September 20, 2008
The economy of the United States is not a pure capitalist system. We operate economically under what economists like to call a “mixed system”. This is a system that combines elements of a market economy with elements of a planned economy. It is because of this mixed economic approach that Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke determined that it was within their authority to nationalize Freddie, Fannie, and AIG in the name of stabilizing the financial markets. In a purely capitalist system, these bailouts would have been impossible. Quite frankly, the crisis that caused those bailouts to happen in the first place would not have happened if we were a pure capitalist country.
That is not to say that capitalism is perfect. But, in the current environment we must brace ourselves against the endless onslaught against the system which has made our country number one economically for some time now. You see the politicians are really just poor sports that have never grown up and never like to admit fault for anything. McCain, Obama, members of Congress, and the Administration will babble on about how the greed and unbridled actions of others are the culprits for the subprime crisis. They will talk tough about how they are going to go after the bad guys and bring them to justice. They will propose new regulations to prevent this from ever happening again. In short, they will attempt to socialize us to believe that only a capitalist system with the ruling elite (themselves) in charge is good for the country. They are all liars and are hereby permanently banned from the shrine of Free Market Economics.
Throwing out accusations and speaking in vague generalities is easy. That is what the politicians do all the time. So instead, let’s look at some examples of where capitalism has been blamed for a crisis that the politicians actually started. We have all heard about the greed and lack of regulations that caused the savings and loan crisis of the 1980s. But, it is never mentioned by the politicians how the crisis came to be in the first place. For that we go back to the year of my birth, 1964. Lyndon Johnson, the patron saint of the welfare/ warfare state, had just begun to rebuild that institution on our shores. With the passage of his so called “Great Society” and increased funding for a military conflict in Southeast Asia, the United States government, through the Federal Reserve Bank, printed money over and above the limit mandated by the gold reserves held by the government at the time. By the late 1960s, foreign holders of U.S. dollars realizing that their asset would soon be worth much less, demanded, as they were entitled to, an exchange of their devalued dollars for American gold. The hemorrhaging of U.S. gold reserves that ensued was so great that Richard Nixon closed the gold window in 1971 to prevent a default. He effectively opened the door to future wild spending by Uncle Sam.
These actions by our leaders: increased spending and lifting the last vestige of the gold standard would set the stage for the savings and loan crisis. Little did policy makers know at the time, that printing money to monetize debt was addictive and would eventually lead to inflation. This was probably because most of them had never heard of the Austrian School of Economics and because some years later Richard Nixon declared that “we are all Keynesians now”. Nonetheless, savings and loan banks through the 1970s played by the rules paying interest on savings accounts and providing mortgages to borrowers. The problem came in the late 1970s when faced with high inflation from the spending binge the Fed had to increase interest rates to 21 percent in an attempt to control rising prices. This hurt the savings and loan banks in two ways. First, a government regulation that placed a ceiling on the interest rates savings and loans could offer to their depositors caused a transfer of funds from low rate savings and loan savings accounts to new higher rate money market accounts in other banks. Second, savings and loan banks had much of their money tied up in low, fixed rate, long term mortgages. As the Fed increased interest rates it made these mortgage backed assets virtually worth nothing. Thus, government spending which forced the Fed to raise interest rates ultimately caused the savings and loan crisis. By 1980, before deregulation, many savings and loans were already insolvent. Politicians are disingenuous when they say the savings and loan crisis was caused by the greed of the bankers; it was caused by the misguided policies of the politicians of the time.
Now, flip the calendar forward a decade to the 1990s. Through the decade, the “Maestro” Fed chairman Alan Greenspan, had kept interest rates artificially low while continuing to pump more dollars into the economy to keep the good times rolling. By the end of the decade, we had the dot.com bubble. Of course, we were told by Washington that this was the fault of greedy techies who were corrupt and had unbridled behavior. At the end of the day, I didn’t expect Washington to come clean and admit culpability, but I did expect them to learn from their mistake so it wouldn’t happen again.
Then, it did happen again. The “Maestro” lowered interest rates to one percent to stimulate the economy after 911. In the meantime, Congress revised the Community Reinvestment Act, which cajoled community banks to make loans to bad risk borrowers. With an implicit guarantee from Uncle Sam, Fannie and Freddie took on more and more mortgage loans. With more money in the pipeline, laws forcing banks to make at least some bad loans, and moral hazard, the federal government had tied and given the noose to the financial community to hang itself.
Again, like in the 80s and the 90s, the cause of the crisis according to the ruling elite is with those greedy bankers. Again they are being disingenuous. In the 1980s, Congress instituted the Resolution Trust Corporation to liquidate the bad assets of the insolvent savings and loans. In the end it cost the taxpayers $150 billion. Today, Congress is considering a similar approach to liquidate the bad assets of the insolvent financial institutions. This time the costs will be in the trillions.
The capitalist system is not perfect, but it is eons better than the bastardized economic system Washington has given us. History has proven that the price of money is better determined by the market than a central bank. History has also proven that a commodity backed currency not the political whims of politicians and financial bureaucrats is the best way to rein in the size of government, protect purchasing power and asset value, and in the end avoid catastrophes like the one we are about to encounter.