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As we career down the road to the unknown land of the next economy, it would be wise to ask ourselves what kind of capitalism we want to pursue.  It will be some kind of capitalism, I feel certain.  Even the most despairing in the nation do not seem ready to turn to communism, as some did in the 1930s in the wake of the great capitalistic crash.  Nor will it be socialism as it was in Britain after World War II, despite the ascent of Washington to the commanding heights of our financial, and soon, industrial, system.  In time the government will follow the lead of Sweden from earlier in the decade and sell its shares in American banks, and probably the automakers as well, to private investors.

But after that, what?  Will we move toward the sort of statist capitalism favored in France and China?  There still would be room for such a system, even after the divestiture of federal financial holdings.  Or to the social capitalism preferred by Germany?

One thing is clear:  There will be no going back to free-market capitalism.  Those who suppose this is possible — and it is the prevailing view, I suspect, here in Texas — are refusing to see the permanent damage done to the free-market idea by rampant and reckless speculation.  Nor can they relinquish the happy dream that the market will correct itself, and even perfect itself, which of course, has been proved to be absurd.

Now the John Templeton Foundation regularly runs double-truck ads in the New York Times asking various thinkers to consider the question, “Does the free market corrode moral character?”  Out of thirteen respondents, only four said, unequivocally, no.  But that isn’t really the point. The purpose of an economic system is not to build moral character but to create the greatest material good for the greatest number of people.  To accomplish this requires rules to protect the system and everybody in it from those who not only would corrupt it, but who would run it right over the edge of a cliff.

Speculative capitalism, therefore, cannot be permitted to return.  What is needed instead is common-sense capitalism — not onerous regulation with a thousand new Sarbanes-Oxley bills, but sensible rules such as banks must keep at least fifty percent of all the loans they make. Then they would have to pay attention to the credit-worthiness of their customers.  Sensible rules such as banks must hold adequate reserves relative to their loans.  Sensible rules such as home buyers would be required to make a down payment if they want to borrow money to buy a house.  Sensible rules such as ratings agencies would be paid by the buyers, not the sellers of bonds.  Sensible rules such as all executive compensation, including bonuses, above, say, $2 million a year would be taxed at 70 percent and the take-home pay of hedge fund managers and private equity partners would be taxed as ordinary income, at 35 percent instead of capital gains at 15 percent..  Sensible rules such as hedge funds must disclose the holdings in which they are seeking to sell an interest.  Sensible restoration of the rules that once governed derivatives.  Sensible rules to force people to do what they should have been doing all along

We also need sensible principles such the motto of Bob Strauss that the consumers of the world — including Americans — should be able to buy the best possible products at the lowest possible price.  That means open trade.  And we must have sensible behavior that grasps the fallacy of the free market, which is the notion that anything goes.  Surely it’s plain by now that this does not work.