“We cannot rebuild this economy on the same pile of sand.” Those were recent words from President Obama.
What I believe the president was saying was that the prevailing model of capitalism, which was shaped by previous administrations and which embraced a pure form of economic liberty, is simply not working.
Clearly, economic growth during the Bush presidency was slower than in any decade since before World War II. Incomes for most Americans have stalled.
We have relied far too much on financial engineering and on foreign capital to finance our domestic debt.
That is the scenario that led to Robert J. Barbera’s must-read new book, “The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our Economic Future.”
Barbera places the blame for our economic stagnation squarely on government policy based on a “misguided confidence in the infallibility of free markets.”
He writes: “It is not that we put our faith in the wrong people, but that we embraced the wrong paradigm. The events of 2008 revealed that using simple-minded free-market rhetoric as a policy guide is a recipe for disaster.”
The author, a Wall Street economist, is also an Economics Department Fellow at Johns Hopkins University.
Although Barbera thinks change is definitely necessary, he maintains his abiding faith in capitalism. He is in no way a left-wing reformer.
In fact, he wrote: “Risk takers are the main drivers in the free-market machinery. Their efforts go a long way toward explaining the lofty growth rates capitalist economies have delivered in the postwar years.
He seriously questions complex financial derivatives and the complex mathematical models on which they are based.
He wrote: “The constructs were underpinned by the assumption that people are well informed and act rationally. They failed to acknowledge that financing markets periodically go haywire.”
He also is very critical of both Alan Greenspan and Ben Bernanke. He thinks that both focused too much on upward wage and price pressures and put too much faith in “computer technology gains.”
One of his points that I totally agree with is that government policy-makers do not respond with the same urgency to rapidly rising markets that they do to rapidly falling markets. It seems to me that explains a lot about the current malaise.
The author makes another salient point: “Innovation on Wall Street, over time, dulls the applicability of a given set of regulation.”
This, he said, demands a constant vigilance and regular updating of the rules, something that has been absent in recent years.
He carefully documents the huge housing crisis, saying that “from 1966 to 2007, housing prices maintained a continuous upward trend.”
That caused economists and home-owners to assume that prices would never fall.
He continues: “As prices rose, people made even larger bets on the housing market in the form of subprime mortgages, mortgage refinancings and complex financial derivatives.”
I heartily recommend this book to anyone interested in economics and government. I certainly agreed with his basic thesis.
Now, as both the economy and the financial markets are beginning to show the first signs of improvement, it is imperative that the Obama administration, the leadership at the Fed and all Americans take a long hard look at the form of capitalism that is best today.
“The Cost of Capitalism” provides a sound blueprint for starting that process.
Friday, October 30, 2009
Kansas City Business Journal – by Michael Braude Contributing Writer
