A few weeks ago, I asked you Who is MOST Responsible for the Housing Bubble and the Financial Crisis? I can’t say that I was, at all, surprised by the responses. They actually came in exactly as I expected.
In case you’re incapable of clicking a hyperlink, the choices were as follows:
A. Banks
B. Complex Derivatives
C. Greed
D. Government
E. Wall Street
F. Deregulation
Although most readers and friends of this blog wanted to select “All of the Above,” because a case could be made for each, this easy-way-out was disallowed. After all, the original question was who is MOST responsible.
Understanding Capitalism
Before I get into the details as to why neither greed nor deregulation caused the financial crisis, I think it’s important to, first, explain Capitalism. I will explain Capitalism because this economic system is generally associated with terms such as deregulation and greed.
If you listen to political activists such as Michael Moore, you will hear endless criticism of Capitalism. There seems to be a serious distaste for the current structure we have in place, which is completely understandable.
But, it’s important to understand that the current structure is NOT Capitalism.
A system which allows one troubled financial institution to be “bailed out,” while another is left to fail is NOT Capitalism. A system which allows for ANY business to be rescued via tax dollars is a far cry from Capitalism. We live in a hybrid form of Capitalism, known as a Mixed Economy.
In a free market (pure Capitalism), businesses are constantly being created and constantly going out of business. Every transaction has to be beneficial for the buyer and the seller. If any exchange is not mutually-beneficial, then the exchange will not continue for long. In other words, companies must always create value for their customers or else their customers will go elsewhere. This allows some companies to grow bigger, while others go out of business. Markets are constantly correcting themselves so that resources are allocated appropriately.
In a free market, the housing bubble NEVER would have grown to what it did.
I must digress as I don’t want to get into the CAUSE of the financial crisis just yet.
Did Deregulation Cause the Financial Crisis?
The financial industry is BY FAR the most regulated industry that exists (Airlines would be a distant second). During the years leading up to the financial crisis, regulatory costs were at an all-time high. On the opposite end of the spectrum, the technology industry is the least regulated industry. Is it any coincidence that the technology sector is experiencing growth, innovation, and competition while the financial industry remains stale?
It’s not a coincidence.
It’s because the technology sector is mostly unregulated, while the financial sector is highly regulated. 10 out of 10 economists agree that regulation STIFLES growth and competition.
“But, technology companies are totally different than banks.”
Guess what? Technology companies want to make money just as badly as the “big, bad banks.” The only difference is that technology companies enjoy the benefits of Capitalism, while banks struggle (or thrive) because of government intervention. New technology companies are constantly being created, while old ones slowly die out. The companies releasing products that please customers grow bigger and companies that “screw” their customers disappear. Some people get hurt, but the overall result is positive.
On the other hand, thanks to government involvement, banks that SHOULD be going out of business are being saved. It really doesn’t matter if they have taken excessive risk or have a business that is completely flawed, they will still be saved. To make matters worse, healthy banks are ultimately penalized because of the unhealthy banks as they are paying increased premiums to the FDIC.
Imagine if Google had to set money aside to reimburse the investors of tech start-ups that go bust.
Then also imagine the government limiting the various ways Google makes money. Imagine if the government reduced the amount of money that Google could earn through advertisements. Would they lay off a chunk of their workforce or would they find new ways to make money? I would assume the latter…
…Because greed drives us all.
Greed, by definition, is “the inordinate desire to possess wealth.” Don’t we all share this desire to some extent?
