Is it capitalism?
I have heard many opinions expressed about the massive economic bailout of the market in the USA, but perhaps the most ridiculous is that it amounts to "socialism." This has been expressed by right wing conservatives who oppose any Government intervention in the "free" market and left wing socialists who think that it proves that capitalism doesn't work!
First of all, regulation of the market is a highlight of modern capitalism, since it has been recognized, especially since the great market crash of 1929, that unfettered markets are inherently unstable. In fact, it was the great fluctuations in the markets leading to such crashes that justified Karl Marx and his followers to propose that socialism was the cure. However, 70 years of communism in the USSR and many years of socialist governments in Europe have lead to the conclusion that socialism itself does not work.
It was the famous English economist John Maynard Keynes (1883-1946) whose ideas, called Keynsian economics, had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern macroeconomics. Therefore, although fiscal conservatives, such as Pres. Bush, try to avoid such interventions, nevertheless it is a central tenet of modern capitalism that market regulation is both necessary and good.
What has happened in the current crisis, perhaps the worst since the 1929 crash, is that over-provision of liquidity, i.e. too much credit, has enabled Banks and credit institutions, such as mortgage providers, to issue too much unsecured credit (i.e. without sufficient collateral). Both Republicans and Democrats in the USA were responsible for the development of this situation, Republicans by removing some of the prior regulations that had controlled the market and Democrats for demanding more credit for poorer people to enable them to buy houses, etc., when they really did not have the income to afford it. Thus the Democrats established the organization called ACORN (Association of Community Organizations for Reform Now) that dispensed mortgages and loans to poorer people, but also gave loans and funds to Democratic candidates for office, a clear case of conflict of interest! Also, such quasi-public organizations as Fannie May (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) that between them owned about 80% of American mortgages, moved from being well-funded corporations to losing 3 billion dollars in three months, and were taken over by the Federal Government recently to prevent them from failing completely. After that, although the US failed to support Lehman Brothers and more recently Washington Mutual Bank, the third largest in the US, they did rescue AIG from bankruptcy, since it too owned too many mortgages to allow it to fail. By estimating the extent of bad ("toxic") debt owned by the largest Wall Street credit institutions the Treasury Secretary Henry Paulson requested b$700 to try to stop the further failing of Banks on Wall Street and thereby to inject liquid cash into the system.
When push came to shove both Republicans and Democrats in the House and Senate found fault with the deal that would have left the US Treasury unhindered to pump such a huge sum of money into Wall Street Institutions to prevent further crashes. Both sides wanted more accountability in their own way for the tax payer's money, Democrats wanting to ensure that the Wall Street bankers who caused the situation in the first place would not personally gain by access to this largesse and Republicans wanting to ensure that the debts would not be "bought" by the Treasury on behalf of the American people, but rather insured in some way so that the public debt would not be immensely increased and a refund would be possible.
As of now it has been announced that after several days of negotiations a deal has been agreed upon and this will hopefully be ready as a bill to sign into law within a few more days. We should be happy that today, as a result of experience and knowledge of the workings of the market, the Government is able to intervene to avoid a very serious market crash, and that hopefully noone will jump from high buildings and few if any will lose their life savings and their livelihoods. If the bill that is passed does accomplish this it will be a sign that capitalism (when appropriately regulated) does work.
First of all, regulation of the market is a highlight of modern capitalism, since it has been recognized, especially since the great market crash of 1929, that unfettered markets are inherently unstable. In fact, it was the great fluctuations in the markets leading to such crashes that justified Karl Marx and his followers to propose that socialism was the cure. However, 70 years of communism in the USSR and many years of socialist governments in Europe have lead to the conclusion that socialism itself does not work.
It was the famous English economist John Maynard Keynes (1883-1946) whose ideas, called Keynsian economics, had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern macroeconomics. Therefore, although fiscal conservatives, such as Pres. Bush, try to avoid such interventions, nevertheless it is a central tenet of modern capitalism that market regulation is both necessary and good.
What has happened in the current crisis, perhaps the worst since the 1929 crash, is that over-provision of liquidity, i.e. too much credit, has enabled Banks and credit institutions, such as mortgage providers, to issue too much unsecured credit (i.e. without sufficient collateral). Both Republicans and Democrats in the USA were responsible for the development of this situation, Republicans by removing some of the prior regulations that had controlled the market and Democrats for demanding more credit for poorer people to enable them to buy houses, etc., when they really did not have the income to afford it. Thus the Democrats established the organization called ACORN (Association of Community Organizations for Reform Now) that dispensed mortgages and loans to poorer people, but also gave loans and funds to Democratic candidates for office, a clear case of conflict of interest! Also, such quasi-public organizations as Fannie May (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) that between them owned about 80% of American mortgages, moved from being well-funded corporations to losing 3 billion dollars in three months, and were taken over by the Federal Government recently to prevent them from failing completely. After that, although the US failed to support Lehman Brothers and more recently Washington Mutual Bank, the third largest in the US, they did rescue AIG from bankruptcy, since it too owned too many mortgages to allow it to fail. By estimating the extent of bad ("toxic") debt owned by the largest Wall Street credit institutions the Treasury Secretary Henry Paulson requested b$700 to try to stop the further failing of Banks on Wall Street and thereby to inject liquid cash into the system.
When push came to shove both Republicans and Democrats in the House and Senate found fault with the deal that would have left the US Treasury unhindered to pump such a huge sum of money into Wall Street Institutions to prevent further crashes. Both sides wanted more accountability in their own way for the tax payer's money, Democrats wanting to ensure that the Wall Street bankers who caused the situation in the first place would not personally gain by access to this largesse and Republicans wanting to ensure that the debts would not be "bought" by the Treasury on behalf of the American people, but rather insured in some way so that the public debt would not be immensely increased and a refund would be possible.
As of now it has been announced that after several days of negotiations a deal has been agreed upon and this will hopefully be ready as a bill to sign into law within a few more days. We should be happy that today, as a result of experience and knowledge of the workings of the market, the Government is able to intervene to avoid a very serious market crash, and that hopefully noone will jump from high buildings and few if any will lose their life savings and their livelihoods. If the bill that is passed does accomplish this it will be a sign that capitalism (when appropriately regulated) does work.
posted by Jack Cohen at 5:50 PM
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