So is Capitalism inherently flawed ? Not inherently, but as all things it works very well in theory, but in practice Capitalism needs a lot of help ! One thing the theory of truly free market economies assumes is just that – a free market with equal access to information so that everyone is making considered decisions. Well, given the complexity of the financial world (which I know as a former chartered accountant is often a deliberately created complexity) it is an assumption that one just cannot make. But much more fundamentally, a true free market theory assumes a continuing flow of wealth back into the economy. Whether in form of saving or consumption, money/wealth by individuals or by organizations is pumped back into the economy. It does not matter whether the money is in form of debt or cash – Capitalism is essentially based on a free barter system, with means of negotiations being cash or credit.
However when large chunks of wealth are pulled out of the economy and put into the ‘hyper economy’ imbalances are created within the economic system……
…..A ‘hyper economy’ is an ‘isolated island economy’ where the super rich play amongst themselves, investing large sums of money that does not go back into to the productive economy but tend to circulate within that isolated system. So the economic system begins to bleed ultimately leading to it’s collapse. At it’s simplest form imagine a king of an oil rich economy that usurps the revenues for his own pleasures – not putting it to use productively. Or the Indian Industrialists bleeding their companies to put their fortunes int Swiss banks. In the US for example and all over the world for that matter in the banking and financial sector, people at the top of their game were creaming billions of dollars away from the real economy and putting it in the isolationsist ‘Island economy’. In effect destroying the financial structures of the real economy, and ultimately unable even to sustain the ‘hyper economy’. After all the whole financial instruments world, and the banking world sustains itself by making money from the ordinary people of the real world. A truth they often forget in the penthouse offices of Wall Street or of Nariman Point.
I think economists are wrong to blame the subprime mortgage fiasco as the fundamental problem that led to the world wide economic collapse. Consumer debt just leads to increase in money supply which, if backed by consumer spending and a desire to increase productivity is actually good for the economy. The subprime mortgage problem was symptom, not a cause.
I am surprised that no one, not even Senator Obama has called for any particular legislation in the banking system. The bankers must be made responsible to their depositers, not just their shareholders. I believe the policy holders of Insurance companies too, for example, should have the power to question executive bonuses and salaries. This is a legislation that s sorely needed.