Why The Assault on “Free Market Capitalism” is Misguided and Ignorant
Observing what is taking place in the United States right now is a fascinating experience for anyone interested in economics. The meltdown of the American financial system, and the subsequent ripple effect this has had on the world, has demonstrated quite clearly that what most of us think about economics, and what most of us want to believe about economics, isn’t entirely accurate.
One of the more disturbing results of the financial collapse in the United States is the ongoing backlash against “free markets.” If you are to believe the popular rhetoric in much of the United States media today, greedy capitalists are responsible for all of the nation’s ills. Many would have us believe that CEOs, investment bankers, financial analysts, mortgage brokers and the wealthy raped and pillaged the US economy on a daily basis until there was finally nothing left to rape and pillage.
There’s only one problem: the United States hasn’t had anything closely resembling a free market for nearly 100 years.
The greed and excess that so many Americans believe was the cause of the financial disaster was actually a symptom rather than the cause: a market dominated by government intervention.
To understand the economic predicament the United States faces today, you have to travel back to 1913, when Congress created the Federal Reserve and delegated control over the United States’ money supply to it.
When Thomas Jefferson stated, “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered,” he knew what he was talking about. He understood that control over a nation’s supply is control over a nation and recognized the danger inherent in letting private interests create inflation and deflation.
Others have known this fact too. Mayer Amschel Rothschild, the founder of the Rothschild banking dynasty, supposedly once stated “Give me control of a nation’s money supply, and I care not who makes its laws.”
Prior to the institution of the Federal Reserve, the United States economy had experienced relatively few periods of inflation or deflation. Financial crises, though they existed, were mostly short-lived and the market corrected itself when it got out of whack.
The creation of the Federal Reserve changed that.
The Panic of 1907, which started in motion the events that led to the creation of the Federal Reserve, was quite a financial crisis. The absence of a central bank in the United States meant that there was no “lender of last resort” present to inject liquidity into the financial system as panic spread and there was a run on the banks and trusts. This crisis, we are told, was an important event that laid the groundwork for the creation of the Fed.
In his excellent book, The Creature from Jekyll Island: A Second Look at the Federal Reserve, G. Edward Griffin paints a different picture.
The Panic of 1907 was, at its core, largely the product of fractional reserve banking. Banks had simply loaned more money than they had in reserves at any given time and bank runs exposed this.
As Griffin explains, the creation of the Fed, which was sold to the American people as a means to create stability, was actually designed by the most powerful bankers in the nation at a secret meeting at Jekyll Island, Georgia. The true purpose of the Fed was to help them expand fractional reserve banking, establish a de facto cartel to thwart competition from smaller banks and to create an environment in which government bailout was implicitly guaranteed.
Monetarists, such as Milton Friedman, argued that the Great Depression was caused largely by monetary policy, specifically a misguided contraction of the money supply implemented by the Fed. In 1928, the Fed raised interest rates in response to concerns over speculation on Wall Street. The market, of course, crashed in 1929. In 1931, after the British left the gold standard, speculators turned to the US dollar, creating a mess that resulted in another interest rate hike based on a belief that by raising the rate of return that could be earned on dollar-denominated assets, speculators would be less likely to liquidate those assets. In 1932, the Fed began easing policy to increase the money supply but didn’t believe that there was a reason to do so and eventually reversed. Throughout the Great Depression, the Fed failed to deal with the banking crisis using all the powers it had.
Thus, there is a widely-held belief amongst mainstream economists that the Fed did not react correctly to the situation and that this led to the Great Depression.
Economists from the Austrian School, however, go one step further: they believe that the Fed actually played a role in fomenting the conditions for the Great Depression. Murray Rothbard, for instance, argued that the expansion of the money supply in the 1920s led to the Great Depression and that by the time the Fed started to take action in 1928, it was already too late.
There’s much to be debated here but one conclusion is inescapable: with the Federal Reserve controlling the money supply, you have anything but a free market. Indeed, as history has demonstrated, so goes the Fed goes the market. It’s no coincidence that when the Fed lowers interest rates, stock markets and asset values increase.
There’s a great irony in this. Federal Reserve Chairman Ben Bernanke, himself a student of the Great Depression, stated in 2004 that “perhaps the most important lesson of all is that price stability should be a key objective of monetary policy.”
But if price stability is a key objective of monetary policy, Bernanke, and his predecessor, Alan Greenspan, have done a poor job. Price stability has been a foreign experience over the past decade as the United States economy inflated like a balloon. The artificially low interest rates of the Greenspan era produced abundant credit that saw consumers spending every cent they had and borrowing more money cheaply to buy even more.
In short, the inflationary policies of the Fed created the illusion that the United States was awash in wealth. From houses to the stock markets, individuals could pick almost any asset class and watch it rise in value. But illusions are illusions and it wasn’t real wealth that was being created from the actual production of goods and services, it was the printing of fiat currency (and fractional reserve banking) propping up the economy.
The housing market was perhaps the greatest beneficiary of this and when it comes to the collapse of the housing market, Americans should not blame greedy mortgage brokers and investment bankers. They should blame Uncle Sam.
In an effort to give the “American Dream” (read: home ownership) to every American, the United States government provided Fannie Mae and Freddie Mack with “awfully big advantages”, including subsidies, a direct line of credit to the US Treasury and the perception of unconditional government support (read: an implicit bailout agreement).
To better understand why all of this played a major role in creating the housing bubble that served as the first domino in today’s financial collapse, exposing the house of cards that the American (and indeed global) financial system was, one needs to understand that Fannie and Freddie don’t lend money to individuals, they buy loans from lenders.
As Bill Mann explained in a Motley Fool commentary in 2004, the presence of these government-sponsored enterprises (GSEs) in the secondary market had profound consequences:
It works this way. Let’s say that you get a mortgage on your new home from Wells Fargo Bank (NYSE: WFC). Wells Fargo, like any bank, has limitations on how much money it can lend as a function of its asset base. If your loan sits on Wells Fargo’s books, it constricts how much the bank can loan. But if Wells Fargo sells the rights to Fannie Mae, it turns that loan back into cash, which it can then go out and loan again. You keep making your loan payments to Wells Fargo, and it passes these funds on to Fannie Mae. Fannie Mae makes money because it can borrow funds at a lower interest rate than you can. So instead of a single loan tying up Wells Fargo’s capital, it can turn around and make multiple loans all from the same original capital base. This, the theory goes, increases banks’ willingness to loan in good times and in bad. As a result, nearly 70% of American families own their homes.
Sorta like a chop shop. But legal.
Fannie Mae doesn’t just hold onto all of these mortgages, though. It will take your loan and package it up with hundreds of others and market them as mortgage-backed securities (MBS) that it then sells to investors (for example, insurance companies, pension funds, or even mortgage REITS like Annaly Mortgage (NYSE: NLY)). Fannie Mae provides a guarantee to these investors that they will receive timely principal and interest payments, no matter what happens with the underlying mortgages. If there are large numbers of defaults, Fannie Mae will have to make the investors whole. If there is a massive crash and defaults overwhelm Fannie Mae, it has an ace in the whole: your tax dollars. Even though the company’s debt offerings clearly state otherwise, the financial markets believe that Fannie Mae’s status as a government-sponsored enterprise implies that the government will provide full faith and credit for Fannie’s debt. It is for this reason that Fannie Mae maintains a AAA credit rating, even though at a 78:1 debt-to-equity ratio it is levered many times what is allowed international banks. (Debt is defined as mortgages on its books plus the value of its guarantees.)Fannie is exempt from regulation by the Securities and Exchange Commission (though Fannie Mae has in the last few years begun filing 10-Ks and 10-Qs), it is also exempt from state and local taxes. The U.S. president gets to appoint several board members, and the U.S. Treasury Department approves Fannie Mae’s debt issuance. And it has approved and approved and approved. Fannie Mae and Freddie Mac have virtually unlimited access to capital, at funding costs that are below the rates otherwise available on the market. As Fannie and Freddie have approached saturation in their core businesses, they’ve branched out, basically by taking on more risk. Fannie and Freddie have been arguing against the need for statutorily required mortgage insurance for loans above 80% of the value of the home, the bailiwick of private mortgage insurance providers like MGIC (NYSE: MTG), Radian Group (NYSE: RDN), and PMI Group (NYSE: PMI). Why would they do this? Because Fannie and Freddie want to cut out the expense of paying the PMI providers, even though it increases the risk of their overall portfolio.
Of course, all the risk the GSEs were taking was actually the risk of the American taxpayer.
In short, Fannie and Freddie distorted the market for mortgages. Everybody in the food chain, from lenders to mortgage brokers to investment banks, may well have been greedy, but that greed was only supported by the unnatural liquidity these GSEs injected into the market.
If there’s nobody buying what you’re selling, greed doesn’t lead to gold. There would have been little market for bullshit loans had lenders not been able to pass their risk on to the GSEs. Fortunately for them, the GSEs, with their full government backing, were there to buy up almost everything in sight, creating a level of demand that would not have existed in a free market.
In a free market, lenders would have managed their risk because they wouldn’t have been able to pass it off to a government-supported entity. Capital would have been allocated differently and the entire mess avoided.
Few politicians understood the monster that they had created.
As late as July, Barney Frank, the Chairman of the powerful House Financial Services Committee, stated “Freddie Mac and Fannie Mae are fundamentally sound…I think they are in good shape going forward.”
One of the only US politicians I know of who actually has a basic grasp of basic economics and monetary policy is Ron Paul.
In 2002, he presciently spoke out about Fannie and Freddie:
GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.
Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.
And before that, in 1999, while speaking out on the Gramm-Leach-Bliley Act, he stated:
The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.
Ron Paul understood what was taking place. As did Peter Schiff, the president of Euro Pacific Capital Inc., who predicted quite accurately the collapse that has taken place and the mechanisms by which it would occur:
I wonder if the idiots who laughed at Schiff are laughing now.
So how did Ron Paul and Peter Schiff know what was going to happen? They followed the not-so-subtle trail of government intervention in the markets, from the Federal Reserve’s foolish inflationary policies to the unsustainable beasts the government had created in the GSEs.
Paul and Schiff also happen to subscribe to the Austrian School of economics, which is beyond the scope of this post but well worth looking into for those who have an interest in the only school of economics that predicted this disaster.
Understandably, Americans are upset, confused and scared. Free market capitalism, which conjures up images of white-collar criminals, ruthless billionaires and evil multi-national corporations, is a convenient target for politicians, analysts, commentators, scholars and journalists – the vast majority of whom were as ignorant then to the bubble that was building as they are to the reasons why it popped now.
Let’s make it clear: these individuals wouldn’t know free market capitalism if it hit them in the face.
As Ludwig von Mises, one of the most prominent Austrian School economists, explained:
Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.
Unfortunately for the United States of America, which has been a deficit-spending, welfare state for decades even though most Americans were under the illusion that it was actually a capitalist state, is fast rushing to socialism, and perhaps more appropriately, fascism.
From the bailout of Wall Street to the bailout (part one) of Detroit, the politicians whose ignorance and malfeasance have supported the unsustainable system that led to the financial mess are taking action to fix it.
This makes about as much sense as asking a drunk friend who defecates in your car to drive you home in it.
But the shift towards more government intervention isn’t over. The “American Recovery and Reinvestment Plan” (chuckle) is quintessential Keynes.
By building new infrastructure, investing in clean technologies (including electric cars), computerizing healthcare records and (of course) providing some tax breaks, the United States can supposedly rebuild its economy. It’s the greatest experiment in Keynesian economics ever and it should be treated like an exotic physics experiment: the economic equivalent of a supercollider is needed. $700 billion? $800 billion? $1 trillion? Will any of this work? Will 2 million jobs be saved? Will 4 million be created? Will they be viable long-term? Who cares? It’s only paper!
Forget of course, that, in effect, over $7 trillion has already been pumped into the markets. This New Deal 2.0 is for Main Street (after K Street takes its cut).
And once the United States government fixes Wall Street, Detroit, state and local governments and just about anyone else who has dug a ditch and wants to be paid to dig more of them, it will make sure that none of this happens again by “re-regulating” the markets (I’ll discuss regulation in depth in another post).
In short, the government is going to save the day and protect the American people. Which is somewhat ironic. While Bernie Madoff sits in his Manhattan penthouse, it’s worth recognizing that the largest perpetrator of Ponzi schemes is the United States government. After all, the United States government issues new debt to new creditors to make more than $400 billion/year in interest payments to old creditors. And it uses new money put into Social Security to pay off past liabilities (including those that aren’t even related to Social Security). In other words, in both cases, the “investment” of new victims is used to pay off old victims – classic Ponzi.
Unfortunately, like all Ponzi schemes, this cannot last.
The Fed’s actions might work in the short term. Just as Alan Greenspan was able to reinflate the bubble by dropping interest rates, you cannot inject trillions of dollars into the system without having some effect (and eventually being forced to sponge up all the excess money you’ve pumped into the system once the economy starts to turn around). Unfortunately, any positive effects cannot last forever and the United States government is sowing the seeds of an event that will make this financial crisis look like a walk in the park: the collapse of the US dollar.
At some point it is highly likely that the United States will not be able to borrow money, which is required to keep the Ponzi scheme going. Already, some of the United States’ most important lenders (namely the Chinese) are purchasing fewer Treasury bonds. They have their own problems at home to worry about.
The timing couldn’t have been worse. Not only are trillion dollar deficits likely for years, the United States has more than $50 trillion in total debt when Social Security and Medicare are factored in – about the same amount as the world’s GDP. As Baby Boomers start retiring, this debt could turn into a economic time bomb, especially when one considers that the US government has mortgaged its Social Security surpluses to fund other programs and make debt payments.
As borrowing money becomes more difficult for the United States government, it will be forced to print more of it. Just like the infamous Weimar Republic did. This creates the risk of hyperinflation, something that few mainstream economists seem worried about even as trillions of dollars is created out of thin air and the United States piles on insurmountable debt. They’re more concerned about deflation, although there’s an interesting discussion to be had as to whether we’re experiencing real deflation or the side effects of massive delveraging.
In any case, the situation over the mid-to-long term is dire and when the dollar goes, the consequences will be devastating for the United States and much of the world.
The only solution to this mess is to let the market correct itself. The collapse of the financial markets and the recession are the market’s attempts to correct a unnatural system that was inherently flawed.
Politicians are standing in the way of the free market. If you listen closely, every policy, bailout and “investment” these politicians are promoting now has been designed to perpetuate the flawed system of unsustainable debt-fueled consumption and deficit spending. Everything is about getting the credit system flowing again and consumers spending again. That’s the only system they know and it’s the only system they can live with.
It’s not a system that will last. True free markets and sound money are the only option if Americans want to save their economy from eventual collapse. It’s too bad so many Americans don’t know about them and have in fact been hoodwinked into believing that free markets are the enemy.
I go back and forth on what’s more frustrating:
Is it the politicians, who created the problem, declaring to us that only they are capable of resolving the problem.
Or is it the citizens, who created the problem, who don’t realize they created the problem by electing people to office on promises that couldn’t be fulfilled.
We have failed to learn from history again. I’m reading the book Liberal Fascism by Jonah Goldberg. It’s fascinating to see our true history, and how we’re repeating our greatest economic mistakes.
Kennedy was wrong when he said, “Ask not what your country can do for you; ask what you can do for your country.”
He should have said, “Ask not what your country can do for you; ask what can I do for myself.”
Great post. Long, but worth the read.
The Happy Surfer: I’m a libertarian so I believe that citizens need to accept responsibility for their actions.
When Thomas Jefferson stated “If the American people ever allow private banks to control the issue of their money…” I have to believe that he included the words “if the American people ever allow” for good reason.
As he also stated, “The price of freedom is eternal vigilance” and that could be extended to mean “The price of financial freedom and economic stability is eternal vigilance.”
That said, there’s clearly a philosophical debate taking place in the United States, even if it’s not a very informed or sophisticated one most of the time.
It appears to me that Americans really don’t know what type of government they want. My American friends seem to like a lot of the trappings of government intervention (the services, the perceived safety net, etc.) but also know that there’s no money there to pay for it. Even so, they’re not eager to help the government out by paying higher taxes, although tax increases seem all but inevitable now.
At the end of the day, pragmatically speaking, I’ve come to the conclusion that politicians promising the world will always be elected because you won’t find a viable politician who can avoid such promises.
The best thing citizens can do is to educate themselves, stay informed and protect their assets.
anon: thanks for the kind words.
Drama you pretty much read the questions in my mind then tied all the loose ends up for me. I thought the other day that easiest way to understand how the economic systems of the world function was to watch them collapse and rebuild.
So I started reading and watching Peter Schiff and Ron Paul a few days ago and the whole think looks like a giant wrecking ball.
I’m eagerly awaiting the post on regulation of the markets (and perhaps another on the Chinese economy).
I’m also a libertarian, and I have an alternative perspective on whether a democracy’s citizens are to blame for the woes of its country, when they chose the politicians that created them. Drama thinks they are. I don’t. There are two, very important things about Western democracies that even its sceptical residents often overlook.
1) To be an important politician, you need to spend a long time in politics.
The President-Elect of the US, Barack Obama, is widely seen as young – both his supporters and detracters agree on this (one lot calls him youthful and the other calls him inexperienced.) Barack Obama is not young. He is in his late 40s. By any standard Western definition he is middle-aged, and mid-to-late middle-aged at that. David Cameron, the (still just about) probable next Prime Minister of the UK is also seen as worryingly young, despite being his early 40s. It isn’t out of the ordinary for a founder of a good-sized business to be in his 20s or 30s. Exceptional entrepreneurs have become famous millionaires in that short time. But to be a proper politician, you need to “climb the greasy pole” for a very long period of your productive life.
2) Even though it’s commonly assumed that elections are what holds politicians in check, an individual politician doesn’t really have to worry about winning them. If he’s important enough in his party, it is inevitble that he will get to experience power. Some simple assumptions:
*In the US and UK there are two parties which can win. Less stable and/or proportional representation democracies are more complicated, but tend to resolve into two blocs which serve the same purpose – the electorate have a choice of A or B.
*Elections generally happen around every 4-5 years.
*It’s exceptional to win more than two elections in a row.
Suppose your average competent politician gets to the higher echelons of his party – i.e. he’d be up for a government post if his party got into power – at the age of 40, and stays there until 65. Throughout that period power will probably change hands, from his party to the other and back again, between 3 to 6 times. If he’s important enough in his party, the whims of the electorate are basically irrelevant. For about half of the peak stage of his career, he will have a position of power.
(For evidence, read the bio of any famous current minister/secretary you like. Most will have held cabinet posts, or at least some sort of government position, the last time their party formed a government 5-10 years ago. It’s what they think of as “experience”.)
The end result is that to obtain power in a democracy, you have to work in politics for many years. Politics is not what anyone, applying any normal standard, would consider a rewarding career. It requires no talent that is of any value to society. It does not reward hard work, virtue or trustworthiness. It’s over twenty years of drudgery, arse-kissing and compromising oneself. People go through it for various reasons – good, bad and ugly reasons – but once they get to the point you’ve heard of them, they’ve basically been moulded into the same type. You certainly won’t find anyone among them who will actually reduce the power of the State once elected. People do not spend 20 years climbing a tree so they can cut it down while they’re still sitting in it.
To blame someone for making the wrong choice there has to be a right choice they could have made instead. In democracy, there isn’t. The people you get to choose from will always basically be the same type of people, and the type of person you might want to pick would never make the 20-year journey to stand in front of you.
To pick up on Jefferson’s phrase: “If the American people ever allow private banks to control the issue of their money…” there is a problem with the ideal that the populace should not “allow” the state to grow too large. The state has overwhelming military authority, the influence over economic activity that goes with it, and no effective limits on what it does with it. We, on the other hand, have superiority of numbers, but that’s it, and it’s of no use to us at the moment. To say that *we* are the ones permitting *them* to do things takes pretty high-flying logic.
Sam B: you make some valid points. I could mention the possibility of revolution (even the French have done it), but I haven’t even heard of a good riot in the United States lately so that’s probably not happening at this point.
Another way to look at it, however, that I’ll discuss in my upcoming post on regulation, is this: every individual is in control of his financial security.
Almost everyone who lost money last year due to the financial meltdown (whether through investments in the stock market or through real estate holdings) had the ability to prevent a good portion of those losses.
From performing due diligence on stock holdings to holding hard assets to living a debt-free lifestyle, there were plenty of ways to not only largely avoid losses but to profit from the situation.
It only required a little bit of research and a willingness to educate oneself.
So while it’s true that Americans may not (pragmatically-speaking) have the ability to do away with the Federal Reserve, for instance, knowing the effects of the Federal Reserve on the market and economy and understanding the consequences gave individuals the opportunity to protect their wealth.
From a scientific perspective, there is no doubt that the government caused this financial situation. From a practical perspective, even if there’s nothing that can be done to stop government’s behavior, you can make decisions to eliminate or minimize how that behavior impacts you.
In all aspects of life, you have to protect yourself. Nobody else is going to do it for you.
By the way, if Americans want to “revolt”, the best way to do it might be to rebuild their savings. Right now the government is so afraid of savings they’re actually worried about giving tax cuts (believing most Americans won’t spend the money they’re given).
When enough individuals vote with their wallets, government is powerless. Refusing to restart the engine of conspicuous debt-fueled consumption is probably the best thing Americans can do right now. It’s the first step on the path to a sound economy.
Sam B, your perspective is very interesting and unfortunately, probably accurate. Obama’s rise I still contend is impressive because he hasn’t put his time in, in the usual places. Two years as a junior Senator is largely unimpressive.
However, the powerful members of our Congress are political lifers, whose major life accomplishments are being political lifers.
I’m very disheartened right now.
This is a well researched article, very insightful. Things could get a lot worse, as you pointed out, if the Chinese stop buying our debt, which is particularly worrying.
The videos with Peter Schiff were so funny, how he got blasted by the other commentators, but was spot on.
Talk about egg on your face.
Drama: I disagree that almost everyone who’s lost money to the financial meltdown could have avoided it through sound investment. That seems to ignore the people who’ve been made redundant. The people who are really worried are the ones who never had any spare cash to invest, and would have had trouble finding the time among their consecutive part-time jobs to walk into a bank and open an account, let alone do detailed research.
A Times opinion column made a fairly good point today: the fear and loathing that arises from a recession doesn’t reflect the number of people who actually suffer catastrophic income loss, as that number is relatively limited. What it *does* reflect is that no-one knows whether they’ll be in that number. And inevitably that affects everyone’s attitude to consumption and investment.
And in a corporatist economy, where the lion’s share of economic activity is state-dictated and so follows no rational laws whatsoever, no-one can be blamed for feeling uncertain. Today you’ve got a good job making furniture because every family should own their own home (here’s a cheap mortgage, go buy some new sofas). Tomorrow you’re on the street. But the local state-run Jobcentre just hired a “diversity officer” to translate every single application form into Cornish, should you need it.
Sam B: again, you make valid points but I still argue that nearly everyone is capable of making decisions that provide protection. I’m not saying that it’s possible to avoid all ill-effects of the economy but it is possible to gain far more protection that most Americans have.
Two examples:
Career choices. If you’re making furniture, for instance, knowledge of the housing bubble might convince you to make alternative career plans (or to save like there’s no tomorrow while times are good) as it doesn’t take a rocket scientist to figure out the impact on your job.
Lifestyle choices. Whether you make $2,000/month or $20,000/month, you have full control over your lifestyle.
The hallmark of a healthy lifestyle is a reasonable gap between income and expenses. This enables savings, and savings provide for the most reliable safety net available. While I know it’s not always possible for everyone to save a huge amount each month, I believe that most people underestimate how much pork they have in their monthly budgets.
Take family. Lifestyle also extends to the decision to have children. While I don’t wish ill upon anyone, if you show me a family of 4 (husband, wife, 2 young kids) that is struggling to get by, I’m unlikely to cry a river. There are far too many people who have children without thinking of the financial consequences and running the numbers for a worst case scenario. It’s sad (especially for the children) but entirely predictable.
I know this sounds cold but it’s a cold world. Individuals can ignore reality or they can choose to take advantage of every single aspect of their lives that they do have control over. From investment decisions to career decisions to family decisions, there is always opportunity to create downside protection.
I can’t speak for other nations, but in the United States, economics needs to become a core discipline, required study for all grade levels.
Atlas Shrugged should also be required reading.
Learned something today Drama. Thanks.
I second the Atlas Shrugged suggestion.
And this is a really good point, imo:
“When enough individuals vote with their wallets, government is powerless. Refusing to restart the engine of conspicuous debt-fueled consumption is probably the best thing Americans can do right now. It’s the first step on the path to a sound economy.”
Wow, I thought this kind of thought had been banned. Pleasantly surprised someone dares make this case with this much clarity and forcefulness.