There is one positive consequence of the economic collapse that is occurring, and the futile attempt by the government to stop it with money stolen from its constituents: the American public has woken up. Despite the best efforts of the major media outlets to spin this the way the government would like, it is apparent that mainstream America is mighty angry that they are being fleeced to prop up the financial system. I hope that anger does not fade with the passage of time – at least not until after November 4th. While wholesale changes are unlikely, it would be nice to see a few incumbents packing after this election and replaced by non-Republicrats. It would be an encouraging sign of things to come.
However, as good as it is to finally see some outrage over the destruction of our Republic, there is still a long way to go. Listening closely to the cries of anger, it is apparent that the majority of Americans still haven’t found their way to actually demanding their freedom. While they are angry, it seems that government has successfully channeled their anger in the wrong direction. Generally, Americans are mad at Wall Street, and are blaming this crisis on “greed.” To the extent that they fault government, they are blaming the crisis on “not enough regulation on Wall Street” and even (ugh) “too much laissez faire capitalism.” This of course plays right into the government’s hands, because the answer to “too much laissez faire capitalism” is more government intervention into the marketplace – which was the REAL cause of this problem in the first place.
If anything, the number one clue that it was not free enterprise that caused this debacle is that the government says it was. By now, every American should know to listen carefully to everything that the Bush Administration says and assume that exactly the opposite is true. However, decades of conditioning to mistrust the free market is paying off for the government, at least for the time being. They have turned this into a class war, instead of an ideological one. They have Americans indiscriminately resenting the wealthy, whether they earned their money legitimately or not. They have Americans condemning corporations, whether they achieved their place in the market legitimately or not. While Americans are mad at their government, they have been convinced, for the moment, that government’s failure was not protecting the average American from the evils of capitalism.
Of course, the truth is that this crisis was a failure of socialism, not capitalism. It was the socialist idea that every American was entitled to a house, and that taxpayers must pay for them, that led to the creation of Fannie Mae and Freddie Mac. Those companies guaranteed mortgages to people that would not have received them in a free market. Only the ability of the government to forcibly collect taxes to back those mortgages allowed the lenders to offer them. If there was any doubt that the government was backing Fannie and Freddie with taxpayer money, that doubt was removed when the government took over the companies when their inevitable failure occurred.
Even with the GSE’s in place, it took another socialist institution, the Federal Reserve, to supply the imaginary money needed to lend to all of those “sub-prime” borrowers. Without the imaginary “liquidity” provided by the Fed, the loans could never have been made and the home prices could never have been bid up so far. The Fed merely blew up another bubble, as it has been doing since the day it opened its doors in 1913.
What these interventions into the marketplace do is create artificial demand. Everyone knows that an increase in demand, while supply remains equal (or when the increase in demand outpaces an increase in supply), results in an increase in price levels. However, demand is not merely the desire to purchase a product, but also the ability to do so. If demand were merely the desire to have something, there would be unlimited demand for all products and services, taking most of the challenge out of running a successful business! The Fed and Fannie Mae certainly didn’t increase the number of people who desired to have a house, but it dramatically increased their purchasing power. In fact, the combination of easy money and credit by the Fed and the incentive for lax lending standards represented a massive increase in demand over the entire housing market, with the predictable dramatic increase in home prices. None of this represents free market forces at work. It is textbook socialist central planning and wealth redistribution.
That brings us to the government “solution,” and what Americans should really be mad about. Our government is now going to forcibly extort trillions of dollars from us in a misguided attempt to maintain the artificial conditions it created in the market. It won’t work. They have tried it many times, and it has never worked. The artificial demand drove prices far above their natural level, and natural market forces are now pushing them back down. Borrowers were lent money that they were never going to be able to pay back. What is worse, a large percentage took the artificial equity caused by the rise in price of their homes in home equity loans and spent it. That money is gone, and the borrowers can’t pay it back. Government taking possession of the mortgages isn’t going to change that. Those borrowers are still going to default, and the home prices are eventually going to go where they naturally must go. Economic forces are like forces of nature. In the end they cannot be stopped.
This intervention is practically identical to the interventions attempted during the Roosevelt administration in the 1930’s, which turned a severe 2-year recession into a crushing, 10-year depression. This bailout will have devastatingly similar results. It doesn’t matter whether a CEO gets away with a $10 million dollar bonus or not. What matters is tens of millions of Americans unemployed for a very, very long time. THAT will be the result of government’s attempts to maintain the artificial conditions in the economy that GOVERNMENT created in the first place.
Since the Austrian economists predicted all of this, while the Keynesians did not, it might pay to listen to what the Austrians suggest as a solution to these government-created crises. While their first advice was always not to create the problems in the first place, they certainly were clear about what to do when the inevitable bubble bursts occurred. Not surprisingly, they advised us to do EXACTLY THE OPPOSITE of what the government proposes. The cure for the recession, according to the Austrians, was to EASE regulation on business, especially in the labor market, and allow the quickest, smoothest reallocation of resources (including human resources) that was possible. As government intervention had created the problem, more government intervention was not going to solve it. In fact, any intervention could only make it worse, no matter what form it took. That is because the wealth creating mechanism of capitalism depends upon the participants making their decisions voluntarily, and government intervention represents forcing people to make different choices. This is really what most Americans are demanding from their government right now – for government to force market participants to choose differently than they otherwise would. Be careful what you fight for, Mr. and Mrs. America, you will probably get even more than you asked for.
I do have hope, however. Sooner or later, Americans will figure this out. At least they’re screaming about something now, which is a lot better than the docile slumber they’ve exhibited over the past several decades as we’ve marched toward oblivion. The government would much rather have them keep on sleeping than to have to divert their anger towards scapegoats and imaginary boogeymen. They will succeed in doing just that this time, but their system is nearing its end. The inevitable economic debacle will occur, and hopefully that will be the final straw. Americans have put their faith in government control and central planning of their lives for almost a century, and it has consistently let them down. Perhaps this last calamity will finally make them see the socialist lie for what it is. Then, they will finally stop walking down the road to serfdom.