Capitalism continues to be blamed for the current global financial crisis.
This is not so. The crisis was caused by government failure and the continuing gloom and doom is being prolonged by unprecedented political bungling (to borrow the words of Leonard Reed from his article Great Myths of the Great Depression written in August 1998). The reason why ‘capitalism’ gets blamed is because the guilty parties, politicians and officials in charge of fiscal, monetary and regulatory policies, work very hard to create and maintain them.
What kicked off the problem was the US government interfering in the functioning of the financial market. Pressure was put on banks to make high-risk loans to homebuyers and businesses that, under normal circumstances, they would never have considered credit worthy. Congress encouraged them by promising that the government sponsored enterprises Freddie Mac and Fannie Mae would purchase the ‘subprime’ loans and save the banks from any non-market risks incurred. To ‘securitise’ these loans, Freddie Mac and Fannie Mae packaged a large number of them and sold them into the financial markets, both local and international. But then Freddie Mac and Fannie Mae, which started life as government owned enterprises, were ostensibly privatised and lenders still believed a federal credit guarantee existed, albeit an implicit one (2004 paper on the US postal service).
The financial mess created through Fannie Mae and Freddie Mac in the name of “affordable housing” has had a devastating effect on economies worldwide. Instead of a Congressional hearing being held to identify the real culprits, blame keeps being laid at the door of capitalism - the so-called ‘greedy’ bankers and investors who put their trust in the politicians who created and protected the system.
What keeps our current depression going is the accumulation of paper money ‘backed by nothing’. Instead of leaving matters to the market and allowing unsound corporations and institutions to be ‘cleaned out’ through liquidation and bankruptcy, all governments, the issuers of all currencies, have debased their currencies, printing excessive quantities of money and manipulating interest rates in an effort to stabilise the current situation. The US dollar, for instance, has lost 87 per cent of its purchasing power since 1961 as measured by the CPI, a rate of debasement more rapid than the rate at which the silver denarius was debased by successive Roman Emperors.
Governments and sundry supporters try to pin the blame on capitalism for the failure of their socialist inspired policies such as the sub-prime loans instead of on their own interventions. Those who promote such policies, generally claim they do so in the interests of the poor, yet themselves take for granted and enjoy all the comforts and benefits that capitalism, free enterprise and individual freedom offer to the more fortunate. One outcry is that governments need to act to ward off the fall of money wages and for public resources to be used either to bolster up undertakings that would otherwise succumb to the crisis, or to give artificial stimulus to economic life by artificial public work schemes. But we need to acknowledge Professor Friedrich Hayek, 1974 Nobel laureate, when he says that “the cause of waves of unemployment is not ‘capitalism’ but governments denying enterprises the right to produce good money.”
Citizens the world over therefore should strenuously question and resist all attempts by governments to increase their grip on financial markets through legislation and bureaucratic regulation which purport to ‘protect’ the people from the supposed ‘failures’ of private markets. After all, ‘Socialists have been and remain forthright in their desire to extend the range of politicised control over the lives and liberties of persons’ (James Buchanan).
When we hear of government projects destined to help the less fortunate, we must keep in mind that a government has no other source of funding other than taxes on its citizens. Governments consume resources while entrepreneurs grow the economy by using funds for investment and development. All government projects are paid for by the taxpayers, that is, the private sector. The private sector, therefore, pays 100% for all such projects. As taxpayers and members of the private sector, we have to ask whether, without the government as middleman, the private sector could deliver a better, more efficient model at less cost to the people.
It is the wealth of countries, companies and individuals that is affected in a financial crisis. Wealth is represented by money. And money, in all countries, is under government control. When rapid increases in the supply of money and credit outstrip increases in the supply of goods and services, the inevitable results are rapid general price and wage increases. The severity of the subsequent corrections is dependent on the magnitude of the prior manipulation. Unless governments everywhere stop persisting in abusing their monopoly to print money and to break economic laws, they will lead us along a long and bumpy path which may well take us into an even more dangerous and perverse financial crisis.
Authors Joan Evans is the administrative manager and Eustace Davie a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the authors. The views expressed in the article are the authors' and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 5 July 2012