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Capitalism's Future

Posted by William C. Prewitt, M.S., CFP® on 20 May 2009 | 0 Comments

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The investment community is struggling with the issue whether capitalism will continue in its present form.  Up to this point, winners of the 2008 Presidential election cycle have created more uncertainty than clarity.  Look at these examples:  

  • Normally a deliberative body, Congress lashed out to take away high bonuses negotiated by bankers; unfortunately these bills had all the hallmarks of impulsive draftsmanship. 
  • Trial balloons issued by the new Administration increased speculation on how much additional regulation will come to bear on financial markets.  
  • Already, several significant companies have submitted to federal oversight and management in order to avoid liquidation. 

Our system of democracy is not the most efficient.  It tends to swing from one extreme to the other; currently, from under-regulation to over-regulation.  When under-regulated, there are booms which drive prices upward.  Eventually, rationalism dominates and prices adjust downward, sometimes to painful effect.  This spreads the seeds of regulation; regulators believe fixing “inefficiencies” will tame the market.  We end up with less responsive markets with more distorted price mechanisms.  For instance, auto companies favored by politicians have been put on life support when market forces would have destroyed them naturally.  Past political problem solving has often prolonged economic suffering.  One has only to look at the Soviet experiment for a long term view.

 

History is replete with thriving companies that passed on.  Yet human enterprise in an atmosphere of liberty continued to forge ahead, despite setbacks.  Looking forward, so long as investors believe that each has an even chance to thrive and the market is not rigged to benefit any chosen investor or group, capitalism will work.  Many have tasted the fruits of capitalism, and we can count on them to wanting it to continue.  Like a painting that loses its luster with too many strokes, let us hope politicians avoid over-regulating an economy that works best on its own.


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