Thursday, November 3, 2011

Is the Present Economic and Social Mess Capitalism's Fault?

The American economy and society both are crumbling. European Union [sic] is in tatters. Majority of western world countries are on the brink of a disaster or as Doug Casey says, have entered in an eye of the hurricane. Just like the Middle Eastern countries waves of angry protests are filling the streets of Greece, Italy, Spain, UK, USA and many other occidental countries. The recent Wall Street Protest movement in America is symbolized by many as peoples' anger against Capitalism or the 1%, who are painted as wicked capitalist pigs! Many writers and so-called intellectuals are claiming that this episode in Western world is an evidence of the failure of Capitalism e.g., see here and here. Tragically, many OWS protestors are demanding Socialism!

So, is this finacial crisis and now sovereign debt default threats a wrongdoing of Capitalism? Is Capitalism responsible for peoples' misery? What is actually Capitalism? Do these writers  - who attack Capitalism - even understand what Capitalism is? I very briefly investigate these and other such questions in the following paragraphs.

Causes of Financial Crisis
The financial crisis, which began in 2007, precipitated in the present world events was actually a making of greedy government officials and its few banker buddies. Corporate greed has nothing to do with this crisis. Not only corporates are greedy, but every individual on this planet is greedy in one way or another. Businessmen work for monetary profit, an ascetic person - e.g., a monk - works for a psychological profit i.e., Nirvana. Both are greedy for achieving more and more of their subjectively chosen ends. Self interest and greed is a driving force of life. Without greed life will stagnate and stink. Bankers would have never taken this much risk if their businesses were not insured by the federal government e.g., FDIC (Federal Deposit Insurance Corporation). The so-called GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac were responsible for fueling the real estate bubble. Federal government's 'Community Reinvestment Act' resulted in the 'sub-prime mortgage crisis'. US Government created the moral hazards in the first place by creating these regulatory institutions and now they are scapegoating the corporate world for their greed and moral corruption! Federal Reserve - the American central bank, which btw is a cartel secretly created by the US government in cahoots with few big banking houses in 1913 - is the institution which provided the endless cheap money to bankers, which they then betted on risky financial instruments like MBS and other such derivative products. Federal reserve bank, under the leadership of Alan Greenspan - kept the market interest rates artificially low for too long creating an artificial real estate bubble. This bubble popped in 2007. And when this bubble popped, instead of allowing the toxic assets to liquidate in the ensuing recession, Bush and Obama governments created another big bubble on top of that bubble in the form of various stimulus packages and federal reserve 'quantitative easing (QE) programs'. Even right now the US fed has kept the interest rates to almost zero (ZIRP - Zero Interest Rate Policy) percent for up to mid 2013! These artificial stimulus are the real cause of this crisis, and by printing truck load of money under these programs the American government has surely baked in future (possible) hyperinflation and following greater depression.

Those who are interested in looking into an in-depth analysis of these events with empirical evidences should read Thomas Woods, Meltdown.

The EU Crisis
In Europe the situation is slightly different. The forceful creation of Euro and the EU by few greedy European politicians created moral hazards for the individual country government officials e.g., Ireland, Greece, Portugal, Italy, Spain etc. As Philipp Bagus analyzed in The Tragedy of the Euro, formation of these institutions created the problem of the tragedy of commons in Europe where by finding that free money is available from ECB (European Central Bank) these government piled on excessive debts. Now these governments are finding it hard to repay their debts - which are running in 100s of percentages of their GDP - and are about to default on their debt obligations. They have only two options left now: one, either default on their debt and repudiate the debt or, two, try and inflate to pay their debts in debased currency. In either case European countries are toast.

Capitalism or Government Intervention/Socialism?
The fact of the matter is, that in the whole world presently there are no free market capitalsim economy. All economies are controlled by the governments and planned centrally. US Fed, ECB, FDIC, Community Reinvestment Act, Fannie Mae and Freedie Mac etc., are not the product of free market capitalism. They are product of government interventionism and socialism. In absence of all these institutions there would have never been any real estate bubble, there would have never been any sub-prime mortgage crisis, and there would have been no EU and no Euro. In a free market economy, if some bank lent recklessly then they will surely go bankrupt. No government will come and bail them out like what is presently happening. If some business made error then it will go belly up; no one will bail them out too.

How in a world someone can blame a system for all these troubles when that system doesn't even exist?! People - especially those writers who are blaming Capitalism - need to wake up from their slumber and carefully see and analyze all the evidences by using sound economic theory. They can begin by reading the books which I have cited above. If they will do that then it won't be too late before they will figure out what I just said above i.e., if you have to blame someone for these troubles then blame your governments and their interventions in the economy.

As Lew Rockwell very aptly said, The State is the real 1%.

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