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Monday, March 2, 2009

Everybody Blames 'Capitalism' for the Mess. Don't.

I would like to address a comment from the post Obama is No Match for Economic Reality: "You guys, the capitalists, messed up completely, so far beyond anyone's wildest imagination..."

Careful. You can't call the system we had leading up to this mess 'capitalist'. You can't call the housing bubble, and the mess on Wall St. the product of 'capitalism'.

You could call it Crony Capitalism or Corporatism or Finance Capitalism, BUT you cannot call it 'ideal' Laisse-Faire Capitalism.

The only reason any of this was even possible was precisely because the markets were not allowed to do their job... that is to say they were not 'free'.

Alan Greenspan changed the world when he first threw the might of the Federal Reserve into the breach during the 1987 stock market crash. Market participants saw this and adjusted their behavior accordingly. That is to say, they lost respect for risk and increased their exposure to it via increased leverage because they could count on The Greenspan Put.

The governments of the world started this mess through with their various economic policies. If the Chinese corporatist model had not artificially kept the Yuan exchange rate down to increase exports, a surplus of trillions of US trade dollars would not have flowed into everything from US Treasuries to US mortgages driving yields down to absurd levels. Without this artificially cheap credit, their would have been no 'reaching for yield' by investors such as pension funds. Without their demand for higher yields, mortgage securitization would never have exploded. Without the hunger on Wall St. for more mortgages to package, there would not have been a move into toxic mortgages such as subprime. Without access to cheap credit strawberry pickers would never have bid a $300k house up to $750k, leading to a massive real estate bubble. Without the bubble, there would have been no bust.

Fannie Mae, Freddie Mac are not the product of free market capitalism but of government social policy. Fannie was founded in 1938 during the Great Depression. In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers. As Larry Kudlow would say, the "mustard seeds" for a real estate ponzi scheme of truly epic proportions were planted. The end result of course could be nothing other than mustard gas.

GM would have smartened up back when it still could if the government hadn't bailed out Chrysler back in 1979. Instead, GM grew complacent, safe in the knowledge that it could never die because the government surely wouldn't allow it. Now GM cannot compete. Bailout or now bailout. Consequently, Detroit is dead and a median home price of $7 500 proves it. (Yes, seven thousand five hundred dollars.)

Government! Government! Government! Constant intervention has resulted constant booms and busts of ever increasing magnitude.


Franco said...

I have tough times explaining to my colleagues and friends about government causing this mess.....

They trust politicians more, that it is the government that can save economy through its various policies bla bla....

Anonymous said...

AMEN preach it brother!

Anonymous said...

Government helps corporations = bad;
government helping individuals = good.
This is what the examples say to me.
The confusion of the artificial, and the real.
Governments are voted in by actual, not the artificial "persons" which corporations are.
But it is to be noted that corporations exist only because the Government (= law) allows them to: there is nothing 'natural' about a corporation.
In a system of popular government, the "rights" of a corporation (perforce it's ability to deal with its resources) must bend to the rights and needs of individual people. Including its employees.
Other than bringing them into existence via the Corp. Statutes, the government should never ever help an individual corporation, except in the limited sense of hiring them for their products or services after a competitive bidding process.
But there are things that can be done, to undo the damage done.
The first thing to do is to realize that the GOP in the USA has been much more a Mussolini-esque party for the past fifty years, than a traditional American one...I blame the influence of TV on US politics.
So they are not the answer: their policies lead us here.
As to the Dems, well, on these matters, I have seen little change to the corporate welfare that has IMO ruined the US economy.
On the plus side maybe they'll adopt less ruinously expensive penal/military policies.
And bring the Gov's focus back to helping individuals, rather than artificial corporate "citizens".

PS Keep on working everybody.
And thank you, Ninja, for stimulation...and profits...

dacian said...

Ben, the USA meant capitalism for the entire world; there is no such thing as pure-free-market-capitalism; it never really existed. As the other post on your site about pure-theoretical-rational-economic-models failed and are utopia, the same is the case with this pure-capitalism. Even if there are no governments, there are no solid arguments bubbles can't happen, frauds, greed, etc. If there is no government, there is church dominance; if there is no church, there is king; if there is no kind, you have an emperor or a crazy dictator, etc. etc. Free markets are tolerated only, they don't exist in the purest form as stated in books.

Now assume there is no FED micro-managing rates and we let the market do it? Is there any reason to believe market knows where rates should be? They will search for it, but during an economic boom I'm sure market will set it low as Greenspan did to favor cheap credit. It's human psychology rather then FED or Greenspan.

Anonymous said...


Anonymous said...

How about blaming the rating institutes aka Moody.
In the "ideal" capitalist system, the Moody's of this world can still give AAA ratings to loans against horse dung.
Biggest problem you run into is monopoly or oligopoly. And then you're set for abuse. If you only have coke and pepsi as your rating institutes you're set up for abuse.

Anonymous said...

Government! Government! Government!
That's childish!
Yes, the Fed is a problem, low rates were a problem. But don't forget the marriage between financial institutes, rating agencies, and dumb borrowers. I don't see the government involved in structured investment vehicles, credit default swaps, false loans, false ratings, forged loan applications... etc.
You know there's much, much more to this than just the government. This is people seeing short term benefits and raping a f*&ked up system. One could make an argument for government regulation (how will you prevent this from happening again?). I wouldn't trust corporations regulating themselves. Nor do I see prisoners punishing themselves.

Anonymous said...

What's the chinese word : crisitunity? Crisis as opportunity.
Perhaps the US ought to follow Putin's lead and prosecute or exile some billionaires:

Or perhaps adopt Islamic banking practices, and do away with interest as the driving force of the economy:

A good time, this crisis, to think of "best practices", by observing others: and how their policies are working out.

Yellowfish said...

Perfect, Ben.

hbl said...

Government in its current incarnation certainly has made the current mess much worse, but people's irrational tendency toward speculative bubble herd behavior is still sufficient to cause serious periodic crises (see Hyman Minsky, Steve Keen, Kondratieff Cycles, etc). I'm surprised that the strong adherents to Austrian economics don't seem to see past their intense dislike of government...

Anonymous said...


I appreciate you're addressing my comment as I believe this discussion is an important one to have. I didn't mean to be so personal as accusing "you guys, the capitalists" and actually said "your guys the capitalists." I wouldn't be so personal as to accuse an individual, especially one so generously posting his thoughts for what I see as a collective failure of a system. Of course a system is made up of many complex individual actions some good, some bad and even some with good intentions turning out quite poorly. In the end, one must judge one's actions oneself.

As to the subject at hand I'm glad to move beyond labels into a more detailed discussion of the various systems. Socialism of which I am an advocate in its democratic forms has a considerably greater value placed on our participation in a society rather than individual agency. Any system is bound to contain elements of both but it is a question of degrees.

I don't believe for example that individuals create wealth and should solely reap the rewards. Wealth is created through a complex social process and should be shared. One thing I am pleased about in the current crisis is the return to more social values. We seem to have gotten some balance here once again and while some here may disagree I personally feel this small aspect of the crisis will be very beneficial. Thanks for hosting this discussion. Keep up the good market work - even socialists can enjoy making money. Best.


darkcloud said...


Fantastic post. Bulls eye. You are one BSD.

My only possible qualification is your reference to "In 1999, Fannie Mae came under pressure from the Clinton administration".

In 1999, both houses of Congress were Republican under Clinton.

Just wondering where exactly the pressure on Fannie Mae came from in 1999, my good man.

Best regards.

Anonymous said...

You sound like Naomi Klein

Robert E. said...

Transparency and killing the Fed are keys to reestablishing the concept of "good" capitalism. In tech, something I know a little about, transparency is key in enabling it to work because transparency is why open source and the net rule. This openness must also apply to finance as well because up to now, transparency has been a word relegated to obsolete items like 35mm slides.

When unfettered access to information is combined with abolishing a private cartel that's killing America, a viable start point to reviving the US is at hand.

David Brin, in Earth, was prescient about surveillance and tech. We have no privacy so extend this concept to everyone so all can "spy" on each other. This tit for tat way of dealing with transparency is the only way out of the fubar we find ourselves in.

Go to wired to see an excellent article on finance.

It's a good read.