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.
quote: 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.
quote: 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.
quote: And whose oversight was it that pushed that policy change?
quote: I find it hard to believe all the "balloon" ARM mortgages the news likes to screech about solely lead to the current fiasco.
quote: The accounting standards of course didn't create the risk, just suddenly made it glaringly visible to everyone in the room.
quote: What's really pissing me off now is this continual Obama mantra that "deregulation" lead to this
quote: Both parties are to blame
quote: 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.
quote: Top Recipients of Fannie Mae and Freddie MacCampaign Contributions, 1989-2008 1. Dodd, Christopher D-CT $133,9002. Kerry, John D-MA $111,0003. Obama, Barack S D-IL $105,8494. Clinton, Hillary S D-NY $75,5505. Kanjorski, Paul E D-PA $65,500
quote: If capitalism is left unregulated, it will kill this country and then will parasite on its dead flesh
quote: The actual villain to blame in my opinion is ... capitalism. Greediness of corporations
quote: Ever notice that the more capitalism a country has, the better it seems to do?
quote: So why didn't this happen years ago? Do you think corporations just suddenly got greedier?
quote: Unregulated capitalism is like driving a car without any rules. No good.
quote: . BTW, the Great Depression was interrupted only by entering the planned economy when the war began.