Regulating capitalism

The financial crisis which has dominated the headlines for the past three weeks is bound to cause a major re-think around the world, but especially in the United States, about the nature of the free market. Certainly, one has to accept, and few would dispute this, that the free market has brought about a huge leap in living stands, prosperity and economic growth wherever it has been allowed to operate. However, this does not mean that the markets cannot be regulated, and this present crisis has certainly highlighted such a need.

I very much doubt that anyone truly believes that this crisis is the beginning of the end of capitalism, but we have to acknowledge that there are many different models of capitalism, some of which are regulated (like in most continental European countries) and others which are more laisser faire, but need to be regulated.

The contrast between European and American capitalism has been debated for some time and only last year, for example, during the German presidency of the G8, both Berlin and Paris had urged the US to further regulate its markets, but this plea was ignored. It is also true that under the Bush administration the markets were further deregulated, which make matters worse.

The problem, of course, is that when America sneezes, the world catches a cold. So, as this crisis has shown, financial or economic difficulties in the US affect the global economy, which means that America has a particular responsibility not only towards the well-being of its citizens but also to the international community. Last week, for example, the UK government had to bail out Bradford and Bingley, at a cost of around £14 billion, and the governments of Belgium, Luxembourg and the Netherlands bailed out Fortis Bank, which cost around £9 billion.

Speaking to the international media, Germany's Finance Minister Peter Steinbruck said that crisis management on its own was not enough in dealing with this difficult financial situation. "We must civilise financial markets, and not just through moral appeals against excess and speculation," he said.

French President Nicolas Sarkozy went one step further. In a recent speech he said the world will have to learn a number of lessons from this crisis and rethink the values of globalisation. This would mean, he explained, restoring the balance between the market and the state. "The market economy is a regulated market, a market that is at the service of development, at the service of society, at the service of all. It is not the law of the jungle."

Before the markets are regulated, there is need for urgent action to stop the situation from deteriorating further, which is why it is so important for President Bush's bailout plan - which is designed to buy up bad debts and stabilise financial markets - to be approved. Last Monday the US House of Representatives rejected Bush's $700 billion rescue plan which sent markets plunging and created shock waves throughout the international community.

Although both presidential candidates backed the plan, there were too many dissenters in both parties, the main culprits being the Republicans who voted two to one against the plan. The majority of Democrats, two thirds, voted for the bailout.

A number of factors contributed to the initial House of Representatives' negative vote. First of all there was a question of ideology. Some Republicans thought such a plan went against the basic rules of capitalism, while some Democrats believed it was wrong to rescue irresponsible banks instead of helping ordinary taxpayers.

Furthermore, the plan was initially unpopular with many voters who e-mailed their congressmen and told them to vote against the plan. Considering that all members of the House are up for re-election next month, many did just that.

However, there were other reasons for Monday's rejection. President Bush is a lame duck president and he lacked the necessary clout to convince members of Congress to back his plan. The fact that the majority of Republicans - from Bush's own party - voted against is indicative of just how little leeway the President has.

Another reason for the Republican revolt was the partisan speech - very ill-timed - by House Speaker Nancy Pelosi, a Democrat who criticised Republican economic policy.

Last Wednesday, however, the Senate approved - by a large majority - a new version of a $700 billion rescue plan, which also included tax breaks for families and businesses, and a raise in the guarantee on savings from $100,000 to $250,000.

Last Friday the new package was then sent to the House of Representatives for its approval. As I write this, the House has not yet voted on the package, but I sincerely hope that it is approved.

The bailout plan for the US financial system is, of course, not perfect but in the circumstances it is the best possible option. The alternative - rejecting the plan and doing nothing - is simply not an option and there are too many risks involved. One need only look at how the markets took a nosedive when the first plan was rejected by the US House of Representatives.

Of course, the fact that a bailout of such a magnitude - $700 billion - is needed to stabilise the financial markets is in itself nothing short of scandalous. Excessive speculation, greed and too much risk-taking is responsible for this crisis, which needs to be fixed immediately.

That is why it is so important that legislation follows - under the next US President - to regulate the markets and the way banks and certain financial institutions operate. This industry needs to be radically overhauled.

What we need is civilised capitalism, not the law of the jungle.