Wednesday, October 21, 2009

The Achilles’ Heel of American Capitalism

The fall of banking giant Lehman Brothers was commemorated this week by financial newspapers, while the Obama administration called for a renewal of federal government led regulation of the financial sector. Should the federal government take the lead in governing the culture of capitalism?

Undoubtedly, the federal government must more thoroughly regulate the American financial sector. Since December 2007, as reported by the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis, the GDP of the United States has shrunken significantly, unemployment has risen to 9.7%, the value of the dollar has fallen and the trade deficit has grown. In sum, the stability of the U.S. economy has been rattled to its core, resulting in the greatest recession since the Great Depression of the 1930’s.

The current U.S. recession began with the deregulation of the financial sector by the federal government. “Greed is good,” proclaimed Gordon Gecko, rich financier played by Michael Douglas in the 1980’s hit movie, Wall Street. The film highlights the excesses of the world of finance during the late 1980’s. By the early 2000’s, the Glass Steagall Act having been annulled by Congress and with the deregulation of the American financial sector reaching a climax, recently retired Federal Reserve Chairman Alan Greenspan, called this era of finance an “irrational exuberance.” The Glass Steagall Act was established during the Great Depression precisely to prevent bank holding companies from owning other financial companies.

The Obama administration has proposed to expand the Federal Reserve’s power to regulate financial institutions. By expanding the power of the Federal Reserve, the Obama administration intends to make the 96 year old institution into a systemic risk regulator. Proponents of expanded Fed regulatory power, (see Brookings Institution report) contend that it was precisely the weak power of the Fed to oversee the financial sector, which forced the federal government to perform bailouts under the Trouble Asset Relief Program (TARP). Opponents to expanded Fed power (see The Heritage Foundation report), warn that centralizing regulatory power into one government agency will breed inefficiency and corruption; these critics propose a shared responsibility with other government agencies such as the Financial Services Oversight Council.

The Obama administration also proposes the creation of the, Consumer Financial Protection Agency, which will be vested with the responsibility to ensure that financial consumer products, such as mortgages and credit card products, are easier for consumers to understand. Critics charge that the latter agency will limit the credit services offered to consumers and stifle innovation of financial products. However, proponents for the creation of the agency argue that government oversight over consumer protection is long overdue.

The Obama administration must act quickly to reform government regulation of the financial sector. Capitalist purists claim that government regulation hampers the growth of capitalism by undermining the natural economic forces of supply and demand. However, the laissez-faire economic doctrine of deregulation of the financial sector which began in the 1980’s and culminated with the repeal of the Glass Steagall Act, an act which is symbolic for restoring confidence in American capitalism during America’s greatest economic crisis, has failed to steer capitalism in a steady course of growth. Nevertheless, it’s not 1930 anymore and the world of capitalism and finance is more complex and has undoubtedly changed. History has repeated itself and the invisible hand of laissez-faire economics has proven that, on its own, it cannot correct or subdue the excesses of capitalism. Notwithstanding, government must avoid regulating excessively.The regulatory framework of the 1930’s must be consolidated to efficiently work alongside the invisible hand of free market economics in 2009.

By: Andres Leon

1 comment:

  1. Great article Andres--

    This conversation always poses more questions for me. The most pressing is that of multi-national corporations who house themselves in countries with little or no regulations. Though the US can regulate how these companies do business in this country, because we are losing our status as the international hegemony, our interests overseas are coming into conflicts with organizations that have no real humane or ecological ethics. Should we impose sanctions on corporations (who are rising in world power as if they were nations themselves) who work in a way outside of our country that we would not allow inside?

    Coca-Cola is on my brain as I write this. There is a plant just over the Texas border in Mexico that is an example of inconsistent business practices. At this plant humane issues are arising because there have been dozens of murders and rapes of female workers on plant property, as well as just offsite. All without investigations, and thus accountability.

    Another issue that I think about is how any administration can say all they want about the importance of their policies, but it does not mean that any will pass legislation. This is because at the root of this economic crisis are lobbyists--sure CEOs and exec.s, and many everyday Americans are also at fault--who work on behalf of those who can afford to buy them. And it isn't the average American citizen.

    Until comprehensive legislation is passed regulating lobbyists, there is no hope.