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    February 18, 2009

    Capitalism won (I think)

    Posted by: Andoni


    As you may remember, after the long struggle to prove which system worked better, capitalism or communism, capitalism finally won in the late 1980's. This was mainly the result of the Soviet Union falling apart and the exposure that their communist system was totally bankrupt - top to bottom. The world had been observing these two competing systems for over 50 years and when the curtain was finally removed in the East, most countries decided that the free market, capitalistic system was the one to follow.

    How did communism ever become a viable alternative to capitalism in the first place? Karl Marx founded the theory of communism and in 1917 the Bolshevik Revolution gave it a home where it struggled for traction -- until the Great Depression. After the 1929 stock market crash and the economic collapse that occurred in the 1930's, communism had the evidence it needed to demonstrate the brutal failure of capitalism. During this period as more and more countries looked at both capitalism and communism, they  freely chose communism because capitalism clearly wasn't working. In fact a main fear of the Franklin Roosevelt Administration during the Depression was that there would be a communist revolution in the United States because of the failure of capitalism. To ward this off, FDR instituted many socialistic programs such as Social Security, the Works Progress Administration, etc to keep the people happy and away from thoughts of a communist revolution.

    Now capitalism is having a bad time again. The ugly side of free markets is visible to the entire world.

    So here's my thought experiment for today:

    What if the current economic meltdown had occurred in the late 80's instead of now. Would the majority of nations have decided that capitalism won ... and decided to follow the free market model?

    I believe that at a minimum the conclusion would have been that a totally free market system with almost no government oversight or control was not the model to follow.

    So did capitalism really win -- permanently? Did the world render a verdict before all the evidence was in? Now as our curtain is being removed and more and more free market failings keep being revealed, what does the world think? Also of note is that the United States is becoming more and more socialistic to help avert a total collapse.

    So who really won the war between socialism and capitalism? I think only time will tell.



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    1. Hawyer on Feb 18, 2009 6:39:53 PM:

      Interesting topic for sure; however, I think pulling the plug on capitalism would be a tad drastic at this juncture.

      When Ronald Reagan kicked off his 1980 campaign in Philadelphia, Mississippi under the segregationist shorthand of "states rights", he uttered his now famous homily: "what are the nine most terrifying words in the English language?" Answer: "I'm from the government and I'm here to help." To the economic royalist, this translated into capitalist liberation; to the rank and file worker, this translated into war on the middle class.

      Playing on the socially racist and fiscally conservative moorings of of the solidly Democratic South, he set in motion a 28-year Republican jihad to strip the country of virtually every check, balance, and safety-net set in place by Roosevelt's New Deal.

      Many cite the 1999 repeal of the Glass-Steagall Act - which had precluded banks from getting into the brokerage business since 1933 - as the straw that broke the camel's back. The brainchild of Texas Republican Phil Graham and signed into public law by Bill (don't-ask-don't-tell) Clinton, the Gramm-Leach-Bliley Act virtually cut loose banks to operate as Ponzi artists.

      But even so, without George W. Bush's and Dick Cheeny's 8-year binge of crony capitalism, privatization, and no-bid contracts, we likely would not have gone over the edge. Cronying-up virtually Federal agency with political hacks, rather than career professionals, his nemesis was FEMA head Michael Brown, whose only credentials were heading up the Arabian Horse Association. Accordingly W's mid-Katrina assessment, "You're going a great job Brownie", will forever illustrate a spectacular disconnect between politics and constituency - ranking right up there with Marie Antoinette's "Let them eat cake".

      The irony, of course, is that when you take the bumpers off bumper cars, you create a demolition derby - which is precisely the debris field created by today's financial meltdown.

      Obama's thankless job will be to reconstitute the rules of engagement between the capitalism and the people whom it purports to serve. Re-regulation and Keynesian stimulus are the only tools in his tool box. Meanwhile, Republicans have cast their futures as obstructionists - wagering on Obama and presumably America's failure. Indeed the world is watching.

    1. C.M. on Feb 19, 2009 3:25:55 PM:

      Interesting topic, and commentary for sure. However, Hawyer, while the last 8 years have so been fraught with "crony capitalism," it has been no different under the auspices of Democratic leadership... their cronies just happen to more intelligent than those on the right. Although Bill Clinton admitted to a CNN interviewer on Tuesday that he "should have better regulated derivatives," he also left us with a surplus (not to mention Monica Lewinsky's dry-cleaning bill!). Unfortunately, with a Treasury Department packed with former I-bankers and hedge fund managers, it is difficult to conceive of tighter regulations for derivatives markets being rolled out anytime soon. As the White House is busies itself with stop-gap measures to prevent a recession-worthy entr'acte of zombie banks and toxic asset proliferation, the only real coup that would restore objective faith in the system is a concomitantly judicial and pervasive regulatory system.

      The SEC should not pick and choose which financial instruments it feels like regulating - every financial instrument should be regulated and all forthcoming instruments should be rigorously reviewed before they are allowed introduction to the market to determine whether they are of sound design and, more importantly, what the potential pit-falls could be for industry as well as society-at-large. To get to the root of the issue, capitalism's current woes are a calamitous amalgam of President Bush/the GOP's ideological bias, the SEC's willful ignorance, the moral malfeasance of Wall Street, and the Fed’s blithe lack of interest. More specifically, nobody wanted to question the housing boom or the profitability of mortgage-backed securities: not the mortgage lenders who were making billions by selling your mortgage agreement to Wall St., who then diced it up, securitized it, finagled a triple-A investment grade for it (from ratings agencies who were all competing for their business), and then sold it to you, your mother, and even foreign countries; not the President, whose domestic “Ownership Society” was flourishing just as his nation-building abroad was crumbling; not the homeowner, whose home equity soared and was resultantly able to borrow money against that equity increase to buy the material items requisite to complete their American dream.; and certainly not the Wall St. trader, who was getting paid million dollar bonuses to peddle a sure thing to you by arguing that, “people will always pay their mortgages.”

      People didn’t pay their mortgages and the Wall Street managers who prematurely plucked them from the garden ‘o cash didn't have back-up plans in place to cope with the crash in housing prices. Worse, they didn't understand the complex investments – like mortgage-backed securities -- their companies were making, that they leveraged or borrowed too much to make those investments, and that ratings agencies failed to accurately gauge how much risk these investments posed.

      And so, Adonai, had this crash happened in the late ‘80s, would the majority of nations still have decided to follow the free-market model? Absolutely. This crash wasn’t a failure of the free market – it was a failure of intelligence and morality. Mortgage-backed securities were championed on ideological terms (see: Americans always pay their mortgages), imprecisely defined investment vehicles designed using made-up math (see: stupid), and knowingly traded on the open market by morally bankrupt traders who were fully aware they were peddling risky goods that they didn’t understand, and pressured ratings agencies who were hungry for their business to label these investments as “AAA,” the industry standard for “totally safe.” Couple this with the government’s gross lack of oversight and the President’s unwillingness to question the Providential hand pushing forth his “Ownership Society,” and bingo, we have an economic meltdown upon the return of intelligence when we finally realized, “oh, crap, people can’t pay their mortgages and my broker is an idiot.”

    1. Lorenzo from Oz on Feb 25, 2009 4:24:39 PM:

      The financial meltdown is spectacular (and more complicated than "almost no government oversight") but the American recession is less dramatic. And the US is suffering less of a fall in output than other major economies. Apart from the financial meltdown, the US economic indicators are, in fact, rather better than in the early 1980s and not coming off the stagflation of the 1970s. Indeed, the meltdown required a series of bubbles, which were the results of prolonged economic growth.

      Socialism, on the other hand, had much bigger problems. Soviet economic growth constantly trended down, life expectancy was stagnant, the economy was much less functional than that of any Western economy. In North Korea, you are still getting collectivisation famine. It is a commonplace of development economics that government firms tend to declining productivity, etc. Ask the Chinese politburo if it wants to go back to its pre 1979 economy.

      There will be some minor revival of socialist activism, and hopefully financial system regulation will improve markedly, but this is not going to be a major turning point in system terms.

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