I couldn’t agree more about the need to clarify what is and what is not guaranteed by the government. This confusion is the heart of today’s problem. We help out LTCM and Bear Stearns, but not Lehman Bros. We help AIG but not GM. One day we say we’re buying troubled mortgages, the next day we’re just buying stock in banks. Oh, and now we’re going to help homeowners renegotiate their mortgages. Things we thought were contracts now are not. As they say, that kind of confusion is what made the Depression Great.

FM

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It is true that Freddie and Fannie have always had an implicit guarantee. Freddie and Fannie used to be explicitly on the government balance sheet, until some point (in the 1960s I believe) when they were “privatized” so that their obligations wouldn’t show on the national balance sheet. Since then they have been in this gray area. In my opinion, it would have made more sense either to keep them on the government balance sheet and regulate them closely (“more government”), or to cut them loose completely like any other private institution (“less government”). The problem was the hybrid status, combined with the management behavior of a purely private, share-price-maximizing company.

Jane Q.: Well, it is very easy to argue that pure capitalism will be better than what we have, since you and I agree that we don’t have pure capitalism today. But given that we have never seen pure capitalism in operation anywhere, it’s anyone’s guess what the actual outcome would be.

The article writer mostly misses the biggest issue here, the one that has been staring everyone in the face but which few have been talking about: what American Capitalism really is.

The author calls it “our curious mix of free-market ideology, lobbyist-driven politics, and widespread private sector capture of regulatory agencies”. But that isn’t American Capitalism at all. In fact, that is not even Capitalism! That is corruption and cronyism, and is NOT part of our “official” government or economy at all.

If we want people to start appreciating Capitalism again, and seeing its real benefits, what we have to do is GET RID OF all the corruption and cronyism, and let the free markets actually be free, and let the invisible hand of Adam Smith actually start working again. Until then, people can lay out all the rhetoric they want, but what they will continue to see is not Capitalism at all.

Don’t blame any of this on Capitalism. Put the blame were it really lies: with corrupt government, financiers who made excuses but REALLY KNEW BETTER, and so on. Pussy-footing around it, and swallowing (and repeating) the official line hook and all, as the author here does more than he/she thinks, will not get anybody anywhere.

Capitalism is not and has not been the problem. Capitalism is the answer.