Free Market Capitalism, The God That Failed

Free market capitalism is the “god that failed,” writes Martin Wolf. Thus does Financial Times lead off a feeble chorus of lament in its “Future of Capitalism” series. What do we do now? is the question. Can capitalism be tamed? Can it be harnessed? “Yes we can!” says America’s president.

Richard Layard from the London School of Economics, offered a way forward:

“We should stop the worship of money and create a more human society,” he writes. “Happiness has not risen since the 1950s in the US or Britain,” he points out, despite big increases in wealth. “Modern happiness research can help find answers,” he believes.

“Old fashioned socialist planning is the only coherent alternative to a collapsing capitalist economy,” an alert FT reader added.

Given the depth of these insights, we decided not to dive into this discussion headfirst. Instead, we will simply mock the swimmers from the bank. Brazil’s president, Lula da Silva, for example, could only come up with a campaign slogan: “The future of human beings is what really matters.” But who can blame them? They want a capitalism that makes people happy…fairer, gentler, greener… they want to reform it…to housebreak it…to cut its balls off so they can safely put it on a leash and introduce it to their daughters.

But they miss the point of it altogether: we can’t reform capitalism; it reforms us. Capitalism punishes mistakes and rewards virtue (or good luck) – not necessarily quickly or gently…but roughly and imperfectly, like a hanging judge in a frontier town. On paper, of course, we can do better. Imagine a world where public employees are saints and geniuses who do such a swell job of allocating capital we want for nothing. But then, when we get a chance to see them in action, we find that they are bigger rascals than the capitalists themselves.

This week, under pressure from its new proprietor – the U.S. government – AIG released a list showing who had gotten more than $100 billion of its bailout money. At the top of the list of recipients was a familiar name – Goldman Sachs. In a truly astonishing co-incidence, Goldman is the firm that had been run by the very person who headed up the AIG rescue – former Treasury Secretary Hank Paulson. And what serendipity! Lloyd Bankfein – Goldman’s top man now – was actually in the room with the feds when the AIG rescue plan was put together.

“…we can’t reform capitalism; it reforms us. Capitalism punishes mistakes and rewards virtue (or good luck) – not necessarily quickly or gently…but roughly and imperfectly…”

In the room; in the deal. But the big scalawags ducked out of the press almost immediately. Instead, the headlines focused on the small fry. AIG paid bonuses of $450 million – some charged it was $1 billion – to its executives. These guys shouldn’t get bonuses, came the popular outcry; they should get a firing squad.

You’ll recall the story. The insurance giant AIG lost money on a series of gambles. For example, it gambled that it could insure the mortgage payments of people who couldn’t afford to buy a house. During the bubble years, people bought houses at outrageous prices. They could borrow 80% of the purchase price from government-backed debt mongers Fannie Mae and Freddie Mac. Buyers were supposed to put up the other 20% themselves, giving lenders a margin of safety in case the transactions didn’t work out as planned. But, if an insurance company would guarantee the other 20%, Fannie could cover 100% of this “enhanced” mortgage loan. AIG found that insuring this part of the loan was profitable – as long as nobody asked questions. But then the market price for the collateral dropped – by as much as 50% in some areas. Suddenly, people were walking away from their houses. Defaults on these “enhanced” loans ran at 5 times the rates on normal Fannie-backed mortgages.

An ordinary person would look at these facts and pronounce the same judgment as the capitalist market: AIG and Fannie both deserve to go broke. But give him enough higher education in the economics department, or a job in government, and the fool rushes in –with someone else’s money.

In the theory of bailouts, an ailing firm is given a helping hand when it needs it. This gives it time to get back on its feet, and prevents it from dragging down its employees, lenders, investors and counterparties. But what actually happens is much simpler. Money is goes from the pocket of the person who earned it…to the pocket of someone who didn’t…from the innocent bystander to the fellow who caused the accident. Capitalism takes money away from erring capitalists; the capitalism improvers give it back to them.

And who decides who gets the loot? Ah…as soon as you hold them up to the light, the angels’ wings fall off. By and large, these are the same cherubim and seraphim – such as Hank Paulson – who were supposed to be leading…regulating…and controlling capitalism when it ran into a ditch. Not a single one raised a warning. Instead, they whooped for the free market and passed the whiskey bottle to the driver! And now, thanks to their bailouts, AIG continues writing insurance against mortgage loans. Seventy-three AIG executives continue getting $1 million bonuses. A long line of reckless counterparties goes unpunished. And Hank Paulson offers advice to Financial Times readers on how to make capitalism work better.

But that is always the problem with improving capitalism…even in the slapstick American way. The reformers promise a ‘new deal,’ but they’ve always got an ace up their sleeve somewhere.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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9 Comments on "Free Market Capitalism, The God That Failed"

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A thought or two.. The only thing wrong with capitalism is that it permits too few people to own too much. Monopolies are no different from socialism except that socialism is easier to sell to the public. Maybe that’s the aspect that “failed” in the U.S. ie: the banks owned too much stuff whose price was way above its value and now they are dictating how everything has to happen. On the other hand, that probably has more to do with money and who issues it, not capitalism per se.


Great article!

The part about house breaking capitalism and introducing it to their daughters was hilarious.

I am happy to see that someone other than Rush Limbaugh finally has the balls to speak the real issue at AIG – namely the 93 Billion laundered through AIG to Paulson’s friends, those other banks should be going bankrupt because of poor decision making. They should be in the poor house and their assets bought by smaller, better run institutions


The only thing wrong with capitalism is that the rules are set by people who believe we can do well without it. Example is the aforementioned LSE academic.


Agreed! Well said, great article.

Yes Spiro. “The only thing wrong with capitalism is that the rules are set by people who believe we can do well without it” but let us be clear…. These people are the liberal politicians with a bent toward socialism and carpetbaggers who get elected with the help of a compliant media. All have been indoctrinated into the system through the liberal think tank commonly known as “College” or “University” and all now unconsciously blather on with their double-speak. Truly, 1984 has come to pass, and the world has become insane. Right is wrong Left is the new Right; Patriotism… Read more »
Erik Martino

The problem with the stock market as we know it is that investment seen as a whole, is a pyramid scheme. Its revenue is based on other peoples investments, not on profit of the companies the stocks represents. The companies is just pretty brands connected to the stocks. How do we prevent bubbles and connect paper value to real value. The problem is not capitalism as such but the premises under which it operates.

Brent Vincent
The truth is this.We live in a world of neanderthol thinkers.A world of I have it and you dont.A world of Im not hungry and you are.A world of I have health care and you dont.A world my friends of I have it and you dont and furthermore I dont care if you ever have it.Yes this is the world we live in.May the strong survive.And yet we have these absent minded selfish arrogant rich people who sit back everyday and claim to be so religious and Godly but yet speak out against a healthcare system for all.They care not… Read more »
Jill Barraclough
Capitalism : The New God Trinity: Individual Satisfaction – Father Exploitation – Son Purchasing power – Holy Spirit 10 Commandments * I will make sure I maximise my profits at the cost of everything else * Individual satisfaction must be 100% satisified even if it means I cheat on my marriage, destroy my childrens lives and end up divorced * Exploit whoever you can for whatever you can, its survival of the fittest * You are what you can afford * Love thy cheap goods even if you don’t know they came from a child sweat shop * Thou shall… Read more »
Ned S

Mrs Barraclough wanted a rest from Mr Barraclough’s physical needs for a while. Mr Barraclough tripped over someone more accomodating in the interim. Mrs Barraclough reckons the pig should have paid more in the property settlement. And that God agrees. And capitalism is to blame for her and the kiddies what she’d popped out to Mr Barraclough getting financially stiffed in such an obviously abhorrent way?

Prozak … I await your learned, ever enlightening and sagelike pontifications on the flatulent ruminations of our race? :) Cheers as always! Ned. :) :) :)

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