Written on Wednesday, October 29, 2008 by Rohan Koshy
The recent financial turmoil that has caught the world's attention has brought with it a big debate about the death of capitalism. With the U.S and U.K taking major equity stakes in a majority of banks many have questioned whether this signals the end of laissez-faire capitalism. The reluctance of Henry paulson and George Bush to nationalise the banks was because they believed in the idea of "free markets" as it were. It is generally accepted that the government cannot regulate markets any better than the market participants (acting in their own self interest). Alan Greenspan, who is a big believer in free markets (having spent time with Ayn Rand) admitted that he had misjudged the potentially disastrous situation that would occur if the markets were left unregulated.
While I've read Ayn rand's books and certainly subscribe to part of her philosophy, i feel that the no holds barred laissez faire capitalism that she has supported would never really work.Working in your own self interest may certainly be the best thing for everybody but it leaves out one thing. Integrity. Self interest is totally skewed when integrity is taken out of it. When you're self interest is to make money no matter how much somebody else may lose then its not in everybody's self interest. It's also known by another word.Greed. Unfortunately that's what became of wall street at the end of 2007.
If i put a revolver containing only one bullet to your head and say ," If you pull the trigger I'll give you a million dollars" would you do it? While 80% of the time you'll get 1 million dollars you know that when you get it wrong, you'll get a funeral. Unfortunately it's not that easy in the real world. When a bank is leveraged 30 to 1, its pretty easy to see the bullet in the chamber but there are many reasons that could be given as to why this may be your lucky day. The biggest one being record company profits, which is what the banks were making. It's pretty hard to argue against record corporate profits. But eventually they got the silver bullet.
One more reason i believe that markets without regulation wouldn't work is perception. Greed is not the only reason for the fiasco. Usually humans first perceive a problem , then decide best course and then finally take action. I believe that there definitely is now a problem of perception. You may not act in your own "best" interests because you may not be able to perceive the risks. Most of the industry couldn't perceive the risk and so we chartered into incredibly risky waters. We couldn't see the storm so we couldn't take action. Credit default swaps(CDS) are supposed to insure you against the risk of default by a company. INSURE. Sound's safe doesnt it?Unfortunately it isn't. You may not be able to perceive the risk that comes with a $62 trillion UNSUPERVISED market. Too many counterparties chasing the same thing. Sometimes we need to be protected from ourselves and i suppose that's what we'll see now.
So does it mean the end of capitalism as in the old days? Yes. But risk tasking is a requisite for progress.Just because countries go to war does not mean democracy has failed. In the financial markets, getting 7% return instead of 6% is not worth it if getting that 7% could also mean biting the bullet.I suspect we haven't seen the end of it but a much more risk averse culture will rise from these ashes and capitalism will continue to create fantastic progress. That is, if we don't manage to break the banks in the process.
