Capitalism at Bay

The Economist ran an excellent article about the looming debate on the proper role of capitalism and deregulation.  Click here to read “Capitalism at Bay.”

Highlights:

“In the short term defending capitalism means, paradoxically, state intervention.”
 
“This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.”
 
“Even if it staves off disaster, the bail-out will cause huge problems. It creates moral hazard: such a visible safety net encourages risky behaviour. It may also politicise lending.”
 
“Capitalism’s defenders need to deal with two sorts of criticism … The weaker, populist argument is that Anglo-Saxon capitalism has failed … A second group of critics focuses on deregulation in finance, rather than the economy as a whole.  This case has much more merit. Finance needs regulation. It has always been prone to panics, crashes and bubbles (in Victorian times this newspaper was moaning about railway stocks, not house prices). Because the rest of the economy cannot work without it, governments have always been heavily involved.”
 
“Yet the failures of modern finance cannot be blamed on deregulation alone. After all, the American mortgage market is one of the most regulated parts of finance anywhere: dominated by two government sponsored agencies, Fannie Mae and Freddie Mac, and guided by congressional schemes to increase home-ownership.”
 
“There was something of a perfect storm in which policy mistakes combined with Wall Street’s excesses.”
 
“Indeed, history suggests that a prejudice against more rules is a good idea. Too often they have unintended consequences, helping to create the next disaster. And capitalism, eventually, corrects itself. After a crisis investors (and for that matter regulators) seldom make exactly the same mistake twice. There are, for instance, already plans for clearing houses for CDSs.”
 
“Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet. “

CDS stands for credit-default swap.  This video explains them in layman’s terms: