Friday, March 13, 2009

Have Capitalists Killed Capitalism?

Capitalism: "An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market."

It might be said that the goal of any economic system is the production of goods and services which a population values and wants. If those products are priced fairly the consuming public will purchase them, the producers will make profits which can then be used to grow their businesses, hire more people and expand the economy, creating more wealth, and so on...

So what just happened?

Maybe we lost site of the goal: to produce products which have value for the consuming public. It seems the more ethically challenged of Wall Street and our financial markets thought they had achieved the alchemist's dream; they found a way to create something out of nothing, which they then sold at a profit. And this is how they did it.

They convinced gullible and/or naive buyers that the rising home prices will continue and that market values are no different than real money, just like money in a bank. These buyers then borrowed on that so called "market value", often more than they could afford to pay back, believing that if they got into financial trouble, they could always sell their homes at a higher price, and come away with a profit.

(NB. The only time the market value is real is when a willing buyer buys from a willing seller. That agreed upon price is generally considered "market value". )

The predators in the financial and banking industries then took these mortgages, bundled them together so that they were impossible to analyze and price fairly, then sold them as 'investments', taking their cut of course, thus creating wealth for themselves without actually producing anything of true value. They even gave them important sounding names like - Mortgage Backed Securities, Credit Default Swaps etc.

The goal was no longer the production of products or services to produce a profit; it now was only the creation of capital, money, for their own benefit. That nothing useful was produced in the process was of no importance. Gordon Gekko lives. For the cinematically challenged, Gordon Gecko, in the movie "Wall Street" pronounced "Greed is good!"

And worse still, it was based on an illusion, a Ponzi scheme - the idea that the market value of anything is no different than real money, instead of what it actually is; a best guess, a hope, a gamble. We have built our financial markets on illusions, a gamble and we are now suffering the consequences of that pipe dream. We've been "Madoffed". (The illusion, the market price of property, also serves as the basis for funding local government. Property taxes based on market prices are responsible for the incredibly unfair distribution of the property tax burden after every revaluation. )

I hope we can return to our original goals - making high quality things and providing high quality services that people want and can afford. The profits will follow.