Tuesday, September 16, 2008

Commie Americans - Capitalist Europeans

I know the post title is a major oversimplification of the situation, but I do find the subject of this article linked to below more than a bit ironic. It also raise some good questions. Does more front-end regulation lead to more stable financial systems overall? Were European investors simply less greedy than their American counterparts (excluding the UK and Spain)? Is our political system so infused with greed, that the politicians will use taxpayer dollars to bail out almost any group that has enough money? Is the assumed greater stability of Europe more conducive to long term growth of financial markets than the riskier/greedier US market?

EU Shuns U.S.-Style `Active Role' on Growth, Banks (Update2)

I don't know the answers to all those questions conclusively, but I do know that widespread corruption and greed can be a bigger drag on an economy that pretty much anything else and eventually, perhaps inevitably, leads to economic collapse (e.g., the former soviet union).


1 comment:

Kevin said...

I've been meaning to respond to this post for a while, but I'm still not sure what to make of it all. Maybe in some ways the EU is more federalist than the US? But they also would seem to impose more rules, e.g. budget deficits must be below 3 percent of gross domestic product. How do they enforce that? With fines?

But I doubt that even the US would commit taxpayer money up front, or pre-emptively create a plan for baling out large financial corporations, as the EU was debating. Such a plan would be like a license to goof off, which seems to be part of the problem.

As I understand it, there does appear to be a cycle of corruption, in part created with some ostensively good, if misguided, intentions, including creating greater access to home ownership, which contributed to bad loans and artificial valuations. In that sense, up-front regulation contributed to the problem.

One of the dilemmas inherent in freedom, and, by extension, the free market, is that everyone controls the outcomes, making them hard to predict. There is a lot of fear that everything will crash. It's awefully tempting to directly control what variables we can, thinking that the government can do better. And at this point, that actually seems to be the default behavior, even if the legislature does nothing. In some cases, central control may indeed be better, but this inevitably also opens the door to greater corruption. e.g. Cautionary Lessons from the Great Depression.

On principle, I tend toward a market solution. Failed companies should be allowed to fail, even big ones, which should benefit the better and, perhaps in this case, smaller, ones. While the government might be capable of softening such blows to the economy, socialist salvation of companies strikes me as destroying rather than preserving capitalism and its benefits.

At the same time, it seems like the free market has over compensated leaders of failed companies in spite of their failures. Then again, perhaps if allowed to fail, this would be a wake-up call to the market that compensation should be tied to actual performance and even future failure that they caused or contributed to. But that reeks of wishful thinking.

What is remarkable is how many people once in those leadership positions now advise government (or campaigns). It is both reasonable and terribly disturbing, given the current state. e.g. Hank Paulson's Wall Street Days.

Sorry if this rambled or wandered. I'm still forming my thoughts and I'm curious what you all are making of these issues.