If capitalism is failing it is because of the greed and curruption that comes from removing regulations and oversight from capitalism’s biggest institutions – banks and big business. You are basically inviting an inevitable disaster as we saw with the financial meltdown.
Over the last week people from all classes and ethnicities camped out at Liberty Square near Wall Street to protest the abuse of capitalism by a small group of individuals. These individuals profited obscenely from recklessly taking advantage of the “deregulation” of the free market. Meanwhile, 99% of Americans saw their retirement funds plummet, got laid off from work or fired, and watched the value of their homes go underwater. In the meantime, CEOs of the very institutions that created this mess walked away with severance packages in the tens of millions. You cannot blame the protestors for their “free market” cynicism and for demanding accountability.
That said, this writer disagrees with the protestors who believe that we should not have bailed the banks and financial institutions. The president made the right decision acting fast and prudently to bail out the financial institutions (out of a mess that, by the way, that he wasn’t responsible for). The banks were experiencing unprecedented credit losses and lack of liquidity to finance the business operations of thousands of U.S companies. Had the president not bailed out the already financially shaken banks, many of the companies that had credit lines with those banks and relied on those banks for working capital most likely wouldn’t have been able to stay open. This would have fueled unemployment further and inevitably depressed economic activity. Most economists believe it would have turned a recession into a depression.
AIG, the insurance giant, is the most glaring example of the importance of the bailout. AIG threatened to bring down the entire credit system because it held a large stake in the multi-trillion-dollar, “UNREGULATED” derivatives called credit default swaps (“CDS’). AIG sold CDS contracts to banks, hedge funds and big investors all over the world. A CDS is basically a guarantee from the seller that they will make good in the event of a default on mortgage debt. When the housing bubble burst and the mortgages started defaulting in an unprecedented pace, AIG had to make good on billions in those insurance contracts. AIG had hundreds of billions of potential credit defaults to cover. Had AIG not received a much needed bailout, it would have caused a chain reaction of defaults and bankruptcies of other financial institutions. This would have destabilized the financial markets and the U.S. economy would have very likely fallen off a cliff.
So what has President Obama done (that by the way George Bush didn’t do) to address deregulation – the main driver of the financial meltdown? One of President Obama’s most important achievements is the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank law provides comprehensive regulation of the financial markets such as an oversight council to evaluate systemic risk in the markets, and increased transparency of institutions dealing in derivatives. Dodd-Frank was put in place to reign in the Wall Street bankers from the type of reckless behavior and high risk business practices that puts their capital and our financial system at risk.
We need business and banks for economic activity and jobs. If you don’t have bank borrowing and lending, almost all economic activity will die. We also need oversight and government regulation like the Dodd-Frank law. The GOP has some like Newt Gingrich on the other hand, who want less regulation and want to repeal Dodd-Frank. Gingrich has a laissez-faire view of deregulate-everything-and-the-market-will-police-itself. If it were up to Gingrich, bankers and Wall Street traders would have free reign to once again put profits ahead of the interests of the American people. We have already seen how that worked out. No thanks.
Capitalism can work but like government absolutely requires some form of checks and balances.