Woes are a result of a non-free market
Blake Gilson
For liberty-loving people, these past weeks have been exceptionally hard. The free market always becomes the media’s whipping boy whenever the economy freaks out. The misrepresentations around these events are staggering.
The first problem with this assertion, that the free market is to blame, can be answered with one question: what free market? Any starting point of capitalism is sound money, not fiat money printed by the central bank. Any sound, functioning capital market needs interest rates determined by savings and the demand of funds for lending, not some crystal ball hidden in the backroom of the Treasury Department.
The second misconception is of greed. Some say Wall Street is in trouble, thus it must have been because they got greedy. This sounds nice, but it’s a vacuous statement with no explanatory power. Were they extra-greedy this year compared with years ago when things weren’t so bad? Would greed convince someone to engage in risky business knowing it would fail? If we wish to find the heart of the problem, analysis must move beyond "greed."
At the center of this downturn are Freddie Mac and Fannie Mae. They exploited low-income home seekers, the argument goes, and now they are tanking the world economy. Too bad Freddie Mac and Fannie Mae are not products of free market capitalism. Fannie Mae was created in 1938 as a part of President Franklin Roosevelt’s New Deal. As private investors were discouraged from investing in home loans, the government felt it could force market out through a little manipulation, a little socialism where free market fails.
The Emergency Home Finance Act of 1970 created Freddie Mac. Acts of congress do not create free enterprise systems, at least ones that have sustainable growth or ones that don’t need government-endorsed bubbles to keep their head above water. We now suffer again the consequence of this failed socialist ideology.
Any explanation of this crisis, or any economic crisis, must explain how everyone could have been wrong. These investors make billions on seeing market trends, but in one moment everyone loses it at the same time. How can this be? The answer is staring us in the face, when the largest economic signal is thrown out of whack. Interest rates coordinate market production. When people save more, they signal a willingness to consume in the long term. More saving means more money is in the banks to be loaned, thus interest rates fall. Low interest rates mean business projects are cheaper, thus the economy expands. This expansion perfectly matches peoples’ desire to consume more in the long term.
But what happens when the money supply is increased when the government’s Magic Eight Ball tells them that the interest rates could be a bit lower? How about 1 percent? The economy expands, but this expansion is artificial; the economy is on a sugar high. The expansion is not backed by real money in the bank and people’s desire and ability to consume in the long-term. It’s a bubble and all bubbles must burst, and this bubble might just have busted the world’s economy.
The same plague that brought about the Great Depression might have just brought on another one, and if this administration takes a page out of FDR’s book and decides to go with more socialism, we will not get out of this crash anytime soon, unless maybe they throw us into another war.
Gilson, a business sophomore, can be reached via [email protected]
Hybrid economy a result of globalism
Abdul Khan
Fannie Mae is a socialist company or entity or hybrid monster that began as a response to free market capitalism gone wild. It is known that there is no point to a business other than profit. So is there a need for regulation?
The truth is, I am glad that the Equal Employment Opportunity Commission made sure that people were not rejected for employment because they were black or female. I am glad that the Occupational Health and Safety Administration said, "Yes my friend, if you want men to work on high steel you must pay for the cost of safety equipment." I am glad that factory waste from slaughterhouses is not used as the lard that I may want to cook my refried beans with.
Not all regulations are unnecessary. As a matter of fact, many of the bureaucracies created in the history of this nation are to regulate business. We now have more industries and types of corporations than ever. They each want to outdo the other to gain leverage on Wall Street. They will compete, unfairly if necessary, with labor and quality of goods and services paying the price.
A business can expect to pay about 30 percent of its income to the government to operate in the U.S. That is law, but loopholes have paved the way for them to avoid it and many pay much less. However, now you can practically e-mail a business to China or India, and many countries are better for business than us because they do not engage in destabilizing events as we do.
When it is easier and cheaper for businesses to put a "Made in China" label on something, doesn’t it make sense that they would? They are in it for bottom line, anyway. What this means is that American capital flows from us to foreign countries, thus depleting the savings.
Our capital has been depleted. We spent years printing money with no backing, thus raising prices on goods while keeping wages terrifyingly low. This happened after the fantastic ’90s. It was greed and risky business gambles; now we see the results. To second-guess it on economic principles or theory developed before the Internet and the new global economy is no more than revisionism and apologism.
Do these events have precedent? Yes. One factor at a time, the greed of Wall Street equates to capital greed in the ’20s, and low wages equates to free market maximizing profits. All these things have happened before, but now it is different. It is also time to stop hoping good debate and discussion will change anything. This conglomeration of bad stuff needs new tactics. We can legally work with Russia, China, Finland and just about anyone but Cuba.
So is this truly free market capitalism? No, because we invest our capital in socialist countries, communist countries and monarchies. This is globalism, liberalism and world economy. The rules change when supply can come from one side of the world and flow to demand in the other.
Khan, a political science and history junior, can be reached via opinionthedailycougar.com
