Doomsday Has Arrived, OR, Why Free Market Capitalism Doesn’t Work

I’m not an economist, and indeed my interest in the economy generally falls just above my interest in which “Hills” character is hooking up with which semi-celebrity. But this recent economic collapse has got me worried.

People on Wall Street.

People in front of the NYSE.

As I’m sure everyone is aware, the stock market fell 500 points today, the worst loss since the markets opened after 9/11. The reason for the fall is one that fascinates me because it takes place on such small scales but has enormous ramifications for the US and the rest of the word:

Step 1: Person wants to buy a house (or a car, or a boat, or whatever).

Step 2: Person can’t normally afford to buy the house they want to buy.

Step 3: Lending company offers them an awesome “adjustable rate” loan so that they can afford the house.

Step 4: Rates skyrocket, making payments impossible, and the house gets foreclosed.

This happened literally millions of times all across the US. It’s obviously bad for the homeowner because they lose their house (and the payments they already made), but, as we now see, when enough people cannot afford to pay back their loans, the lending company too runs out of money and goes bankrupt. In some cases, these lending companies were well aware that the homeowners could not afford their loans, and relied on the fact that they could get at least partial payment for the house, and then resell it on the market when the loan was defaulted. Other times, they gave uneducated homeowners great-sounding deals with rates that increased to absurdly impossible rates, up to 300% (interest, not increase!) in some cases. This is called predatory lending, and it went on for years all around the nation without anyone crying foul.
On a larger scale, these loans ended up seriously hurting the lending companies. Fannie Mae and Freddie Mac, two of the largest lending companies in the US, recently were bailed out by the federal government (and your taxpayer money) so they wouldn’t go bankrupt. But this isn’t a trend that could continue- we cannot keep paying for companies that screwed up, even if the economic consequences are dire. So when Lehman Brothers reached the edge, no one was there to keep it from destruction. The result is what Alan Greenspan declared “by far the worst economy I have ever seen.”

All of this could have been avoided with more regulation. Everyone is always terrified by government intervention, but it is cases like this that prove it is necessary. My general complaint with free market capitalism is that it overwhelmingly favors the rich- those who can afford to play the markets. But here, we can see that it didn’t even do that- everyone was screwed over by what John McCain called “Wall Street greed, irresponsibility, and corruption”. The problem is that Wall Street is SUPPOSED to be greedy. That’s the nature of profit-making. Wall Street has no need nor desire for a conscience. That is what government is FOR- looking out for those whom Wall Street will not. The government protects and serves the people. And in this case, as in many other cases, the government’s free market policies failed. And nothing in the policies of John McCain, a man who continues to insist that “the fundamentals of our economy are strong,” and whose top economic advisor insists that our problems are “just in our heads,” would change that.

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2 Comments

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2 responses to “Doomsday Has Arrived, OR, Why Free Market Capitalism Doesn’t Work

  1. JW

    Well said, sir. Well said and foretelling.

  2. Brock

    Thank you for more liberal tripe because God knows there hasn’t been enough of it.

    “All of this could have been avoided with more regulation.”

    Really? Is that what Barack Obama said? I mean, how could such a brilliant man be wrong?

    Oh wait, I know: regulation, or the lack thereof, did not cause this mess, my friend: your idiot fellow Americans did. They were not the one lending money to a borrower incapable or unwilling to pay the money back. That was their banker. He was not regulated because he didn’t have any risk. There were no regulations protecting Wall Street investment bankers from lending deadbeats money. The idea is that they are smart enough, sophisticated enough, to take care of themselves. (That turned out to be a bad idea, but it was the idea behind the lack of regulation.) Would more regulation have helped? Maybe we could have protected Wall Street investment bankers from themselves. Maybe with good regulations they would not have to give up their summer homes in the Hamptons. Maybe.

    In reality, regulatory policy has worked in the opposite direction. The government wanted more risky loans made, not fewer. For example, the Community Reinvestment Act pressured banks to make loans in poor neighborhoods. Banks (and I was a banker under the CRA) figured that making some bad loans was just another tax, a cost of doing business as a regulated company. In 1995, the Clinton administration revised the CRA to increase pressure on banks to make more loans to risky borrowers. In 1997, the first pool of subprime mortgages was securitized (by Bear Stearns!).

    The law regulating Fannie Mae and Freddie Mac was rewritten to reduce their capital requirements, meaning they would become riskier. At the height of the real estate boom, the United States set record home ownership rates. Politicians, including President Bush, bragged about their success at getting Americans into their own homes. As recently as August 2007, the President bragged that he was helping Americans get homes with lower down payments and higher loan limits. He also signed a law making it easier for homeowners to walk away from their mortgage obligations.

    I’m sorry, pal. That happy juice you’re drinking won’t make up for your ignorance of economics.

    “My general complaint with free market capitalism is that it overwhelmingly favors the rich- those who can afford to play the markets. But here, we can see that it didn’t even do that…”

    My general (okay, specific) complaint with this statement is that it is fundamentally wrong. The free market favors intelligence, not riches. If these Wall Street fatcats were SMART, this wouldn’t have happened. The fact that they are (or were) loaded makes no difference.

    “That is what government is FOR- looking out for those whom Wall Street will not. The government protects and serves the people.”

    More liberal nonsense. Believe it or not, these people that operate on Wall Street make this country what it is. You can’t simply blame them when times or bad without praising them when times are good. Liberals denounce Wall Street, despite the fact that they are the people who finance the businesses that produce the goods and services on which our lives depend. I know liberals like to spit in their mother’s faces, and what you are doing (spreading this tripe) is no different.

    “The problem is that Wall Street is SUPPOSED to be greedy. That’s the nature of profit-making. Wall Street has no need nor desire for a conscience.”

    I suppose that when you go to work (if you bloggers even have jobs), you are being “greedy” or selfish while you’re making the money which you use to buy food, clothing, and shelter. Heartless bastards those Wall Street investors, not sacrificing themselves to ensure that Joe Nothing in Missouri can feed his family of 15 children.

    “And in this case, as in many other cases, the government’s free market policies failed.”

    I know liberals don’t like to CITE examples to prove their case (probably because they don’t know economics from their right ass-cheek), but this is rather pathetic. First of all, if you think President Bush is committed to “free market” policies, guess again. President Bush is probably more of an economic liberal than you are. Secondly, as I already explained, your friend government is not some innocent bystander in this. It is government that interferred in the banking sector, it is government that made banks give loans to deadbeats, and it is government who is responsible.

    Now, I don’t want to point fingers but I do believe the Democrats are the majority in a Congress with an approval rating at a historic low. I don’t know what that says, but…

    “And nothing in the policies of John McCain, a man who continues to insist that “the fundamentals of our economy are strong,”

    I don’t support McC, but what he meant cannot possibly be understood by liberals. Liberals measure the success of an economy on whether Joe Nothing is feeding his family, depite the fact that he isn’t working, isn’t paying taxes, and spends all his money on prostitutes. By the “fundamentals of our economy”, McC means men and women producing goods and bringing them to market. If you knew anything about economics, you’d know that the only reason why this country isn’t yet considered to be in a recession yet is because the GDP has not fallen to a certain point. This is precisely because the fundamentals of our economy ARE strong, believe it or not.

    Go find a real job, blogger.

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