Sunday, September 28, 2008

End of Capitalism?



Family,


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 thought. The purpose of this post is discussion and debate.


6 comments:

JQA said...

Well, I'm not sure if I'm allowed to post on the Kartchner Klan blog, but I just wanted to say that I loved the post. I wholeheartedly agree that the current financial crisis was not caused by capitalism, but I wouldn't place all of the blame on greedy consumers.

As the two news articles candidly confess (back then they had no idea what the party lie would be today) the federal government forced lending institutions to make loans to individuals who did not have the financial resources to cover them. Banks don't want to make bad loans, it's bad business. But if the government mandates it and then offers to buy up the bad loans through Fannie and Freddy, who can fault the lenders? Similarly, if government makes financial overreaching a common occurrence when buying a home who can fault the average undereducated consumer for not being savvy enough to recognize the risks. Often our perception of risk is derived from what the rest of the community is or is not willing to do. If everyone is doing it, the warnings that would otherwise be there are gone.

Certainly some blame for the financial turbulence should be placed on the lenders for abusing a bad government policy to turn a profit on bad loans. Likewise, some blame should be placed on greedy consumers for borrowing more than they could afford to pay back. But most of the blame should be placed on the government leaders who destroyed the delicate balance between lenders and consumers and set the conditions for all of these problems.

Carroll said...

I have enjoyed the blog and comments. I understand the causes, your explanations make sense. Does any one have ideas in effectively solving the problem?

T K Barlow said...

This was from Dave Ramsey, whom I do not always agree with, but this has got to be better than what is proposed now.

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.




II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.




III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

Dan the Man said...

Hi, most people who read this don't know me, I am the husband of Elise. I was just reading and I like these ideas. I don't know a lot about these kinds of things, and by no means am I a supporter of capital gains tax, but I was just wondering, if the capital gains tax is removed and everyone takes their money out of the bank starts investing their savings in stock market, sure it will boost the economy but won't it take all of the money away from banks so they can't make loans? Maybe I missed the idea of it all. Sorry, this was just a thought.

Mom & Dad said...

Who is jqa? Also in our newspaper today it said that "In 2005-6 Freddie Mac secretly paid a reupblican cosuting firm $2 million to kill a bill that would have regulated and trimmed the mortgage finance giant and its sister company Fanie Mae, three years before the goernment took control to prevent their collapse . . ." this campaign carried out by DCI of Washington against a regulatory overhaul bill sponsored by Hagel (R-Neb). . . Anyway, Chuck Hagel tried to fight this, EVERY Republican voted to support Hagel's bill (to overual Fan & Fred) but every democrat voted no . . .consequently, we're in a huge mess.. . ."all democrats opposed it, fearing a new mandate to sell off parts of the mortgage giants would cut into the ability of low and moderate-income families to buy houses." I keep wondering how Bush is taking the blame for all of us when it lies right at the feet of the dems, and Barney Rubble? Was it too late by then anyway? Thus the truth, if you say something long enough, pretty soon everybody believes it. I am open for further enlightenment. Question: Does ANYBODY believe another stimulus package, with more "printed" money, is a solution to this? I keep trying to believe Paulson, but my lacking saavy of finance and lack of experience doesn't is getting harder to accept.

Mom & Dad said...

2nd comment - I didn't mean to send that, as I hadn't read the articles yet - sorry, I was just sort of venting, (thus all the errors). When I went to read the articles I guess it sent my comments. I would like to think of how we could solve the problem rather than blaming - sorry about that. Dave Ramsey's ideas sound logical, but I happen to believe most of what Dave Ramsy says. Kathy