WSJ: Why Capitalism Has an Image Problem

There is a great essay by Charles Murray in this weekend’s WSJ titled Why Capitalism Has an Image Problem.

He mentions two several reasons for the demise of capitalism in the public’s eyes. Collusive capitalism (crony capitalism) is among them. I agree. I think what happened with the housing crisis was collusive in nature in that the governement basically put out mandates for housing and lenders made it happen. Yes, there was greed involved and yes, banks made stupid loans (or purchased stupid loans from mortgage brokers who had no skin in the game). Then when it all came tumbling down, congress hauled in all the bankers and asked them what happened and newspapers talked about the failure of capitalism (without blaming the government).

Murray makes two other points that I think are very interesting.

The objective changes in capitalism as it is practiced plausibly account for much of the hostility toward capitalism. But they don’t account for the unwillingness of capitalists who are getting rich the old-fashioned way—earning it—to defend themselves.

I assign that timidity to two other causes. First, large numbers of today’s successful capitalists are people of the political left who may think their own work is legitimate but feel no allegiance to capitalism as a system or kinship with capitalists on the other side of the political fence. Furthermore, these capitalists of the left are concentrated where it counts most. The most visible entrepreneurs of the high-tech industry are predominantly liberal. So are most of the people who run the entertainment and news industries. Even leaders of the financial industry increasingly share the politics of George Soros.

I found this next reason for capitalism’s demise even more important:

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey’s Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere. That openly judgmental stand is no longer acceptable in America’s schools nor in many American homes. Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans and the near disappearance of the sense of seemliness that led successful capitalists to be obedient to unenforceable standards of propriety. Many senior figures in the financial world were appalled by what was going on during the run-up to the financial meltdown of 2008. Why were they so silent before and after the catastrophe? Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly.

No. Capitalism is not perfect but it is the best economic system out there. But, it fails when politicians paint people as victims and dole out money in unproductive ways. Unfortunately, that’s the system we have today.

16 thoughts on “WSJ: Why Capitalism Has an Image Problem”

  1. Murray ends his article with these words:

    “If it is necessary to remind the middle class and working class that the rich are not their enemies, it is equally necessary to remind the most successful among us that their obligations are not to be measured in terms of their tax bills. Their principled stewardship can nurture and restore our heritage of liberty. Their indifference to that heritage can destroy it.”

    Capitalism is a tool, like a double edged sword. When used to benefit all, workers and owners and community, capitalism benefits are self evident. When used to enrich the few at the top, it’s benefits are obscure and meaningless to the working class. As such, Capitalism does not need a champion or cheerleader or even propaganda to make it popular. All it needs is “principled stewardship” from the top down and across the board. Principled stewardship is the antithesis to greed.

  2. In a free market, large businesses are encouraged to buy up smaller competitors and drive others under in order to increase market share and drive greater profits. “Too Big Too Fail” is simply Capitalism’s ultimate achievement.

    We must choose to make Capitalism our servant. Since one cannot fully control that which one does not understand, making Capitalism a useful servant requires education. To do otherwise, as we have done over the past 40 years, is to become subservient to Capitalism.

  3. “Too Big To Fail” is short for “Too Big To Be Allowed To Fail.”

    BG is right on this point. Failed companies should be allowed to fail, no matter how big.

  4. Why, in your zeal to make government the fall guy for the recession (Really? The finance folks played only a minor role, and that, too, was the government’s fault? Hmm–makes one wonder about the Savings and Loan crisis of years back. That wasn’t about greed? And it, too, was the government’s fault?) did you miss the point of the the WSJ article?

    There IS a moral base to capitalism. There ARE obligations that the very wealthy have to the rest of us non-so-rich folks and to the poorest among us. Capitalism runs into a PR problem when its practitioners forget about stewardship, focus only on profits and blame the poor for being poor.

    I completely agree with you about Capitalism as an economic strategy but I am not as admiring of the those who let greed get in the way of stewardship. I share your concerns that certain government policies abetted the housing crisis, but I don’t think the financial community gets a pass when they decided to take wholesale advantage of those policies, knowing full well that the center could not hold. Even Capitalists need more goals than just making the most money possible, consequences be damned.

  5. Well, Grace, the government was certainly culpable in the meltdown. First, it FORCED banks to lend to those with poor credit, or it would sue them for “racist” practices.

    Second, it increased minimum wage, which forced those, whose labor is not worth that higher price, to be laid off. The ripples in the economy created more layoffs, and people started defaulting.

    Now, the who point of the “too big to (be allowed to) fail” issue is that many of these institutions COULD say, “consequences be damned,” because the government would not let them fail. What would YOU attempt if you knew you would not have to bear the consequences of your failure, but could reap the rewards of your success?

    Yes, we have lost some sense of noblesse oblige — that sense of stewardship. That comes in large part from our loss of religion. When one believes that everything he have — even his opportunities, his talents, his brains, his drive, his “luck” — comes from God, and that he will have to answer to Him when He comes to claim what is His, one gets a strong sense of stewardship.

  6. I think part of the the problem is our poor educational system. The masses simply don’t know any better and it is easy to blame rich people instead of really assessing and understanding a problem.

    However, The ultra rich certainly don’t do themselves any favors, but politicians are adept at holding up the ultra rich as an example, while actually focusing on the middle class – like how “millionaires and billonaires” turns into a hard working middle management stiff/family making $250k or so per year.

    What I often find funny is that the ultra rich/capitalist in hollywood are often given a pass because they like to fake caring about the lowly common man – adopting poor kids from Africa, Katrina, Haiti, etc all the while raking in tens of millions of dollars each year from acting. Nevertheless, a guy like Romney who may have given away $4 or $5 million a year to a charity is still villafied over his cap gains tax rate.

    The benefits of capitalism far outweight its negatives.

  7. Hollywood types adopting poor kids from Africa are not running for President, nor are they saying ‘they understand’ the middle class. In truth, most (not all) Hollywood stars come from humble beginnings and worked their way up to stardom. Many, not all, billionaires had to work for their wealth, just managing their wealth is a type of work. Lottery winners who do not manage their wealth end up poor, again.

    Warren Buffet does not say he understands the middle class, he says he understands his tax rate is lower than his executive assistants. And he is not running for a government office.

  8. Jack, I’m surprised you’d be regurgitating that political manure spin about the CRA.

    Republicans, or should I say Wall St think tanks, dug deep and then campaigned hard to make the Community Reinvestment Act of 1977 the “root cause” of the 2008 financial melt down.

    Here’s some education for the uninformed:

    Community Reinvestment Act of 1977

    Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.

    The Act instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.)

    The law emphasizes that an institution’s CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution.

    Housing and Community Development Act of 1992

    It was HCDA-1992 that mandated that HUD set specific goals for the government-sponsored enterprises Fannie Mae and Freddie Mac, with regard to low income and underserved housing areas. It was to devote a percentage of their lending to support affordable housing.

    CRA was again revised in 1995, 1999, 2005, 2007, and 2008. Yet, no where in the CRA were banks mandated to make risky loans to poor people.

    Risky sub-prime lending came not from the government directly, it came from the banking industry itself. In 1988 the Basel Committee on Banking Supervision, an international body made up of representatives from all the major central banks, produced the Basel Accord, which went into effect in 1992 in the United States and most other participating countries (G10). The accord set capital requirements for all banks that weighted assets based on their risk.

    Under the Basel Accords the lowest capital requirements for a bank were not for the loans they personally originated and understood best but for AAA-rated securities. The safest direct loans are home mortgage loans to borrowers with excellent credit whose loan amounts don’t exceed 80 percent of the property value. These loans to “prime” borrowers have a risk weighting of 35 percent under Basel II Accord (2004). But if such loans are packaged into a mortgage-backed security rated AAA, the risk weighting is only 20 percent, reducing the amount of capital the bank must keep on hand and increasing its profits. Thus a bank has the incentive to sell the loans it has originated and replace them with AAA securities. Indeed, Basel II virtually mandated that banks sell their loans if they wanted to be competitive.

    Why would a package of loans to sub-prime borrowers get the same high rating as a package of loans to prime borrowers? Through the magic of a Credit-Default-Swaps. Although the loans themselves might have a high risk of default they were protected by credit default swaps sold by entities that were themselves rated AAA, such as AIG Insurance, and CDSs were given AAA ratings as a result. A package of sub-prime loans might be rated BB (below investment grade), getting a prohibitive 350 percent risk weighting under Basel II, but that would be reduced to 20 percent weighting as a CDS protected AAA security.

    This, combine with the repeal of Glass-Steagall in 1998 allowing investment banks to merge/acquire commercial banks, made the perfect recipe for high leveraged profit. The only problem was the profit was fueled by unsustainable growth in the housing market.

    The Basel Accords were the sparks that ignited the housing boom and it came directly from the world’s Central Banks and then enforced by govt law in all participating nations.

    No, the Community Reinvestment Act was not the root cause or even a true player. Deregulation of the industry, the creation of complex derivatives, a faulty credit rating system, and the pursuit of impossible returns on investment (that’d be greed) took the nation (the world) into the crapper.

    Remember the “lack of stewardship” conversation. This is a prime example of how Wall St deliberately took steps to maximize their own profits regardless of consequences or damage to others.

    What really sticks in my craw is that both Pres Bush and Pres Obama chose these same weasels to be their financial advisers. If this were China or the USSR, they would have been publicly shot.
    I’d settle for having them impoverished and forbidden to work in any job handling money.

  9. Valkyrie) and if “too big to fail” were not the mantra in the US, then I wouldn’t care the true underlying reasons for the financial crisis.

    I would just be happy in my thoughts knowing that the “market” would have efficiently taken the reckless/ignorant/dumb players out of the game entirely.

    But instead of capitalism, we bail out AIG and the rest of the world banks — so the stupidity continues on.

    “Too big to fail” really means: “have paid enough to bribe/control our government”.

  10. I did not say that was in the LAW, Val. The regulatory agencies frequently go beyond what is in the LAW. Here, they threatened lawsuits to “encourage” banks to lend to the “underserved.”

  11. I have to agree with BG’s comment. True capitalism would mean that these companies would cease to exist when they fail. The really do effectively have some control over our government

  12. I have to agree with BG’s comment. True capitalism would mean that these companies would cease to exist when they fail. The really do effectively have some control over our government

  13. I completely agree the big failures should have fallen, regardless of the consequences. Too big to fail is bogus. We lost two major buildings in NY both heavily involved with the financial industry and we did skip a beat. We had the crash in 1987 and still we came out just fine.

    Congress-critters were more interested in protecting their campaign donors than listening to their voting constituents. In 2010, many who supported the bailouts got replaced by tea party candidates. Still, Congress is too close to Wall St and significant campaign finance reform is the only effective way to break the connection.

    Regulators (who were in bed with financials) did not need to “threatened lawsuits to encourage banks to lend to the underserved.” Countywide, the biggest participant, did not need any threats or persuading in giving out bad loans. The system was paying big incentives to give out as much money to anyone able to sign papers.

    I know that several Democrats blocked legislation in 2005 that *may* have been able to address the situation, but the Fiscal Conservatives on both sides of the isle did nothing to press the matter and Bush dropped the ball as well. Perhaps because their Wall St friends told them “how bad” the idea of govt oversight was to their profit margins. I would love to see THOSE e-mails.

    In any event, we still have a financial system running high risk derivatives and govt running amuck with the same complacent players calling the shots.

    It will take several more years, but eventually, we will either collapse or working class will form grass root organizations to displace the power brokers. The tea party and the OWS movements were a beginning. But the fringe is always quicker to move in radical directions. The mainstream tends to be much slower, but when it moves, IT MOVES.

  14. The spell-checker cannot save you now, Val.

    An ISLE is a small bit of land surrounded by water.

    THE AISLE is a small stretch of carpet surrounded by idiots.

Comments are closed.