Savior of Capitalism; Markets Need Regulation

Article excerpt


Long live John Maynard Keynes and Keynesianism. Known as the savior of capitalism for retrieving it out of the quicksand of the 1930s, the legendary British economist and his rule book had to be referenced once again by the policy makers to deal with the current financial imbroglio gripping the U.S. and global economy. Despite the miraculous post-war economic prosperity and sweeping institutional changes over the span of more than half a century to suit the brave new world, the Keynesian philosophy still remains in tact, undeterred by the ravages of time.

Capitalism continues to suffer from systemic cyclicality and needs government action in times of major distress that result from the swings of markets. Unorthodox government intervention alone can save capitalism from its crisis. The theory of an automatic correcting mechanism of capitalism is once again negated. It also reinforces the view that the chariot of capitalism needs an accomplished charioteer (regulator). Prudential regulation is the only panacea for ensuring that the chariot of capitalism and its financial system are running on the safe and constructive path.

The government's $700 billion bailout - to acquire mortgaged-backed securities that have become illiquid causing this financial crisis - is one of largest in global history. This follows the earlier takeover by the government or nationalization of the failing AIG by authorizing an $85 billion line of credit from the Fed in exchange of 80 percent of its equity, and later of Freddie Mac and Fannie Mae, marking it a historical landmark in the evolution the global economy and system. The collapse of Lehman Brother and take over of Merrill Lynch by the Bank of America - two legendary investment banks, icons of the Wall Street and torch bearers of American capitalism - and other events demonstrate that, despite all the Keynesian tools and monetarist measures at its disposal, the U.S. economy still continues to be subject to recurrent damage by one of weakest spots of the capitalist system: its inherent cyclicality.

The U.S. economy continues to remain vulnerable to the vicissitudes of investment and credit cycles - from the 1987 Wall Street crash to the current housing-loan trauma. The U.S. economy has passed through the 1991 savings and loan crisis, the 1994 Mexican Tequila, the 1997 Asian Drama, the 1998 Russian Roulette, the 2000 Hedge Fund Long Term Capital Management Fiasco and the 2001 dotcom boom and bust. …