Fall of Capitalism?

Looking at the current economic system in America, we are not a true capitalism, just like we are not a true democracy. There are already tons of regulations and a lot of market intervention that is driven by the Keynesians. Sadly, many people fail to see this and blame capitalism for the problems, when in reality we have a lot of policies that contradict and hurt the capitalist system. These people are calling for more intervention and bailouts, which moves the nation even further away from capitalism. I think there will be a time when people realize that market intervention is generally not a good idea and hopefully the nation will be able to make a push back towards true capitalism.

I don't really see us moving to far away from it. The free market system we currently employ has seen great growth and a good increase in average quality of life.

I don't see a problem with regulations on the current market. They are usually in place to either protect the population or protect the free market from unfair business practices. The more capitalist systems of past years saw horrid offenses on both grounds.

The Government bailouts were a little bit of a stray from the usual path, but I don't see any other way to do it. We let the bubble form and should have put in stricter regulations on debt leveraging and credit default swaps. Coulda, woulda, shoulda...

The Parakeet said:

I don't really see us moving to far away from it. The free market system we currently employ has seen great growth and a good increase in average quality of life.

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This "free market system" is not really a free market system and we are moving even further away from a free market with this government intervention. As for the growth and rise in quality of life, a lot of that was due to the formation of bubbles and artificial growth, which were caused by government intervention in the markets, particularly the dangerously low rates of Alan Greenspan. Those bubbles have obviously turned out to be very bad for our long term economic condition and more intervention will only do the same. The Fed only distorts the market and creates bubbles.

The Parakeet said:

I don't see a problem with regulations on the current market. They are usually in place to either protect the population or protect the free market from unfair business practices. The more capitalist systems of past years saw horrid offenses on both grounds.

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These regulations have only hurt growth, the only reason we were still experiencing growth was because it was artificial. To protect for unfair business practices, we need a better system for catching fraud and unlawful behavior, not more regulation. As for the comment on the capitalist systems, just look at Hong Kong, a city that many economists consider the most capitalist in the world- it has been doing great because of the lack of excessive regulations.

The Parakeet said:

The Government bailouts were a little bit of a stray from the usual path, but I don't see any other way to do it. We let the bubble form and should have put in stricter regulations on debt leveraging and credit default swaps. Coulda, woulda, shoulda...

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The bubble was formed because of market intervention as I stated above. The bubble formed, not because we didn't have regulations, but because Alan Greenspan's policies as well as the excessive size of Fannie and Freddie. Fannie and Freddie should have been privatized like Sallie Mae was a while back and we would never have seen this sort of collapse in the housing market, which is now hurting other markets and the whole economy. With Fannie and Freddie the banks that borrowed through them knew that they would be backed even if their risky loans failed and hence, it took away the risk factor. Banks are businesses and they will do what's best for business- knowing that you will be backed even if you make a bad decision with a possibly high reward is the best type of decision you can make. You can't blame the banks for making those poor loans, it is really government policy and big government that was behind it.

Bubbles are an inevitably. It's just human nature to throw money toward whatever everyone else is throwing their money toward. Greenspan really should have reeled in the money supply a bit though. He's definitely lost his god-like status amongst the economic circles because of his decisions. His defense was that he never believed the banks would destroy their own industry. Game theorists are still laughing .

Could you give me more information on what you see as regulations. That's a little too board of a term to really debate anything. Some regulations are obviously good and the government needs to be willing to bust up things like monopolies and price collusion instances. That protects the free market.

We would have had a glut in the housing market anyway though. It was only natural. The tech bubble burst but didn't really crush anything in the financial district. They all decided that mortgage-backed securities were the next big thing. The biggest problem was just that too much private money was being invested, the packages were unregulated (and therefore secret), and that credit default swaps made the market seem fail-safe. I don't think shrinking one bank would have done much to help it. It's was a huge issue that just about every bank had a hand on.

They also aren't exactly being rewarded. Bonuses are down 40% and they'll be almost nonexistent for next year. I don't believe any of the banks just walked away from it. Most of them have lost their status as investment banks. I think it was Citigroup that was freaking out because it could no longer handle the financing for mergers. It lost a huge source of what was effectively free money. The others are going to be facing much stricter restrictions on their dealings and debt in the future. The only thing that happened was that their business was saved and they still have a job. We only did that because the whole sector was on the verge of collapse (which would have wrecked tons of other businesses after they lost their lines of credit).

The Parakeet said:

Bubbles are an inevitably. It's just human nature to throw money toward whatever everyone else is throwing their money toward. Greenspan really should have reeled in the money supply a bit though. He's definitely lost his god-like status amongst the economic circles because of his decisions. His defense was that he never believed the banks would destroy their own industry. Game theorists are still laughing .

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The problem is not with people throwing money where others throwing it. The problem is that by setting the interest rate, the Fed encourages/discourages lending, which essentially distorts the markets. When you encourage too much lending with low rates like Greenspan, you have bubbles because people lend more, which leads to growth, even though the growth may not be sustainable in the long run. An interest rate that is set by banks competing with each other is the most sustainable and stable. A market-set rate would also protect us from the government accidentally stunting growth, when interest rates are set too high.

The Parakeet said:

Could you give me more information on what you see as regulations. That's a little too board of a term to really debate anything. Some regulations are obviously good and the government needs to be willing to bust up things like monopolies and price collusion instances. That protects the free market.

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By regulations I mean things like government intervention into the private sector and telling companies how to run their business or forcing them to do certain things. Some regulations are ok and necessary in the interest of health, but we have way too many regulations in the current market. Part of the problem is that people confuse regulations with oversight, which is checking for fraud.

As for monopolies, the government does not need to interfere because if there is a monopoly that simply means that the consumers really like that company and its product. In a free market, as soon as consumers become disappointed with that product if the company starts to take advantage by raising prices or lowering quality, a competitor is bound to rise up in the interest of providing something better for the consumer. Why should the government punish a corporation for being successful as long as the consumers are happy?

The Parakeet said:

We would have had a glut in the housing market anyway though. It was only natural. The tech bubble burst but didn't really crush anything in the financial district. They all decided that mortgage-backed securities were the next big thing. The biggest problem was just that too much private money was being invested, the packages were unregulated (and therefore secret), and that credit default swaps made the market seem fail-safe. I don't think shrinking one bank would have done much to help it. It's was a huge issue that just about every bank had a hand on.

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This sort of problem would never have happened if the market was more stable. All of these loans defaulted because of hazardous policies and the encouragement of risky growth. There is never a problem with private money being invested, as that is what drives growth. The problem is when the government tries to get in there and encourages growth when the market really can't handle it in the long term.

The Parakeet said:

They also aren't exactly being rewarded. Bonuses are down 40% and they'll be almost nonexistent for next year. I don't believe any of the banks just walked away from it. Most of them have lost their status as investment banks. I think it was Citigroup that was freaking out because it could no longer handle the financing for mergers. It lost a huge source of what was effectively free money. The others are going to be facing much stricter restrictions on their dealings and debt in the future. The only thing that happened was that their business was saved and they still have a job. We only did that because the whole sector was on the verge of collapse (which would have wrecked tons of other businesses after they lost their lines of credit).

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None of the banks wanted the collapse we have seen, but all of this happened at a much smaller level. These banks knew that if these loans defaulted and even if Fannie and Freddie collapsed, they would still be backed by the government since Fannie and Freddie are government owned. On the other side, if these risky loans did work out, they would have very high profits. It was a high risk, high reward play with insurance on the risk- a good business decision, but bad for stability.

As for the bit on bonuses, everyone did not expect this to happen and even if they thought it might, they didn't expect to see their salaries decrease because of it. Furthermore, many of these decisions were made in the best interest of the banks and not just the people running them (although the CEOs would obviously get good attention from it.)

The problem is not with people throwing money where others throwing it. The problem is that by setting the interest rate, the Fed encourages/discourages lending, which essentially distorts the markets. When you encourage too much lending with low rates like Greenspan, you have bubbles because people lend more, which leads to growth, even though the growth may not be sustainable in the long run. An interest rate that is set by banks competing with each other is the most sustainable and stable. A market-set rate would also protect us from the government accidentally stunting growth, when interest rates are set too high.

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I'm personally not sure how much the amount of lending actually affected this. I think it was just the mechanics of mortgage-backed securities and the credit default swap. The banks got cocky and reckless. A bunch of mortgages were given out that they probably knew weren't going to be paid. They didn't care though, since it wasn't their problem.

I'm not sure about a market-set rate. I worry about removing the government from the equation, because the ability to manipulate lending is quite valuable for ensuring continued growth. I wouldn't be against a slightly more hands off approach or even a more reserved approach (like I said...Greenspan is practically a forgotten man in economic circles after this debacle). My other concern is that a market-driven rate would still be vulnerable to severe spikes and irresponsible lending. It'd be hard to tell though, since we haven't ever done it in a time where the world was so connected.

By regulations I mean things like government intervention into the private sector and telling companies how to run their business or forcing them to do certain things. Some regulations are ok and necessary in the interest of health, but we have way too many regulations in the current market. Part of the problem is that people confuse regulations with oversight, which is checking for fraud.

As for monopolies, the government does not need to interfere because if there is a monopoly that simply means that the consumers really like that company and its product. In a free market, as soon as consumers become disappointed with that product if the company starts to take advantage by raising prices or lowering quality, a competitor is bound to rise up in the interest of providing something better for the consumer. Why should the government punish a corporation for being successful as long as the consumers are happy?

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I'm still a little confused on what you mean by regulations. The only ones that jump to my mind would be ones concerning worker safety and consumer health.

I guess I really meant something that was closer to a trust. We thankfully haven't had a true monopoly for awhile. At least not one where they maintained their position through unfair tactics (Standard Oil style). The anti-trust suit against Microsoft was ridiculous.

This sort of problem would never have happened if the market was more stable. All of these loans defaulted because of hazardous policies and the encouragement of risky growth. There is never a problem with private money being invested, as that is what drives growth. The problem is when the government tries to get in there and encourages growth when the market really can't handle it in the long term.

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I'll give you that one. If the government is going to tweak the market, then they need to be ready to make the unpopular decision to reel it in. A number of people I know predicted the sub prime issue awhile ago. There's no excuse for not at least trying to stabilize it a little bit. That might have at least softened the blow and lessened the panic.

That's the biggest problem I have with hard line Keynesians. They forget that you have to be willing to curb growth and allow infrastructure to catch up.

None of the banks wanted the collapse we have seen, but all of this happened at a much smaller level. These banks knew that if these loans defaulted and even if Fannie and Freddie collapsed, they would still be backed by the government since Fannie and Freddie are government owned. On the other side, if these risky loans did work out, they would have very high profits. It was a high risk, high reward play with insurance on the risk- a good business decision, but bad for stability.

As for the bit on bonuses, everyone did not expect this to happen and even if they thought it might, they didn't expect to see their salaries decrease because of it. Furthermore, many of these decisions were made in the best interest of the banks and not just the people running them (although the CEOs would obviously get good attention from it.)

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I think that AIG would be a better example of what you are going for. They really did seem to take the "Too Big to Fail" idea to heart and did some truly stupid things. Freddie and Fannie were arguably pushed into their reckless behavior by government pressure to increase sub prime lending (hard to see how much their encouragement really factored in though).

I don't think that the majority of them of them expected to be bailed out by the government. I'm pretty sure they just thought other banks would support them (An arguably dumber idea). The biggest problem was the bank panic, which I still would blame on the highly unregulated market of MBS, credit default swaps, and the many secretive vehicles they were packaged in. The subprime bubbling bursting shouldn't have been any worse than the tech bubble collapse (I'm guessing). The problem was that nobody knew who had the bad assets and the banks wouldn't even lend to each other. I think the London inter-bank rate was about 5-6% at one point. This caused a few collapses just because they stretched themselves too thin and didn't have enough cash lying around to stay solvent.

The last bit makes a good point though. It looks like Wall Street may have a serious attitude makeover coming. Britain was really pushing for it with their bailout (and actually put it into the contracts) and I hope the US pushes for a bit of an attitude shift too. There's too much of a focus on short term profits at the expense of the company's long term health. There were several CEO's who just don't seem to feel that they did anything wrong. There's a big disconnect at the top. Just my two cents though.

The Parakeet said:

I'm personally not sure how much the amount of lending actually affected this. I think it was just the mechanics of mortgage-backed securities and the credit default swap. The banks got cocky and reckless. A bunch of mortgages were given out that they probably knew weren't going to be paid. They didn't care though, since it wasn't their problem.

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Interest rates drastically effect growth and it certainly played a huge part in this crisis- Keynesians, supply-siders and Austrian economists alike will tell you that. As for the part about the banks not caring, you need to realize that that carelessness was caused by the government backing these risky mortgages. If they weren't backed I guarantee you that these banks would not have made many of those loans. The job of a bank is to think in the best interest of its business and not the government or the people, we need to realize and respect that. That is why we need to cut unnecessary entanglements with the markets, so that if their decisions are bad, they suffer the consequences.

The Parakeet said:

I'm not sure about a market-set rate. I worry about removing the government from the equation, because the ability to manipulate lending is quite valuable for ensuring continued growth. I wouldn't be against a slightly more hands off approach or even a more reserved approach (like I said...Greenspan is practically a forgotten man in economic circles after this debacle). My other concern is that a market-driven rate would still be vulnerable to severe spikes and irresponsible lending. It'd be hard to tell though, since we haven't ever done it in a time where the world was so connected.

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If there are not enough borrowers, a market-set rate will automatically drive down rates as banks try to find more people to loan to. On the flip side, if there are too many borrowers, the rate will go up as banks will charge higher rates. It is simple supply and demand, a system that has been proven to work.

When you said the government is needed to ensure continued growth: just take a look at that statement. It is not reasonable, considering that growth is bad when it is forcefully being pushed because that is what causes bubbles.

You may say that Greenspan is a forgotten man, but please don't forget that as chairman of the Fed, he was naturally an integral part of the Keynesian economic system.

The Parakeet said:

I'm still a little confused on what you mean by regulations. The only ones that jump to my mind would be ones concerning worker safety and consumer health.

I guess I really meant something that was closer to a trust. We thankfully haven't had a true monopoly for awhile. At least not one where they maintained their position through unfair tactics (Standard Oil style). The anti-trust suit against Microsoft was ridiculous.

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I don't know why we were talking about regulations, I think I was simply responding to something you said. I am against most types of government intervention in the markets. Corporate taxes and such only hurt companies and stunt growth (not to mention they hurt the workers because there are less available jobs because of these restrictive policies.)

The Parakeet said:

I'll give you that one. If the government is going to tweak the market, then they need to be ready to make the unpopular decision to reel it in. A number of people I know predicted the sub prime issue awhile ago. There's no excuse for not at least trying to stabilize it a little bit. That might have at least softened the blow and lessened the panic.

That's the biggest problem I have with hard line Keynesians. They forget that you have to be willing to curb growth and allow infrastructure to catch up.

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Why not just allow the market to set the rate as I explained above? This way the market will self-regulate itself. The market is way too big for any one person or group to gauge. This is why the Fed doesn't work.

The Parakeet said:

I think that AIG would be a better example of what you are going for. They really did seem to take the "Too Big to Fail" idea to heart and did some truly stupid things. Freddie and Fannie were arguably pushed into their reckless behavior by government pressure to increase sub prime lending (hard to see how much their encouragement really factored in though).

I don't think that the majority of them of them expected to be bailed out by the government. I'm pretty sure they just thought other banks would support them (An arguably dumber idea). The biggest problem was the bank panic, which I still would blame on the highly unregulated market of MBS, credit default swaps, and the many secretive vehicles they were packaged in. The subprime bubbling bursting shouldn't have been any worse than the tech bubble collapse (I'm guessing). The problem was that nobody knew who had the bad assets and the banks wouldn't even lend to each other. I think the London inter-bank rate was about 5-6% at one point. This caused a few collapses just because they stretched themselves too thin and didn't have enough cash lying around to stay solvent.

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Again, the banks thing for their best interest, not the government's and you can't blame them for that. They knew that they would be backed because of Fannie and Freddie and the Fed, essentially their banks for these mortgages.
Also, you can not compare this bubble to the tech bubble because this was a much bigger bubble and the institutions involved were directly connected to the government and backed by it. The tech bubble was simply caused by optimism of the new inventions, similar to what we saw in the early days of automobiles, planes, and virtually any major invention. That bubble had no where near this sort of effect on the economy and it never would in a free market because it would not be linked to the government and since it was a new sector, it would also not be very interconnected with other sectors.

The Parakeet said:

The last bit makes a good point though. It looks like Wall Street may have a serious attitude makeover coming. Britain was really pushing for it with their bailout (and actually put it into the contracts) and I hope the US pushes for a bit of an attitude shift too. There's too much of a focus on short term profits at the expense of the company's long term health. There were several CEO's who just don't seem to feel that they did anything wrong. There's a big disconnect at the top. Just my two cents though.

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Again, a CEO thinks in the best interest of his company and not the government. The government was backing them, so they took high risks- you really can't blame them, they were just trying to do what's best for their companies.

I see the basis for your argument about the interest rates, but I don't see that as the primary failure. They started making bad loans because they knew they could just sell them off in a month for a profit. That was their business model and it worked for a short period of time. Pulling in the credit might have limited the actual size of the bubble, but it was a problem stretching from real estate agents on the ground to CEOs on Wall Street.

I'm also just not seeing your justification that they were reckless because the government was backing them, or how that was the key factor. The bailout took awhile to pass and was almost killed in Congress. As it was, most economists saw it as a necessary evil (all the ones I knew at least) and something that we had to do to protect the other sectors. It wasn't popular and was never guaranteed.

A lot of banks played fast and loose because they had fairly free access to credit from other banks. That had more to do with the massive profits that MBS were making them and the fact that it looked like a safe market. Inter-banks loans had always been a safe thing. The real crisis was just that they couldn't get the short term loans that they were dependent on. There was absolutely nothing we could have done to stop that either, since a lower lending level would have just crowded out investors in favor of the banks.

I wouldn't paint all CEOs with the broad brush. Some are pretty good and do care about their company. There has been a good bit of corruption in the ranks though.

The whole sub prime mortgage crisis has at least 8 to 10 components and that's if you simplify it, so yeah, an Internet discussion gets rather confusing.

My belief is that a lot of the families were given mortgages they couldn't pay because the banks knew that they were just going to wrap the bad mortgage in a pretty package and sell it to an investor.

MYP is leaning more toward the low interest rates convincing a number of people to grab onto mortgages. It's probably a good bit of both. The crisis was a perfect storm of financial problems that all caught up with us at once.

The Parakeet said:

I see the basis for your argument about the interest rates, but I don't see that as the primary failure. They started making bad loans because they knew they could just sell them off in a month for a profit. That was their business model and it worked for a short period of time. Pulling in the credit might have limited the actual size of the bubble, but it was a problem stretching from real estate agents on the ground to CEOs on Wall Street.

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They mad the bad loans because they knew they were backed and they also knew the low rates would keep the sales going. Both of these are due to the government: the prior because of the GSEs and the latter because of the low rates that created excess credit. Sure, CEOs did play a part in the crisis, just as the loantakers and banks did, but a large part of the reason that all of this happened ties back to the government's fiscal policy.

The Parakeet said:

I'm also just not seeing your justification that they were reckless because the government was backing them, or how that was the key factor. The bailout took awhile to pass and was almost killed in Congress. As it was, most economists saw it as a necessary evil (all the ones I knew at least) and something that we had to do to protect the other sectors. It wasn't popular and was never guaranteed.

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While the bailout was not guaranteed, some sort of help to Fannie and Freddie was almost guaranteed. Why? Because the government owns them. Perhaps the Congressman that vouched for the expansions of those GSEs didn't see it coming or maybe they didn't want it to look like they were supporting the CEOs of these failing companies- but the bottom line is they knew that as a GSE the government would have its hand in it. This is why a privatized alternative would have been much better. Take a closer look at how Fannie and Freddie are actually run and what they did and you will see the point I am making.

The Parakeet said:

A lot of banks played fast and loose because they had fairly free access to credit from other banks. That had more to do with the massive profits that MBS were making them and the fact that it looked like a safe market. Inter-banks loans had always been a safe thing. The real crisis was just that they couldn't get the short term loans that they were dependent on. There was absolutely nothing we could have done to stop that either, since a lower lending level would have just crowded out investors in favor of the banks.

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A lower lending level would have lowered the amount of MBS and it would have slowed activity in the housing market- which is exactly what we needed.

Akuma said:

From what I've seen, those CEOs act in the best interest of THEMSELVES.

Enron, anyone? As for the argument you two are debating, it's rather lengthy but it seems to do with loans. As far as that goes, I believe that was a problem in the housing industry as a lot of families got loans which they could not pay off and this resulted in a bunch of foreclosures.

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ENRON was a case of fraud, it is totally different. I, and no sane non-anarchist person, condones fraud. You can say what you want about CEOs, but at the end of the day it is their actions that play a vital role in a company's growth/decline. They are not all selfish and many work long hours. Also, you are grouping them into one stereotype, which is really just wrong.

All good points. I still think that regulations on credit default swaps and greater transparency with MBS's would have helped a lot too. No real way we'll ever find out though.

*Sigh* So many things that they could have done. Oh well...just hope it sorts itself out soon enough.

The problem with regulations, is there is no end to them. There will almost always be loopholes and what will you do? Add more regulations? It is like a never-ending cycle and one which costs the American people dearly in terms of taxes and eventually freedoms. Why not just let a competitive market handle it and essentially create its own set of checks and balances?

Well there are some things that regulations would have helped immensely (at least make them work hard to be destructive ). Credit default swaps should have at least required something besides the company's word backing them.

MBSs' probably would have stayed disguised though. Just too many half-decent reasons for special vehicles and too many loopholes.

I don't see how a competitive market would have actually handled the problem though. Theoretically I guess they wouldn't have invested in a company that couldn't back them, but if all the big companies don't use backing, then how would that naturally arise? Especially if the big guys are able to offer better rates because of their position. The only correction would have been a major failure that would have caused a lot of collateral damage. Unless I'm just missing something.

Just my tired brain's two cents.

Akuma said:

Do you think that Capitalism will ever fall in the United states?

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'
Capitalism as brain-washed oafs in America imagine it to be fell long ago in the USA.

The plundering of America by the Military-Industrial Complex, the tyranny of mega-monopolies over all economic activity, the corruptions of Wall Street all ensure that the American economic and social system bear a greater resemblance to Stalinist state capitalism than to some mythical free-enterprise system that exists only in the diseased imaginations of idiots.
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numan said:

'
Capitalism as brain-washed oafs in America imagine it to be fell long ago in the USA.

The plundering of America by the Military-Industrial Complex, the tyranny of mega-monopolies over all economic activity, the corruptions of Wall Street all ensure that the American economic and social system bear a greater resemblance to Stalinist state capitalism than to some mythical free-enterprise system that exists only in the diseased imaginations of idiots.
.

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And yet in spite of your rattling on and on, I and the people I know are living very well.

mcstites said:

And yet in spite of your rattling on and on, I and the people I know are living very well.

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Such "people" are not "living well" --- they are consuming like pigs, but not living well.

To live well requires education, culture and wisdom --- all of which are in very short supply in the Land of Debris and Home of the Crazed.
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numan said:

Such "people" are not "living well" --- they are consuming like pigs, but not living well.

To live well requires education, culture and wisdom --- all of which are in very short supply in the Land of Debris and Home of the Crazed.
.

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At least it makes sense in your head - nowhere else.