Capitalism Needs Tweaking – Point #5 of 10 – The Four Pillars of the Financial System

In my blog of December 9, 2010, I pointed out how our capitalist society suffers from dramatic up and down cycles that rob the middle class of their wealth and earnings. I suggested 10 points that would very much moderate these cycles and bring about a far better capitalist society. This is the 5th of that series.

Separation of the Four Pillars of the Financial System
Because of the destructive nature of human greed, long ago our law makers separated the four main parts of the financial industry. They realized that human greed could run amuk, as indeed it has run amuk. In the misguided current urgency to eliminate needless laws and regulations initiated by Ronald Reagan, we have removed logical and necessary boundaries that protect society. We have forgotten what basic human emotions will do.

Confusion Between Libertarianism and Necessary Rules and Regulations.
There has been a growth in the number of people believing that all government is bad, that all regulations stifle human productivity and achievement, that normal people should not be bound by any rules and regulations and instead capitalism and human feelings would cause people to act in a normal way. That is a rough statement of the philosophy of Libertarians.

It Costs $2,000,000 to Hire a Government Employee
A recent calculation was made and it was determined that every government employee hired costs $2,000,000 during their working career. That’s right – Two Million Dollars. That presumes that when government hires someone, they generally stay for life, they get a pension, they get benefits, they need certain working conditions and so on.

What Happens When a Law is Passed
As our society evolves more and more into the rights of individuals, and what is morally correct or incorrect, most people look to the government to enforce these moral standards. To use a bit of an extreme example for illustrative purposes, if someone trips over a curb that is too high, there is a moral outcry and demands that curbs be made lower.

This results in enormous work and expense – all because one person wasn’t watching closely enough and tripped. There is now in society a demand that everything be ‘fair’ regardless of the expense. If people could relate directly their payment of income taxes to this massive expenditure on lower curbs, perhaps attitudes would be different.

However there is a complete disconnect between the fact that people pay for their government, yet government spends money according to what the people supposedly want. If someone woke up and said “We could pay that person that tripped, $10,000 for their discomfort” rather than spending $10,000,000 to fix all curbs, it would make sense.

Yet the disconnect between people’s belief that government is responsible for everything, as compared to we pay for what government spends, prevents this common sense way of dealing with matters.

This gets to the Libertarian Philosophy
In order to lower the curbs, a crew of engineers and transit designers must study the issue, people must be hired to physically change the concrete, supervisors must be hired to supervise, inspectors must be hired to ensure all future curbs are the right height, union representatives must be hired to look after these new employees, office and work space must be created, pensions and benefits must be accounted for, and on the list goes.

But the issue is “Government must ensure this fairness!”
The expense is enormous and every new employee has rights and benefits – for life.

Libertarians say “Stop this craziness !” Let people look after themselves and stop intruding on our lives with more and more government regulation and more and more government.

The Example is Accurate in The Example that at it Helps Obscure the Real Issue
The argument over whether the height of curbs is important for government to address, obscures real issues, such as “Does society have a duty to allow a level playing field for the economic well being of its citizens?” The answer here should be “This is the Only Important Real Issue!”.

Fairness and government enforcement has run amuk.
Too many minor and silly rules that cause enormous financial outlays for minor benefits, cause narrow thinkers to assume that all rules are bad. This is how we got rid of the Four Pillars of Financial Markets rules.

When society started getting complicated, our forefathers realized that if one group of people controlled all financial transactions, their power and influence over society would be far too great.

So they made rules saying that banks had to loan money and nothing else; that insurance companies had to insure and nothing else; that stock market brokerages had to be independent of banks and deal only in the capital markets, and that mortgage companies had to loan money on mortgages, and no-one from one group could own a company in another group.

It all worked fine, until the separation of these pillars of the financial world were eliminated. In 2008 and 2009 we saw the effect of having banks own everything. Banks became stock market traders, with your money, insurance companies owned banks, and so on. All protections of the public were eliminated.

It was as if a group of greedy, self-absorbed uncaring bankers/traders/manipulators were given the keys to the candy store. The result was the near destruction of our financial system.

It is time to bring these separations back and to prevent this type of outrageous behavior from happening again.

It is quite astounding that we eliminated the major rules that protected us, yet we continue to create innumerable minor new rules every day.

It makes one feel as if you have to stand on your head to understand what on earth is happening.