Peter Schiff in the Washington Post:
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.
Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.
But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow — until it could grow no more.
Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.
Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.
Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.
[….]
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.
The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.
Technorati Tags: investment, real estate, real estate marketing
Sean Purcell says:
Peter Schiff couldn’t be more right, as usual.
…a more robust regulatory framework must be constructed to cage the destructive forces of capitalism
couldn’t be more wrong.
It is trully scary how many people ignore the former and believe the latter.
October 16, 2008 — 9:47 am
Dave says:
Write in Ron Paul.
October 16, 2008 — 9:59 am
Sean Carr says:
I’m glad to see that Schiff is gaining some mainstream acceptance. I consolidated my old 401k’s with Euro Pacific Capital several years ago which moved allot of my savings out of USD backed equities. In light of the past few weeks, thank god. Schiff was roundly heckled by many in the mainstream media (including Steve Forbes) for being a pessimist and uber bear. How times have changed. Anyway I would recommend to people to look at Schiff’s website, even if your not interested in an account, there’s many good videos and papers on the current state of the economy.
October 16, 2008 — 10:03 am
Michael Cook says:
“Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.”
This seems a bit harsh. First, the US is by far the most capitalist society in the world, so I find it hard to believe that more socialist places like Europe, Russia or China will pass us by because of our socialist leanings. That is laugable when you think of the fact that Communist China is keeping us a float.
Second, there has to be some happy medium between the free market and regulation. Pure capitalism does not work. There are plenty of public goods pure capitalism does not provide and plenty of negative consequences of free markets (e.g. monopoly behaviors, wealth gaps, etc.). Defining the playing field has always been the goal of regulation. I will agree that regulation has gone from defining the playing field to calling in some plays, but at some point people prefer the safety of rules to the harsh penalties of the free market. I know how Mr. Swann feels about freedom vs. safety, but pure capitalism is just not practical.
Side note: The wealth gap problem has lead to the ruin of many nations. As the wealthier get wealtier and the poor get poorer, it becomes less about the system and more about situational reality.
October 16, 2008 — 10:21 am
Sean Purcell says:
Ah oh Michael, now you have gone and done it.
October 16, 2008 — 10:27 am
Greg Swann says:
> Pure capitalism does not work.
This is specious, an ends-justifies-the-means argument. Involuntary social contact resulting in material injury to one or more parties is crime. Any means of transferring values except by mutually-voluntary consent is criminal in se. Your argument consists of pitting legacy Rotarian Socialism against contemporary Rotarian Socialism, mislabeling one as being “pure capitalism,” but this does not matter. Your next move is to insist that human life without crime is not possible, which is obviously false to fact, but this also does not matter. The past failures of Rotarian Socialism always occasion calls for increased levels of Rotarian Socialism, but this also does not matter. The issue of capitalism versus every form of economically-rationalized crime is not an issue of economics, but rather one of politics and therefore ethics. There is simply no such thing as morally righteous crime. All of us enmired in the current morass can rest easy, though. Nothing will change except to get worse. But it doesn’t do to lie to ourselves. Force is crime, and our entire economic system, all over the world, throughout history, has been based to greater and lesser degrees on Kleptocracy — never on capitalism.
October 16, 2008 — 10:55 am