It wasn't Capitalism, Stupid

Tibor R. Machan

The Sunday, April 25, 2010, issue of The NYT Magazine carried a very clearly written essay by Roger Lowenstein, titled "Cracked Foundation, Fannie and Freddie are Broken. What would fixing them mean?" It further substantiates the point I have been making in numerous columns, essays and scholarly papers over the last several months, namely, that capitalism had nothing to do with the recent financial fiasco. Indeed, it was nearly all due to government meddling, especially with the policy exemplified best by the establishment and operation of Fannie Mae and Freddie Mac, the mortgage giants established by the federal government and recently bailed out by taxpayers at a cost of "upward of $125 billion."

As Lowenstein put it, "government support of the mortgage twins was among the original sins of the financial crisis. It stemmed from the country's affection for homeownership--a legacy of a frontier nation that subsidized homesteading for pioneers and encouraged later generations to homestead in the suburbs via the mortgage-interest deduction...."

Now whatever one may think of the sentiments that drove all this, one matter should be crystal clear: laissez-faire capitalism is entirely incompatible with such public policy. Accordingly, all the blather about how market fundamentalism (Paul Krugman's favorite term) led to the fiasco should by now be admitted to be utterly false.

There is a lot more and anyone who insist that laissez-faire capitalism is the source of our wows would need to come to terms with what the essay makes evident, namely, that government meddling, overt and covert, was the culprit. And it is useful to note that this article is published in The New York Times, a paper that has backed the Krugman explanation all along. Admittedly, the Sunday magazine has, on a few occasions, published essays and notices that put forth a dissenting account, akin to what we get from Lowenstein. The first of those I noticed was published about a year ago, by Professor Niall Ferguson of Harvard University back on May 17, 2009, titled "Diminished Returns," and made the point up front, namely, "The biggest blunder of all [behind the financial meltdown] had nothing to do with deregulation."

As I see it, the best objection to government regulations and other type of interference with people's economic activities rests on the fact that free men and women tend, in the main, to be far more competent at managing their own professional affairs than do government bureaucrats and, even more importantly, have every right to do so without others' intrusive meddling. Call it interference, call it paternalism, or call it nudging, as I understand human community affairs no one has the proper authority to manage the affairs of other people who haven't invited them to do so and have done nothing to violate anyone's rights. That this may now and then result in what some folks consider unwelcome--high risks, high or low prices, lack of full employment or complete financial security--is no excuse for the violation of anyone's rights. It is, in fact, part and parcel of a regime of individual rights that personal errors, even by large groups, will probably be made now and then. But it is far less damaging than the damage caused by governmental intrusions in the free market place.

Now this line of reasoning is out of fashion in our time because it rests on principles that are defended as true. That's because in our day pragmatism is very popular. As Rahm Emanuel, Mr. Obama's Chief of Staff put it in an interview in Bloomberg Businessweek (4/26-5/2, 2010, page 41), "Well, he [Obama] is a pragmatist....He is not wedded to a philosophy or ideology." (But, quite oddly, Mr. Emenuel adds: "[Obama] sees government mainly for setting rules and then letting the private sector operate within those rules." Oh yes? Utterly dishonest, this remark.)

Anyway, despite being a principled opponent of government interference in people's lives, economic or otherwise, I do keep my eyes on the arguments made by more empirical minded thinkers and so I welcome Mr. Lowenstein's contribution in The Times, indicating that my principled stance has the backing of the more research-minded folks.