As regular readers know, under the blueprint to save the financial system, lenders are going to have to bear responsibility by absorbing the losses on the excesses in the financial system.
Mr. Lilico's column discusses why lenders absorbing losses is consistent with and supportive of moral capitalism.
"Capitalism" is a system for the allocation of capital – of investment.
Under the (private) capitalist system, those with ideas for businesses but without money to fund them ("entrepreneurs") are free to seek money from those with investment funds available ("capitalists"), and those with investment funds available are free to provide investment for those with ideas but without money.
If projects work, then the entrepreneur and the capitalists share out the proceeds (exactly how depends on whether the capital is provided as debt or ownership, and various other things that won't concern us here).
If the project fails, then the capitalists lose some of their money.
In itself, this is such a transparently good, fair and moral idea that there is absolutely nothing – zero – bad anyone could seriously want to say about it. Who, honestly, wants to stand up and say they think it is per se immoral for those with good ideas but without money to be able to try to get some to fund their ideas?...
Objections to Capitalism are almost never to the idea in itself. There are three key classes of objection.
First, there is the objection that it is more expensive to achieve than it is worth. Capitalism requires an extensive panoply of property rights, contract laws, institutions to set and enforce these, typically a medium of exchange (money), somebody to regulate the medium of exchange (a central bank) and many other extremely burdensome things.
Second, there is the objection that Capitalism is a con. In theory it might involve capitalists losing their money if the project goes bad, but in practice as wealthy people they control the state, and will use their power to prevent themselves from ever making losses. So what people call "Capitalism" is (on this argument) never actually Capitalism – it's always a system of oppression of the poor by the rich dressed up in the garb of a system of fairness and opportunity....
Once we understand this – once we really grasp it – we can see what has gone wrong with the system we called "Capitalism" (meaning private Capitalism) recently.
The problem is that it hasn't been Capitalist. The problem has been that those that lent money – the bondholders and depositors that lent money to banks – did not lose money when their investment projects (i.e. the businesses that were the banks) failed.
The second critique has been the key one – the system has been a con. In practice, the wealthy have used their political power to insulate themselves against making losses by taxing the poor to keep the foolish / unlucky rich rich.
David Cameron and others are asking how we might make Capitalism more responsible.
But Capitalism is all about responsibility – if your ideas don't work, you don't make money; if you fund the wrong projects, you lose your money.
Capitalism is a system of consequences – failure (through incompetence, laxity or bad luck) has the consequence of loss.
Consequences for failure is a central part of what Capitalism is about. If failure is forbidden – if the state intervenes to bail out banks, to bail out their bondholders and depositors – then we don't have Capitalism.
So it is totally absurd and incongruous for any politician that supported bailing out the banks (as Cameron and virtually every other British politician did) to then ask how Capitalism can be made responsible! For all one can say is: "Well, for a start by being Capitalist, which in practice means you and your kin steering clear."
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