According to the Merriam-Webster online dictionary, the definition of capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market”. Most people today would probably say that our economic system is capitalism. But is that really true?
The Dutch government recently bailed out another bank, SNS Reaal, after telling taxpayers their taxes had to be raised and benefits reduced to cut the deficit. Doling out billions to Brussels to give to Spain and Greece and bailing out “too big to fail” banks, on the other hand, apparently does not increase the deficit, nor does fighting wars in the Middle East. Meanwhile the media are towing the party line telling everybody how the government had no choice because otherwise people’s savings would have been wiped out. The same old “we’re all in this together” nonsense. Yet nobody ever stops to think: why don’t they just bail out the people who had savings in the bank rather than the bank as a whole? Wouldn’t that be much fairer and cost a lot less taxpayer money?
For the record, I don’t personally agree with that solution either, but if the argument is that you can’t just tell people their hard-earned money went down with the ship, surely this would be a much better solution. Yet, I would argue the government should not be involved at all. In that scenario people would be forced to think twice before putting their money in a bank without knowing how solvent it is. In other words, this sort of system would reward healthy, risk-averse banks and penalize banks that take on excessive risk. You might have heard of this sort of system. It’s called free-market capitalism.
Capitalism, however, is not the system we live in today. That system would be more accurately described as crony capitalism or state capitalism. You won’t hear that from the politicians, economists or media lapdogs though; they are too busy blaming capitalism for everything that’s wrong with the economy.
Another thing they are very good at is giving people the impression that it’s all terribly complex. Oh yes, it’s all so very complicated you had better leave it up to the “experts” to tell you what is going on and what should be done about it. You are just an average Joe, you see, and Paul Krugman knows much, much better than you do. And even though the problem is so incredibly hard to grasp, the solution is simple: more government! That’s right, all we need to do is trust the government to get us out of this mess and pretty soon we’ll all be living in paradise!
Still, a closer look at the role government regulators played in creating the crisis paints a very different picture. As Simon Johnson and James Kwak explain so well in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Wall Street bankers had become one of the most powerful political forces in Washington in the years leading up to the financial crisis (and still are). Their money funded the campaigns of congressional representatives, investment bankers and their allies assumed top positions in the White House and the Treasury Department and the ideology of Wall Street became the political consensus on Capitol Hill. Though the revolving door and campaign contributions gave the bankers an important leg up, the fact that regulators now were convinced that “what’s good for Wall Street is good for America” was by far the most crucial factor. It was this ideological power over those high-up in government that swayed their every decision to favor the bankers over the voters. A culture of mutual dependence was born and its effects were felt across the world when the crisis hit.
The people of Iceland, on the contrary, recognized the system for what it was and put an end to it in 2008. With a debt of $85 billion and a population of only about 300,000, it was quite an understatement to say the system had spun out of control. But the bubble had burst and now the very same people that raked in billions during the expansionary years of the bubble were telling taxpayers they had to pay up or the country would be in ruins. Fortunately for Iceland, the people saw through the scam and chose not to bail out banks, instead jailing the politicians and bankers that conspired to commit the fraud. Today Iceland’s economy outperforms that of both the United States and the European Union, where it was decided the banks were not only “too big to fail”, its executives apparently were too big to jail.
In light of the fact that regulators not only failed to prevent the financial crisis but actively helped cause it, giving them more power to “solve the problem” would be like giving an arsonist a few extra matches to put out the fire he just ignited. Why would we want to do more of the same and expect different results? Einstein called that insanity.
It’s time we try free market capitalism for a change, because history has taught us that is the single most successful system in recorded history when it comes to raising untold millions out of poverty. It’s also a great way of reducing deficits, by the way.