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Don’t Call It Capitalism
Monday, September 22nd, 2008My Fox column this week is on–what else?–the crisis on Wall Street.
39 Responses to “Don’t Call It Capitalism”
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Radley,
Please help me understand this becuase I really want to. But I’m confused when peopel say this is corporate welfare, they always seem to be talking about the solution to the problem. Obviously that is correct, but what about the problem itself? Was that not brought on, for the most part, by capitalism?
I’m not arguing here, I know very little about this and I want to understand how the free market would have prevented the initial problem from occurring, or at least made it less likely. Thanks!
By far your best to date. I particularly liked the mention of expensive campaign promises that cannot be funded into the future while neglecting to discuss SS and Medicaid. Great work!
I can’t be out of money, I have checks left.
Nick T, the problem isn’t Capitalism. It’s government medalling IN capitalism that’s has caused all of this. As Radley said in an earlier post, what happened here should be a perfect example of WHY we need a free market and instead it’s being twisted into an example of why free markets are bad? It’s the equivalent of buying a coffee at McDonalds, dumping 5 sweeteners and 4 creamers into it, and then complaining to McDonalds that now you can’t drink their bad coffee?
A good article on who/what’s really to blame:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0
It sounds like you really can put the blame of this more on one party than the other ….. as opposed to just being ‘crazy’ lately, I’m not sure why McCain isn’t pushing this kind of stuff in his ads.
James D, thanks for the info. However, I think this only exascerbates my confusion. That article pretty clearly argues that what was needed was regulation, or government intervention on the practices of private companies.
How then was the solution to avoiding this problem any sort of free-market or hands off approach by the government.
This is again, why I am so confused and looking for info. As a believer in the free-market I want to understand the arguments as to how free-market capitalism would have *prevented* this mess to begin with. Rather, everything I see seems to argue that the solution would have been *more* regulation not long ago.
I kind of agree with Nick T here–while you’re making a somewhat convincing argument that the government shouldn’t bail out these companies now, it doesn’t really address the issue of how the government is responsible for their failure to begin with.
It seems awfully convenient to claim that the current financial situation has nothing to do with capitalism, and that it is instead the fault of meddlesome government. Haven’t the last eight years seen deregulation touted as the solution to our economic woes? Are we seriously to believe that after eight years of deregulation that there is no connection between it and the financial crisis?
Deregulation is the path to pure capitalism, and as we’ve taken babysteps toward it, we’ve encountered some serious problem. Now, those same people who screamed that they wanted deregulation are screaming for bailouts. Can I assume that we will at least witness the Libertarian/Free-Marketeers decry our current crop of entrepreneurs? These men of money, who insist on capitalism as the solution, are now insisting on the government’s deep pockets as the solution? Which is it?
PLEASE EXCUSE THE CAPS; MY BROKEN KEYBOARD HAS DECIDED THAT I MUST SHOUT, DESPITE MY PLEAS TO THE CONTRARY.
THE CURRENT STATE OF AFFAIRS IS NOT CAPITALISM, BUT THEN WE HAVEN’T HAD A CAPITALIST ECONOMY FOR QUITE SOME TIME. THIS IS CORPORATISM, WHICH IS THE ECONOMIC HALF OF FASCISM (THE OTHER HALF BEING STRONG-AUTHORITARIAN NATIONALISM; DRAW YOUR OWN CONCLUSIONS ABOUT THAT).
AGAIN, SORRY FOR THE CAPSLOCK. ANOTHER DARNED GOOD KEYBOARD (SAITEK ECLIPSE) RUINED BY AN ERRANT BEVERAGE.
Sam –
Can you give me three examples of “deregulation” that have taken place in the last eight years?
Talking about deregulation doesn’t count. Neither does starting a war, then contracting parts of that war out to KBR and Blackwater.
I’m talking real-world deregulation of major industries or the financial markets.
I can’t think of one, much less three.
Recently there was a GREAT quote about those who would call our system (till now) capitalism. I’ll have to paraphrase.
“Showing someone who thinks we were a capitalist country a truly free market capitalist system is kind of like taking someone who thinks Playboy is hard core pornography and showing them anal fisting porn.”
Sam, the problem with the deregulation as it was done is that we keep removing restrictions and safeguards on corporate activity without also removing government incentives. The government mucks with the free market in multiple ways. On one hand, it gives out corporate welfare and fixes the tax system to encourage specific types of behavior and discourage others. The government also bails out corporations that screw up, setting a poor example for future corporations that are thinking about undertaking risky behavior.
On the flip side, the government comes back and then regulates how corporations can behave.
Looking at this as risk vs. reward, the government incentives to corporations increase the reward, government bailouts lower the risk, and government regulations and taxes lower the reward. Government has mucked with the free market in multiple directions. Deregulation is okay, but if we remove all regulation and taxes but still incentivize and bailout then the government is still mucking in the free market but in the opposite way that regulation would; by encouraging risky behavior.
In effect, government is trying to balance risk versus reward by mucking with both sides of the equation at once and trying to find the proper balance.
The free market argument is that the market would have balanced itself just fine if the government left it alone. But leaving the market alone involves leaving it alone *everywhere*, not just when it comes to regulation.
Sam, there has been very little in the way of ‘deregulation’. There has been plenty of ‘reregulation’, where one set of onerous rules is removed, only to be replaced with a different set of onerous rules. There has been mission creep and bad priorities, like making ‘owning houses’ a priority, even in a housing shortage with horribly inflated pricing. And there has been a lot of terrible decision making by a lot of companies, where they do not accurately (or at all) assess risk.
The thing is that one tenet of a ‘free market’, or even of capitalism, is that the weaker companies, the ones that make bad decisions and don’t correctly assess risk, fail. They go down the tubes, taking the people who made the bad decisions with them. And hopefully they take the bad policies as well, leaving the people who don’t make bad decisions, and the companies that follow better policies to prosper.
If the government bails them out, that’s not market forces, that’s not capitalism. That’s anti-those things. So even if that previous stuff was the market, taking the corrective functions of the market out circumvents any good a market can do.
That’s just a start. The interest rate and money supply shenanigans by the Federal Reserve are a whole ‘nother non-market problem.
This may also be a lesson in social engineering. Fannie Mae and Freddie Mac were borne from the belief that broad, private ownership of land is as fundamental as life, liberty, and the pursuit of happiness. The “American Dream,” we were taught, is to someday own a house where we can raise our 2.2 children, grill hot dogs, and park our Detroit built automobiles.
We are told that people who actually own property lead better lives, exhibit less social dysfunction, and have minty fresh breath most of the time. Fannie Mae was created on the premise that property ownership is highly correlated to all things good, sound, and just regardless of whether or not you can afford to plunk down the 20% initial investment.
I personally think that social engineering feats like Fannie Mae confuse cause and effect.
Look, I know it’s tempting to believe the media and the politicians who are talking about how greedy private corporations in the free market have caused all of out financial woes. We hear a lot of ridiculous hot air about how more government interference in the market through smarter and tougher regulation (and, now, bailouts) are the fix.
That’s all baloney. Step back and look at this mess. The primary bad actors in this were government-sponsored enterprises. Those GSEs (Freddie and Fannie) are the largest mortgage holders in the country and by far the largest holders of the bad paper behind the current crisis. Those GSEs were supposed to be somewhat privatized, but that’s really a joke because they operated with special rules and with the understanding that they would have one hand on the taxpayers’ wallet if things turned south. And – guess what! – it turns out that they do. Those GSE’s successfully resisted regulation (as James D’s link points out, but which as also been pointed out in other sources) by playing political games just as well – if not better – than the private companies currently being vilified (not always without cause, mind you).
Moreover, the whole industry is subject to government lending rules that encouraged lending to people who were not financially qualified to buy a house yet. In other words, there were more government regulations that added to the problems we are seeing.
So, when people cry that this is a failure of the free market, they have an awfully broad view of what the free market is. A market overwhelmingly dominated by GSEs is not the free market. Government regulators telling private lenders when they can approve a loan are not artifacts of a free market. And, all this uproar about how we need better regulation has a grain of truth because we do need better regulation of the government players in this field. (It would be better to get rid of the GSEs entirely, but apparently people still aren’t really skeptical about the government being in the mortgage business in the first place.) But, the broader take-away lesson here is that government regulation didn’t work. Whether the failure was because of corruptible politicians or just general incompetence to centrally plan a complex market, there was a whole regulatory structure in place and it failed. Why do people have such a reverent faith in the ability of government? It amazes me that people can look at this colossal failure of the government to even regulate its own creations and then turn around and claim what’s needed is more regulation.
This wasn’t a failure of the free market; it was a market dominated by government. And it wasn’t a failure due to lack of government regulation; it was a failure of government regulation, mostly of itself. And, now that we are potentially in the hole for another 1,000,000,000,000 dollars, the “solution” on the table is more regulation? Attention government: PLEASE STOP “HELPING” US!
I uh … fixed that for you.
Good point, Bot. In past elections, candidates couldn’t say enough about promising “the American dream” of owning their own home to everyone in the country (particularly those who vote, of course). You don’t hear that much about that American dream stuff in the current race. I guess maybe it’s occurred to them that there is a reason why some people don’t own their own home.
Although, now I’d say it probably would have been cheaper just to buy them each a home than it will ultimately be to bail out the institutions who loaned them money they can’t pay back.
I think that relaxation of rules for banks and their debt-to-net capital ratio is perhaps the most instructive: http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
In the situation, the government allowed for five significant banks to possess far more debt than net capital, in violation of previously existing rules.
Here are the effects of deregulation in the energy markets: http://www.usatoday.com/money/industries/energy/2007-08-09-power-prices_n.htm
And deregulation in coal safety standards: http://dynamiclog.blogspot.com/2006/01/west-virginia-coal-mines-and.html
I didn’t mean for it to end up looking so ugly. Sorry about that.
Great column Radley.
There have been some great posts here in the “corporatism vs free market” debate, it’s just a shame the people who need to learn the difference (i.e. McCain, Obama, the House, Senate) don’t read this site.
I agree with most of the comments about the gov’t interventions in the market has caused this mess. But another underlying problem is that a lot of corporations are depending and encouraging this as well. It’s as much the fault of the “independent financial firms” as it the fault of the FED and other gov’t agencies. I have a hard time believing that a lot of corporations want a free market. They want protection most often. They are not true free market institutions in that respect.
A lot of issues have been addressed so far and I think it only shows just how complicated the financial mess is. We could continue this thread all day discussing corporate law, interventionist policy, corporate welfare, fiat monetary policy, and all the other aspects of the financial crisis and still only scratch the surface of the fundamental problems the American Economy. A lot of wrongs need to be corrected in the end.
So when capitalists ask for what they define as “pro-market” deregulation, we shouldn’t trust them? And we should blame the politicians who go along with their requests? So in other words, the capitalists are always protected, and the politicians are always guilty?
In a real Capitalist economy, businesses can fail because there is no one there to watch over them to make sure they act wisely. What we have is an economy where the entire population has turned their retirement savings over to these market operators thinking that government will keep their money relatively safe. They no longer have to worry about it. They get lazy. And when something bad happens, the first thing the government tries to do is assure them that they will fix it so that the loss they suffered can never happen again. They will make it all better.
Whenever there’s a stock market crash or a government starts printing tons of money, we all talk it up as if it’s never happened before in history. We’re taken totally by surprise as if we couldn’t possibly foreseen it coming. Actually, it happens a lot and there are almost always signs in advance.
There’s only one person interested in keeping your money safe and that’s you.
What would really suck is if the government puts us on the hook for the $700B bailout and then the financial markets go down in flames anyway….
Dave Krueger
Why do I get the awful feeling what you just said is going to come ture?
Heh, Sam, (#17) beat me on the NY Sun link, three of the five banks that were “deregulated” (Lehman, Bear Stearns, Merrill Lynch) have gone under and the other two (Goldman Sachs and Morgan Stanley) don’t look too hot at the moment. Also look at the The Gramm-Leach-Bliley Act (while sponsored by [ugh] Phil Gramm it got bipartisan support and Clinton’s sig). I’d also chalk a lot of this up to the greater number of “liar’s loans” and bad mortgages (interest only, ARM, reverse) as well but I don’t know if there was a change in regulations that lead to their increase or just a spike in good old-fashioned greed.
This free market ya’ll keep talking about.
Has it ever really existed on a large scale or is it just some kind of Utopian pipe dream?
Sam, it’s almost farcical to call what happened with energy utilities ‘deregulation’. And it’s certainly unfair to blame higher prices on deregulation, when we see prices of all energy rising. It may be true that regulation was artificially keeping the price of electricity and other energy down, but that’s not sustainable.
Take Maryland in particular. It was ‘deregulated’, where they gave the idea that multiple electricity generators could sell in the state. But at the same time, BGE negotiated a very long-term fuel contract, one that kept the prices the same (low) for years. Other companies could not have competed at the low price that BGE was providing, so they didn’t enter the market. Well, when did that contract run out? 2 years ago, as the price of energy was going up steeply. So there were HUGE increases in what people were going to pay. The stupid state even took out a LOAN to keep energy prices low, with people paying the new rates and interest on the loan after prices got to the new supply price.
It’s not ‘deregulation’ that caused those price increases. It was the end of a great supply contract, and the lack of competition, which was suppressed by other companies not being able to compete on price or service. But when the prices went up, to match reality, that was constantly demagogued as the fault of ‘deregulation’.
The people in the story linked are not being harmed by ‘deregulation’. They’re being harmed by the transition, and by a history of government intervention (get rid of fake price caps, and fake credits, and yes, people’s prices will go up). And yes it hurts, but transitions like that DO hurt. It’s one of the biggest problems with libertarian thought: how do we get there from here? People are gonna get hurt. But that doesn’t mean that the goal isn’t right or just. It just means that some people are getting a better deal from government intervention than others. This is never in dispute. It is just very obvious in cases like this.
It exists, but not out in the open because the government has outlawed it. It has to hide. It goes under an alias: The Black Market. It’s kind of like a parallel universe.
Recently there was a GREAT quote about those who would call our system (till now) capitalism. I’ll have to paraphrase.
“Showing someone who thinks we were a capitalist country a truly free market capitalist system is kind of like taking someone who thinks Playboy is hard core pornography and showing them anal fisting porn.”
ktc2, that was me right here.
Consumers want everything now, for free, and in perfect condition. Vendors want to sell one thing once, for an infinite value, later. Both parties look to the government to allow these “ideal” situations. The government distorts the market, removing market forces required to maintain real growth, creating a house of cards. Until we realize that is not the government’s role, our destiny is that of Rome’s.
“It’s one of the biggest problems with libertarian thought: how do we get there from here? People are gonna get hurt. But that doesn’t mean that the goal isn’t right or just.”
Highway, that might be the best description of libertarianism I’ve ever heard. That reasoning is why I can only consider myself partially libertarian and have issues sometimes with a libertarian solution to a problem … but if someone could just find a good way to ‘transition’ us, it sure would be nice.
Epis,
Ah yes, so it was. I shall attribute it to you when I use it from now on. Just couldnt remember where I’d heard it.
Honestly, calling it “debtism” would be more accurate.
As it is though, capitalism is what capitalists say it is via their actions. By that definition, “free-market capitalism” is not redundant, it’s contradictory — and always has been. Capitalists calling for themselves to suffer the full brunt of their failure would be like the hungry voting against dinner.
James D:
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
Kevin Hassett, author of “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market ” (Amazon: 17 copies, used and new, from $.60)?!?!? Kevin “Recessions are good for your health” Hassett?!?!
“David Mamet once told an interviewer that he got the inspiration for his 1984 Pulitzer Prize-winning play “Glengarry Glen Ross” from an account of a salesman’s fatal heart attack, caused by a recession “so vicious the competition was for jobs and sales, especially among older men.” However, for most Americans, the story is quite the opposite. Americans get healthier as the economy gets worse. Unemployment tends to increase during recessions, but economist Christopher J. Ruhm of the University of North Carolina at Greensboro has found that a temporary one percentage point increase in the unemployment rate leads to a 0.5 to 0.6 percent reduction in the mortality rate, or about 14,000 fewer deaths per year.
Why the health benefits? With more free time and less money on their hands, people tend to consume less tobacco, exercise more, prepare healthier meals and lose weight. In addition, they are much less likely to have car and other accidents, and to catch communicable and sometimes fatal diseases such as influenza. Among the top 10 causes of death in the United States, only suicide rates show a substantial unemployment-driven increase. Even deaths caused by heart disease fall substantially. “
Fannie and Freddie, in particular – NOT capitalism: Rep. Barney Frank (D., Mass) in 2003, “Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing.”
Corporations being given missions by, and therefore receiving benefits from, Congress is not capitalism. And Fannie/Freddie buying of all these mortgages is the foundation of this credit crisis; companies rushing to give F/F something to buy created this mess. That’s simplifying it, of course, but it definitely wasn’t capitalism.
It always bothers me to hear people equating a business failing with the free market “failing”. Business failure is an important part of the free market, it’s the price paid for poor business decisions and practices. When businesses do badly, they fail and go under to be replaced by businesses that are better run.
The part of this that is truly free market failure is that the government is interfering and not letting bad business fail. Plus, as pointed out above, Freddie and Fannie aren’t really a function of free markets anyway, but strange creations of bad government regulation that were doomed to failure anyway, like Social Security.
People are already getting hurt. The difference is only this: in a free market (barring the acts of criminals and the normal mortality and dangers inherent in life) it’s the right people that get hurt.
A good way to transition is to do it quickly.
It’s like you’re asking for a good way to take a bandage off slowly.
Capitalists calling for themselves to suffer the full brunt of their failure would be like the hungry voting against dinner</em<.
Nope. I do it every day and it’s nothing like that.