UNFETTERED CAPITALISM LEADS TO ECONOMIC ANARCHY

UNFETTERED CAPITALISM LEADS TO ECONOMIC ANARCHY

That's a mouthful. Here's what it means.
When free-market capitalists seek the highest rate of return on their capital, they invent new investment products to enhance their ROI, and as it turns out, in either unregulated financial markets, hedge funds, or in financial institutions and products whose managers, and financial markets overseers, just didn't "see" the risks developing.
As in the current mortgage derivatives markets, and recently commodities markets, this packaging of investment products requires the leverage of debt to enhance the ROI. In fact, leverage through debt is the ONLY way to maximize the spectacular rates of return desired by risk-oriented investors. For some, however, the concept of risk has been somehow transmuted from high risk to euphemisms like Collateralized Debt Obligations, Swaps, Derivatives, and others.
As these products were developed, and downstreamed to second, third, even fourth-level removed investors, so was the risk. Banks and Mortgage lenders wanted to originate loans, package them in some way, make their fees and return to the dining table-mortgage markets-for another round of feasting. That's one brand of Unfettered Capitalism
But the process eventually had to allow the risk to present itself, which it did when the ARM's reset; when the No-doc and Alt-A mortgages given to people who were not qualified, who could barely afford the initial 4 1/2 percent rate on over-priced housing, and who gave up the ghost when housing started to flatten, then decline under the wight of foreclosures, overpriced housing with no buyers, and more problems.
Worse, many of these home buyers initially saw their housing value rise by double digits in the 2004-2005-2006 period and were encouraged to take out second mortgages, home-equity loans and lines of credit which they used for cars, vacations and more.
Hence the current freeze in housing liquidity, and general liquidity overall, because new loans can't be originated, older loans can't be resold or redeemed, are in default or foreclosure, and banks don't trust each other to repay the loans normally used to finance their day-to-day business. The downstream investors can't get their money either; the investment banks, the lenders can't and won't redeem these obligations, as they promised, their value is so suspect that hardly anyone is willing to buy such debt, or sell it and take the almost certain heavy loss that risk-based pricing would incur.
Capitalist markets exploit the opportunities in the system, and so in the interest of society in general, must be regulated to the degree necessary so as not to allow greed to hurt consumers and organizations which seek advantage beyond what they have at risk of their own money.
What does this mean?
When individuals and institutions generate risk beyond the invested capital of their owners and stockholders; when society inadvertently and unknowingly joins in the risk because the investors have used leverage to enhance the reward on their own capital, that creates an unacceptable risk for the everyday investor and consumer (read taxpayer). That's the Economic Anarchy referred to above.
Now, necessarily, comes Economic Socialism.
I hesitate to use the word Socialism, but it aptly describes a process in which society's interests and active participation in the capital markets process overrides the joy and society-building effects of investor-driven capitalism; the process of investing at risk to build value, create companies, industries and jobs that increase our standard of living, and improve society.
Therein lies the conflict; the tug of war between dog-eat-dog, free market competitive systems, and the desire for a society which benefits the most people, offering opportunity and achievement.
Therein also lies the opportunity for Millennium Capitalism; a New Order of free markets in which investing in human Capital offers rewards commensurate with the risk; where achievement-oriented infrastructure is created with an eye towards getting high rates of return on Human Capital. Who takes this risk, underwrites this approach? A democratically structured government, elected by it's Citizens to marshall the resources necessary.
Obviously, a new type of capitalism is needed; less a Keynesian type of laissez-faire economics in which the unseen hand of the free marketplace rewards risk-takers appropriately for good decisions, or not, for bad ones, more a minimum oversight and infrastructure process which necessitates the levels of capital needed to offer the public financial products and services, improve the standard of living for all.
This is accomplished through regulation of the process in which capital is raised and deployed; how it is invested, and now, importantly, leveraged. New capital ratios for financial institutions must be employed, maybe even limiting the current types of "leveraged" investing at 20-1, even 30-1 employed in some packaged financial instruments, and commodities trading. Hedge funds, as well as others, must have certain levels of available capital to meet redemptions; can't deploy more leveraged risk than the capital base will insure, and other regulatory measures that insure that risk is borne by the investors and institutions that engage in it.
What does this mean?
For instance, if commodities trading only permitted "cash" contracts, there would be no leveraged risk, either on the upside or downside. Investors who really believe oil, or gold, or copper or wheat is going to rise or fall could "bet" accordingly. Investor/users of commodities like manufacturers, food processors, refiners, wouldn't have more capital at risk that the contracts they own; alternatively, since some amount of leverage would create greater liquidity, and greater risk, limiting the margin to 2-1, or even five to one, would mitigate the possibility of cascading failures dragging taxpayers into the risk matrix with the investors.
The proof? In the modern era, equity risk capital has declined as a percentage of total invested capital, including debt. The leverage of debt, and risk, at all levels-government, state, local, corporate, investor, even pension funds-has steadily increased.
We can see how the effect of allowing irresponsible investor-dominated markets, leveraged by unregulated debt, puts society at risk.
We want and admire the free market system that has given so many entrepreneurs and investors the opportunity to create companies, and profit from them.
A little more financial industry economic oversight, well-researched, and dedicated to preserving a capitalist society, may be a good, even necessary thing.
If it has the effect of limiting the "shoot the moon" rates of return that speculators and others gain through marketplace leverage and a "game the system" attitude, so be it.
It's a small price for continuing prosperity, and a system which encourages investment.
And, for those who are tempted to say that the notable and successive failures don't argue in favor of Economic Socialism, remember we managed stupendous accomplishments as a country and as a society before the modern era of "leverage."
In so many ways the effect of socially responsible regulation that protects and encourages free-markets has been positive, while minimizing the damage to investors-and taxpayers- that greed can engender.