Steve Forbes has been one of the high priests of free-market capitalism for as long as I can remember. Recently he teamed up with Elizabeth Ames to write How Capitalism Will Save Us which can be summarized as a modern manifesto for the Austrian School of economics which, quite frankly, surprised me. I knew that Mr. Forbes was conservative, but I didn't realize how far out to the right he stood until reading his most recent publication. The book covers an array of current economic topics which include: cap and trade, the gold standard, flat tax rates, universal health care, executive pay, globalization and outsourcing. Because The Ithaca Experiment is an investing blog, I'm not going to cover most of the authors' arguments, just the ones that make the most sense from an economic viewpoint. I'd like to stay within the realm of my expertise and some of these topics are beyond the scope of the speciality of this Web site.
How Capitalism Will Save Us states: "Thirty years ago, only about 13 percent of Americans owned stock. At least 50 percent of American households do today.". This can only mean that more people have skin in the game with their IRAs and 401Ks and individual holdings whether it be in securities or mutual funds or ETFs. That's why there is such an outrage over the 2008 market collapse - over half the country lost significant amounts of retirement income. People want to tar and feather these bankers who were partly responsible for those losses. According to the book, it wasn't the bankers fault, but government intrusion that caused the financial system to to implode. Forbes and Ames believe that "the financial crisis was a by-product of not one but three government-created disasters.": monetary policy, a succession of regulatory failures like mark-to-market accounting and GSEs like Fannie and Freddie helped inflate the bubble.
I'm from the school that ascribes to the theory it was lack of government intervention that enabled the bankers, insurers and mortgage lenders to run wild, sometimes being leveraged debt to equity as much as 40:1. It all started with the repeal of the Glass-Steagall Act in the early 1990's. The Glass-Steagall Act went into law in 1933 to help ease speculation by bankers and once repealed, gave the bankers a licence to do whatever they wanted. Give these financiers an inch, and they'll take a yard. It's just the name of the game on Wall Street and they need to be under someone's thumb because left on their own accord, they'll gum up the works. What is troublesome about How Capitalism Will Save Us, is that throughout the book they keep saying that we need less and less government in all aspects of the economy, but they admit that if the government hadn't interceded with the bail-out program, "the impact on the world-wide economy, on billions of people, would have been cataclysmic.". I think the operative word here is cataclysmic. It seems that Mr. Forbes and Ms. Ames want it both ways.
The authors of How Capitalism Will Save Us admit that: "Several of the nation's financial institutions were nationalized in all but name.". They also concede: "The financial sector is not just another industry. It is the lifeblood of our system. Without banks and other credit providers you don't have an economy.". And yet, when it comes to executive compensation, they seem to feel that the nefarious impresarios that ran the banks into the ground should be paid top-shelf dollars despite the awful jobs they did. No wonder the nation is hot under the collar when it comes to the bonuses being paid with TARP money. It's a good idea President Obama imposed a $500,000 cap on the pay of top executives of banks that received bail-out funds. They are government employees now and should be paid accordingly. They had their chance in the free-market system and failed miserably. A palace revolt is under way.
I agree with some of the tenets of supply side economics, like the theory of creative destruction. How Capitalism Will Save Us describes it very well: "Joseph Schumpeter, the great twentieth-century Austrian economist, recognized the disruptive power of innovation. He understood that advances wrought by entrepreneurs and others are not only beneficial, they also shatter the old order. Schumpeter called this process 'creative destruction' and explained that it is essential to a healthy economy.". Hyman Minsky believed this, too, as we have covered in earlier posts, but Minsky also believed that the financial industry should be regulated by the government. Forbes and Ames should unlock the chains of 20th Century thinking and come on into the new era. They may be stuck in a time warp.