This is one of the most honest and clear statements I have read on what happened in the financial crisis and what we still need to fix in order to regain strength in the global economy. It is penned by the Dallas Fed Director of Research Harvey Rosenblum. I would like to highlight pretty much every word; but here are some key takeaways:
For capitalist economies to thrive, weak companies must go out of business. The reasons for failure vary from outdated products, excess industry capacity, mismanagement and simple bad luck. The demise of existing firms helps the economy by freeing up resources for new enterprises,leaving healthier survivors in place. Joseph Schumpeter coined the term “creative destruction” to describe this failure and renewal process—a major driver of progress in a free-enterprise economy. Schumpeter and his disciples view this process as beneficial despite the accompanying loss of jobs, asset values and equity…
An unfortunate side effect of the government’s massive aid to TBTF banks has been an erosion of faith in American capitalism. Ordinary workers and consumers who might usually thank capitalism for their higher living standards have seen a perverse side of the system, where they see that normal rules of markets don’t apply to the rich, powerful and well-connected. Here are some ways TBTF has violated basic tenets of a capitalist system:
Capitalism requires the freedom to succeed and the freedom to fail.
Hard work and good decisions should be rewarded. Perhaps more important, bad decisions should lead to failure—openly and publicly. Economist Allan Meltzer put it this way: “Capitalism without failure is like religion without sin.”
Capitalism requires government to enforce the rule of law.
This requires maintaining a level playing field. The privatization of profits and socialization of losses is completely unacceptable. TBTF undermines equal treatment, reinforcing the perception of a system tilted in favor of the rich and powerful.
Capitalism requires businesses and individuals be held accountable for the consequences of their actions.Accountability is a key ingredient for maintaining public faith in the economic system. The perception—and the reality—is that virtually nobody has been punished or held account-able for their roles in the financial crisis.
The idea that some institutions are TBTF inexorably erodes the foundations of our market-based system of capitalism.
Read the whole report here:Choosing the Road to Prosperity
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There are two extremes: true communism and pure capitalism. This article appears to speak of the latter. Both systems lead to human misery because they are idealistic and not realistic due to human frailties: sloth and greed to name a few. Somewhere in the middle is a workable desirable alternative which blends the advantages of the two. But it takes a altruistic government to reach that happy medium. Unfortunately, such a gov’t doesn’t exist!