Is radicalism vindicated?

"Radicalism" stands for an extreme institutional change in the system, usually dumping capitalism to go to some form of socialism. Gerry Cavanaugh and others have long called for such a change. The main idea behind the radical view is that it is capitalism that is the root of our problems, not only on the economic side, but on the political side. Capitalism, besides milking the public, promotes a concentration of wealth and political power that enables the rich to prostitute the democratic process to their advantage.

Most economists, including me, have always stoutly defended capitalism on the grounds that we (the electorate) can make capitalism work by implementing the proper role of government.

But recent potentially catastrophic developments on both the political and economic (financial) sides do make you wonder. The political controls necessary to keep the excesses of capitalism within limits have failed.

The story on capitalism is that it has been the key institutional process that has produced the advanced economic world we have today.

But unless the driving motivation for profit and power that is the heart of capitalism is kept under control, the consequences could be disastrous for society, as we now see.

Led by Greenspan, backed by Cheney and Bush, we have had for several years as near a laissez faire (no government regulation) political policy as possible, which, naturally, opened the door to anything goes on the financial side.

The Bush policy of financing their wars on credit meant avoiding unpopular taxes and freeing up loads of spending power.

A lot of these dollars floating around landed in the mortgage market for new houses. Entrepreneurship went wild. Credit eased so as not to stand in the way of buyers with really low income. Buyers of houses to sell later and the banks financing sales made tons of money.

To make even more money, banks bundled mortgages up into a new investment opportunity — a collateral mortgage obligation — of unknown and unknowable true value.

But CMOs were not enough. Banks dimly perceived that credit was being vastly overextended. As if by magic, the solution appeared in the form of something really creative called "credit default swaps," which were a form of credit insurance that hardly anyone understood,

Nevertheless the credit agencies rated them AAA, which made them investment grade and eligible for reserves for retirement funds. They looked so good that world financial markets loaded up with some tens of trillions of dollars of essentially worthless accounting entries (the CDS). Inevitably, demands for withdrawals appeared that could not be honored, and the whole financial structure quickly collapsed

Where do we go from here? Nobody knows. You know that there is no clear path to recovery when not a single expert from the Obama team has even ventured a guess. The domestic and world financial situation is so unprecedented and complex that it seems beyond reasonable analysis

So the radicals can certainly make a case for disposing of capitalism. The difficulty is that socialists have yet to analytically present their socialist substitute.

Harry Cook is a retired professor of economics. He taught at Southern Oregon University from 1966 to 1986.

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