further Swiss Reader's comments, I believe the Financial Services market has never been and will never be a Free Market. There are too many barriers to entry and the buyer's informational power is so small that it can never be so. What it has become is a way of some wealthy people to take one way bets.Now we can recreate this situation in the future or we could try and redress this. For me, the main problem is that we allow private corporations to indulge in Fractional Reserve Lending. Suppose this was disallowed, could we still make a financial services marketplace that was reasonably efficient? I believe we can.

Swiss Reader

The system which has led to the current crisis is not really capitalism at all. Capitalism means that the owners make decisions, get the rewards and carry the risks. In reality, the rewards are being appropriated by the managers, while the poor shareholders are left with the risks. Quite predictably and according to economic theory, this has led to massive misallocation of capital, viz. to bubbles, and now to the actual crisis.Any long-term solution will have to include a strenghtening of shareholders' rights. Before discussing capitalisms' failings, let's introduce proper capitalism first!


The arguments of capitalism vs. socialism boils down to self-interest vs. altruism. Neither one of these concepts by itself is a good model for a society. A purely altruistic society would lead to apathy and resentment because you cannot force someone to be altruistic. On the other hand, a purely selfish society would quickly degenerate into chaos and would tear itself apart.

A truly wise person can see that ultimatley self-interest and altruism have a point where they are in harmony, much like the point where the supply and demand curves meet. A smart capitalist can see that it is in his/her personal interest to help the poor. That is because a person in poverty is a drain on society and may well turn to crime out of necessity or animosity due to his condition. But if that same person can be helped to reach their natural potential, then that benefits everyone. He can now be a much better consumer and producer for society. The man that once may have mugged you can now become a doctor and potentially save your life. Education and hope are the keys.

The question then becomes, not whether we should help those less fortunate, but what is the best way to achieve our goal. So the debate should not be a dogmatic fight between ideologies, but a scientific problem for political scientists and economists. Even the grandfather of capitalism, Adam Smith, pointed out that government intervention can be a good thing when the intention is to help those in need and the methods are carefully considered. Those capitalists who argue for purity with religious zeal are very misguided. Government regulation and intervention will always be neccessary, but it is a tool that should be used sparingly and only when it is actually effective.

Travis B.

It is easy for the skeptical to sum up this article simply. Save us in the bad times and get off our backs in the good times. However, I agree with this newspaper that it is not that simple. Finance needs to be regulated as the article suggests. In this decade finance became a being in and of itself with money being gobbled up in it rather than flowing through it. This is inherently an unsustainable cycle because you eventually run out of greater fools. Worse when that happens all the lesser fools realize what they are and run for the hills.

Finance's real role in capitalism is to lower the transaction costs of transferring capital and having markets that direct capital. In this decade finance did the former by obscuring the latter. Regulators (Fed Reserve exempted)had their powers diluted by politicians at the behest of Wall Street. The regulator's advantage to counter the private sector's advantages of money and talent is that their word is final. Wall Street took their arguments to politicians when they lost with the regulators and the regulators and regulations were declawed. The Fed Reserve is unique because it is seen to be on par or in excess of Wall Street talent wise. Unfortuantely it turned out to be just on par and Wall Street and the Fed made the same mistakes.

For capitalism to work, capital needs to flow to those who can turn it into something productive such as software, a engine or a new drug. The problem with the last decade is capital was not flowing to these people, but rather to tinkers on Wall Street who sliced up capital and debt and convinced a greater fool they had added value when it turns out they had not even really transferred risk much less actually added value. This made the smartest of them very rich while doing nothing to enrich everyone else. Unlike productive companies that use capital to create something more valuable than the capital behind it and truly grow the economy.

That is the capitalism that has enhanced the world. By opening up the world markets we found that many countires had things to offer (natural resources, cheap labor, lax environmental regulations, agriculture) that would provide a greater real return on capital.

We don't need to protect capitalism, but return to it.

Crashes happen because people put to much money in things that don't create real value. Internet companies with no idea of how they are going to make money. Real estate that is really just the same land it was yesterday out in the exhurbs. Financial products that are nothing, but paper that no one understands. The backlash will be greatest on Wall Street because that is where the "fraud" is. People could see that internet companies weren't making money, but invested anyways. People could see that a $40,000 a year worker could not afford a $400k house, but loaned him the money anyway. What people could not see because it was hidden by Wall Street was the inherent bubble in all those financial products. That bubble being that the bets they were making are so big that they can't be called in.

A return to capitalism is an easy sell where the fight is showing how this past decade was a distortion of capitalism and instilling confidence in people that the distortion will be prevented in the future.

world citizen

I am a capitalist and a student. Capitalism is only one of many economic solutions garnered over the history of civilization. It has generated the most growth and innovation, but has forgotten the masses and left many in it's wake. Kondiev cycles imply the economic paradigms last around 500 years. Capitalism's current cycle is at an end. Will it be destroyed and replaced? Hardly, communism tried that and failed miserably. Socialism has focused on some issues left aside by capitalism but most socialist countries have high national debt and unemployment rates.
Capitalism in its current form is in its last throes. Something will replace it. My current doctoral work is precisely in that area.
Capitalism is an efficient form of motivating masses of capital, but it is not adecuate for controlling extremes. These extremes include avarice (greedy bankers), sloth (lazy workers), ignorance (global educational levels are still wanting) and jealousy (why can't we have what they have!!!).
A new system should include freedom to grow and make mistakes but guidelines for reducing risks. Education must be at the forefront because innovation is what has elongated capitalism's current reign, and innovation is what has kept man around for so long.
Any new system must give basic human dignity to the most impoverished with food and education so that they do not remain pariahs. We as a people have ignored the plight of others. We, humanity, are self-centered which is why capitalism is such a success. When humanity learns to look outside the self, we will accept a system that will be an evolution of current thinking.
Humanity is turning a corner, I hope we choose well, our future depends on it.

omar Ibrahim

....fails re equitability and fair reward of honest labour.
If more money is the ultimate objective then YES capitalism is a better manufacturer of money if the well being of man is the ultimate objective then capitalism certainly IS NOT the better system!


This is actually a great work by The Economist. Brave defense of the blameless side of liberalism and good insights on what went wrong. I agree it still needs a deeper analysis of the real economy. Maybe a historical perspective from Bretton Woods, going through the oil crisis in the 1970s and the need, perhaps, for a new Bretton Woods.

Jimmy Gatts

It is not surprising that The Economist wants to see the current crisis as a "bump on the road" to "free market" solutions that will include education and health-care (who doesn't want to see the lobbyists of the health-care industry have a crack at that one ?).
This is hardly surprising from The Economist who after the debacle that were the stewardship of the presidency by the Republican Party for the last 8 years wants to put another republican for the next 4 years.
For those of you who do not have the time to read The Economist's articles on the financial crisis and the race to the White House , here is a summary : SHit Happens. Stay the Course.


well, go right ahead and fight or capitalism. Who is stopping yo?

Your trouble is that too many folks have been given a brutal lesson in what unregulated capitalism means:you lose a lifetime's savings bfore losing your job and house.

So people will regulate to stop that happening. Not for the sake of socialism or Marx but for their own survival.

And one fine morning, they will wake up and realise that hey are living in .....socialism !1

Ta ta

omar Ibrahim

A disappointing, but NOT atypical, stand by the Economist.
Capitalism has survived and, hither to prevailed, because it deprived its competitor(s) from oxygen....by dragging them into a , terrestial and extraterrestrial,arms race and outspending them to capitulation; NOT because it gave a greater number of people a better life.
The success of capitalism is normally gauged by the ratio of its growth in GDP and GNP and never by the ratio of those who overcame abject or gentle pauverty and want.
In the sense of HOW MUCH MORE MONEY WAS MADE not TO WHOM and not BY WHOM capitalism definitely prevails re efficiency and certainly


You do make some interesting points. However, one of your first (and your key argument, I reckon) is that capitalism (laissez-faire) ought to be MANAGED better. Isn�t that a direct hit towards Smith's and Ricardian theory?


you do not mention or acknowledge that Smith's individual "selfish" spirit, so praised by you in so many occasions, does not care about the public good, and even less about equality between humans.

The Economystic

OK, you say we must fight for capitalism, then we must fight. But fight must be organized.

Could you, please, provide us with the name of the new Che ?


I think that capitalism will never die. It could be changed , his ancient mechanisms could be oiled , but no political leader or financier is serious about killing it.Someone has dragged "star trek" into the comment. Probably only in such a scenario it could be possible that world works different.But it's only a great science-fiction series or the World's farthest future.


This magazine should be called the populist or the marginalist! You have supported politicians and arguments that skewer capitalism. Obama and his Congress alies are going to push back free market principles to what we had 70 years ago.

Thank goodness we have the Wall Street Journal left. The only publication that really understands the need to advocate free market thinking.


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