Monday, September 8, 2008

Saving Capitalism, Version 2.008

Well, then. Maybe Milton Friedman and his many devotees don't have it quite right.

Friedman, an influential economist at the University of Chicago, argued in his Capitalism and Freedom (1962) that political freedom flourished best in an environment of economic freedom. As a withering critique of the Keynesian-influenced New Deal state, his ideology gave rise to a powerful vision of national and international economics within a branch of the Republican Party in the 1980s that ascended to power alongside Ronald Reagan. Efforts to deregulate and reduce the role of government in economic markets followed.

Free-market capitalism became a rallying cry. By the 1990s, both major political parties rejoiced in its delights (remember, Bill Clinton backed and signed the North American Free Trade Agreement in 1992). John McCain is definitely a free market guy. On June 10, 2008, Barack Obama--yes, that Barack Obama--said "Look. I am a pro-growth, free-market guy. I love the market" on CNBC.

Given all this purported love of the free market, what should we make of the federal bailout of the mortgage lenders Freddie Mac and Fannie Mae, announced on Sunday?

Fannie Mae, born in 1938 as part of the New Deal's effort to put more Americans in single-family homes, was privatized by Lyndon Johnson in 1968, as the federal budget broke apart on the shoals of deep tax cuts (the one important legacy of JFK's administration) and massive deficit spending (guns AND butter--or Vietnam AND the Great Society, as the historians say). 1970 saw the creation of Freddie Mac in order to insure that Fannie Mae would not monopolize the mortgage market.

Both engaged in highly profitable but inherently unstable lending practices through the late 1990s and early 2000s. Like other lending institutions, they took on risky debt and fed a credit-addled nation. A speculative frenzy emerged because the subprime mortgage industry faced little regulation. When the bubble burst last year, both lenders went bankrupt and because the U.S. economy depended on growth in the housing market, the nation's economy--and by extension, the global economy--was gravely threatened.

So, predictably, a administration ideologically committed to Friedman's free market scrambled to take on Fannie Mae and Freddie Mac's debt. There's nothing new with government bailouts. Nixon bailed out Lockheed and the Penn Central Railroad. Carter saved Chrysler in the waning moments of his presidency. George Herbert Walker Bush ensured that the savings and loan industry survived. It's a firm reminder that at the end of the day, no matter what they claim about the free market, there's no such thing as a major party presidential administration that won't bail out a major industry or economic sector if they think national economic security depends on it.

Now taxpayers will cover the billions, maybe even trillions of dollars in necessary guarantees. The value of the dollar will surely drop, given that the national debt just soared even higher. Frankly, it remains unclear as to whether or not this move will only delay the inevitable drag on the economy that trillions of dollars of failed debt is likely to produce.

So why can't we just admit it? Not only does the "pure" free market not exist (nor has it since before the Progressive Era), but without government regulation and intervention, a "free" market doesn't do anything but create massive oscillations and economic instability (just as it did in the 1870s, 1880s, and 1890s).

Why then does anyone who critiques the free market get beaten down by policy makers of nearly every stripe?

When Franklin Roosevelt came to power in 1933, the nation was on the brink of collapse after a decade that saw an immense concentration of wealth in a small number of hands and a massive push for deregulation. As the historian Eric Rauchway recently pointed out in this book, FDR had to create a government able to dramatically intervene in the national economy in order to protect capitalism from itself. So we got the New Deal. And ever since Harry S. Truman ran on his "Fair Deal"--a drastic post World War II retreat from the New Deal (forced by an angry Republican-controlled congress)--this notion of government intervention in the marketplace has been under attack.

Why the disjuncture between the way things are and the way people say things are? Perhaps the problem is, as the social theorist Slavoj Zizek suggested in the documentary "Zisek" (2005), that in this post-Cold War world it is easier for millions of educated adults to envision an asteroid hurtling towards earth or the existence of space aliens than any sort of alternative to free market capitalism.

Maybe, just maybe, it's time to start doing exactly that. To that end, A Rye Drinker is voting for this guy in November. Want to learn more? Look here. And here. And for those of you from the TV generation, here.


Matt L said...

On the meme, saving capitalism from itself, check out Karl Polanyi's book "The Great Transformation (1944)." Pollanyi contends that the major change wrought by the industrial revolution was not mechanization, but the attempt to turn three things into market commodities: land, labor, and money. At different points attempts to treat all three as commodoties resulted in catastrophic failures and forced government interventions to protect both the public and the markets themselves.

A rye-drinker said...

Thanks for the recommendation!