Is Capitalism Dead?
The market that failed was not exactly free.
IS THIS the end of American capitalism? As financial panic spread
across the globe and governments scrambled to contain the damage,
reality seemed to announce the doom of U.S.-style free markets and
President Bush's ideology. But this is wrong in two ways. The
deregulation of U.S. financial markets did not reflect only the narrow
ideology of a particular party or administration. And the problem with
the U.S. economy, more than lack of regulation, has been government's
failure to control systemic risks that government itself helped to
create. We are not witnessing a crisis of the free market but a crisis
of distorted markets.
This Story
It's true that the Bush administration has stood for light regulation
of capital markets. But it did not invent this approach. By the middle
of the last decade, experts across the spectrum believed that U.S.
financial institutions faced outmoded restraints on their ability to
innovate. Thus, the Clinton administration, supported by then-Federal
Reserve Chairman Alan Greenspan, refused to tighten regulations on
financial derivatives, memorably dubbed "financial weapons of mass
destruction" by Warren Buffett. The 1999 repeal of the Glass-Steagall
Act, a Depression-era law separating commercial banking and investment
banking, passed with overwhelming bipartisan support in Congress and
was signed into law by President Bill Clinton.
We'll never know how this newly liberated financial sector might have
performed on a playing field designed by Adam Smith. That's because
government interventions of all kinds, from the defense budget to farm
supports, shaped the business environment. No subsidy would prove more
fateful than the massive federal commitment to residential real estate
-- from the mortgage interest tax deduction to Fannie Mae and Freddie
Mac to the Federal Reserve's low interest rates under Mr. Greenspan.
Unregulated derivatives known as credit-default swaps did accentuate
the boom in mortgage-based investments, by allowing investors to
transfer risk rather than setting aside cash reserves. But government
helped make mortgages a purportedly sure thing in the first place.
Home prices seemed to stand on a solid floor built by Washington.
Government support for housing was well-intentioned: Homeownership is
a worthy goal. But when government favors a particular economic
activity, however validly, it must seek countervailing control to
ensure the sustainable use of public resources. This is why banks must
meet capital requirements in return for federal deposit insurance.
Congress did not apply this sound principle to Fannie Mae and Freddie
Mac; they were allowed to engage in profitable but increasingly risky
activities with an implicit government guarantee. The result was that
taxpayers had to assume more than $5 trillion of their obligations.
Contrast U.S. experience with that of Canada, where there is no
mortgage interest deduction and the law requires insurance on any
mortgage over 80 percent of a home's purchase price. Delinquency rates
at Canada's seven largest banks are near historic lows.
The new capitalist model that emerges from this crisis must operate
according to more consistent principles. The Fed should set interest
rates with the long-run value of the dollar in mind. Government must
be more selective about manipulating markets; over the long term,
business works best when it is subject to market discipline alone. In
those cases -- and there will and should be some -- in which
government intervenes on behalf of social goals, its support must be
counterbalanced with taxpayer protections and regulation.
Government-sponsored, upside-only capitalism is the kind that's in
crisis today, and we say: Good riddance.
On Mon, Oct 20, 2008 at 4:09 PM, Gruss Gott <[EMAIL PROTECTED]> wrote:
> McCain is accountable as the one of the top supporters of the very
> "investment" vehicles that got into this mess.
>
> McCain's #1 economic adviser - officially until 3 months ago,
> unofficially now - is the AUTHOR of the legislation that unleashed
> this crisis.
>
> So Bush accountable for the last 8 years. Our choice is for the next
> 8. And your selection is the guy that's captain of the thieves.
>
> Not a good choice Robert, but consistent with your last 2. Go 3 for
> 3! You know what you say: "when you're in a hole dig deeper!"
>
>
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~|
Adobe® ColdFusion® 8 software 8 is the most important and dramatic release to
date
Get the Free Trial
http://ad.doubleclick.net/clk;207172674;29440083;f
Archive:
http://www.houseoffusion.com/groups/cf-community/message.cfm/messageid:275689
Subscription: http://www.houseoffusion.com/groups/cf-community/subscribe.cfm
Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=89.70.5
