Isn't Economic Crisis a Crisis of Capitalism?

I think it's interesting to wonder whether this economic crisis we are in is the product of socialism or capitalism.

Many capitalists (or libertarians) argue that the Community Reinvestment Act forced banks to give home loans to those who couldn't afford them. However, this would not be a problem under a capitalist system. If banks made these loans to low-income people, the risk on these loans would be high, and in a capitalist economy this would result in higher bond yields (the risk premium). These securities would be sold of to those who are willing to accept the risk. There are hundreds and thousands of risky investments, e.g. most hedge funds are risky investments, but when the investment fails it is not the business or the investment that is at fault. Rather, it is the investor's fault for buying the investment in the first place. Everyone knew that sub-prime securities were risky.

Another argument capitalists make is that the Federal Reserve, the US's central bank, inflated the money supply by reducing interest rates, thereby resulting in misallocation of capital and subsequently to a house price crash. They argue that because the Fed intervened in the economy, then this is a problem of socialism. However, many of the people who make this argument also state the the Fed is not a government agency but a private organization. If the Fed is a private organization, then this becomes not a crisis of socialism but rather a crisis of capitalism.

Some capitalists argue that the way to fix this problem is to return to a gold standard because the gold standard would ensure that the central bank wouldn't increase money supply, which would lead to inflation or misallocation of capital. However, the last time I checked it is not illegal to buy and hold gold. In fact, if you want a gold standard, you can buy gold ETFs (GLD) on the stock exchange. If you do this, you are effectively holding gold-backed currency. We did have a capitalist economy because individuals had a choice between gold and fiat currency. Most chose fiat currency.

So either way you look at it, it seems as if this economic crisis is the product of capitalism. The assumption under a capitalist system is that individuals know what is best. Yet it is individuals who purchased high-risk mortgage-backed securities and individuals who held onto fiat currency rather than gold. So why isn't this crisis a crisis of capitalism?

Gee, some people really do seem hellbent on blaming a spectre called "capitalism" for this.

If the Fed is a private organization, then this becomes not a crisis of socialism but rather a crisis of capitalism.

No, it's more precisely a crisis of fascism and a sign that the label "private" in this connection is meaningless. What sort of "private" organization enjoys a legally awarded monopoly?

However, the last time I checked it is not illegal to buy and hold gold.

Gold is subject to capital gains taxes IIRC. It is not suitable as a currency at the present. Also the government doesn't seem to like private issuers of currency much...

So either way you look at it, it seems as if this economic crisis is the product of capitalism.

No, I don't think so.

The assumption under a capitalist system is that individuals know what is best. Yet it is individuals who purchased high-risk mortgage-backed securities and individuals who held onto fiat currency rather than gold. So why isn't this crisis a crisis of capitalism?

Please explain to me, with a monopoly over force acting in the background facilitating this mess, how exactly you came to the conclusion that this is all voluntary? Yeah, certain individuals (who probably knew no better/trusted government guarantees) bought into the government's lies and false (and sometimes true) promises. And fiat money is so privileged and entrenched so as to make other forms of money a poor choice. So again, do explain how this is a "criss of capitalism". It seems more like socialism, whereby losses are socialized and wealth is transferred to bail out privileged parties.

God, I'm so sick of this nonsense.

-Jon

Norak:

Another argument capitalists make is that the Federal Reserve, the US's central bank, inflated the money supply by reducing interest rates, thereby resulting in misallocation of capital and subsequently to a house price crash. They argue that because the Fed intervened in the economy, then this is a problem of socialism. However, many of the people who make this argument also state the the Fed is not a government agency but a private organization. If the Fed is a private organization, then this becomes not a crisis of socialism but rather a crisis of capitalism.

The Fed has the coercive power of the state to enforce its policies. Wether if it is technically part of the state or not is irrelevant.

 

Norak:

Many capitalists (or libertarians) argue that the Community Reinvestment Act forced banks to give home loans to those who couldn't afford them. However, this would not be a problem under a capitalist system. If banks made these loans to low-income people, the risk on these loans would be high, and in a capitalist economy this would result in higher bond yields (the risk premium). These securities would be sold of to those who are willing to accept the risk. There are hundreds and thousands of risky investments, e.g. most hedge funds are risky investments, but when the investment fails it is not the business or the investment that is at fault. Rather, it is the investor's fault for buying the investment in the first place. Everyone knew that sub-prime securities were risky.

The bondholders are not Americans.  They are foreigners.  America is bankrupt.  It can't afford to buy it's own debt.

So that said, these foreign investors bought, because they knew that they had the full faith and credit of the US government, in other words, the ability of the government to tax.

Under capitalism, there would be no taxes.  So not only did the CRA create moral hazard, but so to does the promise of debt repayment by the US Treasury.

Second, the government was in charge of regulating the market as well as the regulators.  Only 2 years ago, the FED said that the mortgage industry was better regulated than it thought, and there were no problems.  Now if the market was responsible, ratings agencies would go broke and be sued for fraud.  But since it is the FED, and they have sovereign immunity, no one will be held accountable for not doing their job.

In a capitalist (private) system, the people who make mistakes bear the consequences.  In your socialistic system, the innocent pay for the guilty and the guilty go free.

The Fed has a state-appointed monopoly on legal tender. What precisely could possibly lead you to believe that that is a fault of the free market? I am actually interested to know.

Norak:

I think it's interesting to wonder whether this economic crisis we are in is the product of socialism or capitalism.

What's to wonder? 

Norak:

Many capitalists (or libertarians) argue that the Community Reinvestment Act forced banks to give home loans to those who couldn't afford them

The CRA is only part of the issue.  Do you have any idea how much regulation exists in banking, insurance, finance, et al?  Most people don't, or they would realize it's absurd to think that we had an "unregulated' economy, or that laissez-faire, free market capitalism was responsible for the financial crisis.

Norak:

Another argument capitalists make is that the Federal Reserve, the US's central bank, inflated the money supply by reducing interest rates, thereby resulting in misallocation of capital and subsequently to a house price crash. They argue that because the Fed intervened in the economy, then this is a problem of socialism. However, many of the people who make this argument also state the the Fed is not a government agency but a private organization. If the Fed is a private organization, then this becomes not a crisis of socialism but rather a crisis of capitalism.

The mere existence and operation of the Fed should convince anyone that we have not had a laissez-faire, free market capitalist system, much less that it could have caused the crisis.  Yes, the Fed is ostensibly a private organization, but the Fed Chair is appointed by the President and that appointment needs the approval of Congress.  How many private organizations do you know that have their CEO chosen by the federal government?  More importantly, the Fed has been granted a monopoly power by the federal government, to control the supply of our money, to regulate the interest rates, and to some degree to regulate the banking system, such as by setting the banks' reserve requirements. 

In a laissez-faire, free market capitalism system, any bank would be free to issue money, but no particular bank would have a monopoly on this, or have such control over other banks.  Furthermore, like any business, if a bank made bad loans or investments, they would suffer the consequences in the form of losses, and would have to improve their policies or risk going out of business, their assets taken over by other banks. 

Many people who want to blame capitalism or laissez-faire for the crisis claim that the Fed and federal regulators allowed the banks to engage in risky loans and investments, such as sub-prime mortgages, and it was this freedom and the "greed" of banks and investors that caused the crisis. 

However, even if it was true that such deregulation occurred (and I would like to see more evidence of that), the Fed and the federal government still stood ready to back them up and bail them out of their problems through easy credit or the FDIC.  A clear moral hazard.  In other words they were granted freedom without the responsibility for the consequences of their actions.  This is license, and only a powerful force such as the government could have made it possible.  In laissez-faire, freedom and responsibility go hand-in-hand--you can't have one without the other. 

It takes government to make freedom without responsibility a reality, or conversely responsibility without freedom.  Neither of these is good. 

So however you look at it, government intervention made the economic crisis possible, and it's absurd to blame laissez-faire, the free market, or capitalism. 

The thing is, free market doesn't prevent individuals or companies from going bankrupt. Nor does it prevent crises from happening. There's always is a risk. The difference is, with heavy government intervention we have today, the crises are more common and the recovery is longer. In laissez-faire, the parties responsibles are punished but today they're rewarded and the government grows even bigger because if must "save the economy" and invent more regulations to prevent future crises.

The funny thing is, most people (even those who are far from socialistic) truly believe that Fed has made the market more stable and fair while it has been nothing but disaster in all areas. And now they have the audacity to blame the free market for what's clearly the government's fault.

It is just a crisis of the "Socialism of the Capitalists". Nothing to do with real Capitalism.

I think it's interesting to wonder whether this economic crisis we are in is the product of socialism or capitalism.

This crisis is a crisis of the current economic system we operate under. You can call it capitalism if you want (since you'd be correct to do so), but I don't think that's quite descriptive enough. I prefer to call it a heavily regulated, intervened and bailout-for-the-rich economy, so...

Many capitalists (or libertarians) argue that the Community Reinvestment Act forced banks to give home loans to those who couldn't afford them. However, this would not be a problem under a capitalist system. If banks made these loans to low-income people, the risk on these loans would be high, and in a capitalist economy this would result in higher bond yields (the risk premium). These securities would be sold of to those who are willing to accept the risk. There are hundreds and thousands of risky investments, e.g. most hedge funds are risky investments, but when the investment fails it is not the business or the investment that is at fault. Rather, it is the investor's fault for buying the investment in the first place. Everyone knew that sub-prime securities were risky.

The CRA is partly responsible for causing the housing bubble. I would agree that sub-prime mortgage/loan securities are not a problem in and of themselves. The problem is that these individuals or institutions who are now under water because they invested in such instruments aren't allowed to fail, and that things like the CRA were ever forced in the first place.

Another argument capitalists make is that the Federal Reserve, the US's central bank, inflated the money supply by reducing interest rates, thereby resulting in misallocation of capital and subsequently to a house price crash. They argue that because the Fed intervened in the economy, then this is a problem of socialism.

Well personally I don't call that socialism, it's merely interventionism.

However, many of the people who make this argument also state the the Fed is not a government agency but a private organization.

They are mistaken in their thinking. The Federal Reserve is a government agency. It was created by government. It operates on behalf of the government (as well as their private member banks and other cronies). It's more correct to call it a hybrid institution. However, one can think of all government institutions as private--in a sense they are, they just have a different business model and organizational structure, and are imposed by the barrel of a gun, working in the guise of "the public interest" or whatnot.

If the Fed is a private organization, then this becomes not a crisis of socialism but rather a crisis of capitalism.

It is a crisis of bad regulation, bad policy and bad interventionism.

Some capitalists argue that the way to fix this problem is to return to a gold standard because the gold standard would ensure that the central bank wouldn't increase money supply, which would lead to inflation or misallocation of capital.

Well that's not the only reason but a step in the right direction. In fact, the central bank should just be gotten rid of completely if we have a gold standard.

However, the last time I checked it is not illegal to buy and hold gold. In fact, if you want a gold standard, you can buy gold ETFs (GLD) on the stock exchange. If you do this, you are effectively holding gold-backed currency. We did have a capitalist economy because individuals had a choice between gold and fiat currency. Most chose fiat currency.

No, it doesn't quite work that way...

So either way you look at it, it seems as if this economic crisis is the product of capitalism. The assumption under a capitalist system is that individuals know what is best. Yet it is individuals who purchased high-risk mortgage-backed securities and individuals who held onto fiat currency rather than gold. So why isn't this crisis a crisis of capitalism?

As I said before, this is a crisis of bad regulation, bad policy and bad interventionism.

You could claim that any government intervention is inherently socialistic as it leads to the government control.

i can, and i do.

thanks for noticing :-p

I would also like to know how a gold standard would stop fractional reserve banking. If you had gold and stored, say, 100 ounces at a bank, the bank can still take 90 ounces of that deposit and lend it out to others, thereby inflating the money supply.

I would also like to know how taxes denominated in UD dollars is a problem. You don't have to use the fiat currency. You can convert all you US dollars into gold, silver, oil, etc. It may be the case that taxes are paid in US dollars but you can simply convert back from gold to US dollars when it is tax time.

Norak:

I would also like to know how a gold standard would stop fractional reserve banking. If you had gold and stored, say, 100 ounces at a bank, the bank can still take 90 ounces of that deposit and lend it out to others, thereby inflating the money supply.

Fair point, but this is just a semantic misunderstanding. Around here when people say 'the gold standard,' it's usually sort of implied that they mean 'commodity-backed currency and 100% reserve requirements.'

Norak:

gold, silver,

Capital gains taxes on precious metals make it impossible to legally use them as currency.

Norak:

I would also like to know how a gold standard would stop fractional reserve banking. If you had gold and stored, say, 100 ounces at a bank, the bank can still take 90 ounces of that deposit and lend it out to others, thereby inflating the money supply.

A free market in money makes it very difficult and risky to engage in inflation.  Suppose a bank issues receipts for gold to a customer making a withdrawal of his funds.  The customer then spends those notes, and the recipient deposits them in his account at a different bank.  The other bank, preferring to hold actual gold rather than paper, calls upon the first bank to redeem the receipts for gold.  Also, if a bank's customers got wind of a rumor that a bank did not have enough gold to fulfill its obligations, and there was no government promising to step in and cover the bank should it come up short of cash, it would more than likely instigate a bank run and drive the offending bank out of business.  These factors would severely limit the ability of any bank to issue receipts very far beyond its actual quantity of gold reserves.

 

waywardwayfarer:

A free market in money makes....

He said 'gold standard', not 'free market in money.'