Capitalism: There’s Still No Better System

The News & Advance
Published: September 22, 2008

We’ll state this right off the bat, so no one misunderstands what’s to follow: There is no better economic system than America’s version of democratic, free-enterprise capitalism.

Not crony capitalism as found in much of Asia, not kleptomaniac capitalism as found in much of the Third World, not socialist capitalism (we know, sort of an oxymoron there, but … ) and definitely not the totalitarian capitalism of Moscow and Beijing..

Capitalist economies, however, run amuck sometimes; when they do, they do so in spectacular fashion, as in the savings and loan crisis of the late 1980s in the United States and what we’re witnessing today on Wall Street.

The mess on Wall Street, for which the American taxpayer will be footing the $700 billion bill (and that’s a conservative estimate), is one of those spectacular failures, on par with the S&L crisis. The S&L cleanup, according to a Treasury Department study from several years ago, cost the U.S. taxpayers $519 billion — $125 billion shelled out by the Federal Savings and Loan Insurance Corp. and $394 billion by the Resolution Trust Corp. Adjusted for inflation, that still makes today’s proposed $700 billion Wall Street cleanup less expensive, so far.

Under the rescue plan put forward by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, the government will buy up the bad mortgages out in the market, taking them off the hands of banks and investors with the bill being footed by taxpayers. Some outside experts have argued the government should have forced the sector to shoulder more of the burden itself — across-the-board regulations requiring the cancellation of dividends and shoring up of financial reserves along with the government itself taking direct equity stakes in individual institutions. Either approach is highly risky, and there’s no guarantee of success.

There are a couple of lessons America’s political and business leaders — and the American electorate — should learn from the financial sector bailout. You would think they’re obvious, but evidently they’re not.

* You don’t get something for nothing … or next-to nothing. That goes for would-be homebuyers as well as high-flying investment bankers trying to book ever-higher profits in search of their $62 billion in bonuses (one estimate of what Wall Street paid out last year).

* Reasonable regulation is not a bad thing. Over-regulation of any segment of a nation’s economy stifles innovation and growth. After the S&L crisis virtually obliterated that segment of the financial sector, though, a rational person would have expected a top-to-bottom review to determine the new lay of the land and how various federal and state regulatory agencies fit into the picture. That didn’t happen; instead, what resulted was the virtual deregulation of the entire sector, which leads to the next lesson.

* Lobbyists and their open wallets have too much influence in Washington. Yeah, it’s been said before, but it bears repeating. Beginning in the early 1990s and reaching a fever pitch in 1995 when the GOP took control of Congress, commercial banks and their lobbyists began all-out campaigns to repeal the Depression-era regulations of their industry that barred them from entering the more lucrative, though more risky sphere of investment banks. Lobbyists’ dollars flowed to both Democrats and Republicans and to former President Bill Clinton, and it all paid off when those regulations were repealed in 1999. Allowing commercial banks to encroach on investment banks’ turf put those institutions’ bottom lines under pressure, forcing them to venture into more risky, more complicated lines of business in search of profits. And it blew up in their faces.

Both Democrats and Republicans in Washington allowed this crisis to bubble up through the economy for more than a decade, and they ought to be taken to the woodshed for it.