When capitalists are held to the same low standards as government, what kind of future can capitalism possibly have?
(Page 2 of 2)
But at the time, too many people were benefiting from the boom to raise a fuss. From the borrower living in a new home to the mortgage lenders raking in the dough, from the rich bankers earning staggering bonuses to the policymakers in Washington who didn’t want to mess with the one thing that was sustaining American growth, everybody had a stake. In July of 2007, Citigroup’s Prince summed up the attitude best when he told the Financial Times, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” (He resigned that fall.) Once the defaults started piling up among cash poor homeowners, it was only a matter of time before the problems worked their way up the food chain—from the mortgage lenders to the financial institutions that purchased their mortgage-backed securities, and up to AIG, which insured those securities against the risk of default.
Even as Wall Street executives left tremendous wreckage behind, they walked away with extraordinary sums of money. While conservatives should defend the right of an individual in a free society to be compensated based on his or her value as determined by the employer, it’s difficult to make the case that those CEOs who nuked the market truly deserved what they were receiving.
Fuld, for example, earned $484 million in salary, bonuses, and stock options from 2000 until the time he drove Lehman into bankruptcy last fall, according to ABC News (though he claimed at a Congressional hearing that the drop in Lehman’s stock put his actual holdings at around $350 million). In January it was reported that Fuld sold his $13 million mansion on Jupiter Island in Florida to his wife for $100 to protect it in advance of civil lawsuits he expects to face from angry investors.
The actions of Fuld and other top executives, as well as the disposition of assets as part of the firm’s bankruptcy sale to Barclay’s, infuriated one former Lehman employee who spoke to TAS but asked not to be identified.
“It’s like the building is burning down and they’re running out with all of the furniture,” he said. “They’re looters.”
The financial crisis that imperils the U.S. economy has already put the American taxpayer on the hook for trillions of dollars in direct bailouts and exposure to troubled assets. Milton Friedman once noted that “what we have is not a profit system; it’s a profit and loss system.” But Wall Street titans who reaped the benefits from the market when the getting was good, were quick to abandon it and seek government help once things were bad. As of this writing, the nationalization of the nation’s largest banks remains a realistic possibility.
IN A FREE MARKET, it’s inevitable that individuals will make mistakes, and in a perfectly free market, they should suffer for their bad judgment. But when misjudgment occurs on such a mass scale that it guts the entire financial system and all taxpayers end up picking up the tab anyway, where does that leave us free marketers?
Asked about the challenge the financial crisis poses to free-market conservatives, Paul Singer, founder of the hedge fund Elliott Associates and a prominent Republican contributor, suggested avoiding “stupefying” regulations and simply setting strict margin requirements to limit the amount of leverage investors take on. The regulations would apply regardless of whether the entity is a bank, hedge fund, or individual and they would have to be global in scope.
Even if investors make mistakes in such an environment, Singer said, the limits on their positions would prevent the explosion of the entire financial system. For conservatives, prudent regulation focused on improving disclosure is a noble goal, as transparency is key to a functioning free market.
If conservatives err by allowing their ideological commitment to capitalism to make them place too much trust in the actual capitalists, liberals make a mistake by not recognizing that government regulators are also susceptible to corruption, conflicts of interest, and poor judgment.
Former Fannie CEO Franklin Raines, and other top executives at the public-private mortgage financier, lined the pockets of Democratic politicians who in turn protected the company from further scrutiny. Raines, who led a student strike at Harvard in 1969, held positions in the Carter and Clinton administrations. He was awarded $90 million in compensation over five years at Fannie before he was forced to resign in 2004 amid a multi-billion dollar accounting scandal at the mortgage giant. As chairman of the Fed, Greenspan diligently evaluated arguments warning about dangers from the housing bubble and widespread use of derivatives, but ultimately dismissed them. He was dangerously wrong.
THE PROBLEM FOR CONSERVATIVES is that any failure of the market leads to more government, and any failure of government also tends to lead to more government. In this case, we are facing a major financial crisis caused by failures by both the public and private sectors. The crisis could not have happened without certain government policies, but it could have been prevented if Wall Street had shown more wisdom, humility, long-term thinking, discipline, and, ultimately, some common sense.
Even in holding the most piggish of capitalists into account, however, it is important to argue forcefully against intrusive government regulations that will smother the type of activity that is essential to successful financial markets, which help fuel economic growth. American capitalism has suffered its share of downturns, a few of them severe, but its record of generating prosperity stacks up quite nicely against European socialism.
In the United States, when unemployment went north of 7 percent, it was declared a crisis, but when it hit 7.2 percent in France early last year, President Nicolas Sarkozy boasted, “This is an important achievement, it is the best figure in 25 years.” Over the last quarter-century (1983–2008), gross domestic product in the United States averaged 3.19 percent annual growth, compared to 2.29 percent in the 27 European Union countries, according to an analysis of data from the Economic Research Service. In 2008, real per capita income was $43,512 in the U.S. and just $29,796 in the EU.
In pursuit of money and power, humans are capable of doing contemptible things. But let us not forget that when people behave badly in a capitalist system we end up with the likes of Fuld, Mozilo, and Prince, whereas when government control over the economy is taken to the extreme, we end up with Lenin, Stalin, and Mao.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online