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There's Nothing Wrong with Capitalism

12/08/2009 12:00 pm EST


Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says the markets need to correct their excesses by themselves, and government intervention will only make things worse.

As we move into December, the majority of the correspondence we receive is centered on one basic question: So, what do I do now? What will happen in and to the markets in 2010?

Of course, neither I nor anyone else on this planet knows for sure. What I can predict with a fair degree of certainty is that there will be events that will come from so far out in left field that anyone who says they knew they were coming is a pathological liar.

The global economy and the markets have followed a fairly predictable pattern over the last 400 years: A long period of expansion inevitably morphs into a speculative asset inflation, which culminates into a blow-off top and ends with a long period of contraction; rinse, then repeat.

For some reason, probably natural egotism that is part of human nature, central bankers and governments have long attempted to mitigate the credit contraction and bear market part of the cycle by throwing more credit and liquidity at the contraction. Despite what is widely written and taken as gospel, this has never worked beyond a short period of time and probably never will. That contractions do eventually come to an end is a natural part of the economic and market cycle—not as a result of central bank or government interventions.

For advocates of central planning, however, leaving the economy and the markets to their natural forces and cycles is simply unacceptable. Accordingly, the Federal Reserve was created in part to insure that a contraction such as the one from the early 1900s was never repeated; obviously, the forces that led to the Great Depression did not get the memo.

Not to worry, though: All that is needed is more regulation and government intervention. Enter the Securities and Exchange Commission (most often referred to as the SEC, which was created through the Securities Exchange Act of 1934) and the Glass-Steagall Act of 1933.

Promoters for the SEC argued that it ostensibly would put an end to investment scams and market cheats. I can just hear Dr. Phil now: “So, Mr. Madoff Investor, how did that SEC thing work out for you?” To be fair, Glass-Steagall did have a much better track record, right up until it was dismantled in 1999.

Perhaps that is my greater point: The market and economic cycles are what they are, and no central bank or government intervention can change that. When the excesses from the previous cycle have been completely wiped out then a new cycle can begin. In my opinion, we aren’t there yet (read Dubai World).

The markets don’t need fixing; there is nothing wrong with capitalism. What does need fixing is failed central planning, onerous government regulation, and the ongoing corruption of the body politic. What is happening today is nothing more than garden- variety graft and it is killing the markets and the investor class.

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