Bailing Out the Capitalists

[Etta Place]

March 18, 2008
Bailing Out the Capitalists
By E. J. Dionne

WASHINGTON -- Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries, and how government should keep its hands off the private economy.

The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe has any idea what kinds of devalued securities sit in one another's portfolios.

So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can't have that. It's just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail" because they could bring us all down with them.

Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don't expect these people to trade in their BMWs for Saturns, do you?

In a deal that The New York Times described as "shocking," J.P. Morgan Chase agreed over the weekend to pay $2 a share to buy all of Bear Stearns, one of the brand names of finance capitalism. The Federal Reserve approved a $30 billion -- that's with a "b" -- line of credit to make the deal work.

I don't fault Ben Bernanke, the Fed chairman, for being so interventionist in trying to save the economy. On the contrary, Bernanke deserves credit for ignoring all the extreme free market bloviation. He doesn't want the economy to collapse on his watch, so he is willing to violate all the conservatives' shibboleths about the dangers of government intervention. As a voter once told the legendary political journalist Richard Rovere: "Sometimes you have to forget your principles to do what's right."

But if this near meltdown of capitalism doesn't encourage a lot of people to question the principles they have carried in their heads for the last three decades or so, nothing will.

We had already learned the hard way -- in the crash of 1929 and the Depression that followed -- that capitalism is quite capable of running off the rails. Franklin Roosevelt's New Deal was a response to the failure of the geniuses of finance (and their defenders in the economics profession) to realize what was happening or to fix it in time.

As the economist John Kenneth Galbraith noted of the era leading up to the Depression, "The threat to men of great dignity, privilege and pretense is not from the radicals they revile; it is from accepting their own myth. Exposure to reality remains the nemesis of the great -- a little understood thing."

But in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary and the market system is, on balance, a wondrous instrument -- when it works. But the free market is just that: an instrument, not a principle.

So now the bailouts begin, and Wall Street usefully might feel a bit of gratitude, perhaps by being willing to have the wealthy foot some of the bill or to acknowledge that while its denizens were getting rich, a lot of Americans were losing jobs and health insurance. I'm waiting.

At the very least, the die-hard defenders of unregulated capitalism could accept a truth spoken to me back in 1996 by William Cohen, when he was a Republican senator from Maine.

He was talking about a plane crash and the public grousing about whether the government's safety regulators should have kept a more careful eye on the airline in question. But he could have been talking about the financial system right now.

"We have been saying for so long that government is the enemy," Cohen said. "Government is the enemy until you need a friend." Then he added: "Is the public ready to say: 'Let the private sector handle everything'? Clearly not."

All Wall Street firms should be required to carve Cohen's words into their foundations before they crumble.

RealClearPolitics - Articles - Bailing Out the Capitalists

[Judge]

I don' t disagree, as I've said before, and as have others, capitalism is often a horrible system, it's just better than anything else. Over the long term, a capitalist system will outperform all others and money will find it's highest and best use. The capitalist system also does ultimately punish the greed - as we are now seeing, but it can be painful - which is what the fed is trying to moderate.

[jmichna]

I agree with much of what was stated in the article, and I also agree with the Judge's statement... capitalism is flawed, but it is the best system we have. True capitalism is self-correcting... poorly managed, poorly run businesses deserve to go belly up, and not get bailed out by the government. The answer is most definitely NOT more government intervention.

In a sense, capitalism is self-correcting... over time the badly run companies go out of business. And, by 'badly run' I'm including not just fiscal irresponsibility, but inability to adapt to market needs, inability to supply safe product, inability to keep an effective, satisfied, intelligent work force, and all the other things that go wrong.

Every time a business gets insulated from the impact of the Market (you, me... we are the Market) has on it, things just get worse. The lenders who decided to lend out money sub-prime, and to high risk borrowers, took a risk we should not have to share... they (lenders) should go out of business.

Keep government intervention out of business... let "business Darwinism" take its course. If FDR had kept his hands away from trying to "fix" the Great Depression when he assumed office in 1933, the Depression would likely have been over in another year or two... instead of dragging on into WWII. Instead, the Federal government put in place a US version of communism's "Central Planning."

As a side thought: Can anyone point out an economic system that works - not theoretically but in real practice - better than capitalism?

[Brickboy240]

Well, isnt' alot of what we're seeing right now, the unintended consequences of the left?

Many years ago, if you did not have good credit or money to put down on a home - you could not BUY a home. Back then, credit cards and all sorts of creative financing from banks and credit unions just did not exist. Basically, if you did not save your money and live below your means and were not responsible for paying your bills on time - you did NOT get credit or loans, period.

Then, many on the left, who always spout this "level playing field" nonsense, petitioned the govt. and the lending/banking industry for changes in their policies. They claimed that by having high standards for lending and requiring cash down payments, etc. some people were being denied "the American Dream." It all sounded so sad and convincing but the stone cold truth was that the banking industry was protecting itself and actually doing a favor for those who were not economically responsible.

But...many politicians caved and passed newer laws for the banking and lending industry that pretty much forced this industry to loan money to those who did not show economic stability or responsibility.

The banking/lending industry has always been about making money for themselves and after losing their collective shirts on open credit card issuance in the early 1970s, they went ahead with lending to these questionable indivduals...BUT...they were going to make sure that the industry made money FIRST on these people...before they defaulted.

So the banks and lending institutions lent money on all those shaky and creative sub-prime mortgages. They knew damn well that many of these would end up in foreclosure, but were pressured to lend to people that had no business signing for these mortgages.

The banking/lending industry was not surprised by the massive defaults and forclosures and place the blame on the borrowers. As much as this pains many of you...the banking industry is right in their assumption.

Those individuals that lost their homes would not be in this position..IF...they had taken more responsiblilty in their economic behavoir. If they had lived below their means, saved money and been more careful with their spending...none of that mess would have happened to them. This is a huge problem in this country and nobody is willing to face the cold hard fact that the root of all of this is the economic irresponsiblilty of the individual. We blame the banks or lending institutions or govt. for bailing out these Wall Street banks, but if a majority of individuals had been more responsible with THEIR OWN MONEY...none of this would have happened.

Should DC have to bail out these banks? Well, DC is largely responsible for the lending law changes...are they not? The banks and DC share in the responsiblilty for this mess. Washington is responsible for allowing lending law changes and the banks are responsible because they set up the irresponsible lending and carried it through. The individual who signed for the loan also bears responsiblilty because they knew well that this was somehting they would not be able to follow through on.

The fingerpointing in this little mess has become a fulltime sport..has it not? Well ,the bottom line for us, the individuals is still the fact that it is best for all of us, if we learn to live within our means and save money for the future. If that means not buying the latest gadget or huge house or new car...well...we need to have the will power to resist the media and the free market's pushy advertising and hold back. This is, I believe, the root of all conservatism....to CONSERVE!

- Brickboy240

[Palmguy]

Originally Posted by jmichna

True capitalism is self-correcting... poorly managed, poorly run businesses deserve to go belly up, and not get bailed out by the government. The answer is most definitely NOT more government intervention.

In a sense, capitalism is self-correcting... over time the badly run companies go out of business. And, by 'badly run' I'm including not just fiscal irresponsibility, but inability to adapt to market needs, inability to supply safe product, inability to keep an effective, satisfied, intelligent work force, and all the other things that go wrong.

Every time a business gets insulated from the impact of the Market (you, me... we are the Market) has on it, things just get worse. The lenders who decided to lend out money sub-prime, and to high risk borrowers, took a risk we should not have to share... they (lenders) should go out of business.

Keep government intervention out of business... let "business Darwinism" take its course. If FDR had kept his hands away from trying to "fix" the Great Depression when he assumed office in 1933, the Depression would likely have been over in another year or two... instead of dragging on into WWII. Instead, the Federal government put in place a US version of communism's "Central Planning."

Well said. Let these companies go out of business; everytime the .gov saves them it just perpetuates this mentality that "if we screw up, Big Brother will save us".

[jmichna]

I know it's a bit off-topic, but I've done a bit of reading on FDR's impact on the Great Depression. The most frightening thing to come of this reading is the reality of "Unintended Consequences." No good deed goes unpunished.

Below is an overview of FDR and the Depression (most of which was plagiarized from a good resource at the Independent Institute in an effort to be concise). It is long, but I think it is a great illustration of unintended consequences resulting from economic intervention:

FDR initiated his 'New Deal' when he assumed office March 1933. The New Deal is the largest peacetime expansion of federal government power in American history. Many of the programs\policies of the 1930s remain embedded in policy today: acreage allotments, price supports and marketing controls in agriculture, extensive regulation of private securities, federal intrusion into union-management relations, government lending and insurance activities, the minimum wage, national unemployment insurance, Social Security and welfare payments, production and sale of electrical power by the federal government, fiat money—the list goes on.

FDR's inaugural address is mostly remembered for line: “...the only thing we have to fear is fear itself....” FDR's address also called for extraordinary emergency governmental powers: The day after FDR took office, he called Congress into special session. Before Congress could meet, FRD proclaimed a national banking holiday—which FDR refused to endorse when Hoover suggested it.

FDR invoked the "Trading with the Enemy Act" of 1917, declaring “all banking transactions shall be suspended.” Banks were allowed to reopen only after a case-by-case inspection, following approval by the Feds. This dragged on for over half a year, creating public panic which FDR used to help him ignore traditional restraints on the power of the Federal government.

FDR's (and his advisers') understanding of the Depression (economics in general) caused them to get "cause & effect" reversed. FDR did not understand that prices had fallen because of the Depression. FDR believed the Depression prevailed because prices had fallen. The "obvious remedy" (given FDR's misunderstanding) was to raise prices! Raising prices was accomplished by creating artificial shortages. A series of policies was created to "cure the Depression" by cutting back on production! It is hard to understand, looking back now, how anyone could have believed this intervention would work.

Gold
FDR initiating a massive gold-buying program, and abandoned the gold standard, the bedrock restraint on inflation and government growth. FDR then nationalized the monetary gold stock, made private ownership of gold illegal, and nullified all contractual promises—whether public or private, past or future—to pay in gold.

Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69 percent increase, but the domestic price level increased only seven percent between 1933 and 1934, and over the rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, strangling international trade and throwing the world’s economies further into depression.

Agriculture
Having hobbled the banking system and destroying the gold standard, FRD turned next to agriculture.

FDR, together with the Farm Bureau, pushed through the Agricultural Adjustment Act of 1933. The Act controlled acreage and production, restricted marketing agreements, and regulated licensing of processors and dealers “to eliminate unfair practices and charges.” It authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production. The intended goal was to raise farm commodity prices until they reached a much higher “parity” level.

Millions who could barely feed and clothe their families now had to deal with the results of a system designed to make food and textiles more expensive. Though this was initiated as an “emergency” measure, no president since has seen fit to declare the emergency over.

Industry
Industry was essentially nationalized under FDR’s National Industrial Recovery Act of 1933. NIRA was the result of special interests compromise: businesses seeking higher prices & barriers to competition, labor unions seeking Fed sponsorship & protection, social workers seeking control of working conditions & child labor, and proponents of massive spending on public works.

NIRA granted FDR power to license businesses or control imports to achieve the vaguely identified objectives of the act. Every industry had to have a code of fair competition. The codes contained provisions setting minimum wages, maximum hours, and “decent” working conditions.

NIRA policies were predicated on the notion that what the country needed most was cartelized business, higher prices, less work, and steep labor costs. FDR created the National Recovery Administration. Under Hugh Johnson, the NRA forced businesses to display the NRA Blue eagle emblem and abide by NRA codes. The NRA used parades, billboards, posters, buttons, and radio ads, and tried to silence opponents who questioned policy. The policy was enforced by a vast system of agents and informers.

Eventually the NRA approved 557 basic and 189 supplementary codes, covering about 95 percent of all industrial employees. Big businessmen dominated the writing and implementing of the documents. They generally aimed to suppress competition. Figuring prominently in this effort were minimum prices, open price schedules, standardization of products and services, and advance notice of intent to change prices. Having gained the government’s commitment to stifling competition, the tycoons looked forward to profitable repose.

Eventually, SCOTUS invalidated the whole mess in 1935. Striking down the NRA, Chief Justice Charles Evans Hughes wrote that “extraordinary conditions do not create or enlarge constitutional power.” Congress “cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed.”

Despite the SCOTUS decision, the NRA-type economic approach continued. NRA logic reappeared in the National Labor Relations Act of 1935, reinstating union privileges, and the Fair Labor Standards Act of 1938, stipulating regulations for wages and working hours. The Bituminous Coal Act of 1937 reinstated an NRA-type code for the coal industry, including price-fixing. The Works Progress Administration made the government the employer of last resort. Using the Connally Act of 1935, FDR cartelized the oil industry. Eventually, as FDR appointed his judges while in office, SCOTUS came around to FDR’s way of thinking.

After all this Federal intervention, the Great Depression was still reality. As the Federal sector continued control of the private sector, the economy continued in depression. The combined impact of Hoover’s and FDR’s interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.

More tragic is the lasting legacy of Roosevelt:
- The commitment to individualism, free markets, and limited government suffered a blow in the 1930s from which it has yet to recover.
- The theory of the mixed economy is still the dominant ideology backing government policy.
- In place of old beliefs about liberty, we have greater toleration of, and even positive demand for, collectivist schemes that promise social security, protection from the rigors of market competition, and something for nothing.

[Etta Place]

Originally Posted by Brickboy240

Well, isnt' alot of what we're seeing right now, the unintended consequences of the left?

Many years ago, if you did not have good credit or money to put down on a home - you could not BUY a home. Back then, credit cards and all sorts of creative financing from banks and credit unions just did not exist. Basically, if you did not save your money and live below your means and were not responsible for paying your bills on time - you did NOT get credit or loans, period.

Then, many on the left, who always spout this "level playing field" nonsense, petitioned the govt. and the lending/banking industry for changes in their policies. They claimed that by having high standards for lending and requiring cash down payments, etc. some people were being denied "the American Dream." It all sounded so sad and convincing but the stone cold truth was that the banking industry was protecting itself and actually doing a favor for those who were not economically responsible.

But...many politicians caved and passed newer laws for the banking and lending industry that pretty much forced this industry to loan money to those who did not show economic stability or responsibility.

The banking/lending industry has always been about making money for themselves and after losing their collective shirts on open credit card issuance in the early 1970s, they went ahead with lending to these questionable indivduals...BUT...they were going to make sure that the industry made money FIRST on these people...before they defaulted.

So the banks and lending institutions lent money on all those shaky and creative sub-prime mortgages. They knew damn well that many of these would end up in foreclosure, but were pressured to lend to people that had no business signing for these mortgages.

The banking/lending industry was not surprised by the massive defaults and forclosures and place the blame on the borrowers. As much as this pains many of you...the banking industry is right in their assumption.

Those individuals that lost their homes would not be in this position..IF...they had taken more responsiblilty in their economic behavoir. If they had lived below their means, saved money and been more careful with their spending...none of that mess would have happened to them. This is a huge problem in this country and nobody is willing to face the cold hard fact that the root of all of this is the economic irresponsiblilty of the individual. We blame the banks or lending institutions or govt. for bailing out these Wall Street banks, but if a majority of individuals had been more responsible with THEIR OWN MONEY...none of this would have happened.

Should DC have to bail out these banks? Well, DC is largely responsible for the lending law changes...are they not? The banks and DC share in the responsiblilty for this mess. Washington is responsible for allowing lending law changes and the banks are responsible because they set up the irresponsible lending and carried it through. The individual who signed for the loan also bears responsiblilty because they knew well that this was somehting they would not be able to follow through on.

The fingerpointing in this little mess has become a fulltime sport..has it not? Well ,the bottom line for us, the individuals is still the fact that it is best for all of us, if we learn to live within our means and save money for the future. If that means not buying the latest gadget or huge house or new car...well...we need to have the will power to resist the media and the free market's pushy advertising and hold back. This is, I believe, the root of all conservatism....to CONSERVE!

- Brickboy240

Blaming the left for the greed of Bear Stearns is quite the stretch, Brickboy.

[Brickboy240]

So...the people that wanted a "level playing field' and encouraged the loosening of lending practices bear no part of the blame?

Really? I am not buying that.

If the lending industry was allowed to keep their high standards for lending...we'd likely not be in this mess.

- brickboy240

[mgeoffriau]

Boy, we sure have a lot of class envy going around today, don't we?

The first sentence of the column gives it away: E. J. Dionne has no understanding of the principles of a free market economy. Posing the question in terms of how "brilliant" capitalists are or whether they "deserve" seven figure salaries is a dead giveaway. Only someone committed to collectivism would talk about wages in terms of what someone "deserves".

The BMW->Saturn line is a nice collectivist cliché as well.

[Etta Place]

Originally Posted by Brickboy240

So...the people that wanted a "level playing field' and encouraged the loosening of lending practices bear no part of the blame?

Really? I am not buying that.

If the lending industry was allowed to keep their high standards for lending...we'd likely not be in this mess.

- brickboy240

Who forced the banks and mortgage companies to lower their standards? Name them.

It was deregulation that caused this problem.

You know, I find it odd that a person who decries leftists and socialists like you do would be such a fan of an automobile (Volvo) that is manufactured in one of the most socialistic countries in Europe!