Thursday, October 16, 2008

Don't Blame Capitalism

Don't Blame Capitalism

This article was written by Peter Schiff
Here is a breakdown of the financial crisis that deals with the real perpetrators

Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.

Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.

Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.

Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.

Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.

And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.

Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.

The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.

The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."

Finally somebody telling the truth


At 4:06 PM, Anonymous Attila said...

He left out the bolstering of the Community Reinvesment Act that essentially forced banks to make bad loans while all these other things were also going on.

At 5:43 PM, Blogger Swift said...

All the things that you mention combined would not have caused a problem, at least at this time or even far into the future. The 1995 amendments to the Community Reinvestment Act guaranteed that there would be problems bedore too long by itself. Banks cannot be forced to lend hundreds of billions of dollars to people who cannot pay it back without the system collapsing. The Democrats bought victory in the '96 elections. The US and the rest of the world is just now finding out how much that victory is going to cost.

At 6:51 PM, Blogger Powell lucas said...

The article is completely accurate, but it misses one little point. It wasn't the government who told the people at AIG that they could sent their executives off to an exclusive California resort or on a hunting trip to England while they were getting a bail out from the American taxpayer.
The government set up the rules which created this mess (as governments always do) but they didn't hire the criminals who took advantage of the situation to rape the general public.

At 7:14 PM, Blogger Strong Conservative said...

Perhaps the biggest crime is that Chris Dodd, who received hundreds of thousands of dollars from Fannie and Freddie, is now "investigating" the causes of the crisis.

If that doesn't stink of corruption, I don't know what does. Dodd, Raines, Gorelick, Kerry, and Obama should be the ones being investigated.

The American Republic cannot continue down this path forever, and I fear tyranny hovers in the distant future if justice is not served. I don't say that lightly, but sadly.

At 6:06 PM, Blogger Joe Green said...

It does not take a rocket scientist to figure out what went wrong in the US economy. People who lose their jobs no longer have the money to pay for their mortgages.

The US economy lost millions of jobs in the US because of "free trade" and things like NAFTA and the FTA. Well paying industrial jobs were exported for the past couple of decades to "low wage" countries like China, Mexico and others. Capitalists that made these decisions did so for short term profits, and it worked as long as the money continued to flow. Finally the money ran out, and the whole thing collapsed like a real ponzi scheme that Alan Greenspan created with the Fed.

Now the capitalists want the world economy to bail out their bad investments by having governments mop up their "toxic assets". I say we should let them eat paper, let the currency that they created with the marginal banking system drop like a stone, and begin anew with fresh money issued directly to our citizens rather like what took place when the Soviet era money also was recognized as "worthless". All the stockmarket today, is approaching "worthless" status because of how MBAs and "neocon" managers infected with Objectivism hollowed out companies for short term gain that destroyed the ability of corporations to create new products and services.

Let capitalism die the same death that communism died.

Then we can start over with some more sensible rules that much more completely regulate the behavior of capitalists and bankers.

We also need strong medicine for CEOs that cannot keep their grubby hands off their corporations money. Anyone that pays himself more than $5 million a year, needs to spend a week in jail for each million that he exceeds the limit by.

We do not need anymore pontificating Bill Gates who create monopolies with inferior software. And we certainly need no more "advice" from clueless men like Alan Greenspan, even if he did write the "Capitalist Manifesto" for Ayn Rand's book - Atlas Shrugged, as scholars have recently suggested.

By promoting Ayn Rand and all her evil works, you are a participant in these "Satanic Works".

At 7:34 AM, Blogger mewmewmew said...

Perhaps the biggest crime is that Chris Dodd, who received hundreds of thousands of dollars from Fannie and Freddie, is now "investigating" the causes of the crisis.

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