Posts Tagged ‘economics’

I just read a fabulous article from the Wall Street Journal about the current economic crisis: Click here to see article

How ironic that it is a Frenchman today that touts the virtues that America itself has seemed to forget in the midst of it’s political battles. It was also a Frenchman (DeTocqueville) who, in 1835 published a book about the very same economic principles. He praised America for wisely allowing the principle of self-interest to run its course within certain bounds.

In 1776, the United States signed the Declaration of Independence, espousing the highest ideas for human freedom, for a government’s true role: to protect the rights of the citizens, and pledging the “lives…fortunes…and sacred honor” of it’s best citizens, the founders, to make it come true. That same year, Adam Smith published his master work: “The Wealth of Nations.” Coincidence? I don’t think so.

I’m in a class right now that is in the middle of exploring the implications of our economy on our freedom and vice versa. Adam Smith suggested an impractical economy with zero government involvement: the Free Market. We live (theoretically) under capitalism, which has a limited role for government, essentially to maintain a predictable environment that facilitates honest business transactions.

DeTocqueville summarized the power of the Americans’ implementation of Adam Smith’s observations: by giving individuals freedom to pursue their own self-interest, they tend to act (collectively) in ways that promote the well-being of the entire society. Individuals gravitate to the place where they can best contribute to society. Trading freely, everyone can acquire more goods than they could alone. Because of everyone’s specialization, the entire economy produces more than it otherwise could. Resources are allocated efficiently. All of this happens without planning and without government encroaching on individual freedoms. In fact, government involvement can actually harm the system.

Take Fannie Mae for example. The following article (from the NY Times in 1999) reported on the precursors to our current economic crisis: Click here to see the article.

In summary, Fannie Mae took new interest in sub-prime loans. The Clinton administration wanted to extend home-ownership to minority groups. They used economic pressure to do it and broke the economic system in the process. Lenders had previously refused to extend “sub-prime” loans without a significant hike to their interest rates. This made it harder for people with poor credit to get a loan (including a disproportionate segment of minority groups). However, in a Capitalist system where lenders want to make money and compete for these loans, they only loan money to people that company statisticians can guarantee a profit on. Capitalistic, Fannie Mae would have bought loans as many loans as could guarantee a profit. Lenders thus lend on sound terms that benefit the company and thus benefit the whole economy. But, for political reasons, the basic Capitalistic principle of “self-interest” was violated in 1999. Because Fannie Mae is federally subsidized, part of their “self-interest” is preserving that federal subsidy. Clinton pressured them to buy sub-prime loans even though it was not in their direct, monetary self-interest. The administration didn’t see implications of their actions. Because Fannie Mae would buy sub-prime loans that were not a safe investment, lenders began extending non-secure credit to millions. It was in their self-interest to do so because Fannie Mae would buy the loans immediately, eliminating the lenders’ risk. The market quickly floods with new loans, lenders encourage EVERYONE to take out sub-prime loans at the beyond their income, the housing market booms as people buy houses, and housing costs increase. But sooner or later statistics catch up with us and we discover the reason why Fannie Mae didn’t buy sub-prime loans in the first place. Eventually, the house of cards falls betraying the best interests of the entire country, the entire economy. It happens because government involvement alters a company’s perception of today’s self-interest, betraying our entire economy.

Bottom line: government involvement (for political reasons) influenced a very large company to work counter to what its own self-interest, buying loans that statisticians could predict would not turn on a profit, and in doing so it left our entire economy to suffer the current economic crisis.

The unseen price of the same involvement is increased government power. As the government pulls power power to itself to prevent the crisis it’s own involvement created, it has greater potential to encroach on personal freedoms–in the name of preserving the economy–which will encroach on peoples’ freedom to act in their own self-interest, which distrubs the economy…you can see the cycle.

So what is bright and beautiful in this apparently dismal assessment? What justifies this political opinion being posted on this blog?

This is the bright spot: The principles on which both our nation and our economy are based support and strengthen each other. When our nation protects economic freedom to pursue individual self-interest, it protects and strengthens our freedoms. When we protect our personal freedoms, we protect our national economy. The principles of a capitalistic economy and a free society support and strengthen each other. If we really want to protect our economy and keep it both strong and stable, we can find the power to do that in the fundamental principles of our founding: government is created only to protect individual rights. If we confine our government and our leaders to their proscribed roles, we also protect our economic freedom. Each strengthening the other, we protect ourselves from the fate of Rome, Napolean’s France, and Cromwell’s England.

And both of these principles found themselves established in 1776. Coincidence? Yeah, right.


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