Is Capitalism Dead?
- 11 January 2009 by Author 0 Comments
Is Capitalism Dead?
By Richard Larsen
Published – Idaho State Journal, 01/11/2009
One of the distinguishing characteristics of America versus European or Asian nations is a commitment to the principles of free market economics. This is the conviction that entrepreneurism by individuals can create products and services of sufficient demand that wealth can be created; that those emerging companies can then adapt, expand, and create more products and services that create more wealth, more jobs, and generate the necessary capital to fund expansion.
This concept of free-market economics, or capitalism, has as its foundation, freedom. Freedom to work for whom we desire, freedom to create a company if so desired, freedom to create products and services, and the subsequent freedom to spend the fruits of our labors according to our desires and needs. For in a capitalistic system, the means of production are owned by individuals, and the private sector, rather than by government. This principle made America the economic power that it is.
Many have literally cheered the purported demise of capitalism with the housing and financial collapse of 2008. But far from a failure of capitalism, what we have witnessed is a government-created calamity. Lending institutions are naturally averse to lending their capital to people who are not likely to repay it. But when the Community Reinvestment Act was implemented during the Carter administration, the pressure was placed directly on banks to do just that.
This coercion only increased during the Clinton years when then-Attorney General Janet Reno declared they were going to aggressively pursue lending institutions not in full compliance with the CRA. The squeeze was on for banks to lend where otherwise they would not. But with Fannie Mae and Freddie Mac serving as guarantors of those loans, the incentive for mortgage bankers to avoid risk of non-repayment was essentially thrown out the window.
After the collapse of Enron, Congress passed the most stringent and onerous regulation governing publically traded companies ever. The intent was to prevent another Enron from happening, yet Congress intentionally excluded Fannie and Freddie from coverage under that regulation. Two years later, Fannie was doing the same thing Enron did, cook the books to make their earnings appear better than they were.
Capitalism takes risk, but not imprudent risk to lose capital. Without government policy forcing banks to make the loans they did, and without the explicit guarantee of those mortgages by the corrupt Government Sponsored Enterprises (GSEs) of Fannie and Freddie, we would not have had the collapse of the financial system we’ve witnessed this past year.
In all likelihood the real estate bubble would have still happened, as the Federal Reserve had reduced the Fed Funds Rate and the Discount Rate to such a point that long-term investing in real estate was suddenly more attractive. But bubbles come and go, whether it’s tulips in the Netherlands, dot-com bubbles on Wall Street, global oil futures, or domestic real estate valuations. The bubbles burst, markets correct, and we move on. But not so easily this time.
The failure of government to properly regulate their own mortgage enterprises jeopardized our entire financial system. And yet some say that deregulation has created this milieu even though the National Registry of all government regulation is larger now than ever before since it was created in the 1930s, at over 80,000 pages. Regulation is not a panacea to cure all potential abuses, but smart regulation can be. What Congress has done to our financial institutions and to our economy is inexcusable. They bear full culpability and not only are they not held accountable for their abuses, but they’re throwing money at the situation to try to fix what they broke.
Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor said recently in the Wall Street Journal, “The present crisis started not because capitalism was allowed to run its selfish course, but because the government interfered with the operation of private businesses and allowed excessive growth of money and credit.”
Survival of the fittest is an evolutionary principle that applies as aptly to free market capitalism as it does to biology. The worst thing government could have done was to step in and play “god” to the financial markets to determine which survive and which do not. Free markets do that on their own when allowed to. We see it every day. And the notion runs in direct contradistinction with what the President Elect said this week, “Only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy.”
The government should not be trying to spend our way out of the recession by throwing money at it as they have. In all likelihood the efforts will not only fail but will encumber many future generations with a federal debt unlikely to ever be repaid. Sounds a lot like the mortgages they forced banks to make, doesn’t it?
Allan Meltzer of Carnegie Mellon University has proposed a capitalist solution. He said, “Just let the defunct firms fail, and the healthy ones purchase the assets.” Now that would be capitalism that we can believe in.
Economics professor Walter E. Williams was even more blunt. He said recently, “The blame for our current financial mess rests with government… In the clamor for more regulation over our financial institutions, has anybody bothered to ask whether people in government know what they’re doing?” Centralized planning has never worked. What we need is more free-market economics, not more government control.
Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at firstname.lastname@example.org.