“Greed, for Lack of a Better Term, is Good” Gordon Gekko in the motion picture “Wall Street”

Whether we like it or not, if capitalism fails, so do most Western democracies, including our own. But as the financial collapse that continues to surround us proves rather substantially, an unregulated contemporary financial sector generally does what’s good for senior managers (and occasionally shareholders) but rarely takes into consideration any social or non-legal ethical consequences, even if the aggregate effect of such behavior could be devastating to the greater economy. While Wall Street rails at the thought of tighter regulation, particularly in the wild world of derivatives creation and trading, it is actually in their best interest that the public have faith in their decisions and confidence in the system itself, factors that are sorely missing in today’s world. If regulation is the path to restore that confidence, so be it.

The prestigious UK-based Financial Times (January 8^th) presented a series of articles on the pressures against the continued survival of free market capitalism (and I do believe that free market capitalism can exist within a regulatory schema based on honesty and responsibility for the obvious consequences of financial decisions). “Greedy bankers, overpaid executives, anaemic growth, stubbornly high unemployment – these are just a few of the things that have lately driven protesters on to the streets and caused the wider public in the developed world to become disgruntled about capitalism. The system, in all its different varieties, is widely perceived to be failing to deliver.

“Business in the leading English-speaking countries attracts misgivings. Fewer than half of the American and British people sampled in the 2011 Edelman Trust Barometer have faith in business to do what is right. The survey rates the US and the UK only marginally ahead of Russia on this score. So there is talk of a crisis of legitimacy and an erosion of business’s ‘licence to operate’.”

As Europe teeters on the brink of a precipitous fall, there is a nasty undercurrent that the culture of debt – from supporting lifestyle choices to overleveraged corporations to government programs that exceed a current capacity to pay – is a product of following the “American system of capitalism,” a structure once admired and now pictured as one that no longer is sustainable. In short, they still blame us for most of this debacle, even though they made the choices and are currently pursuing an absurd policy of trying to remake flamboyant Greeks, Italians and Spaniards into austere, thrifty little Germans.

China’s centrally-directed economy – a fairly recent pseudo-capitalistic but seemingly successful system – is now finding traction among emerging nations seeking a way to implement their own growth policies, and the debt-driven “American system” where “free markets” trump national priorities and social interests is falling by the wayside, despite the fact that we remain the largest economy on earth. Most of these emerging nations politely sidestep the issue of corruption, which is a force that permeates a structure where too many big financial decisions are entrusted to a tiny few. The core of distrust of the “American system,” however, is centered on the rise at the top, the contraction of the middle class (what emerging nations are trying to grow) and the further fall at the bottom of the socio-economic spectrum... the ever-widening income/wealth gap between the very top and everyone else.

“As Stewart Lansley, author of a recent book on inequality, puts it, the modern economy appears to consist of two tracks: a fast one for the super-rich and a stalled one for everyone else. Those in the slow lane enjoyed rising living standards before 2007, despite stagnant real incomes, thanks to increased borrowing on the security of their homes. Since the crisis, however, American and British homeowners have faced a long and deep squeeze on real living standards, while struggling to service an unprecedented level of indebtedness. At the same time, says Mr Lansley, finance has come to play a new role as ‘a cash cow for a global super-rich elite’....

“What is unquestionably novel is the ferocity with which US business sheds labour now that executive pay and incentive schemes are more closely linked to short-term performance targets. In effect, the American worker has gone from being regarded as human capital to a mere cost, or what was known in the 19th century as a ‘hand’. Yet this pursuit of a narrowly financial conception of shareholder value may destroy value for the ultimate pension beneficiaries – because of the disruption that slashing and burning causes, and the cost and time involved in hiring and retraining when conditions improve.

“That underlines the ‘agency problem’ at the heart of the banking and boardroom pay sagas. The accountability of management – the agent acting on behalf of the highly dispersed beneficiaries of equity ownership – is fundamentally flawed. While the public may not be aware of the details of the weak chain of accountability, or the growing number of investors such as high-frequency traders or hedge funds that have no interest in playing a stewardship role, it sees the outcome, which contributes to the wider inequality story.” Financial Times.

In the end, the American system of capitalism needs improvement and credibility enhancements to create sustainability. The perception of overpaid financial mavens moving money around but not creating any products or services of tangible social value – simply to make themselves rich – has its roots in the unregulated derivatives market and the void of social responsibility that did in fact encourage unqualified borrowers to leverage themselves into oblivion. These compensation structures are profoundly out of step with the times as are the absurd pay scales of major CEOs, who get paid monstrously even as their corporate efforts fail to generate the level of success to justify such compensation. Our tax system has also failed us by allowing certain fund managers to pay reduced capital gains taxes on what the rest of us would perceive as earned income, and to tax income generally in a manner that favors folks who live off investments versus employment.

The ultimate measure of our correcting the system will always be on the growth of our middle class, a social structure that is the best current example of our failures as it shows more members dropping down into the lower classes (our own 2010 Census shows half of Americans labeled as low income or less!). CNNMoney.com (January 11^th) tells us the slide began even before the recession: According to Pew's Economic Mobility Project “Nearly one third of Americans who were raised in the middle class dropped down the economic ladder as adults -- and that's before the Great Recession hit…Things have only gotten worse in recent years. The Great Recession has likely made it harder for many people to remain in the middle class, experts said… Long-term unemployment has devastated the ranks of the middle class, with many people losing their homes and forced to turn to food banks and government aid after they run through their savings. It takes nearly 41 weeks, on average, for the jobless to find new work. Also, the steep decline in home values has hurt many in the middle class…

“Recovering from a huge drop in income is not easy, a separate Pew study found. Half of people who lost more than 25% of their income in 1994 had not recovered four years later. And a third did not regain their economic footing after 10 years… [I] t remains to be seen how quickly Americans will recover from the current economic downturn…Young adults may find it particularly difficult to hold onto their parents’ middle class status. That's because they are having a much harder time landing jobs, particularly well-paying positions in their field. The unemployment rate for 20- to 24-year-olds was 14.4% in December, compared to the national 8.5% rate…. This could hurt their earning potential for decades to come, which has earned them the nickname ‘The Lost Generation.’”

But the rich are richer than ever before while the middle is dwindling and, along with the poor, not remotely keeping up with those at the top. Houston – and every other city in the United States – we’ve got a problem. “Do you think that the biggest conflict in America is between the rich and the poor? If so, join the club: According to [another] recent poll published by the Pew Research Center, nearly two-thirds of Americans believe that the wealth gap is the greatest cause of tension in America.

“According to the poll, which was released [January 11^th], 66% of Americans believe that there is a ‘strong’ or ‘very strong’ conflict between the rich and the poor. These numbers are particularly noteworthy when one considers that in July 2009 -- less than three years ago -- only 47% of respondents expressed those opinions. What's more, the number of respondents who stated that there was a ‘very strong’ conflict has more than doubled, and is currently at the highest level since Pew began asking the question in 1987.” DailyFinance.com, January 13^th. And exactly what kind of conflicts can we expect if the middle class continues to experience this rather severe collapse, with so many “middles” now moving steadily into a Census-defined lower income category? Can we really be “America, land of opportunity” anymore?

When that middle class is restored to its former glory, when the disparity between those at the very top ceases to spread farther and farther away from the earnings of the middle – a reality that can only be accomplished with new rules and regulations (clearly, American business is not implementing middle class-friendly growth as the statistics prove) – then our system of American capitalism will be placed back on the right track. But as history has proven throughout the ages, woe to the system where fewer and fewer people have a meaningful stake in a particular society. It’s time for Wall Street and American business to understand why regulation and a revised tax system actually benefit their long-term survival.

I’m Peter Dekom, and there’s this “forest and trees” thang going on in the American business community.