It’s not simply “greed”. You and me we are all greedy, we know we need to control it.
Capitalism does not equal to greed, it should be “acknowledge the greed in ourselves and manage it”.
Free market does not equal to regulation-free, it should be a fair play ground protected by regulation like anti-trust laws. Without regulation protection, it’s not free market, its market for big bad guys freely intimidate small good guys and others.
Globalization forced companies of free economy to play with super huge players from controlled economy – a game of controlled economy.
It’s not a failure of capitalism. Actually to the exact opposite, this failure of 2008 is a failure of the betrayal of capitalism.
Thank you for spend your time on yet another crisis reasoning analysis.
Well, I have to do it because I (just as every other analyst) think no one gets it yet.
Let’s be clear, don’t say it’s simply “Greed” caused 2008 financial crisis. You and me we are all greedy, and we all know from day one that those Wall Street fat rats are greedier. This is no news. We knew it so well that nearly every single mature free market country in the world has “anti-trust” laws. But in a globalize world, there are so many loopholes and incentive for governments and enterprises not to control the greed (yes, Wall Street call it lack of risk control, as a nation, it is lack of greed control).
First, Capitalism and Socialism.
While these 2 words have been widely used by extremists on both sides in justifying their “fight against…” they are widely misunderstood by vast majority (sometimes intentionally misled by the “leaders” who wanted to benefit from the misunderstanding).
I’m in no business to challenge any of the super power to redefine these two words, but just for the sake of economic discussion, let’s clarify the usage of them in pure economic arena:
Capitalism means free economic environment, entrepreneurs sort out business issues with minimal intervention from political powers; and collectively, they form the core of a jurisdiction’s economic.
Socialism means controlled economic environment, political power forms the majority of the economy and controls most of the economic activities, and the jurisdiction’s economic power is an associate of its political power.
Which one is better is a long debate that I do not anticipate a conclusion any time soon.
The issue at hand is both sides seem think their “baby” is perfect. No! None of them is perfect; both of them have their strength and weakness.
For efficiency, controlled market is definitely the winner, just think about several people lifting a heavy weight, if all the participants work on one single command, it’s much easier to accomplish the work. On the opposite, if each single individual do things as they like, some lift, some push, some sit on it, some lift early some come late, the work probably won’t be done anytime soon.
In a Controlled market, all participants need to follow strict orders (in addition to rules). So they can concentrate vast resources of their economy in a few players to make them bigger than if they operate in a free economy.
What’s the weakness of socialism? Just check any financial media, how many ideas on how to run the economy you see each week? When lack of ideas (often conflicting) is never a problem, there is only one controller (in most case, the government). So whose idea is to be implemented? Yes, this is the BIGGEST problem of controlled economy – choose which one idea should be practiced and kill all others. Since there is a fundamental weakness of “Selection”, at the end, the idea that triumph is usually the one of a political iron fists – either an “elected by mistake” like Adolf Hitler, or arbitrary like Joseph Stalin.
The truth that most “controlled economies” are run by socialist countries is observed by many. It’s much easier t choose in an arbitrary system than a free market system. Problem is at the end, most of these efficiently controlled economy machines were misused to efficiently crush their country instead of build wealth, they did serve those small groups in power well during the course though.
Where “controlled economy” short is where free economy shines. The free economy allows (actually promotes) enterprisers to carry out their own ideas. So instead of the super power pick one idea, everyone put their ideas into real world practice, and see which one works best.
OK, that doesn’t mean it’s perfect. It addresses arbitration issue, it does bring efficiency issue. Since not all the ideas are really good, some efforts are voided in proving “only good on paper” ideas will fail, hence “wasted”.
So in short, free economy gives us freedom and does not suppress ideas so at least some effort will be put into the right direction but some efforts will be wasted in testing out not-so-good ideas; on the other hand controlled economy gives us efficiency, but the struggles in putting the efficiency in to the right (let alone the best) direction.
How about the commonly mentioned “self correction” or “let market sort things out by itself” in free economy? Well, you know what? The “self correction” or the natural selection of economy comes through “let the unfit die”. The best thing of a free economy is everyone can start their venture as they like; the best thing for free economy is those who do not fit the (new) environment fail.
THIS IS WHAT REALLY FAILED IN 2008 FINANCIAL CRISIS – BIG FINANCIAL FIRMS IN THE NOTION OF “TOO BIG TO FAIL”, DID NOT FAIL when they did wrong, and did not fit new financial environment. They should have failed much earlier if they were not as big as they were in 2008. A hundred smaller financial firms would have much less power in creating and sustaining the bubble led to the 2008 burst (so would have much less blow to the economy as it did).
Yes, my point is IF there were lots of small financial firms instead of “big nine”, and we let those unfit ones fail during the past years, we would have recovered from the (much shallower) crisis already. The problem is we don’t have enough financial firms to fail. The truth is the “big nine” are controlling our financial systems in such a way that (at least in financial area) it’s no longer free. And they were allowed to become “too big to fail” so at the end, political power has to intervene to support them.
When some people due to their hidden agenda (usually for their political gains) misled people to think “Capitalism” equals to “Greed”, I want to point out, Capitalism is actually “Acknowledge greed and manage it”. The failure of 2008 was because in the decade leading to it, the so called “free world” refused to admit its greed and failed to manage it.
How did that happen? Globalization – or more precisely, the globalization of greed.
First, enterprises are for profits, and that’s expected. This was one of the features of capitalism so that wealth is built and incentive is provided for enterprises to expand economy. Greed needs to be managed, so that a level play ground is provided to all participants and preventing the big players to leverage their power to suppress smaller players.
This is a key to capitalism; because without a level play ground, the economy will never be free – it will become a place for the big players freely intimidate smaller, newer players. There are regulations, acts, laws passed by mature democracies – outlining what can or cannot be done whether it is a one person self employed start-up or hires a quarter of the population of a state.
Big enterprises will always try to avoid the “manage” – the regulations of mature countries. The word they coined it as “globalization”. Yes, as most of the people has complained about globalization is not about cheaper goods, it’s about regulation avoidance (and more, we will go there later).
This is no new gimmick though. Long well known to the general public, some companies (lots of sea shipping companies) move their registration to a no-name island to avoid tax. However, before globalization, it’s not feasible for a domestic company to do so while still enjoy domestic treatment and access to local market.
Globalization allows all the benefit with no obligation. You can operate in one country, but use another countries regulation to perform things that are not allowed in the home country. All good planed for the big companies uh?
Second, once the market is open to globalization, big companies suddenly see competitors that are HUGE. Why? Because in those controlled economy, some of the players are monopoly and even government subsidized to control their domestic market. Let’s make up a hypothetical example: in US there are two dozen big air companies, while in China and India, each has a population quadruples American’s has only two air companies. Think about the size of their air company – even if each Indian or Chinese consumes 1/10 air one American does, each of their air company is about 5 times of an average American air company.
OK, so in the name of “patriot”, American companies going global are tolerated to be “bigger”. Don’t forget, those foreign monster enterprises run in a controlled environment, and they don’t fail (their government either own, or back them). And in the name of globalization, enterprises in free economy have to compete with them, and became too big to fail. These big companies from free economy are now playing a game that is not free, even though you those big companies are registered in US.
So basically the globalization is like playing football and soccer (and baseball, hockey, basketball you name it) in the one field. It does benefit those (who think themselves) are good at mix and match, but all the rules are no longer as written in stone as they used to be – most “multinationals” are not regulated by one (free market) jurisdiction any more.
Yes, my point is the 2008 failure was not due to a failure of capitalism as some people dimmed. It was a failure of capitalism to play its own game. It was dragged into a totally different game – it can only maintain a domestic free market, while allowed and encouraged its enterprises to compete with controlled-economy super powers. In short, globalization forced you to play a different game, the rules protecting fair play are no longer available and you failed, is that a surprise? Now that allowing an unfit US company to fail is less a natural selection process – was it failed due to unfair competition environment, or really due to it’s own weakness?
Do I sound like anti-globalization? No, I’m pro-globalization – the globalization of markets, not greed. To promote globalization, one need to understand, those regulations to protect level play ground do not necessarily exist in places beyond US soil. Here is the play book.
First of all, where goes free market where goes regulation to protect real “freedom”. Yes, totally unregulated market is not a free market as it gives big players unfair advantage. Both the US and EU have anti-trust laws those are some of the regulations in place. Governments of free market countries are technicians who maintain a level play ground. They are NOT players. So “globalization” can extend to these market as long as all parties agree on coordinated measure in protecting fair play principle, and allow natural selection to work.
Yes, globalization can only go to the extent where “fair play, nature selection” regulations (anti-trust and others) can be extended to. And with globalization, “patriot” need to be out of the picture (as far as free market goes). Because the biggest benefit of globalization is a bigger market, more market participants hence more idea to try out. The bigger the market, the less likely it is to be influenced by single player, and better survival chance for good ideas (if regulated coordinately and correctly).
Second, for those countries that cannot provide same level of fair playground for all participants, (i.e. Brazil, Russia, India, China), specific risk management should be put into place to protect free market will continue to be free (from big player intimidation) – only open comparable domestic market in exchange for market entrance to the counterparty’s, and allow only clearly segregated subsidiaries of US company to operate in those countries. These subsidiaries are NOT allowed to operate or influence home country (the US). Their bloom or fail should be clearly separated from free market operations of similar products and services – these subsidiaries can die without affecting it’s parent company and cannot influence it’s parent company’s home operation. Similar rules should be imposed on foreign companies from controlled-economy.
This is to ensure that the advantages or disadvantages of a company resulted from operating in a controlled economy will not be brought back to free market environments. We’ve mentioned the advantages of controlled economy is it’s efficiency – they can concentrate resources of the whole country in certain big company of theirs. This efficiency when allowed to operate and compete in free market, will undermine the single most important feature of capitalism’s “Self-heal” function – they and their competitors will be too big to fail, hence preventing innovation and natural selection.
All in all, the real cause of the 2008 financial crisis cannot be simply blamed on “greed”. That’s a feature we all inherited from our human nature. It cannot simply be blamed on capitalism as the crisis was formed exactly because capitalism was not playing out.
It was because of the greedy and irresponsible push of globalization that pushed American economy into direct contact with control economy where greed is not managed by regulations guaranteeing level playground.
To compete in such an unleveled ground with huge foreign firms (have you ever heard sovereign wealth fund?), “patriotism” then allowed American enterprises (financial firms in the case of 2008 crisis) to avoid normal market natural selection process and causing them to become too big to fail.
Sub-prime mortgage? It’s just the unlucky first little back street blowup happen to be too big for the big financial firms to cover up. Given the way financial firms were operating before the crisis, if it’s not Sub-prime, it would be something else blowup – they’ve been operating as if there is no free market regulation at all for too long.
