In the aftermath of World War II, Ghandi was once asked what he thought about western civilization, and  replied, “I think it would be a good idea.”

I would propose the same reply to , “what do you think about capitalism?”  It would be a good idea.

Much of the criticism that has been focused on capitalism is undeserved.  The problem was less deregulation than the failure of regulation to keep up with financial innovation.  Capitalism requires regulation just as democracy requires laws and courts.

So much of this financial meltdown was caused by poor regulation and government policy, and their interference with capitalistic enterprise, yet few proposals at regulatory reform address the government’s role.

When a large enterprise is deemed too big to fail and carries an implicit government guarantee, it faces a much lower cost of risk than its smaller competitors who cannot depend on government sharing its losses.  This weakens the independent bankers and financial institutions. It weakens the system.

When the FDIC insures the weak as well as the strong, we will invest in the higher paying CDs at weaker institutions because the government bears the risk. The sounder banks suffer.

Capitalism is mischaracterized even by its defenders. It is not about greed. Greed existed long before capitalism and will exist long after a better system is found. It is not about self interest which may just be a less offensive form of greed.

Capitalism is about the competition of ideas.  Good ideas much be allowed to succeed, but more importantly bad ideas must be allowed to fail. The capital will thus be redeployed to generate more innovative and competitive ideas.

Central planning, socialism, or excessive regulation is the opposite of competition;  these forms of elitism force homogenized ideas on everyone alike.  If the governing elite picks great ideas then everything is wonderful, but if they pick bad ideas financial catastrophe results.  Since the elite will only know a fraction of what everyone in society knows the chance of them ‘picking’ a better system than the competition of the market place is nil.

Lessons of this financial period will be woefully incomplete if we omit the analysis on the regulations that caused the problem and focus only on the absence of regulations that could have prevented it.

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