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Capitalism's Growing Pains

By Brett Danko, CFP®

As I am teaching and lecturing throughout the country, financial advisors ask me my thoughts on the government’s existing and proposed regulation of our financial system and whether it is bad or good for capitalism and the markets.

I usually start by discussing the complexity of the situation.  I explain that no one really knows what to do and the willingness to try a different approach if one solution doesn’t work makes sense.  After all, we are experiencing economic difficulties not seen in nearly 30 years and possibly not in 75 years.

Answering these questions actually forced me to come to grips with my own interpretation of free market capitalism.  You may disagree, but here are my thoughts and a couple analogies:

The Good Kid

One view of our capitalist system is that of a well meaning, good natured, hard working 17 year-old senior in high school.  You know the type of kid – good grades, athletic, volunteers through his church and respectful of adults.  Despite all the positive attributes, he/she is still a 17 year-old child.  He may be responsible, BUT it is still important to watch over him to be sure he stays on the right path.  He needs to be allowed to explore the world and make mistakes, but NOT allowed to endanger himself or others around him.  In fact, if the parents leave for a long weekend with the kid by himself, even the “good” kid may still have a party at the house!

Free market capitalism, without sufficient safeguards and regulation, is like the “good kid” described above WITHOUT boundaries.  The large financial firms have displayed greed, stupidity and hubris over the past few years.  Chasing ever higher profits, they disregarded the warning signs and basic common sense as these indestructible “masters of the universe” carved up financial territory akin to Mafia dons of the 20th century.  Government and the judicial system need to keep order and make sure that capitalists are playing by the rules and NOT getting in the way of progress by forcing more nimble, yet smaller players out.

The Umpire

Another analogy could be that of the umpires in baseball.  I once saw a longtime, well respected umpire interviewed. He said his goals were to do his job well, let the teams play and not decide who the winner or loser would ultimately be.  He noted that if no one discussed his calls after the game, he was pleased.  

Adam Smith, in his iconic work The Wealth of Nations, used the “invisible hand” of the marketplace as a metaphor for the self-regulatory nature of the market.  However, unlike Smith, I believe government could help that invisible hand to be more efficient in how the markets worked, just as long as it does interfere too much in how the game is played.  Many officials envision some type market-friendly regulation that does not restrict America’s entrepreneurial spirit.  This is a very fine line that needs to be monitored continuously.

Regulation, like parenting is more art than science, with many decisions being made on the fly in reaction to situations on the ground.  After nearly a decade of seemingly having NO ONE (not Congress, not FINRA/SEC, not the rating agencies) watching the “kids at home”, let’s hope our government officials and regulatory bodies do NOT overreact and push the pendulum too far to the other side.

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