Embracing Capitalism

I’m writing this as Lehman Brothers closes its doors and Bank of America rescues Merrill Lynch. Clearly, the news isn’t good on Wall Street. And it’s also far from good on Main Street. The economy has lost jobs for eight months in a row, and the nation’s unemployment rate is now over 6 percent, the highest it’s been in five years.

With over 600,000 jobs disappearing since the start of 2008, declining incomes, and rising food and gasoline prices, the Democrats will blame President Bush and the Republicans will try to put a decent face on things. But, in my view, both parties are off base.

Wall Streets woes and the soft economy we are currently confronting is simply part of capitalism, and capitalism is a truly dynamic current. It always has been. And it always will be. It’s volatile, unpredictable, and full of change. And, if it were easy to master, everyone would be Warren Buffett with multi-billion-dollar net worth.

Even Buffett, however, would concede that there’s plenty of scary data out there right now – rising debt, loads of bankruptcies, foreclosures and defaults, bank losses and shrinking credit availability. But you know what? We’re still on the path to prosperity. And that path is littered with obstacles just as it’s paved with opportunities.

The trick is separating the noise from the meaningful data and extrapolating from the data the trends we will see in the future.

So, in the spirit of coping with the chaos, confusion and consternation together, I’d like to offer several key ongoing trends that you can benchmark and bookmark. Hopefully, they’ll help as we watch the latest chapter of capitalism unfold.

First, Wall Street isn’t going through a rough patch, or even a cyclical down period.

No.

It’s actually in the process of being completely restructured from head to toe. A decade from now, it won’t look anything like it does today. In investment banking, you’ll have a few mega-firms, and plenty of sprightly boutiques with specialized expertise. The venture capital model that we currently see will have faded away; it needs to be re-tooled so that it can serve more than the maturing information technology and telecommunications sectors. As for the private equity and hedge fund industries: they will encounter significant regulatory pressures and morph by necessity into something else still to be determined.

Second, our global connectedness will intensify, but localism is far from dead. The high price of oil will revive regionalism, so we’ll have a blend of complex macro and micro markets the world over. That said, China’s economic and financial leadership (or will it be dominance?) will accelerate even though this brand of capitalism doesn’t completely mesh with ours. And it’s clear after this summer’s invasion of Georgia that the Russian petro-regime will be heard – especially in oil-dependent Europe. Vladimir Putin is a big-time capitalist, too, and we can’t forget that. He just practices capitalism on his own stark terms.

Third, we are entering the post-petroleum era, but oil prices will still remain high. I personally believe the global oil market will be the most significant and vexing arena for capitalists over the next 20 years. I also think we’re moving toward a new energy economy – but it is a long-term play, no matter how much hype is generated. Invest in this sector, but understand that only patient and smart capital need apply.

Fourth, the sub-prime mortgage crisis is not over – not by a long shot. And before all is said and done, I believe its negative fall-out and impact will completely transform the way property – both residential and commercial – is bought and sold in this country. There will be a better model, a new and improved financial architecture. The new approach will have to preserve the American Dream of home ownership for the middle class, but it will also have to permit and deliver meaningful returns for lenders.

Fifth, the world’s wealth will continue to grow, so no worries there. The only question is whether we can bring borrowing and saving into greater alignment. I hope we can. We need to. And without redistributing wealth (remember, this is capitalism!), we must find ways to spur entrepreneurial growth in less developed and under-developed nations. We can do this, I’m sure, but we’re going to have to innovate when it comes to our investment strategies and practices.

Sixth, excessive risk is going to cool down. And, as a result, so will returns. But the slower, steadier growth will allow us to heal. People have been singed badly in recent years, and while I don’t think my fellow capitalists are timid (remember, we’re capitalists – we take measured risks!), I do think they have spent enough time in the financial burn ward for a lifetime. So look for greater caution – maybe even more prudence. Yes, you heard me correctly, prudence!

Seventh, regulators will demand greater transparency and place greater constraints on the financial community, and the financial community will comply – even though the guiding hand will hardly be invisible! After Enron and the sub-prime melt down, there are just no options – not if we want to restore a modicum of trust to the markets.

Eighth, the public and private sectors are going to engage in blended financing on a broader and deeper basis because the problems we face are so huge and sweeping. This will be especially true in health care and alternative energy. It’s imperative, from my perspective as a capitalist, to avoid state-run anything. But we’ll be flexible and work on an unprecedented scale together with government. An interesting new model will emerge here, too.

Ninth, investors will continue to invest in technological innovation, but the cutting-edge over the next decade won’t necessarily be killer apps – a better browser or search engine, for example – but breakthroughs that will enhance global quality of life. It will be possible to make money and improve the world at the same time. Call it capitalism with a slight conscience, if you’d like, but it’s happening.

Lastly, there will be a newfound appreciation of financial capital – of what it can do to transform lives on virtually every continent. I am a strong, hard-edged capitalist, so I don’t want to go all soft and squishy on you. But there’s an historical precedent here – the Victorian Age of the mid-to-late 19th century, when people realized that equity could literally move mountains. We’ve been so awash in capital these past few years that we may have taken it for granted. I think that cavalier attitude will gradually vaporize over the next decade. And it’s a good thing.

So, the bottom line is that big, big change is on the way. In fact, it’s already begun, and it’s not necessarily going to be easy to swallow. But we’ll manage to digest it somehow. And, in the end, no matter how difficult it is, we must never forget that we’re financing the future – and that’s absolutely essential for our children and our children’s children. I know we’ll keep moving ahead because there’s no other choice.

Michael Butler is chairman and CEO of investment bank Cascadia Capital. He is writing a book titled Financing the Future and the Next Wave of 21st Century Innovation, and has been serializing it here at peHUB. The above was an excerpt from the tenth, and final, chapter.