This is a failure of unregulated markets. That phrase seems to have been adopted by every politician, analyst and most economists. The very idea that our current economic situation is a "failure" of free market capitalism is absolutely without any merit. The abandonment of free market principles is what got us into this mess in the first place. The economy should have gone through a recession back in the late 1990's during the dot-com bubble burst. This was the time when everyone was buying dot-com stocks and many put their entire savings into internet stocks. The market corrected because sadly there is no need for 1,000 Amazon.com sites. I will place a link at the end of this article for readers who are interested in reading and learning about the dot-com. I want to encourage thought and shamelessly promote the Ludwig von Mises Institute; so forgive me for not spoon feeding every detail myself. I will now, very basically explain our current financial crisis according to the Austrian business cycle theory and monetary theory. However I STRONGLY ENCOURAGE those interested to go to www.mises.org to learn more from people who are much smarter than myself.
"Artificially low interest rates caused by government intervention into the market will lead to malinvestment. As this malinvestment is discovered markets; left unhampered by government interference; will naturally correct and be able to separate good investments from malinvestment." There it is folks. That's your answer. Ludwig von Mises wrote this in his Magnum Opus "Human Action" back in the 1940's. Henrzy Hazlitt, Frederick von Hayek and many others have stated something similar to this even before Mises did. This is the cause of all of our problems. Here is the basic rundown. The federal government; in all their infinite wisdom; created Fannie and Freddie after the stock market collapse of 1929. The crash of 1929 was also a result of an abondement of free market principles. Hoover and his intervention into the credit and monetary market did not allow the markets to correct and paved the way for arguably the most active and I would argue one of the top 3 worst presidents this country has ever had, FDR. I will write more about the Great Depression and FDR's absolutely horrific policies in a later entry.
Fannie and Freddie were, as Henry Paulson put it, in the "business of making the American dream possible." However the price tag for making the American dream possible was placed on the American taxpayer. Here is a simple fact of life, not everyone can afford a 500,000$ house. Fannie and Freddie together own over 80% of the country's mortgages. They are GSE's; Government Sponsored Enterprises. many investors had more confidence in buying mortgages from Fannie and Freddie because they were "guaranteed" not to fail because they were backed by the government. It is the same principle of having confidence in a bank that is insured by the FDIC. As stated earlier the dot-com bubble of the late 1990's has a lot to do with our current situation. After the bubble burst, we should have had a recession back then. However the then president, Bill Clinton and the then chairman of the Federal Reserve, Alan Greenspan wanted to avoid the recession. So Greenspan decided to drastically lower the interest rates and spured the rampant investment into the housing market. The artificially low interest rates convinced many people who were renting at the time that they could afford to buy a house; usually a very big expensive house. The banks, backed by the loans and mortgages of Frannie and Freddie were encouraged to make very risky loans to people who had a very shaky credit history. These mortgages were then resold on the stock market. People were basically betting millions that these loans would be repaid; looks like they were wrong. The problem now is that there are too many houses and the malinvestments are not being allowed to be purged from the system. People bought houses they could not afford and those who have lower incomes are being evicted. All the while those on wall street have received 700$billion courtesy of the American tax payer. So who really benefited from these loans? Without these government interventions these people would never had bought these houses they couldn't afford and the tax payers wouldn't be paying for it. Yea I don't know about you but I really hope that these same people decide to "help" us out some more. I think they have done quite enough.
Now many people blame the selling of these mortgages in an unregulated market as the main culprit, implying that stricter regulations are the answer. Those who committed fraud and stole people's savings should be prosecuted and brought to justice; there is no doubt about that. However without government intervention by the Federal Reserve, government monetary policy and the risky loaning encouraged by Fannie and Freddie this situation would never have happened. Fannie and Freddie did not respond to market forces and were backed by the monopoly that is government power. The prospect of being held responsible for their actions was never there. They felt they could never fail and they acted as such. Institutions without the backing of government safety nets have to act with their long term self interest in mind. This, as people in Washington are unaware of, is called BEING HELD RESPONSIBLE FOR YOUR ACTIONS!! If these institutions fail, it is only themselves and their investors that are at risk. This fact keeps most private institutions always vigilant and always monitoring themselves and being very frugal and cautious with how they spend their money. A lesson those in Washington should be obliged to learn. Those businesses and institutions that do make bad decisions or committ fraud are then brought to justice by either market forces, or held accountability by the justice system. The free market is its own safeguard and regulator.
Government caused this problem and more government spending will not help it. This 700$ billion bailout will do only a few things. First it will most certainly cost more than 700$ billion the government is notorious for not being able to calculate costs. This money will also go right back to the politicians. When those who passed this bailout run for re-election who do you think is going to finance their campaigns? I'm putting my money on a lot of the bailout money going back to their campaigns as a great big "thank you" for baling their ass's out. This will also destroy our currency. Despite what many in the mainstream media and economic world say inflation is NOT rising prices. Inflation is simply an increase in the money supply. What this does is make the purchasing power of our dollars go down. Which in turn is why the FDIC is so counterproductive. Many people may feel confident that their money is "insured" by the FDIC. This may help prevent bank runs and gave a so called confidence in the banks but in the end it can only hurt people. Many leave their money in these banks while the government prints more and more of it. Both Obama ad McCain want to increase spending on domestic programs and abroad. This coupled with the absolute bullshit stimulus checks and the 700$billions bailout is going to rob people of their money's value. By the time people decide to withdraw their money from the banks they will have seen their savings destroyed and their purchasing power is in shambles. This is exactly what happened in post WWI Germany. If it was not for the FDIC people would have taken out their money sooner and could have invested it. The FDIC provides people with a false sense of security and allows the government to rob them; all the while pretending to protect their savings.
Free market banking, a gold standard and a limited government are the answers to our problems. Many in government to want to help, but they don't seem to understand that by intervening they are causing more harm to those that they are attempting to help. The free market is the la salvation we have. The market of ideas and commerce; and both of these must be left free and unhampered if we ever hope to overcome the tough times ahead and want to reign in our government. It is time for the market to be allowed to work and the ideological battle must be won. I consider it my job to spread the ideological and moral superiority of free market capitalism through advocating and writing. This battle for the heart of the American free enterprise spirit must be regained and capitalism needs to stop being the whipping boy of those who want to expand the size and power of government over our lives for their own gains.
In Liberty,
Mr. Jefferson
Here is the link for the dot-com story.
http://mises.org/story/736
www.mises.org
Check out Murray Rothbard's book "America's Great Depression" for a very detailed analysis of the reasons for the prolonged causes of the depression.
http://www.mises.org/store/Americas-Great-Depression-P63C18.aspx?AFID=14
If one rejects laissez faire capitalism on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action.
-Ludwig von Mises
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