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An anti-capitalism poster from 1911, published in the Industrial Worker, a socialist-anarchist newspaper
Fire, the wheel, the printing press...and the capitalist economic system.

When listing all the numerous inventions that improve our lives, one of the most important is usually ignored: the capitalist economic system.  With recent market turmoil causing some observers to claim capitalism itself has failed, it's apropos to take a closer look at the technology behind it.

Capitalism is an invention, no different than the transistor or the automobile. Like those others, it's comprised of many smaller inventions: the corporation, the bank, the stock market, commodities, securities, futures, etc. All together, they are a group of technologies invaluable for efficiently converting labor and resources into goods and services. Nothing we've devised has ever worked so well.  Most of our prosperity and standard of living derives from it.

Take Russia. By far the world's largest country and the richest in natural resources, it has a highly educated and hard-working populace. Yet when Putin took over, their GDP was barely larger than the tiny island of Hong Kong's, and despite quintupling in the last few years, it's still a tenth of the US economy. Or consider China which, after allowing a small bit of capitalist endeavor to penetrate its system, transformed into the world's fourth-largest economy nearly overnight.

One of the reasons so many people (including some misguided economists) have trouble accepting capitalism is its apparent simplicity. It just seems impossible that a system so seeming chaotic can outperform something intelligently planned by trained economists. But that assumption is itself incorrect. Where a planned economy is like a single-core processor, capitalism is a neural-net processor with millions of nodes. A socialist economy is run by a few government-appointed individuals. But in a free market, every time you buy or sell a product, you're adding a calculation to the system. Whether you buy a car, rent a movie, or get a haircut, you're contributing to the price and quantity of goods and services. Cut a trip to the mall because gas went up another 5 cents, and you've input data to force down the price. Go anyway and you've voted to raise the price further.

The system appears simple, but in reality it's an enormously complex, self-regulating, highly adaptive mechanism. And like most mechanisms, it works best when no one pours sand in the gears.

There's a strong theoretical basis that any intervention in a market reduces its efficiency. But still governments keep trying to tinker under the hood. Their shade-tree efforts invariably do great damage. Our current fiscal mess is a marvelous case in point. It's been cast as something too difficult for average people to understand, but it’s really very simple.

Consider.  A couple applies for a loan. They make $60K a year, and need to borrow $700K. Their credit history is poor or nonexistent. The house has doubled in value in recent years-- only because all the other homes around it have as well. And the only reason they can afford the payments is because interest rates are so low and they're being offered a balloon mortgage that, if rates climb or their house depreciates will surely bankrupt them.

Does it really take a rocket scientist to know how risky this is? And that a bank with a large portion of its portfolio in such loans is also in peril?

So why did so many banks take such risks for so long? Here's the key to the whole problem: government intervention. In a free market, interest rates will rise in step with rising risks. They didn't -- thanks to the Fed. And government-sponsored enterprises (GSEs) such as Fanny Mae, Freddy Mac, and the Federal Home Loan banks kept the music playing. With most of the risk ultimately guaranteed by the federal government, no one really cared.

The bailout will ultimately cost a trillion dollars. It's also left us an industry that's effectively been nationalized, and a precedent that will encourage future industries to take more inappropriate risks. But worst of all, we have people on both sides of the political aisle calling for still more government involvement. Capitalism hasn't failed here-- government intervention has.

What goes up must come down. When a market rises too fast, it must eventually decline. The longer one prevents that, the harder that fall will be. Very simple. It's a shame our politicians can't understand that.

But the technology itself is still sound. And if we just leave the machine alone, very quickly it will start working again.

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now, that was pathetic
By rvd2008 on 9/22/2008 1:26:11 AM , Rating: -1
I think masher is better crunching megawatts from nukes than talking capitalism. At least he is "fundamentally strong" in the former. Anybody agrees?

RE: now, that was pathetic
By Andy35W on 9/22/2008 2:10:53 AM , Rating: 2
I don't agree with some of the individual points but I think the general argument was valid and well written.

I'm not sure if the total cost will be $1 trillion, it might be nothing at all, but probably it will be more than $100billion to the taxpayer. So not only is the common tax payer suffering because or repossessions from the banks, who are trying to cut their losses after faulty selling pracitices, but now those same people have to bail out the banks as well with tax money. Does seem rather unfair on the havenots.

The financial institutions are completely merciless and without compassion unfortunately. All of them have statments about putting the customer first but when it comes to it that is a total lie and it is the $ that always comes first. That's why every few years they lose billions through greed and then repeat the process, ie junk bonds, Enron/Worldcomm and now subprime. Bailing them out this time will mean they will continue as in the past and once again in a few years time provide another problem.



PS Seems to be a bit of a race on at the moment between Bush and Chavez who can nationalise the most industries :)

RE: now, that was pathetic
By pmonti80 on 9/22/2008 3:25:45 AM , Rating: 2
I don't agree to everything with masher here. But a least the final chapters are so true that it's impossible to be against.
What kind of example will this "socialization of the economic losses" will set for the future? Next time there is some kind of economic bubble forming, the enterprises will go for it instead of trying to be cautious about that bubble. They will make a lot of money and they know that when the economic bubble will burst, if the problem is big enough, the government money (OUR MONEY) will solve all their problems. So it's better for them when the problem is very big, the help is assured, "We are too big too fail".

RE: now, that was pathetic
By pmonti80 on 9/22/2008 3:33:25 AM , Rating: 2
I don't agree to everything with masher here. But a least the final chapters are so true that it's impossible to be against.

I meant paragraph, not chapter.

RE: now, that was pathetic
By Hieyeck on 9/22/2008 10:07:01 AM , Rating: 1
masher is spot on. Why is it that I readily disagree with you?
I'm not sure if the total cost will be $1 trillion, it might be nothing at all, but probably it will be more than $100billion to the taxpayer.

Because someone doesn't pay attention to the news.,2933,425663,00.html
You can't put bias on $700 billion.

RE: now, that was pathetic
By Ringold on 9/22/2008 6:35:03 PM , Rating: 4
Okay, slow down, and consider what is happening with those 700 billion, because it has to do with accounting, not bias.

If a soldier shoots a government-bought-and-paid-for bullet in Iraq, that's just plain expense. Money out the door, one asset up in smoke, never to return. Welfare spending? SSI? Medicare? Money out the door, nothing gained on the government balance sheet.

This 700 billion on the other hand will be used to buy assets at possibly a depressed market value. They can either turn around later during a better point in the economic cycle and sell those assets at a potential profit, or depending on what they are exactly, hold them to maturity. For all 700 billion in assets to go up in smoke would require such an economic catastrophe that frankly this would be the least of our concerns.

I actually think the tax payer might end up making a profit out of all this years bail outs in the end. Hank Paulson has negotiated some great concessions. This is fundamentally different than all other government "spending."

RE: now, that was pathetic
By FITCamaro on 9/22/2008 7:52:31 AM , Rating: 3
I think your comment is worthless.

His article is well written and spot on. This financial crisis is largely due to government intervention. Democrats have pushed and pushed for lending institutions to give more loans to those who cannot afford them because they wanted to raise minority home ownership. Now the rest of us have to pay the consequences.

If we add Obama to the equation of this already spend happy Congress, things are going to get very bad indeed. Honestly I think regardless of what McCain says, if elected he's almost going to have to raise taxes because of these massive bailouts. Nothing is free. Obama we already know will raise taxes. And for more than just those who make over $250,000 a year.

RE: now, that was pathetic
By Master Kenobi on 9/22/2008 8:20:32 AM , Rating: 5
The problem is that the government is to blame here. The government oversight of the GSE's (OFHEO at the time) mandated that Freddie and Fannie needed to take in more loans to help with lower income families that could not normally afford it to promote "the american dream". Had this not happened, the GSE's would have continued to say no, and refuse to buy those loans. Historically, the GSE's do not dabble in the non-performing loan category or the sub-prime category either. You can thank congress for this entire mess though, since they ultimately hold the leash to OFHEO. /Rant off.

*Disclaimer: I work for one of the GSE's*

RE: now, that was pathetic
By FITCamaro on 9/22/2008 9:11:44 AM , Rating: 2
Yeah I agree with you.

RE: now, that was pathetic
By rtrski on 9/22/2008 9:19:50 AM , Rating: 2
And whose oversight was it that pushed that policy change? (I'm not asking an intentionally leading question - I don't know the answer or how to search for it quickly, so I'll use your response as a starting point to do so.)

Does sound like a bit of a smoking gun though. I find it hard to believe all the "balloon" ARM mortgages the news likes to screech about solely lead to the current fiasco. Certainly they played a part, but usually those were used by people (at least in my personal knowledge) who could've afforded something smaller to get something bigger, e.g. the greedy overreaching, not the low income who wouldve' been below the threshhold).

Something else I rarely see mentioned is new fair-value accounting standards suddenly coming into play in the last year or so meaning everyone had to come clean about what their assets and derivatives were worth "if they were to sell them today". The accounting standards of course didn't create the risk, just suddenly made it glaringly visible to everyone in the room.

RE: now, that was pathetic
By FITCamaro on 9/22/2008 12:43:57 PM , Rating: 2
Bush and others pushed for more oversight of Fannie and Freddie back in 2003 and the Democrats wouldn't have it. They were busy putting their people in there so they could get huge amounts of money.

Love it how Obama says the situation is deplorable when Jim Johnson who's made $90 million of it is on his f*cking staff and one of his key advisors.

RE: now, that was pathetic
By Ringold on 9/22/2008 9:43:05 PM , Rating: 2
And whose oversight was it that pushed that policy change?

If he's talking about what I think he's talking about, it was the mid-90s Clinton years. Thank ACORN, the Marxist housing group, among others.

I find it hard to believe all the "balloon" ARM mortgages the news likes to screech about solely lead to the current fiasco.

Everybody is really to blame; government, banks, consumers, and especially lazy consumers who didn't understand the products they were using and probably didn't care to -- or worse, knew what they were getting in to, but didn't even care.

The accounting standards of course didn't create the risk, just suddenly made it glaringly visible to everyone in the room.

I'm not 100% set on it, but I think mark-to-market isn't quite the great beacon of light you seem to imply. Marking asset values to market is great.. when there is a market! I suppose technically there is a market for these toxic things, but it's so distressed and frozen up that these accounting rules would destroy modern finance for the sake of ideological purity. In reality, most of these things that're going for pennies on the dollar will work out, but god.. 3 month T-bills selling at par? Long bonds traded below 4% today for, I think, the first time in history. Where is the logic in marking to market when the market has gone absolutely insane? Marking to model seems to me to only delay disaster for a firm that bets wrong, not avoid it entirely, while allowing a bank to ignore the vicissitudes of the market in the mean time.

RE: now, that was pathetic
By rtrski on 9/23/2008 9:53:15 AM , Rating: 2
Thanks for the reply. After posting my initial question, I've started to see an awful lot of the same sort of responses in editorials re: Fanny and the congressional (and lobbyist) 'push' to get into low-income mortgages, etc.

And I think I agree with you about the 'fair value' accounting. Makes sense when there is indeed a market, but when there isn't, it becomes undefined in a hurry: how do you assign a liquid value to an aggressively illiquid asset? Still, if they'd been doing so all along, then the fact of the assets being illiquid due to lack of demand would, one hopes, have raised red flags long before they ballooned to the point they did...?

What's really pissing me off now is this continual Obama mantra that "deregulation" lead to this, when the deregulation he's talking about allowed comingling of banking and investment offerings (from his purported economic arch-nemesis, Gramm) and near as I can see is what allowed some banks and investment houses to actually merge and avoid the bailout bandwagon. The ones that had diversified in such a manner were the healthiest remaining.

RE: now, that was pathetic
By sigilscience on 9/23/2008 10:31:45 AM , Rating: 2
What's really pissing me off now is this continual Obama mantra that "deregulation" lead to this
He sings that song because he knows his followers are the type that believe that government is the cure to all ills.

When they hear "more government is the solution", they don't even think. Their brains click off, and they experience a warm flood of emotion over their entire bodies. Sort of like lying in a fresh puddle of urine.

RE: now, that was pathetic
By pmonti80 on 9/22/2008 8:24:04 AM , Rating: 2
I think it all depends on how you see it. The problem is probably too much intervention, but the problem is hardly all democrat. Bush is the one that wasted so much money and he was there for the last 7.5 years. Democrats have been there for a year and a half, their capacity for destroying USA economy has been more limited.
Greenspan and company are much more at fault than either democrats or republicans. And Mr. Paulson's "socialitation of the economic losses" is hardly non-interventionist.

RE: now, that was pathetic
By pmonti80 on 9/22/2008 9:30:36 AM , Rating: 2
You should also take into account that from now on interventionism is here to stay for a looooong time. After your money (you USA citizens) saved the banks asses. Now in order to prevent that in the future governments will want much more interventionism.

RE: now, that was pathetic
By Ray 69 on 9/22/2008 10:09:33 AM , Rating: 2
Democrats are more responsible than you give them credit for. The origins of this mess can be traced back to the Bill Clinton era and he's a Democrat. However, the Republicans are hardly blameless for this mess either.

RE: now, that was pathetic
By TheDoc9 on 9/22/2008 11:32:37 AM , Rating: 2
Both parties are to blame, along with the Fed and other banks.


- The Gov. encourages banks to give high-risk loans while the Fed keeps interest rates low.

- After some time everything starts to implode, the Fed then creates money out of thin air and loans it to the Gov. at interest in order to 'save' the economy.

- The Gov. and other banks begin purchasing these failed banks and groups, the reasoning is to ensure stability.

Whats really happened here is a consolidation of banking into a more centralized system, directly controlled by fewer people - i.e. the large banks have just gotten larger by buying these failing banks and groups. They've done this with money loaned by the Fed and GIVEN to them by the government.

-The fed has insured that it will make even more money over the next 20 - 30 years, because of payments to interest on these loans paid for by tax payers on money it created with a pin stroke.

RE: now, that was pathetic
By theendofallsongs on 9/22/2008 12:00:03 PM , Rating: 1
Both parties are to blame
Not according to the facts.

Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally...

It is easy to identify the historical turning point that marked the beginning of the end. Back in 2005...for the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee...

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

There's a lot more. Very, VERY interesting reading.

RE: now, that was pathetic
By porkpie on 9/22/2008 3:57:16 PM , Rating: 2
Great link. That's a fantastic article. A lot I didn't know about the scandal. As usual, the media tries to hide all the really relevant details from us.

RE: now, that was pathetic
By FITCamaro on 9/22/2008 4:05:29 PM , Rating: 2
Indeed. But you'll never hear it even discussed on CNN, ABC, NBC, etc.

RE: now, that was pathetic
By Entropy42 on 9/23/2008 4:18:35 PM , Rating: 2
Not that this makes it false, but that article is written by McCain's financial advisor. Its not terribly surprising that he blames Democrats, Obama, and Clinton, and also finishes by claiming that McCain would have saved us if only they had listened.

RE: now, that was pathetic
By FITCamaro on 9/24/2008 9:20:29 AM , Rating: 2
Those things are on the record in history. Not believing it because the guy telling you is a McCain advisor doesn't make it untrue.

RE: now, that was pathetic
By masher2 on 9/24/2008 10:54:59 AM , Rating: 1
FYI, Jim Johnson, who headed Obama's VP search committee, is ex-CEO of Fannie Mae. Johnson joined the team at a point he was under fire for preferential loans to and by Fannie Mae.

It's also indisputable that McCain cosponsored the Federal Housing Enterprise Regulatory Reform Act of 2005, a bill that was ultimately blocked by Democratic vote.

RE: now, that was pathetic
By sigilscience on 9/24/2008 11:28:25 AM , Rating: 1
Top Recipients of Fannie Mae and Freddie Mac
Campaign Contributions, 1989-2008

1. Dodd, Christopher D-CT $133,900
2. Kerry, John D-MA $111,000
3. Obama, Barack S D-IL $105,849
4. Clinton, Hillary S D-NY $75,550
5. Kanjorski, Paul E D-PA $65,500
All five democrats, and four of them sit on committees which oversee Fannie Mae and Freddie Mac in some way (or should have overseen them I should say).

RE: now, that was pathetic
By FITCamaro on 9/24/2008 5:12:56 PM , Rating: 1
Funny how this isn't on the news huh? If McCain sat in Obama's place on that list, it'd be on every news channel 24/7. But the media doesn't want people to know.

Gotta maintain that "I'm just like you." image Obama tries to portray.

RE: now, that was pathetic
By FITCamaro on 9/24/2008 5:21:10 PM , Rating: 2
Yeah I know. Didn't know the exact name of the bill McCain cosponsored.

It's amazing how little people want to learn. It's easier to stick your fingers in your ears and shake your head back and forth going "LALALALALAALA IM NOT LISTENING LLALALAALALALA!"

I'll admit that I'm not perfect. That sometimes I have the wrong info. But I read all I can to try and educate myself. Not watch the news and listen to whatever crap is on. Take for instance the situation in Georgia. Georgia started it. I'll admit it. Russia wasn't entirely the bad guy there. I do think they overstepped their bounds on the response though considering South Ossetia (sp?) isn't even really their territory which Georgia moved troops into. And that Russia is quickly reverting back to the Soviet era.

RE: now, that was pathetic
By rvd2008 on 9/22/08, Rating: 0
RE: now, that was pathetic
By pmonti80 on 9/22/2008 10:39:17 AM , Rating: 4
Capitalism will probably regulate itself as the laws of free market dictates. The problem is we don't want to deal with that fact. Because that means that there will big ups but also big downs and the regulation of those downs may take a lot of time and be very hard. That is not acceptable by our current standards, so we use regulation and government intervention so that ups go up and downs don't go down.

RE: now, that was pathetic
By FITCamaro on 9/22/2008 1:02:44 PM , Rating: 3
Exactly. If capitalism were allowed to play out, people would lose their homes. As they should. But its bad for votes so they'll spend our money to save those people from their own mistakes.

RE: now, that was pathetic
By jgvandemeer on 9/22/2008 11:15:16 AM , Rating: 2
If capitalism is left unregulated, it will kill this country and then will parasite on its dead flesh
Ever notice that the more capitalism a country has, the better it seems to do?

The actual villain to blame in my opinion is ... capitalism. Greediness of corporations
So why didn't this happen years ago? Do you think corporations just suddenly got greedier?

Your rantings don't have much to do with the real world.

RE: now, that was pathetic
By pmonti80 on 9/22/2008 11:28:48 AM , Rating: 2
That is just an opinion. Some people think capitalism is a means to an end, just until we find something better. And to other people the free market an end in itself.

RE: now, that was pathetic
By jgvandemeer on 9/22/2008 11:41:43 AM , Rating: 2
His was just an opinion also.

But as a wise man once said: "the difference is MY opinion is right".

RE: now, that was pathetic
By rvd2008 on 9/22/08, Rating: 0
RE: now, that was pathetic
By Ringold on 9/22/2008 9:57:28 PM , Rating: 2
Not close?

.951 HDI, which heavily weights all your pet peeves, versus the highest score of .968, Iceland, a tiny island in the Atlantic largely untouched by the world. As the UN takes care to point out for you, we come darn close and have 1/3 more purchasing power than France. Figure 2 notes that, contrary to your post, we rank higher than the OECD average, and supporting the person's post you were responding to, the further down on Figure 2 you go the less capitalism you find.

Not that I expect you guys to work with data, but there it is.

Unregulated capitalism is like driving a car without any rules. No good.

Adam Smith would agree. The key is balance.

RE: now, that was pathetic
By Ringold on 9/22/2008 10:00:31 PM , Rating: 2
. BTW, the Great Depression was interrupted only by entering the planned economy when the war began.

Again, your lack of data is no surprise, but if you look at unemployment data from the era, you'll notice the "Great Depression" was in recovery before the war, but really only turned in to the Great Depression after exactly what you claim saved it started to be implemented; government control over the economy. I'm not aware of any economist or historian of any integrity that still believes otherwise, as history is pretty clear.

"So, I think the same thing of the music industry. They can't say that they're losing money, you know what I'm saying. They just probably don't have the same surplus that they had." -- Wu-Tang Clan founder RZA

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