09.21.08
Socialized Capitalism
No matter how you package it the present attempt by the Bush Administration and Congress to “rescue” the financial system comes down to being the implementation of socialized responsibility for the excesses of capitalism.
I am a capitalist in that I believe a well-regulated private market does a better job at providing us with cars and stereos than would a government entity. However, I also believe that there are things that we simply cannot leave completely to the market like national defense, education, medical care, and a wide-variety of public services that have to have standards and not profit as their chief motivator. We have always achieved these goals through a partnership between government and the private sector. As my Econ 101 professor used to say, “We have a mixed economy.”
Financial services are one of the things that the government should not be involved in, with the exception of regulating behavior so that something like what is going on now does not happen. Bailing people out after the fact will not promote good, responsible behavior in the future. It will only encourage future excess.
In listening to Secretary Paulson and others discuss what the government is now willing to do I see very little evidence that it is going to help anyone but those who made these financial mistakes in the first place. What happened to the belief that when a market is down those who are the winners replace the losers? If we do not allow this present crisis to play out on its own how will we know who were the really weak players and who were the strong? How will we know which companies to invest in once the mess has been cleaned up?
The claim that inaction will result in catastrophic failure also appears to me an exageration. According to the Boston Consulting Group, on September 4, 2008 world wealth stood at a staggering $110 trillion. Compare this with 2001 in which world wealth stood at about $27 trillion. Now if, as some suggest, there is about one to two trillion dollars in corrections that need to be made this would represent between 0.9 and 1.8 percent of total wealth being destroyed by letting this thing play out. Probably less since not all of these “junk” securities are worthless.
Yes, this is a lot of wealth and a correction of this magnitude would cause a lot of hardship at both the top and bottom of the wealth scale. However, it seems more prudent to me to have the government standing by with $700 billion in assistance to the demand side of the economy rather than the supply side of the economy. In fact, one must ask the question, “If all of this is truly related to the downturn in the housing market why not simply make sure people can pay their mortgages?”
If we accept the present wisdom that only about 3% to 5% of all mortgages are threatened with foreclosure it would cost less than two hundred billion dollars to pay these people’s mortgages for a year. Wouldn’t this stop the mortgage crisis and thus the slide in the financial markets just as quickly? Wouldn’t it also have the added benefit that people will not be scrambling for new housing and be forced into bankruptcy, which would only serve as another damper on economic activity. It would also give us plenty of time to get these people into mortgages they can afford.
Yes, this would be a more complicated way of solving this crisis. Yes, those at the top would probably end up losing a lot. However, the American taxpayer would be better off, and those who caused this mess in the first place would not be able to get jobs managing the local Arby’s once everything played out.
If we are to restore confidence to this market as quick as possible we will need transparency, and the first step toward that end is to know who was really responsible for screwing the pooch. We will never know that as long as these companies go unmolested by the market.
