Over the past couple of months, an unprecedented series of dramatic interventions by the U.S. Treasury and Federal Reserve—not to mention ongoing bank seizures by the FDIC—have seen government’s role in the domestic economy take on a scope and size almost inconceivable as little as six months ago. Many pundits have written glumly about the shift in the nation’s economic center of gravity from New York to Washington, D.C. and its implications for the future. Many political commentators, particularly on the left—which after Tuesday’s election appears ascendant—would like to blame the unfettered, laissez- faire capitalism of the Bush administration for creating the problems that now bedevil the global economy.
Before rational people can formulate a solution to a problem, it might be a good idea to correctly assess what caused said problem and to do so in a manner which—to the extent possible—removes political viewpoints from the analytical process. Failure to do so will only ensure that a correct diagnosis will not be obtained and therefore the treatment intended to tackle the problem will more than likely fail or—perhaps—make the problem worse.
As the Obama administration—with buttressed margins in both houses of Congress—moves to address the problems which confront us, there will be great temptation to foist the blame for this mess on George W. Bush and the Republicans. This was certainly the standard Democrat party line in the election. In pursuing this argument, the standard criticism is that Republican infatuation with laissez-faire capitalism enabled an under-regulated and greed besotted finance sector to inflate a monstrous credit bubble which has now burst with calamitous consequences.
Were it only that simple. It is quite unfair to blame laissez-faire capitalism for this mess. Truthfully, such an economic system, if it ever existed in America, has long been a thing of the past. While government regulation in this country may pale in comparison to Europe, it is certainly there and ponderous. Whether we are talking minimum wage laws, the Community Reinvestment Act, Sarbanes-Oxley (which was enacted during Bush’s first term in office), fair lending laws, etc., there are federal, state and local laws and regulations effecting every business that are hardly inconsequential.
Fannie Mae (FNM) and Freddie Mac (FRE), so much at the heart of the housing disaster, were “government sponsored enterprises” with an almost unprecedented ability to impact the secondary mortgage market in a way that would horrify a true capitalist. Of course you cannot call either Fannie or Freddie “government sponsored” now as the government essentially owns them, lock, stock and barrel.
Our whole legislative system of government and the lobbyists that flood it with campaign donations, meals, entertainment, etc. begets a government that cannot—even if it wanted to—keep its nose out of economic affairs. We live in a quasi-capitalistic society, with the degree of socialistic intervention extent in the system on a sliding scale that moves left and right depending on the shifting whims of the electorate. (That the vast majority of the electorate do not understand this reality is certainly worrisome in its own right, but I digress.)
By all means, hard times require hard choices. President-Elect Obama, in his eloquent acceptance speech, described a long and steep road ahead. This was not hyperbole. However, it might be a good idea to at least correctly diagnose what has happened before attempting to treat the disease. Unbridled capitalism did not create the problems we now face. I say this because, unbridled capitalism has never been tried—at least not in modern history—in the U.S. And if unbridled American capitalism is the culprit for the world’s problems right now, how would you explain the massive problems roiling Europe? Most reasonable people would agree that the European economic model—particularly excluding Britain—is far more statist, if not socialist, than capitalist. Yet from Germany (often held up as a shining example of an economic model) to Spain, Scandinavia to the Mediterranean, Europe, with its heavy regulation and massively intrusive government bureaucracy (the EU) is currently suffering worse than we are and with fewer prospects for rapid recovery. European banks, we come to find, were much more heavily leveraged than our investment banks. Did hyper-regulation prevent that?
The road ahead is long and steep and our leaders will need to “think outside the box” in order to get things turned around. In such a dire situation, one would hope that unconventional and here-to-fore untried methods might be implemented. I would propose that we consider trying something that we really have not tried before to overcome these hurdles: a little more laissez-faire capitalism.