What’s most distressing about this whole financial mess is that very few people seem to understand what’s going on. This of course greatly reduces the quality of the options that we will choose from in order to get out of trouble. As poor choices are implemented and then do not work out as intended, people become even more confused about what’s actually going on.
So when I hear the sentiment that we should let the banks fail, all sorts of red flags go off in my head. Everyone is confused.
One, the banks are not like failed web startups. They weren’t bad ideas with no monetization potential. They actually hold peoples’ money and lend out money for investment. Finance allocates capital for businesses to operate.
Two, there is danger in ascribing punishment onto the market for its “sins” so that it can learn a lesson instead of profiting from gaming morally hazardous opportunities. In my opinion it is a fundamental misunderstanding of capitalism to assume that businesses will be morally responsible. Businesses are required to make as much money as possible. If regulations and laws allow a company to do things that are morally questionable, they will still do those things unless the CEO/board has some belief that certain moral principles actually lead to more profit.
That is to say, the “lessons learned” and avoiding moral hazard are tasks of the government. Laws and regulations should be crafted in such a way so as not to impede business or tempt government interests, but to allow for a fair market. In the financial sector, this is even more important because of the large gains to be made by gaming the system. Past loosening of restrictions allowed for sub-prime mortgage disasters, and now the government is trying to fix it by restricting of short sales and mark-to-market accounting. The sense one gets from these actions is that those making the laws have no understanding of the sector they’re trying to regulate.
Right now we’re on the precipice and it’s unclear to anyone whether we’ll get out of this okay — anyone who says differently must remember acts like Smoot-Hawley (in which govt. fucked up) or the 1987 crash (in which govt. did nothing) as counter-examples to each other.
So what happens next? People are confused: some say that this is the end of radical free-market capitalism. Some say that this is another attempt to grab power from the people and return it to government. While Naomi Klein in “The Shock Doctrine” argues that this fits within the context of Milton Friedman’s desire to prey upon disasters and instability —
“Only a crisis, real or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”
— in order to implement a completely free market, I recently read an article that argued that socialists operate within the same mentality. So the two opposite ends of the spectrum accuse each other of the same thing.
That is some scary shit. The implication is that certain ideologies are waiting for weakness in order to implement programs that run completely counter to the wishes of a democratic state — that is, the will of the people. If these ideas were valid in the first place, one wouldn’t have to wait until the people are mortally afraid to get them to agree. The ideas could be worked into the political debate normally.
Let me provide a more optimistic take on what happens next.
It is true that Congress is unlikely to have the vision to institute the proper reforms and regulations needed. So money flows will fall into the next scam that will probably affect the poor and the taxpayer.
It is also true that a lot of companies will go out of business due to lack of capital and demand.
Also true is that the common American is not yet pissed off enough that he’s protesting in Washington about the nation’s conditions.
So large change is not likely to take place structurally.
But I do believe Obama getting voted in (which is a lock after this recent mess…sorry Republicans, but you blew it) will provide more stability and maturity to our policies.
I also believe that the internet’s rise is the first glimpse of a new future economic reality, one where barriers to entry in many productive enterprises will approach a cost of zero. Publishing is easy. Financial transaction and data and idea diffusion is almost instantaneous. Information can be duplicated without degradation for near free. Processing power is exponentially growing to the point where complicated tasks will cost near nothing to compute. If we are able to capture solar power efficiently enough, an internet-like upheaval of old economic principles with regards to energy costs will occur.
So the old oligopolies will be forced to change or die. Large record labels can’t exploit musicians and buyers by limiting distribution. Newspapers will have to compete with a fluid sea of small publishers. Oil companies will need to change their face considerably.
At this point, we may be able to see Muhammad Yunus’s desire for the social business, a business whose stated goal is not to make profit for investors, but for reinvestment to solve social problems. Such a business is largely untenable right now, but that’s because the costs and stakes are too high to operate a business.
In this new economy, the internet model will make sense financially. Customers and clients will be able to reward internet-model companies in different ways than they are able to now, because they will be rewarding business goals other than shareholder profit.
Reduce costs enough and people will help others instead of just exploit them since their reputations will become their key metric for income. Traditional businesses of course will continue to be a major force, but for the rest of us, when we’re at work or not at work, we’ll be able to monetize our productivities in other ways beyond just showing up at a desk job every day.
I know this is optimistic and takes a long-term view, but I see the ground being laid quietly for a new infrastructure, as the old companies die out and as people continue to argue about socialism versus radical free markets. Remember 2001-2003? People predicted the end of the internet as a business opportunity after the stocks blew up, and meanwhile it was quietly building upon itself and growing up.