Over the last six months, we have seen turbulent economic circumstances: share prices are in decline, the housing market is in freefall, and there is a distinct loss of confidence in the banking sector. The answer that various governments has to offer is bailing out the big firms that got us into this trouble in the first place.
But is this wise? By doing this, the goverments are effectively admitting defeat in the fight for capitalism. Big banks can remove their bad debt by swapping it for good government bonds, thus bypassing the cycle of investment leading to return, or lack of one. The fundamental principle of a capitalist society - one can invest for profit, but a profit is by no means guaranteed - is being bypassed, because apparently the banks are too important to the success of the capitalist system for capitalism to be allowed to take its course.
Do not misunderstand me, I am not against government intervention per se. What I am against is the bypassing of the economic system in which we operate for short term gains. Government intervention should be strictly within the system, rather than trying to bypass the capitalist system. By this I mean that governments should be treated as any other investor, willing to take equity for the cash that the system wants. That way, the system works as it was intended to. Although this should only be used as a last resort, it is up to individual governments to invest as they see fit. This way, the bailouts happen on the Government's terms, rather than on the big companies' terms. This is a system that holds those responsible to account for their actions, rather than pretending it never happened.
Hopefully this episode will herald an age of fiscal responsibility by everyone. But let us cast our minds back to the last time of speculation, ridiculously cheap credit and soaring stock markets. This is not by any means a 21st Century phenomenon, a very similar thing happened with the Wall Street Crash of 1929. This crash was highly exacerbated by Hoover's refusal to act, which shows that government intervention in the markets to create stability is, in my view, highly undesirable unless on the conditions outlined above, but unavoidable. With state aid, e.g. the Tenessee Valley Authority et al, the American economy came through in the end.
So we must stay alert to the fact that capitalist markets are to a large extent self-corrective. Due to the laws of supply and demand, as credit becomes scarce, the reward for providing credit, e.g. a better interest rate on your bank account, will increase, thus making it more profitable to provide credit, so more people do so. Defaults on mainly US mortgages sucked the credit out of the system, but this is an alternative approach to radical government expenditure to solve the problem.
To conclude, capitalism has been tested. But it has been tested before, and it pulled through. All that has happened is that the economic growth built on debt has collapsed, which should serve as a warning not to do it again. But rather than bailing out those concerned, capitalist systems have the capability to recover from these setbacks, which is altogether a much less risky strategy than nationalisation of banks. I accept that government intervention is unavoidable to save the system from ruin, but the capitalist system that we praise when it "works", but criticise when it doesn't, should have the chance to redeem itself first, before any risky intervention. And when the state intervenes, it should do so within the system, rather than by influencing the system from outside, and should be treated as any other investor. These are the conditions for a successful revival. We must realise that we got it wrong over the last decade, and rather than patching up a discredited economic theory, we must allow the markets, that have served well in the past, to create the foundations of a more responsible future.
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