“The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization.”
Mikhail Gorbachev
Capitalism is an economic system where means of production are privately held. This allows individuals to operate for profit in a “free market scenario”. Though Capitalism in its current form owes its existence from the thinking of Economists since the 17th century, it can pre-date its existence by centuries.
Capitalism in its various forms has been in existence since very early ages. The barter system, the ancient Silk Route from China to the Roman Empire, the Arab trade in spices from India to the West is examples of Capitalism. This trade was characterized by Merchants and hence came to be called Merchant Capitalism. Merchant Capitalism slowly evolved from individual “Merchant” to the partnership form. Mention of this is found in text from the 9th century to the 15th. Partnership or Mufawada, in Arabic, compagnia in Europe and the Vaishya or trading communities in India have been around for centuries. The concepts of Credit, Profit, capital, credit notes etc have all revolved around the early trading systems of barter and gold.
The Industrial revolution replaced the “Merchant Capitalism” by the market Economies of the present Western world. Capitalism in its present form has been characterized by the principal of Laissez Faire. The Principle of Laissez Faire has been around for more than 300 years. It has been derived from a slogan “Laissez faire et laissez passer" meaning 'Let do and let pass'. Another slogan “Laissez faire et laissez passer, le monde va de lui même!" added the words “the world goes by itself”.
Laissez Faire at its core advocated non state intervention and profit as its core. Eminent leaders have all advocated this in present times from Churchill to Thatcher, Reagan to Bush.
“The substance of the eminent Socialist gentleman's speech is that making a profit is a sin, but it is my belief that the real sin is taking a loss”.
Winston Churchill
The issue with unregulated Capitalism is that it discounts certain basic human elements such as blind greed. It also assumes that markets would be able to be self regulating.
“Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.”
John Maynard Keynes
Mikhail Gorbachev
Capitalism is an economic system where means of production are privately held. This allows individuals to operate for profit in a “free market scenario”. Though Capitalism in its current form owes its existence from the thinking of Economists since the 17th century, it can pre-date its existence by centuries.
Capitalism in its various forms has been in existence since very early ages. The barter system, the ancient Silk Route from China to the Roman Empire, the Arab trade in spices from India to the West is examples of Capitalism. This trade was characterized by Merchants and hence came to be called Merchant Capitalism. Merchant Capitalism slowly evolved from individual “Merchant” to the partnership form. Mention of this is found in text from the 9th century to the 15th. Partnership or Mufawada, in Arabic, compagnia in Europe and the Vaishya or trading communities in India have been around for centuries. The concepts of Credit, Profit, capital, credit notes etc have all revolved around the early trading systems of barter and gold.
The Industrial revolution replaced the “Merchant Capitalism” by the market Economies of the present Western world. Capitalism in its present form has been characterized by the principal of Laissez Faire. The Principle of Laissez Faire has been around for more than 300 years. It has been derived from a slogan “Laissez faire et laissez passer" meaning 'Let do and let pass'. Another slogan “Laissez faire et laissez passer, le monde va de lui même!" added the words “the world goes by itself”.
Laissez Faire at its core advocated non state intervention and profit as its core. Eminent leaders have all advocated this in present times from Churchill to Thatcher, Reagan to Bush.
“The substance of the eminent Socialist gentleman's speech is that making a profit is a sin, but it is my belief that the real sin is taking a loss”.
Winston Churchill
The issue with unregulated Capitalism is that it discounts certain basic human elements such as blind greed. It also assumes that markets would be able to be self regulating.
“Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.”
John Maynard Keynes
Laissez Faire has enabled the concentration of wealth which has created the emergence of “Financial Capitalism”. The US economy had been increasingly marked by non intervention of the state in the financial sector as evinced in Milton Friedman’s Economics. Friedman in his book “Capitalism and Freedom” favored reducing the role of government as a means to create political and social freedom. His philosophies greatly influenced the policies of Ronald Reagan and Margaret Thatcher.
Ben Bernanke, the current chairman of the Federal Reserve, is an ardent believer of Friedman’s Economics. He paid tribute to Milton Friedman on his ninetieth birthday “I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again”.
The current crisis caused by the financial meltdown has brought onto centre stage “Social interventionism” as an ideology. This involves the intervention of a government in the affairs of the market. Practically all the major leaders of the industrialized nations are falling over themselves to provide Government funds to tackle essentially “Private Problems”.
Laissez Faire’s demise would have at its root the unbridled quest for maximum profit without any oversight whatsoever, as characterized by Wall street in its actions from the passing of the GLB act in 1999 and the removal of the “Net Capital Rule” in 2004.
To contain the damage from the economic crisis, the EESA has been passed by the US Congress. The Emergency Economic Stabilization Act of 2008 (EESA) is $700 billion package devised to rescue financial institutions by purchasing devalued mortgage-linked assets. A fundamental shift in this package is a proposal to place limits on executive's compensation, another blow to Laissez Faire.
However the questions arise:
Will these funds help save some limited people at the expense of a vast many? Would it by like Fannie Mae and Freddie Mac, Profits are ours, the losses are somebody else’s?
Or is it the end of Laissez Faire and the beginning of a socialist society?
Answers on Linkedin:
http://www.linkedin.com/answers/financial-markets/equity-markets/MKT_EQU/342428-564729
6 comments:
Perhaps the best analysis published... http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx
Here are my thoughts:
If the government is going to fish our economic waters, they better practice catch-and-release. Or else they'll drain the lake of all species for future generations. There better be a long-term plan to replenish and preserve laissez-faire, or the fishin' hole will dry up. Perhaps we'll see that the bailout is a necessary temporary fix that will lead to long-term prosperity and actually more laissez-faire. This will only happen if the gov't eventually sells its new ownership stake and cuts the cord after the re-birth of the economy.
What we don't need is a sustained approach to socialize and regulate and prop-up the losers. We need more of a Libertarian position when it comes to economics... Let the markets rule... Let good business dominate and let bad business fail! Propping up failed businesses will lead to more bad business and more debt, a weakened dollar, and even more gov't spending. We need more Free Enterprise, I mean a finely honed version of Capitalism without political influence.
Here's the problem. Capitalist societies tend to become more socialist over time. I believe this natural socialization process was first explained by Adam Smith, the great 18th-century Scottish economic and morality philosopher who has been championed as a founder of laissez-faire economics. We've seen that such a phenomenon is because successful capitalists become perceived as so powerful that it urges government to break them down (anti-trust laws, over-taxation, unionization, etc.) out of fear and political ambition. The have-nots revolt against the haves, voting in politicians who are hell-bent on wealth redistribution in order to gain votes from the more popular poor voting base. Social programs get implemented by politicians and funded by the haves in order to keep order amongst the have nots. And then the people start to get a sense of entitlement, getting used to hand-outs. They see prosperity and they want it, but they don't understand the sacrifice it takes to get it. They continue to fund and vote for politicians who promise to give them what they want without having to earn it (including, it seems, even higher education, first class health care, food, cash in the form of tax credits, and plenty of pork). Businesses become unable to afford the employment of the American laborer, so jobs get shipped off. Businesses incorporate overseas to avoid the 2nd highest corporate tax rate. The haves are disincentivized to produce more. Our economy is drained, our nation becomes poorer and less competitive. Just in time for China to start opening its doors to laissez-faire.
The question is, who is going to lead our country back to the principals of laissez-faire that made the U.S.A. so great? Here's a hint: (It ain't Obama.)
Also, if we had a simple, fair tax code, a flat tax on production and consumption that allows U.S. businesses to be competitive around the world, we'd have lower unemployment, greater productivity and more prosperity.
"In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. A central element of Say's Law is that recession does not occur because of failure in demand or lack of money. The more goods (for which there is demand) that are produced, the more those goods (supply) can constitute a demand for other goods. For this reason, prosperity should be increased by stimulating production, not consumption. In Say's view, creation of more money simply results in inflation; more money demanding the same quantity of goods does not represent an increase in real demand." (Wikipedia)
Links:
http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx
Michael McMorris, QPA, QKA
Well the question itself is disturbing. Where investor money is concerned why was a "Laissez Faire" adopted in the first place? For any market to perform to its optimum it necessitates having a set of checks and balances. Shouldn’t there have been regulations in place to ensure that this situation didn’t occur? Why was the regulator napping or worse sitting with its eyes shut while huge organisations went ahead and gambled (and lost) investor money. Isn’t the regulator a guilty party to this whole affair? So then who takes the government to court?
“Free market capitalism works only to a point. A truly free market would have no regulations whatsoever. Yet, in the US we have grown through various economic booms and busts stretching back to our beginning. And the enlightened view is to basically allow economic players room to do what they can on the playground but within the confines of the fences of the playground.
Business does better in the long run when there are predictably rules to the game. And when confidence is shot then drastic actions need to be taken to bolster that confidence.
Allowing too much laissez faire can be a problem. The image of the cowboy and the Wild West is appealing but erratic and unpredictable moves make it difficult to do business.
So the elimination of the "Net Capital Rule" and the Fed's inaction on the issue of derivatives is an example of bad Wild West policy.
When the federal government first got involved they thought that it could be done on the cheap. By picking and choosing which banks to support in an ad hoc basis, it contributed to the uncertainty. By letting Lehman collapse, the government contributed to the loss of confidence.
Hopefully, the quick, if not halting, actions of the past few weeks here and in other global markets will help avert a much deeper and prolonged problem. But this band aid will likely need another.”
YES- you are right..back to Nationalization.If the U.S. government moves ahead with a plan to take ownership stakes in American banks, as seems likely, it would be an exceptional step - but not an unprecedented one.The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, but the practice is sometimes different. Over the past century, the U.S. government has nationalized railways, coal mines and steel mills, and it has even taken a controlling interest in banks when that was deemed to be in the national interest.The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under government stewardship.Finance experts say that having Washington take stakes in U.S. banks now - like government interventions in the past - would be a promising step in addressing an economic emergency. The plan being weighed by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets. Across Europe, governments rolled out similar initiatives Monday.In other countries, the government bank-investment programs are routinely called nationalization programs. But that is not likely in America, where nationalization is a word to avoid, given the cultural aversion to anything that hints of socialism.Putting this plan on the table makes a lot of sense, but you can't call it nationalization here," said Simon Johnson, an economist at the Massachusetts Institute of Technology's Sloan School of Management. "In France, it is fine, but not in the United States."
In times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. Bondholders and stockholders were compensated, and railroads were returned to private ownership in 1920, after the war ended.
During World War II, Washington seized dozens of companies including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industry-wide strike that would cripple the Korean War effort. That forced nationalization did not last long, since the Supreme Court ruled the action an unconstitutional abuse of presidential power.
In banking, the U.S. government stepped in to take an 80 percent stake in the Continental Illinois National Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As one of the country's top 10 banks, Continental Illinois was deemed "too big to fail" by regulators, who feared wider turmoil in the financial markets. Continental was sold to Bank of America in 1994.
Yet the nearest precedent for the plan the Treasury is weighing, finance experts say, is the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks but also bought stock in 6,000 banks, at a total cost of about $3 billion, said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.
A similar effort these days, in proportion to the current economy, would be $400 to $500 billion, Sylla said.
When the economy eventually stabilized, the government sold the stock to private investors or the banks themselves.
That program was a good one, experts say, but the U.S. government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis to revive the patient.
Ramesh Manghirmalani
Ramesh Manghirmalani added the following clarification:
"The goal is to get the engine of capitalism going as productively as possible," said Nancy Koehn, a historian at the Harvard Business School. "Ideology is a luxury good in times of crisis."
The government plan to buy stakes in banks would be the latest step in Washington's efforts to ease the credit crisis. The government has already spent or authorized $800 billion to keep the investment bank Bear Stearns and the troubled insurer American International Group from collapsing and for the economic rescue package to buy soured mortgage-backed securities from banks and Wall Street companies. The Federal Reserve has cut interest rates and pumped money into the banking system to get the normal business of lending going again.
Nothing has turned the tide yet.
After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state role in the economy.Europe today remains far more comfortable with government's having a strong hand in business. So when Sweden, for example, faced a financial meltdown in the early 1990s, the nationalization of swaths of the banking industry was welcomed.
The Swedish government quickly bought stakes in banks, much as the Treasury is considering, and sold most of them off later, a model of swift, forceful intervention in a credit crisis, financial experts say.
"The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?" said Robert Bruner, a finance expert at the Darden School of Business at the University of Virginia. "The auto industry is in dire straits, and the airline industry is in trouble, for example."
"But the spillover effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense
Ramesh Manghirmalani
Hi Sunil,
LIBOR will fall - Libor-OIS spread traded at record 3.67%, TED spread traded at 4.65% and Libor traded at 4.82% (Oct 10). Without EESA unemployment would have been higher and Americans would have had less access to credit.
The G-7, G-20, EU, IMF & World Bank have formulated plans this last week and will fix the 'crisis' by pouring liquidity into the markets - the US Treasury may use the $700 billion EESA to buy equity positions in financial institutions: $25 billion in each Citigroup, J.P. Morgan, Wells Fargo and Bank of America/Merrill Lynch, $10 billion in each Goldman Sachs and Morgan Stanley, $3 billion in State Street Bank and $2 billion in Bank of New York - with preferred stock, warrants, compensation limitations and the FDIC supports interbank lending.
Federal Housing Finance Agency orders Fannie Mae and Freddie Mac (FHFA is their new regulator) to purchase $40 billion a month of underperforming mortgage bonds - to promote greater stability and liquidity in the U.S. mortgage market.
G7 (United States, Japan, Germany, France, Italy, the United Kingdom and Canada) agrees to recapitalizing banks with public and private funds, insure depositors and unfreezing credit markets. G20 (G7 plus China, Brazil, Russia, India, Mexico, South Korea, Saudi Arabia, Argentina, Australia, Indonesia, South Africa and Turkey) commits to "using all the economic and financial tools to assure the stability and well functioning of financial markets" - they account for about 90% of global gross domestic product. IMF's 185 member nations endorse a commitment to "use all available tools" to prevent systemic failure. World Bank agrees to help developing countries strengthen their economies, bolster their financial systems and protect the poor against the financial turmoil in international markets.
15 leading European nations commit $1.8 trillion and agree to a 14pt plan to aid troubled banks by adding capital through investment and by guaranteeing inter-bank lending. European governments (Germany, Ireland, Sweden, Austria, Denmark, Iceland and Greece) guarantee all private savings accounts. European Union countries raised minimum guarantees for bank deposits to €50,000 while the ECB raised overnight lending to $100 billion. The United Kingdom (£37 billion), Spain (€100 billion), Russia ($36 billion), Portugal (€20 billion), Norway ($55.4 billion), German (€400 billion), Netherlands (€200 billion), Austria (€85 billion) and France (€320 billion) establish plans to support their domestic banking systems.
This is a Panic - most of the losses will be recovered shortly after the bottom.
Buy Low - Sell High. Without EESA unemployment would have been higher and Americans would have had less access to credit.
JC Brandon
Links:
http://www.JCBCapital.com
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