Amid all the chest thumping and finger pointing about the failures of capitalism, let’s not forget the responsibility of governments across the globe. They relaxed regulatory requirements, turned blind eyes to dangerous – and in some cases, illegal – activities and indulged in their own excesses.
Capitalism is like an energetic small child who needs rules, boundaries and discipline. If a toddler accidentally sets his home on fire, it’s the parents who bear the blame. “Capitalism in crisis” could easily be subtitled “government in crisis”.
I’m not trying to excuse capitalism or its principal actors from a generous portion of the blame for the all too vivid pain of the past four years. Serious alterations are needed, only some of which have been put in place.
But government has also seriously let us down. The current mess in the eurozone is hardly the fault of capitalism or the financial system. Public officials who created the euro went ahead with the hare-brained scheme of their own accord. Indeed, many financiers (myself included) proclaimed loudly that the euro was ill-designed and likely to run aground.
Then, while the peripheral countries such as Greece were gorging themselves on cheap money, even the Germans turned a blind eye. It was no secret that Greece’s debt was exploding as it doubled government wages, expanded public job rolls by tens of thousands and even spent $14bn on the 2004 Olympics, more than twice what was budgeted.
Imprudent public finances were not limited to Greece. Countries throughout Europe burst through central government budget ceilings. Many were recently repaid with ratings downgrades.
Yes, a measure of increased public spending was needed to combat the recession that accompanied the financial meltdown. But in the case of the US, because of poor tax and spending policies in the seven preceding years, the nation went into firefighting mode with its tanks partly depleted, having squandered a fiscal surplus.
Or take the dramatic rise of global income inequality over several decades. That wasn’t a secret either, and yet, the US chose policy measures that exacerbated the problem rather than diminishing it. Tax cuts in 2001 and 2003 famously led to Warren Buffett’s secretary paying a higher tax rate than he did. In 1993, the 400 wealthiest Americans paid 29.4 per cent in tax; in 2008, it was 18.1 per cent.
By now, the failure of regulators to contain dangerous forces should be well accepted. In the US, deregulation gave rise to a series of problems, ranging from radioactive levels of leverage at securities firm to imprudent lending to homeowners.
For years, America has had consumer protections around everything from the safety of children’s sleepwear to interest rates on credit card borrowings. Yet, virtually no such help was provided to homebuyers as ever more tempting but ill-advised loans were dangled in front of them.
Nor were most overseers any better than their corporate counterparts at identifying the coming tsunami. In February 2006, Ben Bernanke, who has generally been an outstanding chairman of the Federal Reserve, said that “house prices will probably continue to rise”. Just five months later, they began their precipitous decline.
Undoubtedly the benefits of capitalism vastly outweigh its deficiencies. For all the recent devastation, no other economic arrangement could possibly have lifted the standard of living of so many so substantially in the postwar period.
More importantly, the global citizenry appear to agree. While past periods of extreme economic dislocation have often yielded demands for radical change, both Greece and Italy have installed technocratic prime ministers who are focused on correcting the past failures of government rather than imprisoning bankers.
So we must press on with fixing capitalism. My vote is that we devote equal attention to the public sector apparatus as to the evilness of business. Most urgently, an increasingly integrated global economy needs to be paired with global governmental structures. For example, while the various Basel accords have brought a measure of uniformity to bank reserve requirements, in other key areas, nations continue to go their own ways. The US has chosen to limit banks’ ability to engage in proprietary trading (the Volcker rule), the UK is separating deposit taking from trading altogether and some other countries have left their systems unchanged.
The rise of multinational corporations and lack of a global taxation regime has given rise to a race to the bottom in corporate tax rates, another contribution to growing income inequality. In the US, corporate taxes have dropped from 5 per cent of gross domestic product in the 1950s to 1.3 per cent last year.
According to a recent Edelman poll, substantial pluralities of citizens around the world believe business is not sufficiently regulated. If capitalists wish to avoid more regulation, they must get behind better governmental oversight.
The writer is former head of the US government taskforce that oversaw the federal bailout of Chrysler and General Motors.
