Breaking Views

Don't blame capitalism for this mess

A message to G-20 protesters: Free markets aren't the culprits. It's the way they've been manipulated.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Hugo Dixon, breakingviews.com

(breakingviews.com) -- The world faces crisis of finance, not a crisis of capitalism.

As protestors gather to denounce capitalism on the occasion of the G-20 summit in London, it is worth remembering that free markets and free trade are not to blame for the current economic mess. The real culprit has been skewed finance. This distortion has operated on four levels.

First, there has been an imbalance in world trade, with giant surpluses in China matched by deficits in the U.S., the U.K. and elsewhere. That allowed borrowers to rack up huge debts.

It was not a natural phenomenon of the free market. It was at least partly the result of China's decision to keep the renminbi's value artificially low.

Second, there has been the U.S. habit of bailing out the financial system whenever it hit trouble.

Investors used to talk about the "Greenspan put" in recognition of the fact that the former boss of the Federal Reserve could always be relied upon to squirt money on the markets at the first sign of trouble.

This, again, distorted the free market. It both numbed investors' fear, causing them to take excessive risks, and added cheap credit in the West to the liquidity pouring in from the East.

Third, there was the inherent distortion in having financial institutions that are considered "too big to fail".

Banks sailed too close to the wind because they knew the authorities could almost always be relied upon to bail them out. The antidote to having institutions that are "too big to fail" is either to cut them down to size so they can fail safely or to regulate them more tightly. But, in recent years, banks got bigger and were deregulated.

Fourth, there were the "heads-I-win-tails-you-lose" incentive plans for the financiers themselves.

If their bets paid off, they stood to become multi-millionaires. If they lost a packet, shareholders and ultimately taxpayers were left to pick up the tab. Some culprits have even been able to walk away with fat bonuses and enhanced pensions.

This, again, is not the free market. It is an asymmetry that turned finance into a casino.

So the G20 protestors should blame distortions rather than the free market. And the G20 leaders should aim to fix those distortions so the world never again has to face this mayhem. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 28,335.57 -28.09 -0.10%
Nasdaq 11,548.28 42.28 0.37%
S&P 500 3,465.39 11.90 0.34%
Treasuries .84 -0.01 -0.83%
Data as of 8:02am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.