"A Free Market Could Have Prevented This"

The most disgusting and disheartening aspect of the current financial crisis has been the false accusations lobbied at the innocent free market in efforts to assign political blame. American Democrats especially have been guilty of this misdirection, using it to push for massive intervention in the economy which is precisely what we're seeing in their constantly-expanding pork-laden stimulus package.

Frustratingly, many defenders of capitalism appear to concede the point in their arguments. They argue for limited government and free markets without understanding or explaining what would separate those policies from the ones that got us into this mess. What's worse, these arguments are now frequently heard being spouted by CEOs and business executives. If you can't count on big business to defend capitalism, who is there left?

Luckily, there are still a few rational businessmen remaining, foremost among them John Allison, former CEO of BB&T Corp, which has been one of the few large banks capable of turning a major profit in recent years:

"[A] lot of financial institutions did dumb stuff," says Allison. "[B]ut they did it in the context of a government system that was misleading. I mean, probably all of us were misled." "Once you had this government -- through the Federal Reserve, through the [Federal Deposit Insurance Corp.], through Freddie Mac -- supporting this expansion of housing, it's easy to believe that housing prices won't ever fall," he says. "That was the context in [which] very poor decisions were made."

Allison puts this point quite clearly. Yes, poor business decision were made but they would not have occurred - at least, not for very long - had the state not encouraged short-sighted business policies through government intervention. The free market demands honesty from corporations whereas the government demands only a decent lobby group. In a free market, your decisions are either based in reality and so will prove to be profitable or they are based in self-deception or altruism and so your company will fail. This equation changes, however, once you introduce the element of government. What is sensible is no longer the ultimate standard for earning a profit and this fundamental shift reverberates through every corner of the market. We have witnessed the effects of this distortion since the 1990s.

Unlike many alleged capitalists, Mr. Allison is unwilling to let the free market take the fall for something that should clearly be laid at the feet of the government.

On the TARP bailout:

As the financial crisis takes its toll on both healthy and troubled institutions, Allison is highly critical of what he suggests is an overregulated banking industry. He says mistakes made by the Clinton and Bush administrations led to an inevitable crash in the sector. More recently, the Treasury's bailout efforts though the Troubled Assets Relief Program, or TARP, has been misguided in its approach to the problem, he says.

"This is potentially the worst economic correction that I experienced in my career," he says. "What's unique in this correction was the panic created unfortunately by the Treasury, the Fed and [former President Bush] in October."

On the "bailout & pray" approach to the state's business policy:

Allison takes issue with the government's ability to produce -- "out of the blue" -- $700 billion for the bailout package; the "incredible arbitrariness" of saving some banks and letting others fail; and the lack of consistency within the plan so far, he says.

"Markets hate that kind of stuff," Allison says.

On where this recession started:

Allison says the roots of this downturn were laid out by years of easy credit and misguided policies from the Fed and Republican and Democratic administrations.

For one, the aggressively low interest-rate management by former Fed Alan Greenspan created the "illusion of low risk" in the economy that caused consumers and investors to "save less" and "make more risky investments," he says. From the early 1990s through 2007, "we didn't have a meaningful correction," he says.

"Every time there was a bump, the Fed did everything they could to smooth that bump out," he says. "[W]hat they did was defer the problems and create a much bigger problem."

...

Most importantly, he took issue with the Clinton administration's affordable housing policy objectives, which ultimately led to the solidification of government-sponsored enterprises Fannie Mae and Freddie Mac as major players in the mortgage market.

"Homeownership is a good thing in a broad context, but encouraging people to buy homes they can't afford is not a good thing," he says. "If you want to look at the proximate cause for this mess you got to focus on Fannie Mae and Freddie Mac. They would have never existed in the free market. They drove the mortgage market."

This is a crucial point. As Kevin Gaudet from the Canadian Taxpayers Federation pointed out in a previous video, the government has begun picking and choosing which banks and institutions are worthy of saving and which ones can be allowed to burn. Unsurprisingly, the banks that they are anointing as "Too Big To Fail" are for the most part the profoundly inefficient ones.

Allison has a practical suggestion for the President:

He suggests that the government offer homebuyers a 10% tax credit to encourage consumers to purchase homes that are already built or in the process of being built in order to clear the excessive inventory. The tax credit would "create a floor on the housing market," he says.

"That's very important ... to the capital markets," he says. "... So even if it meant house prices were going to go down another 10%, but you knew that's where they were going to stop, then you could re-price the capital markets and value all this stuff."

If most business executives had Mr. Allison's integrity, the government would have never been allowed to get away with the wholesale distortion of market forces that it did and we would not be looking at one of the worst recessions in the history of the global economy.

As Allison puts it, "A free market could have prevented this."

"The World Runs On Individuals Pursuing Their Separate Interests"

Compliments of The Surly Beaver, we have an outstanding and succinct defence of capitalism as the only appropriate economic distributive system known to man.



Choice moments:

"The great achievements of civilization have not come from government bureaus."

"If you want to know where the masses are worst off, it is exactly in the kinds of societies that depart from capitalism."

"The record of history is absolutely crystal clear that there is no alternative way so far discovered of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprising citizen."

"Is it really true that political self-interest is nobler somehow than economic self-interest?

Let Them Fail: Auto Industry Bailout Would Reward Irrational Business Behaviour

It has recently been calculated by the Center for Spatial Economics that the failure of the auto industry would immediately result in the loss of 323,000 jobs in Canada. This would be particularly disastrous for the already-devastated Ontario economy since approximately 87% percent of the job loss would occur in that highly industrial province. As a result, Ontario Economic Development Minister Michael Bryant has stated publicly that it would be irresponsible for the government to allow such a collapse to occur and so, joining a chorus of voices all across the North American continent, Bryant called for a bailout of the auto industry.

But is a bailout the truly responsible decision for the government to make? Would it serve the interests of the Canadian people and save the economy from the brunt of what promises to be a terrible recession in the long run? The answer is absolutely 'no'.

Canadians are being fed the tired bromide that the fluctuations of the free market are to blame for the current financial crisis and that governmental manipulations of the economy are how we are to best achieve the economic stability and security that we seek. This notion could not be further from the truth. The auto industry is failing because it has been chained by government restrictions for decades and, furthermore, because it has pursued and continues to pursue highly irrational business policies. Rather than being punished for their errors, which would occur naturally in a free market that would force them to adapt or else fail, state representatives are declaring that these businesses are simply 'too big to fail' and that more government involvement is the solution to a problem caused by too much freedom. These businesses cannot be allowed to fail, they say.

But, as Amit Ghate writes, the failure of businesses is not merely a normal occurrence in a capitalist economy, but a crucial phenomenon for the emergence of the highest quality ideas and products. Technological advancements have driven numerous industries completely out of business - Ghate offers typewriters as a relevant example - and these advancements, and the resulting industry failures, are healthy in a free economic system. So why are we hearing so much noise about the necessity of saving the auto industry?

The Big Three are failing because investors have no interest in risking their money on poorly run companies that are already forced to work within the confines of unacceptable governmental restrictions. These restrictions include labour laws that have required companies to submit to short-sighted and financially calamitous union demands as well as fuel economy laws requiring companies to produce small vehicles at extraordinary costs that have no chance of turning a significant profit. A popular mechanics article explains the real cost of these laws:

"It takes money to build more fuel-efficient cars and trucks—lots of it. Want a diesel engine? That’s a $3000-$5000 premium per vehicle. Tack on at least another $5000 for hybrid technology. Plus, new cars and trucks have to meet stringent safety standards, and that adds weight, which in turn lowers fuel economy. Try asking a consumer to forgo the leather interior and rear-seat DVD player in their minivan to save weight. I don’t think so. Not that consumers want pokey cars and trucks anyway: No, Americans like vehicles with good passing power and low-end torque. So automakers struggle to meet all these needs, and it’s still expensive."

Rather than campaign against these governmental intrusions, however, the auto industry has turned to their powerful lobby to attempt to coerce money from taxpayers who weren't willing to give it to them voluntarily. Rather than fighting against the real cause of their trouble, these companies have accepted even greater state involvement as the solution to their current state of crisis. Unsurprisingly, we've seen the entirely predictable consequence of this decision in the United States where the price of the auto industry bailout has been a commitment to produce more small cars that meet high fuel efficiency standards, thus guaranteeing the recurrence of the exact same problems the industry is currently facing. The auto industry is guilty of a complete evasion of the realities of their business. And we believe that this is behaviour worth rewarding?

The loss of Canadian jobs is a terrible thing. However, this wrong will not be righted by prescribing as the solution that which has been the main contributing factor to its current state of crisis. Consequently, the only rational course of action is clear: let them fail. When the government runs the auto industry, the auto industry fails. Let these companies go under and hopefully from their ashes will rise rational profit-seeking businessmen and women who will be able to produce stable long-term jobs for the people of Ontario. The bailout alternative is simply too self-destructive to accept as a viable option.