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Capitalism's Fundamental Flaw

forbes.com

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Re: Capitalism's Fundamental Flaw

#71

Post by darjen »

sethg wrote: post #57
darjen wrote: post #26

A fundamental flaw in the article: "The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from b…

Banks, more so than most enterprises, are stepchildren of the state. You can't charter a bank without "government intervention", because a bank's stability, and hence its ability to attract depositors, depends on things like access to credit from the government (the Federal Reserve, in the US). The question is not "government intervention" vs. "no government intervention", but rather what kind of intervention is in t…

you're right, our banking system isn't even remotely close to being based on voluntary trade and "free market". so I'm not sure how we can even discuss this supposed failure of the free market.

Re: Capitalism's Fundamental Flaw

#72

Post by condor »

AndrewDucker wrote: post #35
darjen wrote: post #26

A fundamental flaw in the article: "The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from b…

Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse? Hint: a lot like a jenga tower does just after you take away a vital piece. Letting the entire financial system collapse might _possibly_ have led to better behaving banks in the long term(although I doubt it, people don't learn). But in the short term it would have cascaded through the…

"Do you have any idea what the current financial situation would have looked like if the government had just let the banks collapse?"

No, and neither do you. That's why its called a free-market. It's free to do anything. It's not a free-market thats only free to take the form of what our expectations are.

Re: Capitalism's Fundamental Flaw

#73

Post by danek »

moron4hire wrote: post #39
kansando wrote: post #37

Earlier quoted context omitted.

Right. And allow the economy to go into a long-term depression with 25%+ unemployment. A government "for the people" does not have a choice in this matter. The real problem is that bankers/speculators have so much power on the outcome for people who are not at all related to the industry.

You write like you have a crystal ball and can see the future. There is no telling what "letting the banks fail" will do for the long term. However, we do know that increasing national debt to the degree that has been done is not good.

There is also no telling how bailing out failed businesses will help us in the long term either. Intuitively it seems worse to me. And unfair--what about all the other banks that didn't screw up by leveraging 35:1?

Re: Capitalism's Fundamental Flaw

#74

Post by dantheman »

fnid wrote: post #69
dantheman wrote: post #58

Earlier quoted context omitted.

We are more regulated now than we've ever been before. All this talk about deregulation, though real in some cases, often just meant a decline in the rate of new regulation. When there are less regulations people take interest and make sure things work correctly. For instance, when opening a bank account most people don't do much research because they're all FDIC insured -- who cares what the bank does with your mone…

We are not more regulated than ever before, that's just not true. Regulations are being removed and the regulators are more lax. Did you see what Madoff said about the regulator looking at his business? He called him a blow hard. I also don't think most consumers of banking products are able to determine the solvency of a bank. If the FDIC wasn't there, the account holders would be at greater risk even if they did ca…

Just because the regulators are inept doesn't mean that there aren't more regulations. http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html

Perhaps an individual isn't able to tell, but consumer reports would be able to.

Each individual working in their best interest reforms the market. If they believe that it is unfair, e.g. insider trading, then they will refuse to take part. Thus a market would form to cater to these individuals.

Re: Capitalism's Fundamental Flaw

#75

Post by richcollins »

viggity wrote: post #23
richcollins wrote: post #21

"Integrity, justice, fairness, work-ethic, excellence--all have fallen prey to greed." Greed is tempered by risk when the government can't save you.

Greed would be tempered a lot more by risk if the government didn't save anyone.

Yes I should have worded it "when you can't rely on the government to save you"

Re: Capitalism's Fundamental Flaw

#76

Post by hugothefrog »

From the article:

"She assumed integrity is implicit in the characters of the "leaders.""

I haven't read much Ayn Rand (i.e., none), but I've read a lot about what she has said and written. Is the quote from the article above dramatic license on the case of the author, or did Rand actually state that integrity is a required characteristic in the 'leaders'?

Re: Capitalism's Fundamental Flaw

#77

Post by moron4hire »

KirinDave wrote: post #66
danteembermage wrote: post #62

Earlier quoted context omitted.

I think his point is that, traditionally lending was a very local matter with local banks and local capital issues. If Norwegian pension funds want to fund a mortgage for a home in Paducah, KY, without some kind of securitization they're stuck earnings treasury rates and the home loan is charging the interest rate demanded by Paducah capitalists whether its higher than the Norwegian's rate are not. The point is, ther…

Sure, but that doesn't change the fact that he's implicitly equating an accounting technique with the Theory of Relativity, the invention of the Internet, etc. This worldview seems shocking to me. It's hard to imagine that someone can equate a vaccine for polio and a statistical method as equally beneficial to society, especially when one caused such woe and the other eradicated a crippling disease.

I never made that valuation, you made it for me. I said that the author implied finance was a lesser career choice than nuclear physics, then provided an example where statistical analysis can be used in finance to provide a social good.

Not all bad-credit people are bums looking to default on their loans, skirting the credit collectors as long as they can, living on the underbelly of society. But people who were hit hard by a disaster, made a few mistakes in the past, or are just getting started out are lumped in with the deadbeats. Unfortunately, there is no way to tell them apart, based on financial numbers. By minimizing risk in dealing with these types of loans, the people who are legitimately trying to improve their lives are given an avenue to show they are responsible enough to own a home.

There is still risk involved, but the construct is not inherently deceiving about its risk level. The problem was over-leveraging on this type of activity. Even over-leveraging on mutual funds and money market funds can make you lose your shirt.

"an accounting trick to statistically suppress risk" Mortgage-backed securities as a construct unto themselves are no more an "accounting trick" anymore than accident, life, or health insurance policies are "account tricks". Regardless, "risk" is nothing but a probability factor anyway. Risk is the probability of losing money on an investment, not the certainty of it. To organize assets together in vehicles that allow the earnings of the winners offset the losses of the losers, you're not performing accounting legerdemain, you are reducing actual risk.

Re: Capitalism's Fundamental Flaw

#78

Post by yummyfajitas »

KirinDave wrote: post #43
darjen wrote: post #26

A fundamental flaw in the article: "The banks, however, are another matter altogether, and this is where I think capitalism has hit a roadblock. The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from b…

I wouldn't say that was the main thrust of the article, by any means. You take one sub-point amongst a set of much larger and more important points and mine it out and claim that yet again, government intervention has proven useless. Her main points, for those who will tl;dr the article and take your post for granted: 1. People do not always act in ways that are inherently good, either in an ethical sense or in a sen…

Regarding 1, that's nonsense. There are many unethical people in positions of power in both Atlas Shrugged and the Fountainhead.

Near as I can tell, the most she ever suggests is that people who compete within the market (e.g., by inventing a better metal or making better loans) are more ethical than those who use the government to gain an advantage.

Re: Capitalism's Fundamental Flaw

#79

Post by sethg »

moron4hire wrote: post #63
sethg wrote: post #53

Earlier quoted context omitted.

Expansion of the money supply is not "counterfeit" money, although there are circumstances where it is a bad idea. Counterfeiting is when a private citizen decides to, as it were, expand the money supply with his or her own printing press.

Why should we treat the action of the government differently from the same actions of citizens? Wouldn't it be wrong for a government to murder people with no provocation? Wouldn't it be wrong for a government to kidnap people and hold them captive in a secret location? Why then is it fine for the government to debase the currency, and therefore destroy the value of any accounts held in that currency? This is the cur…

Why then is it fine for the government to debase the currency, and therefore destroy the value of any accounts held in that currency?

The value of the currency depends on what I can exchange it for. If the US dollar's value relative to the things I buy and sell remains relatively stable over the next few years, and if my risk of losing my job remains low so that I can feel confident in my ability to keep earning those dollars, then as far as I'm concerned, the Fed is doing its job.

If the US dollar's value relative to gold goes down, I couldn't care less. I can't eat gold.

Re: Capitalism's Fundamental Flaw

#80

Post by yummyfajitas »

aswanson wrote: post #42
billswift wrote: post #38

Earlier quoted context omitted.

It could have, but I have seen no evidence to support this. In fact, that is why the econo-blogger Megan McArdle at The Atlantic supported the bank bailouts, because she feared that would happen. But despite reading her blog regularly, she has presented evidence only her (and others) fears about what could have happened.

C.f. for what (possibly) happens when banking systems collapse: http://www.livinghistoryfarm.org/farminginthe30s/money_08.ht...

That's also what (possibly) happens when your agricultural system fails due to a dustbowl/drought, free trade is eliminated, big chunks of industry/labor cartelize, and the government takes over huge sectors of the economy.
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