Listening to the news these days is quite funny. It seems that everybody is completely surprised that capitalism in the end works like it is supposed to. If you take high risks, you get sometimes high gains and sometimes -surprise, surprise- high losses. If you have people trying to make a lot of money, sometimes they also will loose a lot of money.
Now some cry for the state to drop in who were hardcore laissez-faire capitalists before (with the notable exception of a very few who keep on and keep the concept, knowing that sometimes you loose).
If you want a free market (which I believe is quite a good thing if you do it right[1]), you'll have to live with a free market.
[1] I wont elaborate more on this, because this will take forever. Basically: there are monopolies which should belong to the state like water, electricity etc, and there are areas where there should be a free market, free meaning that the small farmer in africa can also sell his stuff as the farmer around the corner. On a large scale the big economic powers should not interfere... This is by far not the complete story, a complete coverage of my political and economical views would span about 50 long posts.
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I did not really do any original research on this topic, but I have seen on a couple of sites that there is a case for putting part of the cause for the current problems at loan regulation. There seem to have been a couple of points to this:
1) By enforcing 'independent advice' the government has taken away the link between deciding on the loan and dealing with the consequences of paying it back. As such, there has been a huge increase in bad advice as 'independents' recommend insane payment plans to people who cannot afford it. Once the loan is taken out the adviser, of course, gets a commission on the value of the loan, rather than on the repayments. Independent advice is good, but not when implemented like this!
2) Social engineering in loan regulations has taken place in order to encourage home ownership. Rather than refusing to allow poor people to take out loans to buy houses they may not be able to afford, banks have been encouraged to add a fat risk premium to loans that probably won't be paid back. Yet again, social engineering ends up punishing the people it is supposed to help. Although saying that social engineering is supposed to help the poor is being somewhat optimistic, I feel.
I do feel rather strongly that the shareholders in these banks should be allowed to lose their shirts though. The basis of corporations is fundamentally flawed, I feel. The diversion between ownership and management *does* encourage risky behaviour from executives with little investment, and a secure soft landing. There needs to be more connect between the day-to-day operations of a firm and the people who own the thing. Corporations are good for explosive growth, but the ownership structure does little to encourage stability and security. Ho-hum.
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