Many economists and pundits blame our current financial mess on capitalism run amok. However, what is often lost is the fact that we haven’t had a properly functioning capitalist system since 1971, the year the US government bailed out Lockheed Martin.

Before 1971, “ … excessive greed, recklessness and foolish speculation were punished by the market.” If an early American cowboy left his herd to pursue a shaky investment deal, he most likely ended up ruined, stuck on a construction crew in some dusty outpost while he tried to scrape together enough money to start again. Meanwhile, the conservative cowboy who stuck with his herd, growing it carefully and cautiously, prospered — and perhaps picked up a few of Cowboy #1’s cattle at a steep discount.

After 1971, all of that changed.

While the United States government had intervened on other occasions to encourage young industries, its involvement had been modest and usually resulted in the delivery of a valuable public good. The Lockheed bailout was different; it was the first government bailout of an individual, private corporation. It also flew in the face of capitalism’s crucial auto-correcting mechanism. Ritholtz quotes the economist Allan Meltzer: “Capitalism without failure is like religion without sin — it just doesn’t work.” A generation of American cowboys had learned that if their business venture failed, their very own red, white, and blue knight would come riding in.

The author also points to Detroit and the Chrysler bailout of 1980:

Ritholtz walks his reader through the bailouts of the 70’s, 80’s, and 90’s and stops briefly at the 1980 Chrysler bailout to play “What If” as in “What if the government hadn’t butted its nose into the private sector?” He hypothesizes that the failure of Chrysler might have served as a wakeup call to General Motors, Ford, and the United Auto Works (UAW) union, resulting in more fuel-efficient cars and more sustainable labor contracts. Chrysler’s assets may have attracted investors, Korean manufacturers perhaps, and the company may have reemerged as a smarter, slimmer corporation. “It is quite reasonable to conclude that the bailout of Chrysler in 1980 prevented significant market forces from doing their best to reboot the entire U.S. auto sector.”

I hope our legislators take this into account as they try to “correct” the health and energy markets.

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