Capitalism Didn't Cause Credit Meltdown

By FRED SCHNAUBELT

The anti-capitalists are running amok pointing accusatory fingers. They claim the collapse of the housing and financial markets was due to cowboy capitalism, casino capitalism or greedy capitalism, etc. etc. etc.

People everywhere are crying out for Congress to investigate. Investigate! But who will investigate Congress, its malfeasance and lack of oversight? This is a Congress that desperately wanted people without jobs, credit histories or down payments to own homes. The Democrats pushed for it and looked the other way. Republicans went along to get along.

After all, why shouldn't unqualified people own homes? Isn't this what the Federal Reserve Bank of Boston advocated in its Guide to Equal Opportunity Lending -- a proactive implementation of the Community Reinvestment Act? The Boston Fed, in pursuit of "social justice," promoted a fraudulent study. It abdicated a central bank's fundamental obligation to promote and maintain stability in financial markets. The Boston Fed even reminded lenders that they were subject to multimillion-dollar fines (1 percent of net worth) for failure, in effect, to make "bad loans." (See: Anatomy of a Train Wreck -- Causes of the Mortgage Meltdown).

Fannie Mae and Freddie Mac (created by Congress), the Federal Reserve, the House Financial Services Committee, Barney Frank chairman and the Senate Banking and Housing Committee Chris Dodd chairman and a host of government agencies all played a part in the subprime loan debacle. None of them represent capitalism! Banks under capitalism do not voluntarily make loans to unqualified people with zero down when there's little chance of being repaid.

These watch dogs were too busy taking money from people who earn it and giving it to those who didn't to notice the tsunami. Congress's concern over the seriousness of the financial crisis can be measured by how it turned an initial 3-page bailout into a 450-page rescue plan larded with earmarks, pork and special privileges. Ostensibly a plan to rescue homeowners, many who lost nothing. Tens of thousands made no down payments, and for 3 years before resetting, their monthly payments were less than rent. They got an option cost free and now the government wants the taxpayers to bailout these reckless home speculators. What a country!

Can free enterprise survive?

What about the errant banks, insurance companies and businessmen who ran them? Adam Smith, father of capitalism warned, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." And in 1776 he further observed, "It is not (however) from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest," as if led by an invisible hand.

Many people are shocked upon learning that most businessmen, in fact even highly successful ones, cannot define America's predominant economic system. In fairness it must be pointed out that the business community is actually comprised of two types of people -- "political businessmen" and "free enterprise businessmen" (businesswomen). Political businesspeople seek to privatize profits and socialize losses, just as the big investment banks and Congress are doing today. True capitalists ask no favors or subsidies from government.

What defines capitalism?

Capitalism (free enterprise) is the system of social cooperation based upon voluntary exchange and division of labor, with productive resources privately owned. Capitalism is the societal structure that protects individual rights, including the right to own property. People are free to deal with one another or not, as their individual judgments, convictions and interests dictate. People deal with each other through reason, i.e. by means of discussion, persuasion and contractual agreements on a voluntary basis. For these reasons, capitalism is the only moral economic system ever devised by man. Since transactions are voluntary, they only are consummated when all sides feel they are better off -- in short -- everyone wins.

Under capitalism Ludwig Von Mises avers, government is not a necessary evil, as often heard. "Government is not evil, but a means, the only means available to make peaceful human coexistence possible." Government, when limited, is indispensable in maintaining a free market when it creates a fair field without favor, invokes a common justice, enforces voluntary contracts and defends the citizenry against predators, both foreign and domestic.

The opposite of capitalism is socialism. Socialism is the government ownership or control of the means of production and/or the government control of the results of production. Bear in mind that ownership and control amounts to the same thing. One owns what he controls and controls what he owns. Under socialism where transactions are dictated by government, one person's gain is another person's loss as the state attempts to insure equality and social justice -- taking from Peter to pay Paul. An obvious recent example would be the ensconcing of people in homes with subprime loans they cannot afford via the Community Reinvestment Act, Fannie Mae and now the bailout -- something capitalists never do except through charitable contributions.

If you who expect the average American businessman to put up a desperate fight in defense of the system, you're simply out of touch with reality. There's no reason to expect businessmen to be more committed to the system of economic freedom than anyone else. They're not even the primary beneficiaries of the system. It's consumers, the average everyday Mr. and Mrs. America who, far from being exploited under capitalism, are precisely the principal beneficiaries. Today's credit meltdown is not a failure of capitalism. It is an example of creeping socialism turning into galloping socialism through misguided government intervention in the markets.


Fred has some very well thought out articles.
B
I wish you... Intelligent Investing!!!