Is Capitalism in Crisis? Becker

 

Capitalism in Crisis is the title of a long series of articles in the Financial Times by many participants. No doubt, the severity of the Great Recession has temporarily weakened the respect for capitalism, for “free” markets, and among other things, for the Chicago school of economics. Yet I will argue that the FT’s title should have had a question mark, as in: Is capitalism in crisis? My answer is that while certain aspects of the economic organization of capitalist countries like the United States should be changed to reduce the chances of future severe recessions, it remains true that economies which are competitive and capitalistic have the best prospects for sizable long-run economic growth.

The Great Recession reinforced the lesson of prior panics and financial crises, lessons forgotten during the Great Moderation from about mid 1980s to 2006, that the financial sector has a fundamental built-in instability. In the past this was mainly associated with “runs” on banks, as during the Great Depression of the 1930’s. The instability of modern financial institutions is no longer much related to bank runs because of deposit insurance; rather it is mainly the result of the incentive for financial institutions to raise their profits by increasing their assets relative to their capital.

One straightforward way to reduce this instability is to raise capital requirements of banks and other financial institutions. Greater capital would provide banks with bigger cushions if the value of their assets fell as a result of a crisis in asset markets. Any mandated capital/asset ratio should be greater for banks that are considered too big to fail than for other banks in order to make it less likely that larger banks would need a bailout. The United States and Europe have already moved to increase capital requirements for banks. These rules will have to be adapted over time as banks discover ways to mitigate the impact on their lending.

Asset price bubbles are another issue to deal with. The collapse of the “bubble” in Internet companies in the US during the late 1990s did not have a major impact on the US economy because it affected only a small part of total assets. Similarly, the many bubbles in local housing markets in the past, such as the Florida land boom of the 1920s, greatly affected these local markets, but did not have much affect on the US economy because they were not important to the overall economy. However, unlike these previous local housing booms, the boom from 2002-07 was national, although clearly stronger in certain regions, like Las Vegas, than in other regions. The collapse of this boom had a big enough impact on consumer and bank assets that it did seriously affect the US economy.

The boom in housing prices was related to the low interest rates after the early 1990s, and also to the growing number of mortgages that required neither much of a down payment nor decent credit histories. To reduce the likelihood of such housing bubbles in the future, it might be wise to require larger down payments to get mortgages, so that mortgage owners would have more “skin in the game”. Of course, politicians would likely oppose higher down payments because younger and other households with limited capital would find it harder to buy homes.

While vast attention has been given to the failures of capitalism after the financial crisis erupted, government “failures” that contributed to and prolonged the crisis have received much less attention. Yet government failures were numerous and important. These failures include the Fed’s decision to keep interest rates low after 2003 even though asset markets were booming, and the many bank regulators and other government officials who cheered on the expansion of bank assets rather than trying to control assets/capital ratios of banks. Government failures also include the congressmen and other government officials who encouraged, and even required, banks to offer mortgages to households with bad credit histories, and to households who could provide only a small amount of equity in their homes. Not the least of government failures are the many state and local governments, and countries like Greece, Ireland, and Portugal, that took advantage of the good times preceding the crisis to increase greatly government spending and debt beyond reasonable levels.

It is because of government regulatory failures that I believe the best hope for preventing banks and households from excessively expanding their debt in the future lies in rules, like capital requirements, rather than in greater discretionary power to regulators. Regulators misuse discretionary authority because they often get caught up in the same euphoria that banks and households succumb to. In addition, they sometimes get “captured” by the banks and households they are regulating, and end up being cheerleaders for these sectors.

Yet the fact that financial and housing markets did “fail” in the years leading up to the financial crisis (although their failure was partly induced by bad government policies and poor regulatory oversight) does not add up to a crisis in capitalism as a whole. The vast majority of competitive markets in a capitalist economy like that of the United States performed quite well both before and during the crisis.

China’s form of state capitalism is often considered to be a good alternative to competitive capitalism. China has had an astounding economic record during the past 30 years, but the private sector has been the most productive and dynamic part of its economy. China’s growth started when in the late 1970s it opened farming to the private sector. China has steadily increased the share of output produced by the private sector. Public enterprises are still important, but China has grown despite the important of state-owned enterprises, not because of it.

Capitalism lost prestige as a result of the severity of the Great Recession, but so too did governments. I do not believe that capitalism is in a real crisis, partly because the defects in financial and housing markets can be corrected to a significant extent. More importantly, reliance on competitive capitalism has been the only way that countries have been able to reduce poverty and continue to grow over long periods of time. The great majority of developing and other countries will not forget this fundamental reality as the world pulls out of the Great Recession.

 

 

Comments

[Kanaya]

I'm looking at the new Cameo. I'm thnnikig it would be a great gift for my family to get me for Christmas. I, too, am a Mustard Seed fan and would love to have a copy of your flour file to use. I keep pricing feed sacks and well... If you are still so graciously offering to send the file I am at kanes_1@msn.com. Thank you so much.

[Priya]

Angie, you always make such cute stuff! I ADORE this! So cute! One qiuotesn though, since I just got my Cricut last month, do you use the Cricut Design Studio to do this? I don't have it yet, but am thinking of buying it. Is it worth it? Thanks! Again, LOVE your project!

[Cynthia]

Not too sure that I agree with your point about feeling safe Neil. It seems to me that every time I look at matesirnam news or corporate media, it's overly sensationalized and aimed solely at keeping the audience scared enough to remain passive and maintain the status quo. But I think you are definitely right about people accepting an opinion that fits their world view. I makes me wonder if we naturally prefer not to question things or is it something that we've learned to do. Definitely a great topic to dig into further!

[Andreia]

I totally agree!!!One of my pet pevees is the misuse and misrepresentation of the word Burlesque. It's such a lovely word and it's original meaning is dying out.What annoys me even more is the amount of performers that actuallyuse the term and yet include no form of satire or parody within their performance I have no problem with Tease as an art-form whether it is performed with or without the satire but it is NOT Burlesque by defaultThe origin of the term burlesque' is contentious with most citing the French burlesque, which was, in turn, borrowed from the Italian burlesco, derived from the Spanish burla ( joke') as its root. Its literal meaning is to send up'.Put simply, burlesque means in an upside down style . Like its cousin, commedia dell'arte, burlesque turns social norms head over heels. Burlesque is a style of live entertainment that encompasses pastiche, parody, and wit. The genre traditionally encompasses a variety of acts such as dancing girls, chanson singers, comedians, mime artists, and striptease artistes, all satirical and with a saucy edge. The striptease element of burlesque became subject to extensive local legislation, leading to a theatrical form that titillated without falling foul of censors.A) A burlesque act does NOT have to end with a pair of nipple tasselsbut Classical Burlesque' to be authentic and true to it's originsshould include a parody or satire.B) Following it's re-emergence in early 20th Century America, the term burlesque was used loosely to describe adult revue shows in which striptease acts would perform—often with themes, characters or gimmicks—but classic striptease and hootchy kootchy dance were already forms in themselves and not automatically burlesque by default.C) Seen one pair of nipple tassels seen em all!D) Taking ones clothes of in a coy and cheeky manner does notnecessarily make for interesting parodyanyway, now I have had my little rant i will go away again xxx

[Sasha]

Just lovely! I utesdo do something liek that but with tissue paper. Take forever, but very rewarding! thanks for sharing today... I am totally trying this one out!~ Emily N. from "too Blessed 2 Stress"

[Stephanny]

What a fabulous poscers. Your silhoutte makes such professional looking images. (I'm thinking money right away, lol). Great pillow project! Hope you'll stop by and see our fabrics. Jane

[Ardi]

Of the thousands of posts you have wirtten and I have read that was your best!Absolutely spot on.Some of my friends make disparaging remarks about the Occupy Wall Street crowd. I have to disagree with them and their remarks. The young people who are occupying wall Street have a very legitimate complaint and I support them in that complaint. Sometimes, I wish they could translate their frustration to the people who ultimately bear the responsibility the US federal government, but their hearts are in the right place.Now that Europe stands on the brink of financial turmoil, I have to wonder if we are headed for TARP II. There has been great fanfare about the exposure of German banks to risky loans made to fiscally decrepit Eurozone countries. However, there has been an almost chilling silence about the exposure of American banks to these same counties. In the world of underhanded and opaque American politics, silence is never a good thing.When the dot com bubble burst, President Bush put quite a few miscreants in jail. Congress passed a fairly draconian law called Sarbanes-Oxley.When the big banks on Wall St were determined to be too big to fail and bailed out with taxpayer funds, nobody was even indicted. The Frank-Dodd banking bill was a masterpiece of illusion. Now, Barney Frank has decided to retire. Does he see TARP II on the horizon? Or, as he claims, is he just too tired to run for reelection at age 71? One thing for sure, he will retire comfortably. In 2006 he reported assets valued between $525,020 and $1.6 million; by 2010 Mr. Franks’ net worth had soared to between $1.9 million and $4.6 million, with nary a down year in between. During four years of steady recession a man making $174,000 per year quadrupled his personal net worth.Neat trick.Please don't get me wrong. The Republicans are no more interested in holding the bankers accountable than the Democrats. Nothing would have been different if John McCain were president instead of Barak Obama.

[Neda]

we need to separate out some tinghs .I have zero problem with purpose making money at lucrative endeavors.some people have a knack for making money .I do not think members of Congress nor staffers should be allowed to participate in financial transactions that they have insider info on.I think money in politics is different from financial chicanery and much, much worse and will ultimately and sooner than later destroy any vestiges of a legitimate representative government bestowed on us by our forefathers.If you want to fear / revile something fear this .before you ankle bite the rich and the so-called job-creators .and for Gawd sake.. STOP blaming Obama for everything from herpes to Hemmroids it was our wonderful Supreme Court who voted to neuter Democracy .. even our LITE version of it.As a society , we've deteriorated into the angry bees we're mad as hell and we're going to sting (blame) . without regard to logic or common sense.Cries of FIRE Bernanke or Fire Holden or FIRE the EPA or FIRE Treasury Secretary Timothy Geithner . and replace them with WHO?another Obama selection? Nope just fire them and then fire Obama and we'll figure out who to put in charge afterwards notice there is no . this person is the person who should be in charge nope..it's anyone but the guys currently doing the job.what idiocy this is at any rate.. I do not blame the rich or highly paid CEOs or sports figures or celebrities as long as they are not cheating and doing anything illegal.I don't understand these attacks on anybody and everybody these days it's lunacy.

[Joey]

I don't think capitalism is in crisis, I think the American way of running economies is however. Government has been over-regulating I'd say, and if it was a true capitalistic market we'd be in much better shape.

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