Obama and Economic Liberalism (part1)

With Obama's historic election (I had to say it!), and the recent meltdown in the financial system, it seems the free-market capitalism (aka Reaganomics, market deregulation, Friedman's Chicago school, laissez-faire neoclassism,etc.) has been thoroughly discredited. Although Nobel laureate Paul Krugman is not a candidate for Treasury secretary, I've heard that his liberal economic musings in NYTimes is more influential than all of Obama's economic advisors! So it appears Krugman should be able to set an agenda of neo-Keynesian taxation and infrastructure spending. Heck, even Wall St. is calling for another stimulus package, and more bailouts; they were all about the "free-markets" when they were pulling in the huge bonuses, but now they turn socialist when the banks are about to go under.

(This is a pretty broad topic so I'll try to stay on message.)

Reagan's election in 1980 started a 28 year run of the free-market economy. Even Clinton was not going to change what was working so well at the time. Where did it all go wrong? I'm not smart enough to figure all of it out; some of it was greed, some corruption, some monetary policy (by the monetarist Greenspan) but I want to hilight the role of deregulation. I've long been leary of economic conservatism (is Pete reading this?). Greed is human nature and people will try to make money by any and all legal means; and they will bend the rules as far as possible to achieve this. I believe governments have an important role to play in capitalism and market regulation. Greenspan allowed new instruments like CDS and CDO's go unchecked, as greedy bankers packaged subprime mortgages, pumped and sold them for huge profits. These guys were the stars, making $100's of millions over the past 4-5 years. Now they are out of a job but they are sitting on their yachts in the Bahamas; I doubt they are going to return any of their severance pay. Now that free-market capitalism party is over, the taxpayer is left to pick up the bill, literally. (among the many things written about Wall St, I read over the past few years, the S&P financials made up 10% of S&P500 profits but the financials had 30% of the compensation of the S&P 500). Along with the bailouts, come compensation limits and new regulation.


Note, I cannot really complain too much about capitalism, since I don't know of a better system. But unchecked and unbridled capitalism has failed and will not likely return for a very long time. In theory, the free-markets should work beautifully; economic Darwinism will eliminate the weak and the strong businesses will prosper and generate healthy profits. In practice, however, there is corruption and greed which impacts all market participants. Just as governments create laws to protect society, we need a fair financial regulatory system to protect the market economy.


So how do we make money in this new landscape? I need some time to think about that, for the next post.