Friday, October 24, 2008

Is Capitalism and Deregulation to Blame for the Financial Crisis?

This past week, the Economist, one of my favorite news sources, raised a question that I have been meaning to write about for weeks: the future of capitalism. As many of us have seen, the U.S. economic system (the world’s best economic system) is under fire as a result of the current financial crisis. Subsequently, many of the pro-growth, free-market policies adopted during the past 25 years are in danger of being replaced by the outdated, statist policies that failed during the 1970s. This populist knee-jerk reaction is not the correct way to respond.

This growing desire to wrongly blame for the status quo is well addressed by the article. Specifically mentioned are the criticisms that have been raised against capitalism—namely, that American-style capitalism is a failing policy, and, more specifically, that deregulation of finance is a losing approach. In rebuking these false arguments, the article looks to the record of capitalism in the developing world, and notes that millions of people have been moved out of poverty as a result of the success of capitalism. In fact, it is highlighted that this decade could be the highest growth decade in history. With these indisputable realities, one cannot help but wonder, “where are these critics getting their information?”

There is some consensus that regulation of the financial markets does require a second hard look by regulations. Most reasonable minds and the author of the article seemingly agree with this. As also mentioned in the article great places to start are requiring banks to keep capital reserves during good times, as well as having the Federal Government consider asset prices in their decision making process. But the current crisis cannot be blamed on deregulation alone. Millions of Americans know this and the same sentiment is reflected in the article.

Over-regulation shares as much if not more of the culpability for the current problems. The article notes that the U.S. mortgage industry is heavily regulated, as evidenced by the role of quasi-governmental entities Fannie Mae and Freddie Mac. Regulators and Congress thought they had the proverbial thumb on these areas, while in hindsight, we know otherwise. Pairing this excessive entanglement with industry with ill-advised Federal efforts to increase home ownership brought us total disaster as a nation.

An additional point made by the article also provides proof from beyond our borders that over regulation equates disaster. Looking to the more recent economic crises in Japan and South Korea (also heavily regulated economies), it is not hard to see a greater picture forming that spells out what brings disaster.

Ultimately, as rightly stated by conservative thinkers for years, and most recently this article, we need better government, not more. There could not be a more accurate statement. Complicating an already broken system not only fails to address what brought the first problems into existence but then sweeps them under a rug where they remain hidden for years. What happens then is a re-emergence of a then bigger, more severe issue.

Less is more, both in life and in regulation.

W. Sherman

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