Sunday, September 21, 2008

It is NOT a Failure of Capitalism! -- posted by Daddy

The family has had some particularly great conversations over the past week. Although the children are very aware of the political environment, and how current political debates fit in the stream of history, the recent events in the financial markets prompted some milestone discussions. And these conversations served to underscore our conviction that as a country we are moving further and further away from the moorings of the Constitution, and as we do, we will lose our freedoms, and continue further down what Hayek called the road to serfdom.

Mandy asked me to explain the current situation to the kids. I don’t pretend to be an economist, nor am I versed in the specifics of CDOs, CLOs, credit default swaps and such. But you don’t have to understand these to understand the root of the problem.

All you have to do is ask yourself the following: Exactly what were we thinking having publicly traded companies – Fannie Mae and Freddie Mac, whose debt carried the implicit guaranty of the Federal government? Think about it….for- profit companies with the backing of the government.

However laudable the intent behind these innocuous sounding government sponsored entities (GSEs), they were, in fact, massive government intrusions into what is becoming an increasingly less free enterprise system.

This has not been a failure of capitalism! It’s a predictable result of government intrusion in the economy.

The seeds of the current situation were planted when these companies were created. But they lay dormant for the most part, although they became huge contributors to members of Congress, especially those members who were responsible for overseeing them.

But then the seeds began to sprout. The Clinton Administration, wanting to boost home ownership among low income families, used its influence to substantially loosen the underwriting standards previously required by Fannie and Freddie. And all of a sudden, the sub-prime mortgage market began.

And then the fertilizer was added. In response to the recession that was forming as the Bush administration took office, and that became full blown after the September 11 terrorist attack, the Federal Reserve substantially lowered interest rates. This monetary policy, combined with the fiscal policy of the Bush tax cuts, helped bring the economy out of recession. But then, after economic growth had resumed, the rates remained low. This served to leave tremendous liquidity into the economy.

With all of this liquidity in the market, the banking system, both investment and commercial banks, sought opportunities to put this liquidity to work. This created even more demand for the sub-prime mortgages. The cash flows from these unstable mortgages then became the principle ingredient for the exotic cocktails of securities created by Wall Street to boost there own bottom line.

With the combination of lower mortgage underwriting standard promulgated by Fannie and Freddie, virtually free money created by the Fed, and natural profit motive of Wall Street, the perfect storm was created.

Now we are faced with the prospect of even more government intrusion in the market in an attempt to solve the problem that government intrusion created.

Anytime the government gets involved in the free market economy, it ends up failing miserably. It’s a fact. All you have to do is ask yourself what government program works the way it was supposed to. The answer is there isn’t one.

This came up in a subsequent conversation with John, when he told me about how his friend in England, Mrs. Sarah, commented that their gasoline had come down to $9 per gallon. John asked me why their gas was so much more expensive. I told him I don’t know the exact details, but that the governments in Europe have much higher taxes on gasoline.

This led to a brief discussion about socialism. At the outset, I told John that any man made economic system is inherently flawed, and certainly not impressive to God.

But having said that, the free market economy is the one that has proven itself to be the system that produces the most prosperity for the most people, in contrast to socialism, which has historically promised much, and produced very little.

And despite the abundance of evidence about the failures of socialism, there are those in this country that continue to listen to this siren song of collectivism. Take the current debate about health care in this country. The family discussed the socialized medical systems in Europe, which promise health care for everyone. What the promoters of socialized medicine forget to mention is that under these systems health care is rationed. As a consequence, people can’t get treatment when it’s needed, but instead have to wait, often with a dire result.

As they say in England, the proof is in the pudding. When people in countries with these much ballyhooed socialized medical systems need treatment, they come to the United States.

And now, there are those in this country that want to destroy the finest medical system in the world, and create a socialized system here.

The family has had some great conversations. And although we pray that we will have leaders who abide by what’s left of the Constitution and understand that the size of government is inversely proportional to the amount of freedom of its citizens, we also know that the trend-line of history will continue to be negative until Jesus comes back.

And so, here we are. The road to serfdom has become a slippery slope, and threatens to sweep away our shining city on a hill.

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