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This Month's Scripture Verse:

But mark this: There will be terrible times in the last days. People will be lovers of themselves, lovers of money, boastful, proud, abusive, disobedient to their parents, ungrateful, unholy, without love, unforgiving, slanderous, without self-control, brutal, not lovers of the good, treacherous, rash, conceited, lovers of pleasure rather than lovers of God— having a form of godliness but denying its power. Have nothing to do with such people.
2 Timothy 3:1-5


Friday, September 19, 2014

Reviewing The Cultural Case For Capitalism Part 10 of 12

In this week's episode, Jonathan Witt tries to defend Capitalism and the Free Market from charges stemming from its association with the Housing Bubble and subsequent recession of 2008. In essence, Witt defends Capitalism and the Free Market there by saying that the economic woes of 2008 and the build up to it was due to regulations and government interference rather than having a functioning free market.

Witt makes this claim by by citing a few examples of federal interference:

  1. The government gave tax breaks to home owners but not renters.
  2. The government backed Fannie Mae and Freddie Mac suggesting that if they go in trouble, the government would bail them out.
  3. The government passed regulation that required mortgage companies to provide mortgages to people with bad credit--these were called subprime loans.
  4. The government held down interest rates to 'artificially' low levels in order to spark the economy.
Now according to Witt, all of the above created the housing bubble by temporarily increasing the demand and it seemed to work for a while but was doomed to failure. However, we should note that not only did Witt leave out a lot of details about the kinds of loans being granted, he takes for granted how the loans themselves became parts of financial products in a market that either lacked regulations or the enforcement of regulations. Thus when people began to default on loans, not all of their own doing, these financial products failed and since they were created and sold without regulatory oversight, the free market in which these financial products were sold caused a collapse and not just in the American economy, but in the world's economy as well. And what we find out is that most of the leverage problems occurred in this free market. So if we grant Witt his assertion that the market in which loans were made was not free, we still have free market failure. 

In all of this, what we see in Witt is not just a superficial handling of the Housing Bubble led recession of 2008, but an extreme selectivity in citing factors involved with the recession. How is it that Witt forgot to mention that many of the financial institutions that were hit the hardest by the bursting of the Housing Bubble were institutions not touched by the federal regulations requiring that a certain percentage of loans be given to those with questionable credit who were in need of housing? These regulations came from the Community Reinvestment Act of 1977, which was updated in 1992, and were in response to the failure of the Free Market to help certain urban communities.

In addition, doesn't Witt see that when someone who provides mortgages to people can sell those same mortgages to investors, that such mortgage providers, who are also driven by the profit motive, have less incentive to qualify those requesting loans because it would be the investors who would be on the hook for outstanding loans? And why didn't Witt question another financial product called a Credit Default Swap (CDS) that acted as  insurance policy protecting the investors who bought financial products that included the subprime loans? After all, the CDSs allowed many investors to hold an insurance policy for the same mortgage. Some have likened CDSs to many people being able to buy a home insurance policy on your house while you are the only policy owner who has a vested interest in your house's upkeep.

When the house of cards collapsed, past deregulation that erased the barrier between commercial and investment banking and allowed banks to merge so that the failure of some banks and financial institutions would be catastrophic to the economy, the government had to step in and bailout some of them out. That, according to people like Witt, is not the Free Market. But what Witt doesn't either realize or admit to is that the ingredients he associates with the Free Market including the loosening of government regulations, the reliance on competition, and the ethic of maximizing profits, which makes self-interest the only interest, in the end destroy his idyllic notion of a Free Market. The reason for this is simply that one must be concerned with others in order to maintain such an institution. The ingredients he's identified with the Free Market turns one inward and what one can gain for oneself. 

There are other criticism we can place on Witt's defense of Capitalism here. But it is more important for people to read about the Housing Bubble and subsequent recession of 2008. To gain a more balanced and informed view of all of that, one can check this UNC website (click here) or, for a less balanced but still informative source, one can check the movie Inside Job.

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