Sunday, September 28, 2008

End of Capitalism?


In case you haven't heard, there are lots of people in the U.S and abroad who count the recent economic problems as strong evidence that capitalism does not work. They claim it has created a greedy few who have now taken advantage of the small people. They claim a lack of regulation is entirely to blame. The failure of this capitalist strategy led to a systemic collapse, and now the government is "bailing out" those criminal, greedy people on top, and not doing anything to help the poor people on the bottom.

Related sentiments are very common in the media. For example, after President Bush's address to the nation about the economic bail-out, the local news people here interviewed many people at risk of losing their homes. Their universal response to the speech, emphasized by the interviewers, was that the bail-out protected the rich, but allowed the working class to lose their homes all the same. They all thought the billions should go to pay the mortgages on which they are about to default.

This message of the victimization of the poor was also articulated by both Obama and McCain in the recent debate. McCain said "And Main Street is paying a penalty for the excesses and greed in Washington, D.C., and on Wall Street."

Regarding these thoughts, let's look at a couple of interesting articles from the end of the Clinton era. Please skim this:
and this:

I especially like this paragraph, in case you missed it:

"In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected."

Now tell me, the mortgage crisis that initiated this entire economic downturn, was it the result of unregulated capitalism, or did government intrusion in the free market disrupt the balance of normal risk taking behavior?

Now, I know I am going to sound cruel, but think about this. In America, we have enjoyed, for the past 12 years, the ability to live in incredible houses. Granite counter tops were only in mansions a decade ago. Now, they are almost standard. American have felt entitled to live in whatever the neighbors live in. The mortgage people said we qualified for these homes, so we must be able to afford them, right? Isn't this where the greed lies?

McCain said the average American, or main street, is paying the price for the greed of Wall Street and Washington D.C. I think Wall Street and Washington D.C. are paying the price for the greed of the average American.

Please share your thoughts. The purpose of this post is discussion and debate.


mim said...

Well stated. I agree that greed of Americans is a huge problem. Beyond buying homes that were too expensive, lots of people who could afford to continue making their mortgage payments walked away from their mortgages to cut their losses when house prices plummeted. I know some people who have had enough money saved to pay cash for a house at the the current low prices, let the banks foreclose their homes with mortgages that they had lost equity in, and now own homes with no mortgage.

Carroll said...

I have enjoyed this blogging, I now have greater clarity on the causes of this terrible problem. Does anyone know the solution?

laura said...

I agree Tom. Well stated. I think it's like the scriptures, really. A society cannot get away with this kind of extravagance unscathed. Like mom, I want to know how you feel about the proposed solutions.