Diane Francis, Financial Post Published: Monday, June 22, 2009
It is not the case. This is not the economic version of the Cold War, and the search for a new architecture does not mark the death of capitalism.
In fact, free enterprise was nearly murdered by Wall Street, AIG and other reckless financial institutions. They did not meet their defined responsibilities. They bent the law to bypass rules governing their behaviour. Many of them abandoned traditional banking and got into the gaming business. And they brought the world to the brink in the fall.
The role of government is appropriate in the financial sector because of its importance to sustaining a healthy capitalist system. Banks, brokers, insurers and others are licensed by the government to benefit society by being astute gatekeepers to success. They deploy their own capital and savings from the public honestly by investing in worthy individuals and entities that will create wealth, then repay their loans.
Government’s role is necessary because these institutions, in turn, exist as a result of deposits from the public and shareholders’ money. They have a fiduciary obligation to responsibly use other people’s money for the benefit of all. The rules dictate who, what and how they lend or insure, as well as how they leverage.
But what Wall Street and the others did was lend, or insure, obscene amounts of money to inappropriate entities for inappropriate reasons without any market discipline. There were no clearing houses for the trillions in derivatives they created, no markets for them, no pricing mechanisms, no leverage restrictions, no capital allocation and no transparency or proper accounting.
They were not players in a free-enterprise system, but were gamblers rigging the system for their own benefit.
America’s financial punters sank the legitimate and regulated credit system. They collected upfront fees and played fast and loose with credit instruments; witness estimates that the notional value of credit default swaps and other risky “derivatives” could total up to US$600-trillion, or 10 times the world’s GDP.
Last fall, Washington was told by AIG and Lehman Brothers that the world had gone bust. Thanks to trillions in bank bailouts, and shotgun marriages, total collapse was averted.
Months later, there are positive signs. Consumer confidence has a pulse, at long last, though this has yet to translate into spending. Some 53 million people have lost their jobs worldwide and governments are in hock to the tune of trillions. Innocent victims include the world’s poorest nations and their citizens, including those who ran their fiscal and monetary houses in a responsible way.
Wall Street’s recklessness, and in some instances criminality, has destroyed credit, which continues to afflict third-party, real-economy businesses from Detroit (which already had problems) to retailers and most others.
The fix will take years, require international co-operation and wasn’t the fault of government or the rest of us. So the next time some Wall Streeter or financial-sector apologist is blabbing about how reregulation will kill capitalism, just remember it was capitalists, so-called “champions” in pinstripes, who nearly destroyed free enterprise by driving it into a wall.
