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Fisher Investments MarketMinder:

Fisher Investments MarketMinder: Shifted Balance

During crises, it’s not surprising to see balance shift in favor of government over capitalism. But ultimately, capitalism, not government, drives most economic progress.

Topic:

Capitalism Media Hype/Myths

12/26/2008 By Fisher Investments Editorial Staff

Story Highlights:

Some see this year’s financial meltdown and ensuing government “rescues” as proof of capitalism’s failure, leading to advocacy of more government and regulation.
Government “solutions” can only carry an economy so far and cannot change the behavior of market participants.
Fisher Investments MarketMinder believes that while people are currently pro-government, balance will shift back to capitalism, as it's the only force that can drive real, sustained growth.

____________________________________________________________

For Fisher Investments MarketMinder, the holidays are a time for celebration and reflection. Reflection is easy—the events marking this past year are ones not easily forgotten. But celebration?

Many are finding it hard to make merry in the aftermath of this year’s financial crisis. Collateral damage from the crisis is extensive—unemployment is rising in the US, exporters are hurting in emerging markets, global stock markets are depressed, and each day seemingly brings new cries for government help from struggling industries.

Some see these effects as proof of capitalism’s failure. After all, this year saw the crumbling of a financial nucleus under its own weight, necessitating the US government to rescue the few straggling survivors. Capitalism, it’s argued, encourages greed and self-interests above the public good (Madoff is a “shining” example), and the solution is government and regulation.

Already, we’re at a point where free-market governments worldwide are now invested in banks and other domestic industries. Talks of increasing regulation in financial markets are pervasive among politicians. Many governments are also poised to implement large infrastructure projects in the near future.

But will larger government and more regulation help? Fisher Investments MarketMinder's analysis of history shows regulation does little to curb excesses. This is because excesses exist not because of the capitalist system, but because they are perpetuated by the participants. No amount of tinkering can regulate innate human characteristics.

There’s an old saying: “Everyone’s a capitalist on the way up and a socialist on the way down.” People want it all—to reap the benefits of free markets, but be protected against any downside. Capitalism won’t abide. And that’s a good thing. It’s a system of inherent checks and balances, which can be swift and brutal during the pruning process. In rough times, we seem willing to sacrifice free markets’ benefits for perceived security from this process (investors accepting 0% return on Treasuries is a recent example). Still, if free markets were restricted, what would happen to those checks? Subprime problems (or Madoff’s) were not revealed by regulators, but by markets. Note, politicians are human, too.

A fun example is Fresno, a little agricultural-based city wanting to make it big in the great state of California. Over the years—in good times and bad—the city government used taxpayer dollars to fund its own brand of stimulus. They’ve either fronted all or part of the money, or engineered deals for various pet projects throughout the years: a ballpark for a triple-A baseball team, a Jack Nicklaus-designed golf course and housing project, and a rock bar sponsored by the Red Rocker himself, Sammy Hagar. And so on. Set aside for a moment the dubious wisdom of using taxpayer dollars for what appear to be superficial glamour projects, and consider why all three projects either floundered or outright failed—most in a short time. There are many factors, but in broad terms, in each case there was little counterparty risk: The developers had great upside potential, but no real downside risk since the worst that would happen is they default on their loans to the city—which in retrospect, bore relatively lesser risk than defaulting on a private loan.

Fresno promised in each case to “drive a hard bargain,” but it never really did. Why? A government in any form can probably never be as vigilant or judge risk as well as a private party. Politicians—always and everywhere—are playing with house money and not their own. Governments don’t use “their” money, it’s taxpayers’ money. If the whole undertaking goes bad and millions are lost, the worst that can happen is the mayor isn’t reelected. That completely alters the incentive system. Our guess is Fresno would never have undertaken such lampoon-able projects had a real counterparty, with a visceral and vested interest, supplied the funding. This is the lesson of capitalism in a nutshell: A matching of risk and return, incentive and responsibility.

Fisher Investments MarketMinder encourages you to remember capitalism and free markets are not ever-stable. They work precisely because they compel folks to take risks and seek to create excess value out of existing capital, in whatever form that might be. They’re examples of constant change and innovation. Change isn’t always comfortable—and much of it will fail—but when it moves society in a more efficient direction, society certainly becomes more profitable.

During crises, the balance always tilts toward government and away from capitalism. This doesn’t mean capitalism is done. But such things are always said in times like these. For months now, Fisher Investments MarketMinder has applauded coordinated government efforts to provide monetary and fiscal liquidity and stimulus to the shocked financial system and to provide much-needed confidence. We tend to draw the line, however, at government “ownership” of assets and/or direction of those funds. Government “solutions” can only carry the economy so far—it’s up to capitalism to drive real, sustained growth. That is, it’s up to the people who make an economy, not its turgid overseers.

Happy Holidays from the Fisher Investments Editorial Staff.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Comments
The following represents commentary by Fisher Investments' staff members on the content of the foregoing article. All comments are subject to the full disclaimers of the MarketMinder.com website located here.

32 Comments

Capitalism never truly went away...
Added by evec on 9/25/2009 9:48:22 AM
And hopefully never will. It's encouraging to see the Fed retiring more programs as they realize some are not needed anymore--this bodes well overall for the health of Financials and is further proof a recovery is underway. Balance is indeed shifting, and shifting to the positive.

Capitalism abound
Added by ashmuth on 9/23/2009 2:27:56 PM
In light of Bernanke's announcement last week that the recession is easing I would have to say capitalism is bouncing back. As a Fisher Investments employee, I believe the balance does shift when the government intervenes and takes away from capitalism. But, in my opinion, the economy is turning around and we are well on our way to a full recovery. Capitalism abound!

Recovery in sight
Added by ashmuth on 9/2/2009 3:09:54 PM
As a Fisher Investments employee, I must agree with jd and evec. Free markets typically perform as intended when left alone. Although, as jd points out, last fall was a very unique environment and required government assistance (one of the few times), but that assistance can only go so far. I’ve noticed fewer firms accepting funds and fewer initiatives are being introduced which, in my opinion, tells me we’re well on our way to a full recovery.

Markets key indeed
Added by evec on 8/28/2009 4:06:01 PM
I must agree with jd's comment wholeheartedly. As a Fisher Investments employee, I believe free markets do best when unhampered by too much government intervention. The economy appears to be slowly healing; hopefully, we'll see monetary policy adjusting as necessary.

Markets key to recovery
Added by jd on 8/24/2009 1:49:17 PM
Just about the only time warranting broad government support is a panic--and sure enough, that's what we had last fall. Before government safety nets and the Federal Reserve, alleviating panics fell to the private sector or no one at all. During the Panic of 1907, JP Morgan just about single-handedly bailed out Wall Street. The Fed was created in 1913 to inject emergency liquidity during banking crises, but the next significant panic (in fact string of panics) began in the early 1930s, and the Fed largely sat on its hands then, a major contributing factor to the Great Depression. Today, we've got the FDIC to counter traditional bank runs and a Federal Reserve determined not to repeat past mistakes. Both great things. The Fed's emergency measures this time around eased the crisis. And as evec points out, as need wanes, so too do those measures--as a Fisher Investments employee I believe allowing free markets to get back to work is key to recovery.

Government help no longer as needed
Added by evec on 8/21/2009 2:07:03 PM
Yes, government solutions only go so far...and now we're seeing fewer and fewer firms taking advantage of government aid programs like TARP, TALF, etc. As a Fisher Investments employee, I believe this possibly means a recovery is on the horizon, if we're not already in recovery. Time will tell.

unprecedented stimulus
Added by DEzzat on 4/27/2009 3:13:33 PM
I agree with ashmuth's comment on a perfect stimulus. The amount of fiscal and monetary stimulus we've seen in current times is unprecedented and the wall of stimulus continues. Some articles I've read in the media are quick to dismiss the stimulus plans, but it's important to remember no stimulus is ever perfect.

Constant Change
Added by LRD on 4/24/2009 2:58:21 PM
Building off DEzzat's 4/20 comment, I found this passage enlightening: "Capitalism and free markets are not ever-stable." Isn't that the truth! In my view, they are designed to foster risk-taking activities and distribute wealth. Free markets are exceptionally dynamic, down the vein of "the only constant is change". I believe change is a cornerstone of an innovative company like Fisher Investments. I believe Ken Fisher and Fisher Investments are prime examples of innovation in practice. It's important to challenge yourself and embrace the mentality that "the only constant is change".

Supply and Demand
Added by JMarquand on 4/23/2009 2:27:16 PM
I agree with DEzzat about the basis of capitalism, as described in Ken Fisher's The Only Three Questions That Count. Supply and Demand are the dominant forces in our economy, and as long as those remain, the economy is bound to recover.

capitalism prevails
Added by DEzzat on 4/20/2009 3:26:49 PM
When reading through Ken Fisher's Only Three Questions, there were several mentions of capitalism and its benefits to society. I especially liked the part related to stock markets being an example of pure capitalism-- prices are determined by supply and demand and nothing else. For all those fearing the "end of capitalism" I suggest reading through this book. It certainly gave me a new perspective on the topic.

Big Brother?
Added by LRD on 4/17/2009 1:14:11 PM
Recently, I have read quite a few articles in the news comparing current government objectives and actions to socialism. Regardless of how you feel about goverment spending, its worth noting this does not equate to socialism. Socialism is about owning the means of production (think Venezuela). The primary role of the government during the financial crisis has been to provide liquidity to financial institutions that need it. It is helpful to make this distinction, and realize the government is not overtaking the production side of the economy.

Market Cycles
Added by JMarquand on 4/16/2009 2:53:37 PM
The strength of capitalism is known to ebb and flow with regular market cycles. This appears to be exactly what is happening in the US today and in recent months. The government stepped in with stronger authority than usual to stem a crisis, and I believe once things are firmly back on track, free market enterprise will likely come to dominate the market again.

Capitalistic Society
Added by ashmuth on 4/13/2009 3:31:45 PM
I read the link provided below by LWHoffmans and found it to be very informative. The index provides perspective on how the US is indeed not falling into socialism and we are still very much a capitalistic society.

Short sale worries
Added by evec on 4/9/2009 2:52:13 PM
All the brouhaha surrounding the SEC’s consideration of reinstating the uptick rule frankly puzzles me. The rule was in place for a long time, and there was no provable negative effects. Why all the drama now? Even if it did pass, I believe the impact it will have on the stock market will likely be minimal.

Repaying TARP
Added by CRF on 4/8/2009 4:41:26 PM
Some banks are or considering repaying capital they received from TARP, because they do not like the restrictions imposed on TARP recipients by the government. I firmly believe any business that has to bow to government demands (for example, compensation limits) is at a competitive disadvantage. Especially if those businesses need to compete in the international arena.

No Perfect Stimulus
Added by ashmuth on 4/6/2009 3:44:36 PM
Patience is important to keep in mind with all these bailouts. Many are quick to say stimulus packages aren’t working, but I believe no stimulus is perfect and their effects take time to trickle down.

No Perfect Stimulus
Added by ashmuth on 4/6/2009 3:17:06 PM
Patience is absolutely critical to keep in mind with all these bailouts. Many are quick to say stimulus packages aren’t working. I believe no stimulus is perfect and their effects take time to trickle down.

Mark to market, finally some sense
Added by evec on 4/2/2009 3:24:31 PM
In my view, FAS 157 was very flawed, and today’s announcement of the easing of mark-to-market accounting rules is good news. Hopefully, this move will provide much needed relief to banks’ balance sheets; and hopefully, this easing stays in place for a while. The last thing we need is for someone to change their mind and reinstate the rule in its original form. Uncertainty = bad for markets.

Varied Capitalism
Added by CRF on 4/1/2009 4:12:26 PM
Not every society formally adopts capitalism as an economic system. Some societies believe in socialism, communism, populism, etc. But I think this is overwhelmingly because of governments imposing their desired social structure and goals. I think individuals, without paying attention to it, would overwhelmingly make choices that are capitalistic in nature—after all, this means they would be making the best decision possible for themselves. By this reasoning, and I believe history shows this to be largely true, non-capitalistic governments make decisions that disadvantages the individual.

Death of Capitalism (continued)
Added by evec on 3/26/2009 3:52:18 PM
Building upon what CRF said below about “people continue to prefer free markets,” I also believe this is true and that free markets eventually work out the ideal solution. History shows too much government meddling usually results in negative, unintended consequences, clearly something we all want to avoid.

Death of Capitalism?
Added by CRF on 3/25/2009 3:24:52 PM
So is capitalism dead in the US? In an age of bailouts, it seems that way to some people. The government, both federal and state, seems to be making more and more decisions for the private sector—limiting compensation, taxing bonuses, allocating stimulus money, etc. But I believe people continue to prefer free markets. Not many like to have their decisions made for them by the government. As long as we continue to feel this way, and as long as we have a democracy, the government can only intrude so far into our lives.

AIG
Added by LWHoffmans on 3/25/2009 3:18:35 PM
For investors fearing the government’s overzealous reaction to the AIG bonus flap, and how that might impact stocks, it’s interesting to note the vote on the tax bill aimed at recouping the bonus money has been pushed off. It may very well be that cooler heads prevailed, though politicians claim a vote may not be necessary because much of the bonus money has been returned, voluntarily. Either way, this may have turned into a tempest in a teapot—which I believe is ultimately positive. Markets don’t move on certainties—they move based on forward looking expectations. And if reality turns out to be not as bad as widely expected, that can be a powerful positive boost for investors.

More on Depression
Added by ashmuth on 3/23/2009 4:35:43 PM
I would have to agree with evec’s post below. There is a lot of media hype and hysteria surrounding our current economic state, but forecasting another Great Depression is a little extreme in my opinion. Truth be told, I think it’s hard to know how all of the government stimulus will impact the current woes.

Great Depression?
Added by evec on 3/19/2009 5:23:02 PM
Every day, we keep hearing how today is a repeat of the Great Depression. However, if we look at data from that time period and compare them to current data, we see this simply isn’t true. There are many concerns about the government not doing enough (or doing too much, as in the case of bailouts and stimulus spending), but fact is, we have no way of knowing how impactful government actions are or will be until possibly years later.

Labor Freedom
Added by CRF on 3/18/2009 4:56:44 PM
The Index of Economic Freedom mentioned below by LWHoffmans has very interesting data. It seems to me the US’s ranking is helped by a high labor freedom score. I believe a high degree of labor freedom helps firms and employees find the most suitable match for their employment needs. An immobile labor force (both in terms of movement across borders and across companies) can be a huge hindrance to advancing business and entrepreneurism.

Some additional reading
Added by LWHoffmans on 3/17/2009 3:08:31 PM
As the new administration proposes and enacts new fiscal spending initiatives aimed at stimulating the economy, it's good to note that we are still, by far, a very capitalistic society. Many of today's opponents of the increased fiscal spending fear we are falling into socialism, but on a relative basis, the US is still very economically free, which in the long term is a great benefit. For some perspective, check the Index of Economic Freedom, published each year by the Heritage Foundation and the Wall Street Journal (copy and paste this link http://www.heritage.org/Index/TopTen.aspx). For 2009, the US was ranked number 6, ahead of Canada at number 7 and the UK at number 10. Germany is ranked 25th and France is ranked far back at 64.

Capital Injections
Added by ashmuth on 3/16/2009 11:53:23 AM
In my view, constant government fiscal aid won’t fix current economic woes. It seems throwing money at troubled banks or ailing automakers hasn't made companies better off than they were before all this stimulus. In cases like this, the best route may be Chapter 11—although the concept of bankruptcy can be scary it can help provide these industries with much needed restructuring.

Government intervention
Added by evec on 3/12/2009 4:53:18 PM
While I believe it’s best if governments stayed out of free markets in general, criticism of the bailouts and stimulus packages is a bit premature. Only time will tell how efficiently the money will work its way through the system and when the economic recovery will begin. In hindsight, the government will hopefully realize less regulation is better for markets and act accordingly.

Stimulus Potholes
Added by CRF on 3/11/2009 3:22:26 PM
The government isn’t the most efficient capital allocator, so the stimulus plan could be riddled with potholes—money going to areas that aren’t necessarily going to generate the “best bang for the buck” in terms of economic recovery. However, hopefully that capital goes quickly into private hands (businesses and individuals) and gets put to more necessary and useful purposes.

Don’t Forget Detroit
Added by jd on 3/10/2009 9:31:57 AM
Another example of this principle action: Government aid to the big Detroit automakers—or more precisely, GM and Chrysler. Beginning last year, autos began to suffer—sales were down, operating costs appeared unsustainable. The feds came to the “rescue” with sizeable loans to GM and Chrysler. Did the cash infusions turn business around? Nope. Just a few months later, both firms are still in need of cash, with GM’s auditor doubting their viability as a going concern. Money down the drain? Certainly looks that way. A typical government spending project, mismatching “risk and return, incentive and responsibility.”

Government Involvement in Financial Companies
Added by aanderson on 3/9/2009 4:05:10 PM
This article is particularly relevant to financial firms today. Along with government funds have come compensation limits, board overhauls, poorly defined “stress tests,” etc., all of which inhibit the long-term profitability and even viability of many companies in this space. That doesn’t means banks can’t go on supplying credit to the economy. In fact, contrary to the common perception, banks have actually been increasing lending throughout this tumultuous period. It’s the demand for structured debt products that’s really dried up. But onerous government involvement doesn’t bode well for the future of many bank stocks. Fortunately, outside Financials, direct government involvement in private corporations isn’t much more prevalent today than in the past.

Blaming Capitalism
Added by CRF on 3/6/2009 3:40:03 PM
It makes me frustrated when politicians blame capitalism for today’s economic problems. Politicians had a hand in subprime too. Capitalism is easy to morally disavow since it’s associated with greed and risk taking, but in my view capitalism over the long-run produces higher standards of living and encourages peace. Of course, capitalism isn’t without pain—it’s hardly a smooth affair when markets get out of whack and correct. But I’d much rather live in a world of capitalism than one with overt government regulation.