The risk that the belief in the capitalist system may collapse should not be dismissed. After all, the past two decades were heralded as the triumph of capitalism, so their bitter aftermath must be the failure of the capitalist system. It should be no surprise that I disagree with this conclusion, since I do not think the success of the capitalist system can be found in or was based upon unregulated markets. As I mentioned above, what we are experiencing is not a failure of capitalism or free markets per se, but the failure of unregulated markets – in particular, of unregulated financial sector and risk management. As such, it should not make us less optimistic about the growth potential of market economies – provided that markets are based on solid institutional foundations. But since the rhetoric of the past two decades equated capitalism with lack of regulation, this nuance will be lost on many who have lost their houses and jobs.
The risk that we face is one of an expectational trap – consumers and policymakers becoming pessimistic about future growth and the promise of markets.
A backlash is thus inevitable. The question is how to contain it. Yet the policy responses of the past several months have only made matters worse. It is one thing for the population at large to think that markets do not work as well as the pundits promised. It is an entirely different level of disillusionment for them to think that markets are just an excuse for the rich and powerful to fill their pockets at the expense of the rest. But how could they think otherwise when the bailouts have been designed by bankers to help bankers and to minimise damage on those responsible for the debacle in the first place?