Many businesses fail every day, and that's the way it ought to be. Otherwise, we would still have buggy whip factories in New York City. In Capitalism, failure is not a dirty word. In fact, failures reveal the success of the way things work.
While McCain and Obama seek to grab news space by blaming someone or something for the Wall Street business failures, I do not. Businesses come and go, from bait shops to corner lunchrooms to investment banks to car manufacturers. I feel badly for folks who lose their jobs, but otherwise I feel good about the creative destruction that Capitalism provides space for. Business is all about calculated risk: in the end, what profit rewards is risk, regardless of the product.
These investment banks were gambling to stay alive in a changing world, and made bad bets. Competition is what hones businesses - and they eventually fall if they cannot keep up or adapt - or behave imprudently, or encounter bad luck.
I deal with many business people in my work, and it is my conclusion that the biggest obstacle to business creation, and thus capital creation and job creation and wealth creation, is the government. Note that the biggest screw-ups of the year, Fannie Mae and Freddie Mac, were government agencies. So much for government's role in the financial industry: it inevitably becomes politicized, mediocratized, and corrupted - as with any government involvement in any industry. Few people in government could figure out how to run a candy shop, much less a complex enterprise.
Otherwise, they'd be doing it.
Related: Tyler Cowen on how regulation made the problems worse. Also on how the hedge funds manage risk better than the investment banks.
Also related: How the Dems supported the sub-prime fiasco. Follow the money. And the banks were all too eager to play that game - as long as there were buyers for the junk. A game of musical chairs, as in all bubbles.
