Friday, October 23, 2009

Capitalism Wall Street Style

Here's the problem with the way capitalism has recently worked in the financial arena: the gains go disproportionally to a very small group, but the losses go to everyone.

When I first started investing in mutual funds, the mantra was "more risk, more reward". If you had an appetite for risk, you could invest in a more aggressive mutual fund and possibly reap greater rewards. Of course, you also had to be aware that you could lose more when things turn bad. I understood that.

Now, fast forward 30 years. I no longer have the same appetite for risk and have invested less aggressively. However, it hardly mattered. Because others chose to take on enormous risk, my accounts suffered an almost 50% decline when those esoteric derivative investments tanked! I didn't sign up for that risk! But I sure participated in the losses.Did I receive the enormous gains when those derivatives were doing well? Some may argue I was a beneficiary of the good times, but not to the extent I declined when things turned bad. A relative handful of people made huge profits (plus the bankers who made millions in bonuses), but all of us suffered when those same investments turned bad.

The administration is trying to set compensation rules to restrict pay in the financial sector to reduce the incentive to take such outsized risks. Philosophically, I'm against government getting this involved in business. But, I sure would like to see them find a way to restrict the losses inherent in such risky ventures to the people that knowingly signed up for that amount of risk. Privatized gains; socialized losses - it's just not fair.

1 comment:

Perplexio said...

With the recent bail-outs what happened on Wall St. (and Detroit for that matter) is not pure capitalism.

The gains are privatized-- that is capitalism. But the losses have been socialized-- socialism.

If anything this makes "capitalism" even more dangerous as those who take risks are even more apt to do so knowing that the US taxpayer will be paying for them.

It's a lose/lose situation.