Whatever happened to market corrections?

By Anthony Philbin on October 2, 2008

While bankers and financiers and the lawmakers they control are spinning various doom and gloom scenarios to rationalize why they need saving, under the tenets of a free market economy what we are witnessing is not some unexpected or earth-shattering aberration. Rather the current crisis is precisely the type of correction that markets are supposed to enact upon those investors who take the types of risks and speculate in the types of products that have created the situation that Wall Street and global financiers now find themselves in.

The tragedy of their predicament is that, for the most part, they have been speculating upon and profiting from questionable investment products not with their own capital, but with the capital that citizens have placed in their hands thinking that the RRSP or 401K systems are in some way shielded from the negative implications and consequences that can affect all investments and all markets at any time.

In Canada, RRSPs have been packaged and shilled for years now as the only alternative for ordinary citizens looking to set away a nest egg for their future. The banks have played-up the benefits of market investment and portrayed it as stable and dependable, and unfortunately this misleading representation has led millions of average North Americans down a path that has now put a vast sum of their aggregate retirement capital at risk.

That so many retirement investors don’t have a real clue about where the banks put their money and how they treat it is perhaps one of the things that will be most likely to change should the market be left to correct itself. The renewed sense of responsibility and diligence that would result in the population at large about their livelihoods, and the increased lack of trust extended from the public toward money lenders and investment bankers in general would also be part of this correction—and a very healthy part indeed.

In the wake of the bailout bill’s defeat in Congress, lawmakers and bankers are now warning that companies seeking credit to make their payrolls may not find it available in the short-term, and thus countless jobs could be lost and a severe impact felt by main street Americans and Canadians alike. What they omit is that any company that needs credit to finance its payroll is in serious financial trouble to begin with, and that therefore those companies that do go under as part of the current correction would probably have done so anyway once their credit inevitably ran dry—as it’s supposed to if your company is no longer economically viable. This is more doom and gloom spin and should not be heeded by those few U.S. lawmakers who still have the public’s interest at heart.

Lastly and perhaps most necessary, leaving the market alone right now could cause many in society to more deeply question if an 18th century construct, the free market, founded on worldviews that were nurtured in a climate when the world really was still quite boundless in comparison to that era’s relative human population and resource use, continues to make sense. We are now just beginning to understand that sustainability is a wiser and, in the long term, healthier economic philosophy than the constant expectation of growth which still informs the capitalist ethos and current economic hegemony.

The profit motive—the concept that one can endlessly take more from a system than one puts into that system—is fundamentally contrary to the tenets of sustainable economic and environmental approaches to how we conduct our lives. So long as we pursue capitalist goals the financial system will inevitably and regularly collapse under the siphonings of profiteers and require more money to be printed to maintain the appearance of solvency. On the micro level (households, companies) humanity seems to understand that economics is a zero-sum game, but as the scale gets larger we dismiss fundamental economic principles and design policies based on a ridiculous premise of boundless growth.

This is a lesson not only for U.S. policy makers but also for Canada’s political leaders in the current campaign. The great flaw of progressive parties is that they are still trying to have it both ways. They claim they will create sustainable programs yet still pursue growth-based economic policies. In a world of finite resources sustainability is about how the world’s population gets to access and consume those resources annually.

In the developed west we represent approximately 20% of the planet’s population yet consume 80% of those global resources and commodities annually, and experts estimate that it would require 3 planet earths worth of resources to permit everyone in the world to live like we do now. Simply put this is unsustainable as a social and an economic system and we are all going to need to face serious limits to our spending power if we’re truly going to be able to “fix the world”, as Obama puts it. Someone living in Bangladesh on a dollar a day is not the problem that threatens our world: a CEO working on Wall Street or Bay Street and making $40,000 a day is.

As this crisis now also ripples through Europe and Asia, perhaps international lawmakers may find what it takes to unite and devise a system of global credit regulation that sets reasonable retail loan rates for everyone, everywhere, while simultaneously mandating more realistic fractional reserve levels that will make our financial institutions more dependable and enduring. Banks have set systems of metrics and ratios for lenders to meet that have virtually calculated the risk right out of retail lending (averaging 0.5 percent bad loans per annum), so the long-standing rationale for inflated interest rates based on phoney risk scenarios in the retail sector are no longer valid.

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