A Crisis of Capitalsim?

The Wall Street crisis is being called a crisis of capitalism.
The cause of the crisis is being called a failure of deregulation. 
The $700 billion bailout is being called the only solution. 

Not. So. Fast.

Joseph Calhoun has a powerful essay today at RCM that informs counter-points to all of the above. Key sentence: "The Treasury does not need to enter the market for it to start functioning; the Fed needs to leave the market."

Look, nothing is as simple as the dire binary pronouncements of this whole dark month. I'm already on record saying the bailout was mishandled politically, and today's vote in the House was a spectacular validation. It doesn't make me happy, but it does confirm my frustration that the armageddon gambit by Paulson was a mistake. It also confirms my faith in the American people who have given this Congress the lowest approval rating ever record, which hit single digits in July.

If you dig for root causes for the financial crisis of 2008 (and soon to be recession of 2009, link to Jim Hamilton), you see that capitalism is built on a political foundation: institutions and rules established by the Constitution, two centuries of legislation, and a massive city full of bureaucracy. The capitalism part is doing fine. The political foundation is rotting.

A 2-party system dumbs down everything into a 1-dimensional spectrum. For economics, that is usually is framed as communist dictators on the left and free market fundamentalists on the right. The great irony is that it was the lightly regulated state-backed Fannie/Freddie who were at the center of the mess. Who watches the watchmen, right?

Let's be honest and admit this crisis didn't start last week, or last month, or last year.  No, Speaker Pelosi, it did not sneak up quietly on "little cat's feet" as you said today.  Housing is the key to this crisis, specifically the NON-market incentives pushed by Washington to get people into unaffordable homes. You were successful.

The story is simple: Washington did not regulate itself.  It interfered with the market, broke the market, and is now blaming the market.

Comments

[Devin]

The sound you hear, it's the nail being hit on the head.

[TRuhe]

I agree with 99% Tim ... would only point out one nuance about what I see as a failure in capitalism and that is (undisciplined) speculation. From the – 777 close of market yesterday to the current +297 (as of about 11:40EST) nothing of substance or fundamentals have changed – yet we have a 1,074 point swing.

Retirement plans and pension incomes are getting hammered because of rampant speculation by traders trying to interpret the slightest sign of … anything. The smart money will now be investing in index funds and buying up assets in fire sales that didn’t need to happen. Perhaps Warren Buffet said it best in commenting about his $5B investment in Goldman: “We had a lot of cash and we are now seeing things that give us a chance to use that cash sensibly.” He has the speculators (among others) to thank for the current abundance of 'sensible uses of cash.'