The Blog

Stop Blaming Capitalism for our Economic Woes and Start Blaming the State!

Since the financial crisis of 2008, the public have wrongly blamed free market capitalism for economic woes, when they should be blaming government for allowing crony-capitalism/corporatism to incubate within the system.

Since the financial crisis of 2008, the public have wrongly blamed free market capitalism for economic woes, when they should be blaming government for allowing crony-capitalism/corporatism to incubate within the system.

A big problem occurred when mass hysteria broke out from a coterie of left-leaning groups, politicians and pressure groups as the recession kicked in; they predictably blamed 'evil' bankers in the City of London and on Wall Street, as well as capitalism as a system of resource distribution. Instead, they should have taken a closer look at the role governments played in encouraging unhealthy practices within the sector, leading to this corporatism, or crony capitalism that is so wrongfully misrepresented as capitalism.

In the United States the government encouraged toxic sub-prime mortgage selling through Fannie Mae and Freddie Mac, leaving US Banks as their fall guys. Of course, it's our gut reaction to blame the banks for a failure in due diligence. But when the government actively encourages an action, it's seldom questioned.

One such example was the now defunct New York-based investment bank Bear Stearns in March 2008. In an eleventh-hour deal to drag the firm back from the brink, JP Morgan bought the company with a $29billion Federal Reserve loan. JP Morgan turned hero again later in the same year, buying Washington Mutual out of receivership. The company shouldered the outstanding legal exposures of its two new acquisitions in a time when financial security was far from guaranteed.

A similar situation happened closer to home in Britain in 2008, with the bailouts of Northern Rock and the Royal Bank of Scotland (RBS). These taxpayer-backed bailouts show that the government uses money earned in the real free market (i.e. the private sector) to provide a cushion for enormous creaking monopolies that are 'too big to fail' and in turn, the government imposes onerous regulation to stop smaller competitors entering the market. Moreover, the late 90s saw pressure on bank by governments of all colours to bring mortgages to the masses. Instead of looking at the supply side issues in the house building / planning arena, they chose to lean on banks to increase their loan to value ratio requirements (e.g. from 65%, ending up in crazy ratios of 110% with Scottish Widows) and income multiple requirements (x2.5 joint income was very much the scene in the mid-90s - by the 2000s it had move up to circa x4 on joint, and x5 on single income). The result: families over-leveraged = some defaulting = bad debt on banks' balance sheets.

There are other inherently anti-free market, pro corporatist issues with the UK financial system, such as the Financial Services Compensation Scheme (FSCS), which secures £85,000 of people's bank deposits and other qualifying investments. The FSCS acts as a state sponsored insurance policy, allowing financial institutions to think they are secure, if things go wrong, the FSCS would cushion the blow. This is merely a false sense of security and it is morally wrong, because it enables institutions to engage in behaviour that they otherwise would not have under true market conditions. Don't forget, the taxpayer bears the ultimate burden of this policy, as it is funded through levies and taxation. This behaviour gives the green light to engage in so-called 'casino banking', as institutions have this false sense of security. Governments of all colour needs to learn that they cannot nationalise losses in a crisis, while allowing privatised profits when times are better. This is not, by any definition, free market capitalism; it is rank crony-corporatism.

Any political party that wishes to make meaningful change to this country must become the standard bearer of free market economics. They should follow the wisdom of the Centre for Policy Studies. Their policy 'The Road FROM Serfdom' proposes to abolish Capital Gains Tax for small- and medium-sized businesses, freeing £3 billion for them to invest. Furthermore, the CPS policy also proposes the abolition of Corporation Tax for SMEs, leaving only the large multi-national corporations liable to pay it; freeing up another £8 billion for investment. Based on 2009-2013 trends, the resulting money would be invested, paid out in dividends and used to create more private sector jobs; which all results in further consumer spending and economic growth.

You might then ask: "What happens to tax receipts?" The idea is that extra private sector jobs - created through private sector investment - lead onto a reduced benefits bill and greater tax revenue (Laffer Economics 101 here). As a result, the country would have a lower deficit, lower debt, higher growth and a subsequent increase in living standards. Just look at the recent corporation tax cuts over the past 4 years and yet revenue from corporation tax has gone up, not down.

The point is who creates legislation to regulate every aspect of the country's system? Who, ultimately, says: "yes, you can," or "no, you can't?"

Who restricts, divides, and points the finger elsewhere when it all goes wrong?

Who commits the economic vandalism that is so clearly portrayed in the crayon cartoon?

The answer is the government on all accounts.

As the economist Milton Friedman demonstrated in his simple yet effective pencil analogy; the free market is akin to a pencil: made up of more components than meet the eye and is put together without central interference.

Ultimately, economic collapse can only be the fault of those who wield the levers of power irresponsibly. Governments in the UK, Europe and the US have shown that they're not to be trusted when it comes to promoting free markets, unencumbered by excessive regulation. Their policies have instead resulted in socialism for the banks, big corporations, and other government-backed projects. The media and special interest groups need to stop promoting a skewed, one-sided version of post-crisis capitalism and instead address the real underlying contradictions of what is portrayed to be the 'free market' system, that has led to stunted growth and lower living standards in the West.