Make the Capitalist System Work – It can be the Best System

My Checklist – Following my Blog of Dec 9/10

Capitalism is the ability of the private sector to raise money and invest that money in the private sector. One must differentiate between the good and the difficult parts of our system.

The good must be recognized and honored. The bad must be addressed. As civilization grows and becomes more sophisticated, it is time to become more sophisticated in our financial system.

Why Raise Capital?
Capital needs to be raised and circulated on a continuing basis, and companies need that capital to build homes, or manufacture cars pr provide services. To build a dynamic and growing economy that continually expands and hires new workers, thereby creating and feeding the middle classes, requires a constant feed of new capital for renewal, for expansion, for creation, for growth. In essence that is the capitalist system.

It is a remarkably efficient system in so many ways.

The tremendous personal earning ability of the people in our financial system provides those people with incentive to raise capital. People in the financial industry make a lot of money by doing this.

That is a good thing. The system works.

Investors also hope to make a lot of money by investing in these new projects and the greed of people that invest in these offerings makes the offerings successful.

That is a good thing. The system works.

That New Idea That Needs Funding
People employed by our financial institutions are always searching for that new idea, or for that company that needs money, in order that these people can create and sell a new offering of funds for that need. By creating and selling that new issue of capital, they make lots of money. Nothing wrong with that. The system works and when limited to what I have described, it works very well. It created and sustained the American economic colossus.

That system is fed by the need of investors for a stream of income and creation of wealth. People like what they hear, or what is pitched to them by the financial people, and they buy the issue.

The American Capitalist Society
The American capitalistic society is remarkably adept at raising and distributing capital. The incentives for doing this are:
• the desire to earn large paydays on the part of the financiers that raise and distribute the capital;
• the constant demand for new capital by businesses, whether to expand operations, or to bring a new idea to market, or to extract resources out of the ground; and
• the greed of investors trying to make money out of their investments.

Every day, there are new capital issues that raise money for investment and give that investment money to existing or prospective businesses. The system is very efficient.

So if I claim that the system works so well, why do we have cycles, and why does the middle class get decimated economically every decade or so?

The Problem with the so-called Capitalist System
The essential problem is that the system creates excesses on a continual basis. If an idea works, that idea is sold and sold again, and sold again, and again, until it is so oversold that it has to collapse.

So the cycle wave starts, grows, grows some more, grows more rapidly, and finally collapses.

This overselling is what we have to address.

The Repeated Devastation of the Middle Class of America
Depending on what yardstick one is measuring with, in my economic lifetime, the middle class got economically devastated for similar reasons in 1966, and
• in 1973,
and
• in 1981,
and
• in 1988,
and
• in 1992,
and
• in 2000.

You would think that intelligent people would sooner or later open their eyes and realize that there was an inherent fault in the ways things worked. But that was not to be.

The Fed Chairman – Mr. Greenspan
After year 2000, the esteemed Mr. Greenspan as Fed chairman decided to try to stop these cycles, and flooded the market with money every time a collapse seemed inevitable. The result was that the market just kept expanding with easy money, making the next collapse likely to be much more violent and devastating.

One can put a cap on an ever-expanding growth, but sooner or later, the thing will explode if you continue to feed it. When it does explode, the explosion will be much greater. The devastation to the middle class much more severe, which is exactly what happened.

Sure enough, when the collapse started in 2007 with the freezing of sub-prime debt, it was devastating and the collapse kept expanding until the market crash in October 2008 and March 2009, when the collapse became so severe that the economic world almost collapsed.

What an incredible lack of understanding of history. Yet Mr. Greenspan was applauded each time he appeared before the US Congress. It was as if the Congressmen were applauding the demise of their own economic system.

I have often said that the reason people get elected is because of their ability to talk and look appealing, whereas the very abilities that we need in our elected officials are ignored by the media. That is a topic for another time.

Next we start detailing the 10 changes so desperately needed to correct these idiotic cycles.