Did capitalism caused the UK Financial Crisis

[therights]

Hello,

What do you say to people that Capitalism caused the UK financial crisis because of peoples greed?

Thanks,

Gordon

[DanLane]

Greed is a motivation, not an action. It can, at most, be the secondary cause of something. It is defined as the willingness to disregard your own system of morality and take massive losses or commit crimes in order to gain something of little actual value. The "Because Greed" arguement is that capitalism brings out the oh so evil human nature in the best of us, and causes us to uncontrollably steal from or defraud others in a way which ordinary laws are somehow unable to prevent. Therefore we need to be brought under more creative forms of control to save us from ourselves. There is no need to present evidence of wrongdoing if the motive of the suspect's unidentified actions is enough to convict him of anything, and a pointed finger is enough to prove said motive.

Why is greed only for money and never for power?

Why can the greed of some only be restrained by the endless awarding of power to others?

Why are the greedy jews the greedy businessmen so prone to greed while the lawmakers and the majority of voters are not?

Why is it greedy to trade willingly for money, less greedy to tax or take it by force, less greedy still to sell it for some third party's political support, and not greedy at all to beg for it in exchange for someone else's blood?

"Because Greed" is an empty appeal to emotion relying on the target's implicit hatred and misidentification of human nature (works particularly well on the religious). The hope is that the target will project this view onto a scapegoat and will forget to ask what crimes have actually been comitted and who stands to benefit from the proposed retribution.

[therights]

Hello Dan,

Thanks for the answer - much appreciated.

If the banks were not bailed out by the government then the country would be in a lot worse state, people would have lost their savings and the economy would have possibly collapsed some might argue. Would this sort of thing happen more in a purely capitalist society?

Thanks:)

[Tyco]

Interesting fact I heard the other day: the total cost of the bailout given to the banks in 2008/9, at most could be valued at about £700 million.

That's less than the tax revenue from 'the city' (London's financial sector) in 2007 alone.

Note that I haven't verified this claim. Thought it was a perspective we rarely hear on the news, though.

[2046]

In short, the financial crisis is caused by central banking and its inflationary manipulation of credit and interest rates, which cause the business cycle. The banks should not have been bailed out, instead the free-market approach would have been to liquidate them (banks will either go out of business, call in existing loans, or both, resulting in corresponding bankruptcies) and embrace the deflation as the painful, but necessary cure to purge the imbalances and put the economy back on a sound footing. The idea that if we don't bail out the banks it will result in the destruction of the economy is fear-mongering and propaganda from those who benefit most from the government banking system. In a pure capitalist society, there is no central bank, and the banks are not on the dole, and so like any other business, if they fail, they go bankrupt.

See also:

The Myth that Laissez Faire Is Responsible for Our Present Crisis

[softwareNerd]

If the banks were not bailed out by the government then the country would be in a lot worse state, people would have lost their savings and the economy would have possibly collapsed some might argue.

Here's the problem: for almost a century the major western countries have been operating under a system where the government has taken over the role of "lender of last resort" to banks. For over 50 years, governments have also guaranteed deposits up to a particular level. The government ought not to have taken over this role; but having done so, and with the system in place for multiple generations, it is also hard to say that the government should have simply shrugged and refused to honor its commitments.

Bank problems can be broadly divided into problems of liquidity (not enough cash on hand to pay depositors) and problems of solvency (not even enough long term assets to pay depositors in the longer run). Not providing liquidity to banks -- after having usurped the role of "lender of last resort" -- would have caused much destruction of value. Providing solvency is much less justifiable.

In the longer run, the government ought to unwind itself from the commitments it has made, and allow the private market to handle it.

Would this sort of thing happen more in a purely capitalist society?

Bank runs and recessions pre-date large government involvement. However, each failure teaches people something. Each failure helps the system evolve. My best guess is that the system would have evolved to a point where the busts would have been more shallow, shorter-lived, and -- most importantly -- would have had the heaviest impact on people who took specific risks (rather than having losses "socialized" across all tax-payers). The last U.S. crisis in which private bankers played a large role was the 1907 "rich man's panic". While the government helped, private bankers -- led by J.P.Morgan -- were largely directing the rescue of institutions. Subsequent to that episode, the system would probably have evolved once again, in important ways.

Instead, the American people turned statist. (This was the era that had just see the rise of the "Populist Party", and Theodore Roosevelt was president.) American voters decided that their government would handle such affairs from now on. Like any such scheme, bankers -- seeing the writing on the wall -- decided that they should have a say in the system. A few top bankers pushed for the system that became the U.S. Federal Reserve. (Aside: Many libertarians still point to this attempt by some bankers to influence the shape of the law, and by other bankers to use the law to hurt competitors, as evidence that the Fed is a private bank run by some eilte banker's club.)

A private system would have continued to see panics, but people who wanted to reduce the riskiness of their accounts would have had the choice to do so. They would not have been completely insulated from the folly of others, but the impact would have been minimal. For some people with liquidity and safe portfolios, a crisis would have been a buying opportunity. Government control has removed the need for depositors to be discerning about their banks. What would previously have been a smart decision is now pointless or even bad.

Edited June 25, 2011 by softwareNerd

[Ninth Doctor]

What do you say to people that Capitalism caused the UK financial crisis because of peoples greed?

"Blaming economic crises on 'greed' is like blaming plane crashes on gravity."

Thomas Sowell

[therights]

Thanks everyone for your answers. Apologies for the dodgy title - I wrote it early in the morning:)

You all seem like very smart, logical people. I think I'll stick around here:)

[therights]

2046, a quick question to yourself. You mentioned that in a purely capitalist society there would be no central bank. Do you feel having a central bank adding the problems with the UK economy?

[softwareNerd]

Do you feel having a central bank adding the problems with the UK economy?

The essential function of the central bank is to be a "lender of last resort". This means that when another bank needs cash, that other bank can give the central bank some assets as security and the central bank will give it cash. The central bank also puts restrictions on banks: for instance, it may tell banks they must keep a cash reserve of (say) 10% of total deposits, or that they must not make a new-car loan for more than 90% of the sale price, and so on. The rationale is this: since the central bank is back-stopping the other banks, the central banks gets to lay down some rules of riskiness and banks have to stick by those rules.

In theory, one could have a central bank that forces banks to play by ultra-safe standards. However, that is not how populist governments work. Invariably, the standards are lowered. This puts banks in something of a quandary. Without a central bank, a banker has to think about solvency and liquidity. it would be risky for him to let his cash reserve go below a certain %; it would be risky for him not to give a certain % of short-term loans which he can call in quickly. However, when the central bank allows lower standards and says it will print as much money as needed to tide over any liquidity crisis, then it no longer becomes prudent for a banker to keep such high standards. One can generalize this story to other spheres of life, where people do less for themselves when they know someone else is looking out for them.

[2046]

Yeah, what he said.

The central bank is what creates the business cycles (the booms and busts) and the moral hazard (incentive to take more risks because they know they will be bailed out), so if we're going to pin the blame on one essential culprit (although there are many minor and contributing government manipulations and interventions, e.g. the housing market in the US), modern central banking and cheap money policies is it. See that Youtube video in my post for a more technical economic explanation. See also Economic Depressions: Their Cause and Cure for the easy-to-understand explanation.

[therights]

Thanks again everyone. Struggling to get my head around it all but it's all very interesting.