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Sunday, December 30, 2007

Responding to the Mortgage Crisis: Capitalists, Socialists and Fair Weather Capitalists

There are three economic systems that account for much of the world's economic system: capitalism, socialism and communism. Here is a brief description of capitalism.

Capitalism generally refers to an economic system in which the means of production are predominantly owned and controlled privately, rather than by the state.

Here is a brief description of communism.

Communism is a socioeconomic structure that promotes establishment of a classless, stateless society based on common ownership of the means of production. It is usually considered a branch of the broader socialist movement that draws on the various political and intellectual movements that trace their origins back to the work of Karl Marx. Opponents say that communism is an ideology, whereas promoters say that it is the only political system without ideology.

...and socialism

Socialism is a broad array of ideologies and political movements with the goal of a socio-economic system in which property and the distribution of wealth are subject to control by the community for the purposes of increasing social and economic equality and cooperation.[1] This control may be either direct, exercised through popular collectives such as workers' councils, or indirect, exercised on behalf of the people by the state. As an economic system, socialism is often characterized by state or community ownership of the means of production.

History has proven that the only economic system that has proven to work in the long term is capitalism. We fought a long Cold War over the communist system. Socialism is being tried in states like Cuba and Venezuela. Even in Europe they are learning the hard way what happens when the state replaces the market. (for an excellent dissertation of the failings of Europe's economic systems check out America Alone by Mark Steyn)

Despite all of this, the government insists on responding to every crisis caused by our capitalistic system with a heavy dose of socialism. At this point, we must all decide if we want to be capitalists, socialists or communists. The reason I say this is that too many of us are what I refer to as fair weather capitalists. We know from sports what happens when a sports team has a good year. Their television viewership goes up and their stadium is filled. That's because folks that would never watch the team if it is bad suddenly become fans. We refer to those folks as fair weather fans. The same can be said of fair weather capitalists. They only believe in capitalism as long as things are going well. When entrepeneurs used the capitalistic system to create the technological revolution of the nineties, everyone was on board with capitalism. On the other hand, when folks used poor judgement and recklessness to create the current mortgage mess, the same folks scream for government intervention.

The problem is that government regulations, government bailouts, and governments stepping in to re arrange private contracts are the hallmark of socialism and communism not capitalism. Those are just a few of the plethora of nonsensical ideas that the government has proposed and implemented. In fact, the mortgage mess has become a campaign issue. Here is a snippet of what Hillary Clinton is using in her latest campaign.

What if we had a different president this year? Hillary Clinton called for action on America's housing crisis in March, in June, in August. George Bush and Wall Street did nothing. Since then home prices have plummeted and millions may lose their homes. Hillary's plan: freeze home foreclosures, freeze rates on adjustable mortgages, provide real tax relief for the middle class. When we choose a president next year, let's choose one that would have started fixing our economy this year."

The problem is that when government freezes the mortgage rates of private banks, stops contracturally agreed foreclosures, and creates a fund to bailout dilinquent borrowers the government is no longer overseeing a capitalistic system but a socialistic system. Even though these systems have been proven over and over to fail, there continues to be those that respond to any economic crisis with a healthy dose of socialism. Economic crisis are an unfortunate, though standard, part of any capitalistic system. That is because when you give private citizens the freedom to make their own way, there will be times when they use that freedom foolishly. The market is both cruel and perfect. It will treat the foolish with absolutely no love and it will correct all the mistakes the foolish created.

That is exactly what has happened in response to the mortgage crisis. Dozens of banks went out of business and millions of borrowers are either in foreclosure or near it. The whole entire indsustry is in chaos, and mortgage programs are changed and eliminated constantly. I know because I am in it. The market has also eliminated the excesses all on its own. Sub prime has nearly eliminated all so called stated income loans. There are few if any sub prime programs that go above 90% loan to value. That's because the two biggest culprits of the crisis were stated loans and no money down loans. These are also the loans that politicians want to legislate out of existence. In other words, politicians want to legislate what the market has long ago eliminated on its own.

The politicians, like Clinton and Bush, want to freeze adjustable rates. Keep in mind that mortgages are private contracts. The rates that are adjusting are adjusting based on terms agreed upon by two private parties. Now, the government is stepping in to stop a private contract. In other words, we will make a private contract a function of the federal government. Call me cynical but that sounds much like nationalizing an industry and it is what we scream bloody murder of when someone like say Hugo Chavez does it. Yet, when one of our politicians suggests something similar, they are extolled by certain quarters as caring.

Everyone needs to know that when these politicians step into care they are replacing the judgement of the market with their own. Now if you really believe that Hillary Clinton, Barack Obama, President Bush, Congress, and even the Federal Reserve understand mortgages better than the mortgage market itself, then you are not only naive but also likely a fair weather capitalist.

The mortgage crisis has created a struggle for the very fiber of our economic systems. We must all decide if we are really capitalists, folks that believe in the free market in good and BAD times, or we are really socialists, folks that let government regulate everything for any reason. I have pointed out before how effective socialism can be if packaged right as an election tool. Make no mistake...there will be those that will use the mortgage crisis to try and increase regulation, government control and the size of government itself. Those folks will take us one step closer to socialism. We must all decide which way our economy should go.


Anonymous said...

Thank you for this insightful post. You're assertions about Government regulations and bailouts, etc. can be made for the Airline industry as well. The government keeps bailing out those companies that need to go away for the health of the industry, but they keep propping them up. It just allows bad practices/business to continue. Also, I have been watching and reading about the socialist takeover of the former Great Britain and Europe for a while now, mainly in terms of socialized medicine and government regulated speech and I can only say it is frightening. Everyone in this country better wake up. Socialism and the idea that every one is made equal through it may sound all warm and cozy and fair, but it doesn't work and it isn't at all fair. So, anyway, thanks.

Anonymous said...

Capitalism gives everyone an equal opportunity. Socialists don't want equal opportunity, they want equal outcomes. When a capitalist or socialist talks about equality, keep that in mind.

mike volpe said...

excellent point...

Anonymous said...

Do you really believe that Capitalism gives everyone an equal opportunity? So Joe Smith, from a low income neighborhood, has the same opportunities as Paris Hilton?

mike volpe said...

not an equal opportunity but a fighting chance.