[Originally published in the Rutland Herald.]
Make no mistake about it, our current financial problems are the direct result of greed supported by a lack of effective regulation by the federal government. This is a climate that has been consciously created by the Bush administration, which, true to its Republican roots and convictions, does not believe in regulation and has done everything humanly possible to weaken and minimize it.
Lacking effective regulation, the markets revert to a jungle in which anything goes. The overwhelming greed involved in the subprime mess is a natural adjunct to our free enterprise system. When given the opportunity, people will cut virtually any corner to make money. And that is why we need regulation.
For anyone who has lived abroad, the democratic capitalist, free enterprise system is the one to beat. Essentially, it lets market forces provide the risk/reward system for investors. Communism, fascism, socialism, are all systems that impose political ideologies on economic activity, to the detriment of those managed economies everywhere.
The key to this issue lies in the corruptibility of man. If you acknowledge his imperfections and his proclivity to cheat, then you will conclude that in a country where we have the best known system, we must have regulatory systems that minimize man’s ability to successfully cheat. We haven’t had that since the Carter administration, and that’s why we are dealing with our financial meltdown today.
The consensus is that our current economic miseries are the result of the subprime mess and that we will not move on to better times until there has been a further “correction” in the housing market — shorthand for a further drop in the value of our homes.
The fact that banks were able to pull the sleight-of-hand required to slip the marginal mortgages they were selling in among other, stronger items, obfuscating, but not eliminating, the inherent weaknesses in their products is laid to the weak regulatory system.
If you balk at the thought of greater, more comprehensive regulation, consider the fact that in the AIG meltdown, all the fiscal problems that caused the collapse came in the unregulated sectors of the company. The regulated sectors within AIG had no problems, remain viable and are the only thing about the company that potential investors might find financially attractive.
The only peril in bolstering the regulatory climate in America lies in an overreaction. If in America’s currently politically polarized condition, class warfare, or political, populist grandstanding against corporate interests gain sway, we will be in trouble. To be successful and effective, any regulatory changes will have to carefully retain and nurture a free-enterprise, entrepreneurial system. That is what attracts capital investment and creates wealth.
The other side of our problem is that we create far too little capital here at home. Our main sources of investment capital come from abroad. Yet we live in a society that canonizes spending. We were recently told by our president to spend, spend, spend as the way out of the perils of 9/11. In fact, we spend more than any people in the world. We buy the most inefficient vehicles on earth and then spend, spend, spend to keep them rolling. We spend like drunken sailors at any mall. To do this, we mortgage ourselves to the hilt in our credit card and other retail debt. We pay for nothing and borrow everything.
Under globalization, most of the goods we see are made somewhere else. That means that our spendthrift tendencies not only create debt at home, but cause the flow of dollars abroad to pay for the goods we buy on credit at the mall. Dollars that could become capital instead end up in foreign producers’ hands.
A country that behaves this way cannot conceivably accumulate capital. Without capital, no one prospers, because it is the basis of all borrowing, not just for retail profligacy, but for business formulation and expansion and all the other endeavors that create wealth.
There is potential for a vast, untapped source of capital out there in the middle class, if one of the parties could figure out a way to make long-term investing more attractive and safe for them. That does not mean privatizing Social Security, for if we had given all the Social Security money to Wall Street, as the Republicans wished, that would have wiped out not only Social Security, but the middle class with it.
Not only must we design the world’s best regulatory system, we need to change our ways on capital creation.
Haviland Smith is a retired CIA station chief who lives in Williston.
