Sacred Cods and Holy Mackerals

Bad people doing bad things
September 14, 2009, 9:20 am
Filed under: Uncategorized

Boston Globe’s Ideas section had an interesting piece this past weekend on the writings of a formerly obscure economist named Hyman Minsky who, since the collapse of the financial system, has become a very popular fugure.

Minsky spent decades warning that capitalism, specifically, the financial markets, has a major genetic flaw that can lead to major meltdowns. Long periods of relative economic stability leads to financiers thinking everything is swell which makes them take more and more risks. “Success breeds a disregard of the possibility of failure,” Minsky wrote. Eventually, an increasing percentage of the economy becomes based on leveraged capital and debt. And all it takes is one watershed moment and the whole financial system crumbles.

The watershed moment of our generation was the cooling-off of the housing market. Basically, the tide quickly receded, exposing all the jagged rocks beneath, and the ship that was our economy crashed.

Any sensible economist should have seen what was happening in this country over the past 10-15 years, that too much of our recent economic successes were built upon the easy availability of credit. There is a reason why personal bankruptcies skyrocketed in the earlier part of this decade, and why savings account balances plummeted. Credit cards with $20,000 limits were given to anyone who could scratch their mark onto an application form. Home mortgages were given to people without checking income levels or even employment status. We were told going out to the mall was our patriotic duty.

Capitalism, as Winston Churchill might say,  is the worst economic system out there, except for all the others. It fails for the same reason pure socialism fails: because people invariably end up gaming the system for personal gain. And I would argue that this is why some governmental regulation is needed — not because capitalism is neccesarily bad, but because the people who are running it can be, and often are.

Sure, financiers can be prosecuted for their crimes. But what’s better:  putting Bernie Madoff in jail for 100 years, or preventing Bernie Madoff from ever being in a position to buld a $65 billion Ponzi scheme in the first place?

And remember, running a company into the ground isn’t neccesarily a crime. Sure the CEOs of Lehman Brothers, Bear Stearns and Merrill Lynch may be unemployed, but I’m sure the hundreds of millions of dollars they earned from doing their jobs poorly will be enough to console them.


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