Moral Capitalism in the News Again

We are approaching the 10th anniversary of the start of the collapse of credit markets in 2008. Housing prices started to fall in 2007 and defaults on sub-prime mortgages started to rise at this time 10 years ago.

But Wall Street sellers and buyers of investment contracts tied to sub-prime mortgages — CDOs, synthetic CDOs and CDSs — kept on their merry way right until the collapse. There was no soft landing, as the intellectual gifts of accurately forecasting risk were not in play. The episodic “irrational exuberance” of financial capitalism creating asset bubbles was at work.

(Photo: Kirsty Wigglesworth, AP)

Banks later spent billions of owner’s equity in write-offs, fines and settlements of litigation. But no “one” was held personally accountable, least of all boards of directors and CEOs. Bear Stearns and Merrill Lynch lost their independence. Lehman Brothers paid the ultimate price of failure.

Ten years later, there is more concentration of market power in finance in a few big financial houses. They have more capital to protect them from the consequences of stupidity and years of cheap liquidity provided by governments have kept asset prices high.

The Financial Times over the weekend concluded:

“The financial crisis is over. The crisis of legitimacy goes on.”

In other examples of market failure, U.S. companies that make or sell opioid painkillers are facing a tidal wave of litigation, as those harmed by such products seek recompense through the courts.

Twenty years ago, “Big Tobacco” was brought to heel by litigation which extracted $200 billion in damages for selling non-meritorious products.

And in Europe, Fipronil, which is used to control parasites in pets, has caused “negative externalities” by spreading to eggs making them dangerous for people to eat. Millions of contaminated eggs have been withdrawn from the market.

There are always consequences, a law of nature to be sure. Markets have no power to shield us from all harm, so who has the burden of care to optimize our well-being?

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