I’m sitting in my hotel room in the Four Seasons in Sydney, Australia, watching stock traders on CNBC cry with outrage that the United States has become a socialist country. Can you imagine? Government investing in the banks? Purchasing mortgages, many of them in default? Bailing out greedy bankers? C’mon. These guys are just as big a part of the problem as anyone. It was because of the propensity of the Federal Reserve to flood the capital markets with liquidty that these guys could leverage their own positions and make money for themselves without producing any real product or service. They are the government’s wealthy welfare cases. And now they’re faced with the prospect of actually making a living.

These are the experts. These are the guys who, six months ago, declared we were over the worst. Who stated a year ago that the crisis would be contained to the sub-prime sector of the housing market.

Heck, this from the genius of them all:

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan, former Federal Reserve chairman, 2004.

How could they miss this? I began worrying about the leverage in the derivatives markets as well as the housing bubble in the U.S. around 2005. And believe me, I’m no Phd in economics. I remember one of the fund mangers at the Investors Group in Winnipeg telling me back in 1987 he feared the new index futures (basically allowing a person to bet on the direction of the general market) would result in an unbalanced long or short position that would need to be unwound in a dramatic fashion. Not six months after this conversation came black Monday, the largest one day stock market decline in history, more than 20%.

I think of that conversation often these days, because in fact, that’s what we have happening here, an unwinding of positions, mostly relating to the credit markets, and the unraveling is revealing that the underlying assets were not as shiny as they had been sold as. The corollory to this, however, is that they are not as toxic as they are now being presented as.

The end of capitalism? Hardly, but if it is, who cares? If that was capitalism, a system where a few sharpies can corral the majority of the resources at the expense of a few people (all the while beating their breasts about how they “earned” it) simply though financial engineering, then who needs it? We were convinced, somehow, that the financial industry could mostly regulate itself. This is analogous to the fox guarding the henhouse. Capitalism? Hardly. The purpose of capital markets is to provide capital to businesses either so that they can expand simply so that the owners can monetize some or all of their investment and share the profits with investors. Did we lose sight of this?

Look, I love free markets. I have done well, especially lately. But I am not for letting the inmates run the asylum.