Don't Blame Capitalism

[KONGOS 0]

Peter Schiff is president of Euro Pacific Capital and was Ron Paul's economic advisor.-----------------------------------------"Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power."Source article: CLICK HERE

[Balloon guy 158]

Peter Schiff is president of Euro Pacific Capital and was Ron Paul's economic advisor.-----------------------------------------"Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.For the political left, which has long championed the need for such limits, even though they've had the capacity to do something seeing as how they schair the committee, this crisis is the opportunity of a lifetime.Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.And by using the leftist playbook and equating anyone working hard to achieve for himself and his family as greed, this columnist can continue the class warfare that is the mantra of the socialist movement in AmericaBut over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.Which would make sense to anyone that doesn't know tax laws and realizes that unless you live in the house for 2 years, you pay taxes on all the profit you makeSimilarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.Expecting people to make an educated decision about what they can afford of course is too much to ask, the 'people' are stupid and require government to intervene in their decision making processes in order to save themselves from themselves.And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power."Source article: CLICK HERE

I do agree with the premise that the government should have stayed out and let the companies and banks fail for making bad decisions. But if they are going to save the people, then why not save the companies?

[KONGOS 0]

I do agree with the premise that the government should have stayed out and let the companies and banks fail for making bad decisions. But if they are going to save the people, then why not save the companies?

I think you might have misinterpreted the tone of the article. Peter Schiff is a free-market capitalist and is not advocating saving the banks/corporations OR the people. He believes we need to let housing prices fall and take the recession/depression NOW instead of later when it will be much worse with hyper-inflation as a strong possibility."though they've had the capacity to do something seeing as how they schair the committee"Yes, Schiff is saying it's a huge political opportunity for them even though they're totally wrong."And by using the leftist playbook and equating anyone working hard to achieve for himself and his family as greed, this columnist can continue the class warfare that is the mantra of the socialist movement in America"He's saying that greed is a good thing as long as it is balanced with fear. The Govt/Fed took away that fear by lowering interest rates so drastically and basically guaranteeing bad loans. You did read this sentence right? "Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.""Which would make sense to anyone that doesn't know tax laws and realizes that unless you live in the house for 2 years, you pay taxes on all the profit you make"Most people did live in their houses for 2 years as they were couples or families and not house-flippers. The people buying and selling lots of real-estate were most likely doing 1031 exchanges therefore deferring the tax."Expecting people to make an educated decision about what they can afford of course is too much to ask, the 'people' are stupid and require government to intervene in their decision making processes in order to save themselves from themselves."You really have confused me with your responses. I can't tell if this is sarcastic and you are agreeing with Schiff...or the opposite. He believes that people were at fault just as the Govt/banks were.

[Balloon guy 158]

I think you might have misinterpreted the tone of the article. Peter Schiff is a free-market capitalist and is not advocating saving the banks/corporations OR the people. He believes we need to let housing prices fall and take the recession/depression NOW instead of later when it will be much worse with hyper-inflation as a strong possibility."though they've had the capacity to do something seeing as how they schair the committee"Yes, Schiff is saying it's a huge political opportunity for them even though they're totally wrong."And by using the leftist playbook and equating anyone working hard to achieve for himself and his family as greed, this columnist can continue the class warfare that is the mantra of the socialist movement in America"He's saying that greed is a good thing as long as it is balanced with fear. The Govt/Fed took away that fear by lowering interest rates so drastically and basically guaranteeing bad loans. You did read this sentence right? "Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.""Which would make sense to anyone that doesn't know tax laws and realizes that unless you live in the house for 2 years, you pay taxes on all the profit you make"Most people did live in their houses for 2 years as they were couples or families and not house-flippers. The people buying and selling lots of real-estate were most likely doing 1031 exchanges therefore deferring the tax."Expecting people to make an educated decision about what they can afford of course is too much to ask, the 'people' are stupid and require government to intervene in their decision making processes in order to save themselves from themselves."You really have confused me with your responses. I can't tell if this is sarcastic and you are agreeing with Schiff...or the opposite. He believes that people were at fault just as the Govt/banks were.

oh