"Hyman Minsky—an economist largely ignored during his lifetime and now held up as something of a prophet—argued that speculative bubbles, and the financial collapses that follow them, are an inevitable consequence of unregulated capitalism. Minsky, an economics professor at Washington University in St. Louis who died in 1996, warned: “The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence—in short … financially complex capitalism is inherently flawed.” He called for socialized banking and stimulus packages to protect workers." — Chris Hedges, Obama Has Missed His Moment
Hyman Minsky got it part right. Yes, much of the current economic mess is the inevitable consequence of unregulated capitalism in our existing system. But one very important point that escapes the notice of most people is that our existing system is not a free market system. Our current system is a centrally-planned system. Free market systems do not have central planners à la Volcker, Greenspan, and Bernanke. The root of these problems goes deeper than most people are willing to look.
Our existing economic system is fundamentally flawed. How so? It is based on a fiat currency system with no intrinsic value, a currency that is not backed by anything other than public confidence. Thought experiment: what would happen if the U.S. dollar was backed by a commodity such as silver or gold? Would it be possible for the arguably well-intentioned but misguided Federal Reserve/government to print money according to their whims? No. Would it be possible for the Fed/government to set interests rates artificially low, thereby allowing for cheap and widespread credit, in turn facilitating the housing bubble and subsequent collapse? No.
The reason we are in this financial mess is not due solely to deregulation. Yes, there was ill-conceived deregulation that took place, but there were equally terrible regulations enacted. For example, regulatory changes to the Community Reinvestment Act (1999, 2005), enactment of the Financial Services Modernization Act (1999), and amendments to the Federal Deposit Insurance Act (1999). The problem is not deregulation and overly free markets, but misguided regulation. The Fed made artificially cheap credit available, and the government encouraged and even compelled banks to extend that credit to poor-credit borrowers through many of the regulatory changes/additions mentioned above. As a result, housing prices climbed about 50% in 7 years while all the traditional market forces were trying to pull these prices down through higher interest rates. But the Fed prevented this natural correction from happening through their forced low interest rate policy in addition to bad government regulation and de-regulation. Couple this to massive leveraging of these bad debts (20x-30x, up to 100x in some instances), and we have the current economic crisis.
The root of the problem stems from our debt-based fiat currency system. This system facilitates derivatives, leveraging, and fractional reserve banking. In our current debt-based system, the markets need to be very carefully protected from manipulative/interventionist forces (i.e., artificial interest rates), and greedy casino-style banking interests (i.e., derivatives, leveraging, and fractional reserve banking). These are the excesses pandemic in our current debt-based financial system. Hence the need for regulation. But regulation would not be necessary if the financial system was a real asset-based system, as none of these "casino" capitalism activities would be possible.
The truth is that government knuckleheads (Democrats/Republicans--same difference) haven't the slightest clue what they are doing, nor do they appreciate the repercussions their actions will have on the economy. Why do we trust these people with either regulations or de-regulations that moves us towards increased central economic planning and unmitigated disaster?
The solution to all this is not a move towards socialism and increased government regulation as Hyman Minsky would suggest. That's just putting more power in the hands of our short-sighted knuckleheaded government officials. In any case, would you really trust them with even more control and power over our lives? Perhaps, if they were truly enlightened oligarchs. Perhaps, if they were truly operating in our best interests. But that is far from the case, as any 21st century politically disillusioned socio-politico critic would tell you.
No, what we need to do is replace the existing debt-based fiat currency with an asset-based non-fiat currency. Otherwise the problem will simply repeat itself in a more magnified form at some point in the future. Why? Because, as Hyman Minsky (partly) correctly stated, this boom and bust cycle is built into the existing "casino"-style financial system. We must replace this little piece of valueless paper with a currency that has intrinsic value with mandatory full non-fractional reserve banking. A 100% commodity-backed currency using silver or gold. This would prevent governments and banking institutions from printing money when they wanted it, which includes any form of derivative and/or leveraging, and would be the greatest restraint on government spending, borrowing and bank lending, not to mention dramatically curtailing government's imperialistic prerogative. This would be the end of the military-industrial complex, the end of the welfare state, and the dawn of limited government and a genuinely sound financial system.
1. Ludwig von Mises Institute
2. Works of Ludwig von Mises
3. Works of Murray Rothbard
4. Works of Friedrich Hayek
5. Works of Peter Schiff
6. Works of Ron Paul