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The Financial Times: Capitalism Has Failed

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Yes, that is the underlying message delivered today by one of the world's leading financial publications. For many of us, this is no surprise: you had to be truly ignorant to pretend like the economic system was a success just based on the growing divide between rich and poor over the past decade, and the three-decade long decline in wages in the country. Still, to see the FT pronounce the obvious is refreshing.

The article in written by Martin Wolf, one of the FT's main economic gurus who I don't always agree with but who always writes something sophisticated. His piece kicks off a new FT series dubbed "The future of capitalism". His first paragraph:

Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.

And this is precisely what many people have argued for many years--many people who were laughed at, ignored by the media talking heads and policymakers, and scoffed at as just people who were not willing to get with the new, great global economy. There were some voices who pointed out, amid the noise of the nonsense of the "Dow 35,000" (can we hang those people?) and the stupid nonsense about the "free market" and "free trade, that something was gravely amiss...as in, the actual vast majority of people were not having such a great time.

Wolf continues:

How did the world arrive here? A big part of the answer is that the era of liberalisation contained seeds of its own downfall: this was also a period of massive growth in the scale and profitability of the financial sector, of frenetic financial innovation, of growing global macroeconomic imbalances, of huge household borrowing and of bubbles in asset prices.

And...

Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard argue that the era of liberalisation was also a time of exceptionally frequent financial crises, surpassed, since 1900, only by the 1930s. It was also an era of massive asset price bubbles.

Indeed, we saw these asset bubbles, under Democratic and Republican Administrations, but, no matter how many times they popped, no one really wanted to say, "stop, this isn't a way for our economy to run". Why? For a combination of reasons: some people got very rich, a lot of politicians continued to get paid off in campaign contributions by people who did not want to see fundamental change and, frankly, dumb, incompetent economic managers who were still, for some reason, given worldly seer status (Robert Rubin and Alan Greenspan come to mind).

How many times, in the past three decades, do you remember hearing about how wonderful our economy was? The noise obscured this fact:
Productivity Wages

This show what really was happening--people were working their asses off and not getting paid. Which forced people to rely on credit cards and home equity and...well, you know where that story ended up.

Wolf continues:

We are witnessing the deepest, broadest and most dangerous financial crisis since the 1930s. As Profs Reinhart and Rogoff argue in another paper, "banking crises are associated with profound declines in output and employment". This is partly because of overstretched balance sheets: in the US, overall debt reached an all-time peak of just under 350 per cent of GDP - 85 per cent of it private. This was up from just over 160 per cent in 1980.

And buttressing that today is the World Bank report forecasting the worst economy since World War II:

In one of the bleakest assessments yet, economists at the World Bank predicted on Sunday that the global economy and the volume of global trade would both shrink this year for the first time since World War II.

The World Bank said in a new report that the crisis that began with junk mortgages in the United States was causing havoc for poorer countries that had nothing to do with the original problem.

As a result, it said, nations in Latin America, Africa and East Asia have had not only their growth stifled but their access to credit as well.

As for the stock markets, The Wall Street Journal says today that it is possible that the Dow will go below 5,000 (where are those morons who predicted Dow 35,000?):

As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.

A decline to 500 on the S&P is 183.38 points and 27% away. The index already has lost 881.77 points, or 56%, since its peak in October 2007. The index, which lost 7% last week, hasn't been below 500 since 1995, when the tech-stock bubble was just beginning. After dropping 6.2% last week, the Dow is 1626.94 points and 25% above 5000, a level it also hasn't seen since 1995...

...Some analysts who look at stock price trends see the indexes heading much lower.

"There's a good chance the market could keep going lower," says Bill Strazzullo, chief market strategist at Bell Curve Trading.

At the end of the article, Wolf reaches the following conclusion:

At the extreme, the integration of the global economy on which almost everybody now depends might be reversed. Globalisation is a choice. The integrated economy of the decades before the first world war collapsed. It could do so again.

On June 19 2007, I concluded an article on the "new capitalism" with the observation that it remained "untested". The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-operation are deep.

"I've a feeling we're not in Kansas any more," said Dorothy after a tornado dropped her, her house and dog in the land of Oz. The world of the past three decades has gone. Where we end up, after this financial tornado, is for us to seek to determine.

I agree with him--but only to a point.

The WAY IN WHICH the integration of the global economy was undertaken may be reversed. Note my emphasis--the WAY IN WHICH. Most people I know who opposed the "new capitalism" did so because they saw the seeds of the collapse of the system because it was based on punishing workers and seeking out efficiencies based simply on finding the lowest wage possible.

We did not--and do not--oppose integration among countries. That was just a phony part of the debate--people have been integrating, in different ways, since the beginning of human history. What we opposed were the rules, or the lack of rules, that, in fact, built the very foundation of this perverted system that has now collapsed on itself (and, in a front-page article in the same FT, the paper reports that the Asian Development Bank will report today that "Falls in the value of financial assets worldwide have reached more than $50,000bn, equivalent to a year's economic output"...that's 50 Trillion, folks).

Now, as Wolf says, the world of the past is over.

And the optimistic part: we can now rebuild an economy that values broad prosperity over greed. Let's get to it.