Rob Chrisman: Tempering the attacks on capitalism
If you’ve been listening, you know that virtually all the Democratic presidential candidates have expressed that capitalism is either severely flawed or else should by supplanted to varying degrees by socialism. Assuming you might vote for such a candidate, please consider the following.
Attacks on, and criticism of, capitalism (or as I prefer, the unhampered free market economy) have been directed against a system that does not really exist — what we have is a mixed economy, a mixture of some minimal freedom alloyed with abundant controls. We recognize and provide lukewarm support for private property, but only because private enterprise is the goose that lays the golden egg, i.e. provides the funds for the social programs and the expansion of the regulatory state which the critics desire.
One of the primary examples of capitalism’s supposed failures that Progressives cite is the Great Recession of 2008; it was, they say, caused by capitalistic greed and the financial community taking advantage of insufficient regulation or deregulation. Actually, there were two main causes of this extreme downturn in the economy, operating in tandem, and they have nothing to do with either of the foregoing.
First, following the dot-com recession of 2000-2001, our glorious central bank brought the effective interest rate down from 3-4% to nearly zero and held it there for an extended period. It is axiomatic to mainstream economists at the Fed that continuous stimulus was needed.
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Second, the government passed legislation and promulgated banking regulations that were designed to increase the rate of home ownership by lower income families.
It was the combination of these two government interventions that gave rise to what is called a housing “bubble,” an increase in economic activity that was not justified by the facts on the ground, i.e. the demand for housing was artificially created and would not otherwise have occurred. When the bubble burst, the Great Recession was the result. Not greed. Not the big bad bankers.
Mainstream economists note that business activity varies over time and assumes the character of a “boom” followed by a “bust” but other than Keynes’ famous explanation (“animal spirits”), this is considered an inevitable phenomenon that is not well understood. This is nonsense.
There is a theory of the business cycle that adequately accounts for all of its characteristics. It relies upon an understanding of interest rates and what they represent. In a free market, where government does not manipulate interest rates, the cost to rent money (interest) is charged based on the amount of money in circulation. When there is more money around, rates go down, and vice versa. A propensity to save increases the aggregate cash available, while a propensity to consume decreases it. Saving up suggests that there will be stronger future needs by consumers, leading to a rational need for entrepreneurs to gear up for future production. Savers deposit in banks which then have excess to lend at low rates — great for business to start new, viable projects. But, when interest rates are artificially set low and not as a consequence of peoples’ time preferences, e.g. savings vs. consumption, an incorrect signal is sent that causes widespread malinvestment. Space does not permit elaboration, so please Google “Business Cycle Theory Tom Woods” and watch an excellent 8-minute YouTube presentation.
The mandated low interest rates exacerbated the creation of a housing bubble that dwarfed any previous such boom and this was exclusively the fault of long term government housing polices. This included entities like HUD, FHA, and the Government Sponsored Enterprises (GSEs) known as Fannie Mae and Freddie Mac.
As early as 1977, the Community Reinvestment Act was created to promote home ownership increases for lower income borrowers. Then, in 1990, the act was beefed up to give regulators powers to compel banks and S&Ls to offer mortgages with new, lower underwriting standards that all but eliminated the traditional 20-40% down payment and the need for income documentation.
By 2008, the majority of all mortgages created were of this new, non-traditional (sub-prime) variety. These high-risk mortgages were then pooled and sold as securities which suffered huge losses in value when the housing bubble burst.
Read about this in great detail in a book entitled “Hidden in Plain Sight” by Peter J. Wallison. The research for this book is impeccable.
So … don’t uncritically accept the criticisms of the presidential wannabes — listen to Tom Woods, read Peter J. Wallison as I suggest, and then make up your own mind as to who is being truthful.
Rob Chrisman lives in Nevada City.
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