Wednesday, September 24, 2008

Failure of Capitalism, or Failure of Government?

We here at GR Pundit have made it a general policy to comment and report on local issues only. However, the extent and scope of the current market crisis requires that we break that policy.

What is the origin of the current economic crisis? Is it capitalism run amok? No. It is government run amok. As with so many economic failures, this crisis has its roots in two government programs - Fannie Mae and Freddie Mac. We will say this categorically: this economic crisis would not be happening if those two entities had not been created by (and implicitly guaranteed by) the federal government. This is not a failure of capitalism, it is a failure of government. This is what happens when the government interferes with the market.

Read a New York Times article from 1999 to understand exactly what started this mess.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''


Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

A few more resources on this gigantic destructive government failure:

Just remember - it is government (the Federal Reserve) that created the Great Depression, it is government (FDR's "New Deal") that extended the Depression to last over 15 years, it is government that created this credit crisis. The government needs to get out of the way and allow the market to correct. Fannie Mae and Freedie Mac need to be liquidated and terminated. It is only when true market mechanisms are allowed to work will we come out of this crisis. "A bailout in every pot" will only prolong the pain.


  1. I beg to differ. The fault of the current crisis (as exemplified in the institutions in the private sector that have failed alongside Fannie and Freddie) lies primarily in something the free market loves (and lobbies for with millions of dollars); socialized capitalism.

    The NYT article from 1999 highlights the failure of our current electoral system - not the failure of government intervention in the economy: many people have long been warning of the problems with Fannie and Freddie - but action has not been taken against them by the government because of corporate influence over our government (which makes it far more responsive to the corporate will than the public will).

    To say that the current economic crisis would not have occurred without the creation of Fannie Mae and Freddie Mac is a red herring and doesn't vindicate capitalism from its repeated failures throughout history (especially given that Fannie and Freddie were created as a capitalist enterprise; the same abhorrent model libertarians and conservatives want to apply to other areas like Social Security and public education).

    Institutions like Fannie and Freddie only exist because capitalism has, on many occasions, failed to improve the quality of life of the average person (which also has the effect of stifling economic growth as a whole).

    Without government "interference" in the lending system - middle- and low-income residents would never be able to obtain loans to purchase their own homes and help improve their socioeconomic status through the many economic benefits that an investment like a home affords such people. Moreover, without government "interference," the system would be woefully unstable (subject to disastrous corrections) and monopolies/oligopolies would rule over the market - using their size to unfairly crush all competition, stifle innovation, and victimize consumers.

    The Great Depression was highly complex and caused by a variety of factors and to single out the Federal Reserve as the sole cause is intellectually dishonest. Even those (like Friedman) who blame the Federal Reserve don't cite its existence as the problem - rather they say that it should have been more active when the banks started to fail. So saying that the government needs to "get out of the way" doesn't work.

    In the current situation, like the Great Depression, the government needed to get IN the way of reckless and irresponsible speculation and bring transparency to opaque corporate practices.

  2. Nice comment, Rollnggrnade.

    Crickets from the Ayn Randians.