Deconstructing the Capitalism of the Western World (2)

While investment banks and hedge fund firms are undeniably important parts of the capitalistic economy, their existence in the history had shown the main weaknesses of the great capitalism tenet: the often underestimated human factors and perhaps the hard to predict but important external factors such as luck and timing. The fall of Long Term Capital Management, in which Myron Scholes (one of the Nobel laureates behind the famous Black and Scholes theorem) was one of the board members, due to 1997-1998 Asian and Russian economic crisis showed the risk involved in investment banking and hedge funds bets regardless of the firms' credentials and the amount of money commanded.

Critics of hedge funds and investment firms often accused large investment firms and hedge funds firms of bullying and simply gambling using their vast amount of money. Recent comment by Greece's finance minister, George Papaconstantinou, even claimed that "any country is prey and will be prey to speculative forces." (Aoife White, "Greek Finance Minister Begs For Bailout Details, Says Markets Are 'Attacking' Greece", Huffington Posts, 02/15/10). Indeed, the history has proved again and again that combined forces of speculating bankers, investment firms and hedge funds can truly bring down the well-being of any country especially the weaker ones (like Indonesia and Thailand during 1998 Asian crisis)

The most damaging and dangerous part of investment banks' role in the capitalistic economy is the fact that these firms are not regulated and running their operations beyond any country's borders. In reality, there is no way these firms can be regulated since they are private firms which can work beyond any individual country's jurisdictions. Even when any country try to regulate them, these firms can simply moved their operation to any other country or even to small and less regulated offshore financial centers, such as Cayman Islands and British Virgin Island.

Take a look at Cayman Islands for example. The OECD (Office of Economic Cooperation and Development) once tried to reign on this unregulated tax haven and money laundering center in the 1990s but to no avail. (Natasha L. Rogoff, "Haven of Havoc?" PBS) In 2003, European Union and UK also tried to impose their influence upon Cayman Islands only to secure vague and non-committal self-imposed" rule from the regime.

So, what can be done?