Entry 864, on 2008-10-04 at 18:53:44 (Rating 3, Politics)
I just need to make one more blog entry regarding the American financial crisis. My opinions regarding managers, business people, capitalism, and the world financial system overall tend to be some of my most controversial. Well maybe my opinions on fundamentalist religion, creationism, etc might be even worse but that's really a different issue because there I'm debating from the side of the side of convention against the controversial idea that the universe is only 6000 years old (for example).
When it comes to business I am trying to point out that the traditional wisdom that free markets, businesses working for their own profit, and unregulated competition are the ultimate form of human endeavour is not reasonable. Many people admire millionaires, but should they really? Many rich people haven't really made a great contribution to the future of society as a whole and that money they have means there is less for the rest of us. Yes, I know that is a simplistic notion but its a point worth considering.
So getting back to the financial crisis I want to comment on an opinion I read defending the financial institutions which caused the problem. There was a comment there which really showed me the difference between "commercially oriented" people and the rest of us. It was this: "One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction".
Oh really? Every human interaction has greed as a feature? I wonder where this theory came from. It just shows the sort of attitude right wing economists have though in even saying something like that without even beginning on the subject of how they justify it as acceptable. Maybe they and the rest of their right wing money grabbing friends might see greed as an integral part of every interaction but please don't assume the rest of us do. Maybe that's why we don't succeed at business like you do!
But let's forget about the narrow subject of this particular disaster and look at the big picture. I like to think of it this way: imagine we were visited by an intelligent race of aliens and we were showing them the way human civilisation worked. Would we have the right to be proud of the way the world works?
Would we be proud to show them corporate managers who make no real contribution to society and are paid a fortune and next door at the university the person researching cancer has barely enough money to do the work?
Would we be proud that big corporations withhold or grossly overprice technologies which could be used in the third world to help save people from starvation and disease just so that they can return an even bigger profit to their already disgustingly rich shareholders?
Would we be proud that corporations pollute the environment, cause massive problems for the whole world because of climate change, then hide those facts and bribe politicians so they can continue doing it?
OK, I admit there are other sectors of society which cause similar problems but we're discussing business here. I'm not advocating a socialist state or the end of capitalism, I'm just saying let's stop pretending and accept that lack of control and more free markets are not the answer.
It seems you have misread the point. It simply said 'that greed is always a feature of human interaction.', not that every human interaction is greedy.
Here's a classic, even the idealist left-leaning students are looking after number one. As Cactus Kate highlights from this NZ Herald article.
But others are now more focused on the same issues of higher living costs and crime that worry older voters - especially the cost of housing.
'I was a student last time, so Labour catered for my needs,' said a Christchurch social worker, 25.
'Now that I'm working, it's what are they all going to bring to the party.'
Aside: When I use a double-quotation mark it previews as: `22 - do you know why?
Comment 2 by SBFL on 2008-10-08 at 00:24:48:
And of course the commentator you refer to in the 3rd paragraph is a university professor, not an economist.
When you use silly terms like big corporations and corporate managers, I'm sorry, but this just shows that you don't really know what you are harping on about. What about the politicians, for instance? Here is an interesting Washington Post article from June. The opening three paragraphs:
In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more 'affordable' loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.
Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.
Both candidates tried to blame each other for the crisis. Mr Obama accused Mr McCain of obstructing unspecified “common-sense rules” that supposedly could have prevented it. Mr McCain fulminated about Mr Obama’s ties to Fannie Mae and Freddie Mac, the government-backed mortgage behemoths whose reckless shepherding of loans towards un-credit-worthy borrowers helped create the crisis. In 2005, Mr McCain supported a bill to curb Fannie and Freddie’s excesses. Mr Obama did not, and his party blocked it in the name of helping poorer Americans to own houses.
So how about you desist from the silly Matt McCarten-style name calling and put some substance into your views on this issue?
Oh dear, comment six didn't turn out much better. The preview looks fine OJB, but the publishing goes bad. A bug methinks. I will split it up this time.
A few more articles I have read recently. A note of perspective: Financial panics have been around as long as there have been organised economies. There are common themes. The cause of today’s crunch—the buying of property at inflated prices in the hope that some greater fool will take it off your hands—has featured many times in the past. And the withholding of funds by institutional investors is merely the modern version of an old-fashioned bank run.
Comment 5 by SBFL on 2008-10-08 at 00:52:58:
...and the second part:
Another potential contributor from intervention: So controversial has accounting become that even John McCain, a man not known for his interest in balance sheets, has an opinion. The Republican candidate for the American presidency thinks that “fair value” rules may be “exacerbating the credit crunch”. His voice is part of a chorus of criticism against mark-to-market accounting, which forces banks to value assets at the estimated price they would fetch if sold now, rather than at historic cost. Some fear that accounting dogma has caused a cycle of falling asset prices and forced sales that endangers financial stability. The fate of Lehman Brothers and American International Group will have strengthened their conviction.
and: Already central banks have relaxed their rules on what they will accept from banks as collateral, which has helped to support the prices of risky assets.
Comment 6 by SBFL on 2008-10-08 at 04:59:31:
Sorry about the mess above. Feel free to delete comments 4,5,6 in order to tidy up the thread. I think it was my fault with the tag syntax, but I still don't know why it looked okay in the preview.
Now, my next point. I'll give you some credit in that you said you're not advocating a socialist state or the end of capitalism (despite the rhetoric preceding this statement). Of course a socialist state is no longer an option for enlightened nations anyway. Its been tried and it failed, over and over again. That just leaves capitalism - specifically good capitalism and bad capitalism.
Some extracts from an article on the issue of globalisation: One fear is that American jobs will disappear overseas. This is despite plenty of academic evidence that open economies generally do better than closed ones, that in America in particular many more and generally better jobs have been created in recent years than have been destroyed, and that the number of jobs lost to outsourcing is tiny compared with those wiped out by technological innovation.
...
In their 2007 book, “Good Capitalism, Bad Capitalism and the Economics of Prosperity and Growth”, William Baumol, Robert Litan and Carl Schramm identify four main models of capitalism around the world: entrepreneurial, big-firm, oligarchic (dominated by a small group of individuals) and state-led. Most economies are a mixture of at least two of these. The best economies, say the authors, blend big-firm and entrepreneurial capitalism. The worst combination may be of oligarchic and state-led capitalism, both of which are prevalent in many emerging markets.
...
At the very least, the growing role of states that often lack democratic credentials creates a sense that the competition from emerging-economy champions and investors is unfair, and that rich-country firms may lose out to less well-run competitors which enjoy subsidised capital, help from political cronies or privileged access to resource supplies. So there is a real risk that bad capitalism will spread in the coming decades. Yet at the same time this latest, multidirectional* phase of globalisation offers enormous potential for business to raise living standards around the world.
* This refers to not just companies in mature markets moving into emerging markets but the recent trend that the opposite is happening also. E.g. Tata Group and Lenovo.
And more on living standards: Goldman Sachs calculates that the global middle class—which it defines as people with annual incomes ranging from $6,000 to $30,000—is growing by 70m a year and rising. By 2030, the bank predicts, another 2 billion people may have joined this group.
Some interesting points on protectionism: In particular, how will these governments choose to mix the various models of capitalism described by Messrs Baumol, Litan and Schramm in “Good Capitalism, Bad Capitalism”? Ominously, the governments of some of the bigger emerging economies—notably Russia and China—seem bent on a mixture of state-led and maybe oligarchic capitalism, rather than the potent blend of big-firm and entrepreneurial capitalism that has served America, Britain and other rich countries so well.
- didn't you say Chinese capitalism is even worse than American? Seems the economists agree with you.
... Arguments for protectionism are based on fears that are wholly at odds with the evidence. The experience of recent years does not support the idea that millions of jobs will be outsourced to cheap foreign locations.... As Amar Bhidé of Columbia Business School argues in his new book, “The Venturesome Economy”, it is in the application of innovations to meet the needs of consumers that most economic value is created, so what matters is not so much where the innovation happens but where the “venturesome consumers” are to be found. America’s consumers show no signs of becoming less venturesome, and its government remains committed to the idea that the customer is king. Except, that is, when it comes to protectionism, which will hurt American consumers as well as slow the rise of the emerging markets and hence the escape of millions of their citizens from poverty. Far better to engage the emerging markets in the global economy and help them understand why it is to everyone’s benefit to promote the good models of capitalism, not the bad.
The biggest emerging markets are Brazil, Russia, India and China, amongst many, many other developing countries. The evidence shows that capitalism has lifted many millions of people out of poverty - a 'rising tide lifts all ships' scenario if you like; though that is not to say there aren't losers as well. So it's not perfect - no one ever said it was - but it's the best system there is and to say it hasn't considerably lifted the living standards of the worlds population - particularly in emerging markets like China and India - is worse than being a global warming denier (as you see one at least!).
In fact to promote protectionism (something more enthusiastically embraced by the left) is a form of greed. You are protecting the few in your own patch to the detriment of many in a much worse off situation to begin with. Yes, the greedy and corrupt can be found amongst the annals of capitalism, these people exist in all systems, but capitalism is your best bet, it produces the best value and net gain by far.
Comment 7 by OJB on 2008-10-08 at 20:02:47:
OK, I don't really know how to respond to all that. But I think you assume I have a far more extreme view than I really have. I have already said on several occasions that I don't trust capitalism but it is still the best system we currently have - in other words its the least bad system - sort of like democracy is the least bad political system.
But like democracy the problems with capitalism are mainly in the way it *does* work instead of the way it *should* work in theory. Therefore we need sensible regulation to control it, but many of the current controls aren't sensible.
I dislike too many rules, laws and regulations as much as anyone, so I don't think our views are really that different.
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