The firewalls that used to be in place restricting speculative capitalism need to be set back up. There is a difference between productive and speculative capitalism, and it is speculative capitalism that is contributing to the dire economic situation we are in now.
Thus far the Obama Administration has failed to significantly reduce the unemployment rate. Although there are many reasons for this, perhaps a major one is the Democrats' failure to remember the difference between productive and speculative capitalism.
Productive capitalism is investment in the means of production that leads to employing people in the actual creation of goods and services. Speculative capitalism is essentially gambling. Investments are made in non-productive financial derivative instruments that are bought and sold in financial markets solely for the purpose o f making a profit.
Of course the ultimate purpose of both forms of capitalism is to make a profit, but only productive capitalism leads to job creation. Every capitalist society contains both forms of capitalism; however the balance should favor productive capitalism. A healthy low unemployment rate economy occurs when markets serve their primary intended purpose, which is to raise capital for productive investment, rather than serving as speculative gambling formats akin to lotteries. Furthermore, United States economic history demonstrates time and again that a balance favoring productive capitalism can only be maintained if markets are effectively regulated.
For example, it is argued by some historians that the 1929 stock market crash was caused by an overdose of unregulated speculative capitalism. The Roosevelt Administration clearly believed this, because the Glass-Steagall (G-S) Act was passed early in FDR's first term. This act, and others that followed, essentially created firewalls between the three fundamental types of financial institutions: banks, brokerages and insurance companies. These acts stipulated that commercial banks accepting deposits and making loans could no longer sell stocks and other financial instruments, brokerages could not engage in commercial banking activities, and insurance companies could not be banks or brokerages. The firewall provisions of the G-S Act were repealed by Congress and the Clinton administration in 1999.
Arguably the G-S Act shifted investment toward productive capitalism, which then had the effect of keeping the average U.S. unemployment rate in the post- WWII era at 5.7 percent (1948-2008; Bureau of Labor statistics). It can be further argued that the repeal of the G-S Act in 1999 shifted the ratio back to speculative capitalism. Initially this shift did not threaten the American economy. But when the inevitable speculative bubble burst in late 2008, the connection between firewall removal and the 2009-2011 unemployment rate of between 9 and 10 percent was revealed. The billions and billions of dollars that were invested in speculative capitalism in the 2000s could have been invested in productive capitalism, creating jobs that would have kept the unemployment rate at the post WWII average or even lower.
The firewall removal created a ‘Wild West' deregulated financial environment in the United States in the 2000s similar to the 1920s. Essentially any type of financial company can create any kind of financial instrument, creating a chaotic scenario for the hopelessly inadequate regulatory agencies. Complex non-productive financial instruments are created that fall between the regulatory cracks and therefore escape scrutiny. Eventually the buying and selling of these non-productive financial instruments leads to unsustainable high prices which then collapse, dragging down the value of real tangible assets (like homes) as well.
The Obama Administration naively believes that the passage of the Dodd-Frank Act in 2009 will prevent another 2008-type financial meltdown. Although the D-F Act expanded the powers of the financial regulatory agencies, the version of the act that passed failed to reinstate the firewalls between banks, brokerages and insurance companies. It is no surprise that the Democrats under FDR made efforts to strongly regulate speculative capitalism. After all, that is what the party that presumably represents the working class is supposed to do. What is surprising is that the firewall provisions were repealed under Clinton, and that these provisions failed to be reinstated by President Obama and the Democrat-controlled House and Senate in his first two years in office.
Given this puzzling failure of the Democrats, Republicans should engage in political paradox and reinstate the firewalls. This would be totally unexpected, given that the Republicans are perceived to be unreservedly supportive of free-market, unregulated capitalism in all its forms, including speculative capitalism. However Republicans need to remember that they are the party that traditionally supports individual responsibility and earning your keep through hard work. Making money by being a smart (or possibly corrupt) gambler is not, or at least should not be, a Republican Party value. Furthermore, Americans are beginning to recognize that under-regulated capitalism ultimately undermines the middle class. Republicans could help the country and themselves by reinstating the firewalls, which would shift the investment balance back to productive capitalism, and, not inconsequentially, help shift our culture back to the hardworking, non-gambling, self-reliance that made this country great.
To call financial markets “unregulated” after the 1999 Gramm-Leach–Bliley Act became law, or to compare them with markets in 1929, is either the most ridiculously boneheaded misstatement or the most histrionic intentional hyperbole. The boogeyman of the “unregulated free market” has never been anything more than a partisan talking point, and the author’s choice to characterize it that way is telling.
The fact is that up to, during, and after 1999, we had, and continue to have, a very heavily regulated finance industry, because a lot of folks believe, as professor Stahelski implores us here, that it is appropriate to use public policy and the force of government to direct the flow of productive capital in the economy in ways that individuals acting in their own self interest ordinarily would not. To even call such a scheme capitalism is an egregious misnomer. But far more powerful than the heavy hand of regulation and public policy disrupting the flow of capital in this ostensibly “free, unregulated” market was another government innovation: moral hazard. Blaming the Gramm-Leach-Bliley Act, which allowed the consolidation of financial services companies into meta-companies offering broader lines of services, for creating the “too big to fail” environment is really only a fraction of the story. There is a reason why the most recent run-up and crash was primarily in housing and housing-based instruments instead of other asset classes, and the reason was the implicit and explicit guarantees of government to backstop risk. With the knowledge that they were not fully exposed to the risk they were undertaking, the finance industry behaved recklessly – the very definition of moral hazard. The government for its part lived up to the expectations of the finance industry with individual bank bailouts and the TARP program, and has now enshrined the “too big to fail” concept explicitly in Frank-Dodd to remove all future ambiguity about who will be footing the bill next time. In real capitalism, as in real gambling, when you make bad bets, you lose. And when you’re out of money, the house doesn’t go borrow from all the other patrons in the casino to reimburse you for your losses. That is the virtue of speculation. It is the embodiment of individual liberty and individual responsibility. Having governed those two key components out of the system, using them as a justification for more government is an exercise in circular reasoning.
There is no place in free market theory for maintaining a division between productive and speculative capitalism. The Glass-Steagall firewall, and similar regulations simply can’t be justified in conservative, much less libertarian, free market terms. We over here on the liberal side can justify them, but from premises unavailable to conservatives. In a truly free market economy, there should be no regulation whatever concerning what Professor Stahelski calls “nonproductive financial instruments.” Any financial instrument capable of generating a profit should be allowed in a free market economy. Professor Stahelski is no conservative.
Any financial instrument capable of generating a profit should be allowed in a free market economy.
Gestell was almost correct in this statement. However, it is an over-simplification of free markets which seems to imply something sinister. A more correct and thorough statement, which explains and encapsulates Gesetell’s, would be: Any transaction entered into by mutual consent that is free of fraud or coercion should be allowed in a free market economy. Note how this complete statement eliminates the possibility of inferring that fraud and deception are allowable or desirable in a free market just so long as they produce a profit – a key component in the caricature-driven liberal narrative of the free market economy.
Professor Stahelski is no conservative.
On this you have my full agreement.
We have a shortage of productive capital because it’s all going overseas.
Some news items (a few of thousands):
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1) NEW DELHI—Ford Motor Co. plans to invest about $900 million to build its second factory in India, as the auto maker prepares to introduce more cars and sport-utility vehicles in the country . . .
2) General Electric Co.’s health care unit, the world’s biggest maker of medical imaging machines, is moving the headquarters of its 115-year-old X-ray business to Beijing. . . . The headquarters will move from Wisconsin amid a broader plan to invest about $2 billion across China. . .
3)Boston Scientific Corp. said yesterday that it plans to eliminate 1,200 to 1,400 jobs. . . Boston Scientific disclosed it was investing $150 million and hiring 1,000 people in China. . . the company will gradually shift more work to foreign sites with less government oversight and lower costs than the United States.
4)The New Learjet…Now Mexican Made; Low Labor Costs Attract Bombardier, Which Employs 1,600
G.E. and Bombardier are making big investments in Mexico, using locally-trained workers to help build their newest jets.
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Hey, Congress: connect the dots, idiots! A plant here, a factory there, a thousand jobs here, a thousand jobs there … It’s the Giant Sucking Sound, stupids!
How about getting over your anal-retentive fear of “protectionism”? Quit crapping your pants every time somebody yells “Smoot-Hawley,” and make some move to stop the dis-investment in our nation’s economy.
Mr. Mulligan effectively countered the author’s assertion that we have had anything close to free range capitalism in the U.S. or that more regulation is the key to shifting to productive capitalism. I wanted to address a couple of the ancillary points of the article.
“What is surprising is that the firewall provisions were repealed under Clinton…” That Clinton would have removed certain impediments to speculative trading is not surprising at all. The Clintons entered the White House relatively poor when compared to other presidents but they were determined not to leave that way. They had a history of shady insider dealing in Arkansas with the White Water scandal. They pioneered what is now standard operating procedure for the Democrat Party, which is crafting regulation to favor certain types of speculative investing and setting yourself up to profit from it. This George Soros styled crony capitalism is funding the Democrat’s war chest and enriching its insiders.
It is also worth noting that while speculative trading is granted favored treatment traditional productive enterprises like energy and manufacturing are being driven out of the country by draconian environmental and labor fiats handed down by unelected czars.
If wealth is acquired by government largess and not individual entrepreneurs than we are truly on the road to a modern caste system where only the connected can prosper. It’s ironic that liberals who are setting these condition rail against capitalism as increasing the divide between the haves and have-nots.
More regulation on the banking, insurance and investment industries is not the answer, as 70 years of history proves the unintended consequences are too great.
I agree that Mr. Mulligan’s restatement is more thorough in terms of free market theory. He writes: “Any transaction entered into by mutual consent that is free of fraud or coercion should be allowed in a free market economy.” No consideration of any consequences of such transactions for those not directly party to them can be a premise for any action by government. In other words, no consideration of externalities is permitted.
I should have added that my comment about externalities is intended as identification of one of the key conditions needed to make free market transactions possible.
No consideration of any consequences of such transactions for those not directly party to them can be a premise for any action by government. In other words, no consideration of externalities is permitted.
Actually, to the extent that the consequences of any action (including private transactions) infringe on the rights of any individual, they would have the opportunity to seek legal remedy in a libertarian-styled state. Although you are correct – theoretical, potential, fantasy externalities could not be a premise for government action, as they are now. You would have to actually show damage or injury. And even then the extent of the government’s involvement would be to adjudicate the case and enforce the decision. In the age of the administrative hearing that probably sounds quite antiquated, but such trials actually used to be quite common. They were called “civil cases”.