March 18 • 12:52 PM

Financial panic has lessons to teach us and learn from

February 04, 2009
One of the few good things that have come out of the financial panic of 2008 and beyond is the reexamination of the pre- datory practices of capital-ism and the role of dereg-ulation in the market place.

When the current crisis finally took hold to the point where the Federal Reserve was forced to intervene with the contro-versial buyouts, some banks failed and were taken over as a volatile stock market caused many to compare the situation to the Great Depression of 1939 since the bubble had burst and credit was virtually frozen.

Financial panics are not unique to history for we have had one roughly every twenty years or so. In part this was because founding fathers Thomas Jefferson and Alexander Hamilton had differing conceptions about the role of banks.

Hamilton wanted to establish a central bank like the Bank of England where-as Jefferson opposed the concept and although the Bank of the United States was established in 1792, over the years Jefferson's vision prevailed because banks were viewed as concentrations of economic power. It was not until after 1913, with the creation of the Federal Reserve as a way to inject liquidity into the financial system, that some corrective measures were taken in the effort to stem future panics.

The current global crisis will no doubt take some time to resolve as we work our way out of the present recession. It is obvious that some regulation of banking and real estate practices is necessary. The problem is to seek a balance between a full government takeover of the market place and the necessity to reform some of the practices which caused the present set of problems in the first place.

According to a recent editorial in The Economist heavy regulation will not "inoculate the world against future crisis…what is needed is not more government but better government…" since capitalism eventually corrects itself. In some areas, the Economist points out, this means more rules. In others, it means different ones.

The trick is to ensure capitalism does not dehumanize groups of individ-uals to the point where only the rich and well-to-do survive. In short the defenders of capitalism must never be allowed to forget that one measure of the success of any social system must always be compassion.

The bad old days of 19th Century capitalism ended when the reforms of the progressive era first forced the idea of social responsibility upon big business. When the stock market crashed in 1929 it touched off a global econ-omic crisis that did not resolve itself until World War II.

By then the reforms of the New Deal had begun to take hold although it was not until the late 1960s that business began to recognize it had to be socially accountable for its actions, though some companies had accepted the premise for a number of years as the consumer movement impacted on the culture. Though by no means universal, the sentiment at least defined that business had a responsibility that transcended the profit motive.

For all its flaws capitalism may very well be the best of all economic systems, however, in my opinion, deregulation and privatization should always be tempered when it comes to the consequences of their results as we attempt to define the role government regulation should play in the market place.

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