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Mistrust Misplaced

There is a fundamental difference between our approach and that of capitalism's classical defenders and modern apologists. With very few exceptions, they are responsible - by defeault - for capitalism's destruction. The default consisted of their inability or unwillingness to fight the battle where it had to be fought: on moral-philosophical grounds.

This is from the introduction to Capitalism: The Unknown Ideal. I have mentioned that very important work a few times on this blog. When I first read that book, I recognized immediately that Rand was putting any future failure of Capitalism squarely on the shoulders of Capitalists. Capitalism is not in danger of failing on its merits, but it is in danger of being scuttled by those who would crossbreed it with socialism for the sake of personal profit. Either system can be used to gain wealth, so it is natural that some people would attempt to use both at the same time. Natural, but immoral.

The current situation with Fannie Mae and Freddie Mac has attracted a lot of attention, and little of it could be considered good for the image of Capitalism among the economically illiterate voters who struggle at America’s rudder. More regulation surely looms ahead. Could this actually be a good and necessary thing?

The Economist:

[Freddie Mac’s and Fannie Mae’s] importance lies in what their rescue says about the financial system. At Fannie and Freddie—and, shockingly, at the investment banks—the profits were privatised, but the risks were socialised. One Republican senator complained that he thought he had “woken up in France”. Mr Paulson was still right to intervene: the collapse of Fannie and Freddie would have been a catastrophe. But by not formally nationalising them, he has let down taxpayers and made the same deeply uncapitalist mistake the British government initially made with Northern Rock, a failed mortgage bank it tried to prop up.

Let me emphasize that the profits were privatised, but the risks were socialised. Silly British spelling aside, this is immoral and it ought to be illegal.

In the past, we have argued for privatising Fannie and Freddie completely. But now that the guarantee is explicit, Mr Paulson should seek to secure the gains for taxpayers and treat Fannie and Freddie like one of their own mortgages, by nationalising them, breaking them up and selling them on.

I don’t see why not. It’s got to be one or the other, but the current structure cannot be allowed to continue. Um, obviously.

One last comment from the Economist:

If you cannot let firms fail in a bust, then you must contain them in the boom. That helps explain why the investment banks now need more supervision; why financial firms should have to hold more capital as a boom gathers pace; and why monetary policy should lean against rising asset prices. Regulation is necessary, but beware the state being seduced into taking on duties it cannot possibly carry out well. As Fannie and Freddie show, regulators are easily captured and outwitted. The best controls are transparency and competition. When possible the government needs to stand back. Sadly, it failed to do so in the American mortgage market.

I don’t hear much of this type of commentary from American media and politicians, but this is exactly the case.