Jeopardy-style, answers first:
The answer is: A system that encourages oligopoly: government for business, and business for government. This is State Capitalism, and this is how it works: they get your money, in order to make you ever more dependent, ever more acquiescent.
The last few months of 2008 have been characterized by a severe economic downturn. People in the mainstream news are finally calling it a “recession”, not because of any newfound integrity, but rather because they’ve simply run out of euphemisms. The trouble became really apparent when people began to realize the banking system is broken, although some of us had been predicting this crash for several years.
In all fairness, I had no idea the extent to which it would wreak havoc on the economies, but there you have it: unintended consequences. I saw a boom that needed to bust in the housing market. But I didn’t know how far it would go.
Money flooded into real estate, and consequently into mortgage-backed securities, those securities were largely held by banks and insurance giants, and when the value of these securities dropped to zero, or became so toxic that it was impossible to value them accurately (so they were treated as if their value was zero) the whole house of cards began to fall apart.
Financial institutions like AIG were deemed too big to fail. The automotive manufacturers had their own epic fail, and are getting their own share of your hard-earned money.
This is what happens when consumption (rather than production) drives an economy. (And don’t give me any of that Keynesian Circular Flow bullshit.) Lenders now illiquid, or on the precipice thereof, stopped lending, and the economy which is built on a shaky foundation of consumption, grinds to a halt. Individuals, who for the better part of a decade had been sucking paper equity out of their mortgaged-to-the-hilt McMansions, now find themselves burdened with very real debt. Other monolithic corporations like the American automobile manufacturers, who for years have been selling vehicles as loss-leaders in order to profit through their financial arms, found that they have a hard time making that business model work when new money isn’t continually pumped into the economic system.
The very nature of these institutions implies a massively distorted one-way dependency:
An Insurance Giant doesn’t give a damn if one of its customers files bankruptcy or loses his job, but heaven forbid, a giant like AIG goes out of business, millions would be left uncovered, without affordable health insurance, and without much recourse. Whereas, every single automotive supplier needs the Big Three; the Big Three could give a damn if one or a hundred small machine shops closed their doors tomorrow, never to reopen. The asymmetric dependencies are problematic in their own right.
In a free market (the U.S.A. is not a free market) it is unlikely that any company could ever get as big as General Motors or AIG, for the simple fact that in order to grow, they would have to be profitable, and as long as they were profitable, there would be an incentive for others to compete with them. In a free market, where profit exists, small businesses should have easy access to capital.
Currently, regulations and restrictions prevent most people from effectively competing with large corporations. In a free market, any large corporation would be the necessary offshoot of an extremely beneficial product: in order to be big and profitable, you have to satisfy your customers in ways none of your competition can. General Motors, AIG, etc., none of these companies are now or were unique in this manner, so the question isn’t about their failure, rather it should be redirected.
The question is: Producing nothing meaningfully distinguishable from, nor more valuable than their competition, how in the world did these companies ever get so big.
For bonus points: what do we do about it?
Even Alan Greenspan once argued that “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” So, if you want to talk inflation, (in terms of rising prices which reflect an artificially augmented money supply) just look at the chart to the left, showing the estimated Consumer Price Index from 1800 to 2007. The advent of the Federal Reserve in 1913 is barely a blip on the radar when compared to 1971, but the former paved the way for the latter. 