How to Save Capitalism

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Fabrice Coffrini / AFP / Getty Images

A priority, says Mark Bray, one of the organizers of the Occupy Wall Street movement, should be stiffer regulation of bankers. “There has been too much freedom in the financial sector,” Bray says. “If you give [bankers] an inch, they take a mile. The government hasn’t stepped up to that.” That’s not quite true; there are plenty of legislative efforts to rein in bankers, most notably the Dodd-Frank reform bill in the U.S. President Obama also recently appointed a head of the new U.S. Consumer Financial Protection Bureau. But for many, that’s just a start. Chuck Collins, a specialist on income inequality at the Institute for Policy Studies, advocates tax reform that would hike levies on the wealthiest and end the abuse of offshore havens; new corporate rules that would enhance labor and community influence over company management; and restrictions on the ability of Big Business to fund and lobby politicians. Inequality “is part of the natural dynamic of capitalism when there are no checks to counter-balance wealth and power,” Collins asserts.

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But governments may not have that much muscle left. With debt and deficits bulging, governments across the industrialized world have been forced to cut back on the social-welfare spending that protects the poor. The debt is also pressuring politicians to make capitalism even freer — breaking down barriers to entrepreneurship and loosening up protected labor markets — to enhance the competitiveness of their economies. Instead of riding to the rescue, governments across the West are sounding the retreat.

Moral Hazards

some argue that’s exactly what capitalism needs. The woes of the global economy, they contend, were caused not by a failure of capitalism but by a failure of government. “We have a lot of sympathy with the Occupy Wall Street guys,” says Jim Walker, founder of research firm Asianomics in Hong Kong. “But they should be occupying Pennsylvania Avenue and the Federal Reserve.” As Walker sees it, regulators permitted the banks to ignore risk, then bailed them out when their risky behavior became a threat to economic stability. Ever since, the Fed has helped Wall Street dodge reform by spoon-feeding it easy money, which allows bankers to turn profits at little cost. In doing so, government has thwarted the self-regulating nature of capitalism.

By rescuing big banks, governments overturned the verdict of the markets and rewarded bad practices. “If capitalism had been left to its own devices, none of these guys would still have a job,” Walker says. “The only way to make them responsible is to make them fail.” Capitalism hasn’t perpetrated injustice; faulty government policy has, Walker says. The way to fix that problem is more capitalism: only freer markets can ensure that wrongdoers lose and do-gooders win. “Capitalism hasn’t been given a chance,” he says.

Capitalism, though, hasn’t regulated itself all that well either. Government officials and central bankers aren’t the only ones who failed to prevent the financial crisis. The shareholders, board directors, accountants and other agents of capitalism tasked with monitoring risk and corporate behavior didn’t do their jobs. Mike Mayo, bank analyst at brokerage CLSA in New York City and author of the book Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves, says capitalists have become their own worst enemies. “Big-bank CEOs are more of a threat to capitalism than those on the outside protesting,” he says. Mayo equates reform of capitalism with restoring the checks and balances that police a well-functioning free-market economy. Shareholders and directors are supposed to safeguard the health of corporations and link compensation to performance. Instead, managers of banks and companies have been incentivized to notch short-term profits over long-term gains, encouraging them to take dangerous risks and earning them tens of millions in undeserved payouts. Such behavior “defeats the moral justification for having a capitalist system—that it is more fair and based on merit,” Mayo says. His solution is to repair capitalism one boardroom at a time by strengthening corporate governance. “The problem with our economic system today is not a problem of capitalism,” Mayo says. “It is due to a lack of capitalism.”

However these debates play out, the capitalism that emerges from the Great Recession will be a different capitalism. The groundswell of public discontent that has exploded on the streets from Los Angeles to London to Athens simply cannot be ignored. Yet however loud the calls for change, capitalism is here to stay. While many in the West sour on the system that made them rich, China, India and much of the rest of the rapidly advancing emerging world are slowly, inexorably turning toward freer trade, deregulation and more-open capital flows in their drive for riches. The challenge facing the world’s politicians, economists, bankers and corporate leaders is to reform capitalism in ways that enhance its power to grow and uplift the downtrodden while mitigating the ill effects of globalization and greed. The outcome will shape the fortunes of capitalism — and the world economy — for the next generation.

— With ­reporting by Nate Rawlings / New York

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