Jose D. Roncal
The current financial crisis has changed our perceptions of the term capitalism and everything we have always assumed it stood for. The deeper the recession gets, the longer it drags on, the more anger will get directed towards Wall Street.
The intellectual impact of the economic meltdown has been so enormous the financial systems will be changed beyond recognition. The investment banks, those that were formerly the foundation of Wall Street, have already either folded or merged into the ranks of retail banks. For the middle-income families who face losing their homes and their jobs, and for the Wall Street firms that have been falling like dominoes, the economic crisis has been disastrous. Even high-profile investors like Warren Buffett describe it as having “fallen off a cliff”.
Until the dust settles, no one can guesstimate what the total fiscal cost will be. For a major portion of the financial system, it’s now governments that have been thrust into the role of the primary borrowers, lenders, investors and insurers of last resort. The future landscape of the entire financial system will depend on how quickly and smoothly the government can dislodge itself from the deep hole of commitments they’ve dug for themselves. And the magnitude of the crisis will be measured by how well they manage it.
It’s not as if we haven’t been down this road before. Our economic system today is the result of the successful efforts to fix the mess of the 1930s. It’s also the results of the failures. While our current situation is still not as harsh as the Great Depression, it’s bound to leave a deep scars for years to come.
Over the past decade or more many government agencies have gotten sloppy or simply looked the other way as savvy, disreputable profit-seekers—the banks, hedge funds, insurance companies, and the Madoffs of the world—were allowed to take too many liberties while running roughshod through Wall Street. We are referring to the new complex investment structures, the toxic assets and tainted schemes, the so-called “wealth-creation investments” that got rammed past the gates and into the system.
These deals had so much leverage and so few underlying resources backing them up, you have to wonder how anybody managed to pull them off in the first place. The fact is that, with exception to a relatively small group of math wizards who were hired to run the numbers and structure the deals, nobody completely understood what was going on—not the buyers and not the sellers—which made it easy to keep pumping more deals into the pipeline. We now know that the government employees who get paid to understand such things, and who are charged with the responsibility to stand guard and protect the public from high level fraud, these are the guys that were asleep at the wheel.
But Wall Street and the banking industry was operating under the umbrella of capitalism, which meant that if so much money was being made, and if these deal were driving the market, then everything was fair game. It turned out to be a game alright, but not a fair game.
Now that the house of cards and the umbrella has collapsed, what is the future of capitalism? Will our current, broken system be replaced with a totally egalitarian, socialist society? That’s not likely. Instead, we predict something that Adam Smith might deem suitable.
With all the financial bailouts over the past few months, as well as those still on the table, we’re already witnessing a certain degree of government interference in “the market,” maybe a little more than we’d prefer, but we are taking a wait and see attitude considering the extreme situation we’re in. We expect to see a gradual increase in taxes as well as an increase in public scrutiny and a demand for higher accountability on the part of those who are still taking large profits—the “capitalists!”
But capitalism, albeit in a more muted version in the short term, will survive. Yes, capitalism has it flaws, but then so does democracy or any form of government. There may be moves toward the exits as citizens explore other modes of financial systems, but when none are discovered, the masses will once again hunker around the warm glow of capitalism.
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