When I was in college, the college humor magazine did a brilliant spoof of USA Today, complete with a silly poll in the lower-left-hand corner of the front page. According to their mock poll, Americans thought that the United States was the best country in the world, with about 92% of the vote.
I was reminded of this today by President’s Bush’s speech today, which the Wall Street Journal summarized as “Bush Defends American Capitalism.” The thrust of the speech was, indeed, that American-style capitalism is the best economic system there is, and that the current global crisis should not lead to a reaction against free markets.
I consider the second half of that sentence a fairly unobjectionable position. Saying that we need transparency, cooperation, and economic growth are also fairly unsurprising. However, I wouldn’t say Bush’s arguments that American capitalism – our curious mix of free-market ideology, lobbyist-driven politics, and widespread private sector capture of regulatory agencies – is the best possible expression of free markets is very convincing. Look at what he compares us to:
Meanwhile, nations that have pursued other models have experienced devastating results. Soviet communism starved millions, bankrupted an empire, and collapsed as decisively as the Berlin Wall. Cuba, once known for its vast fields of cane, is now forced to ration sugar. And while Iran sits atop giant oil reserves, its people cannot put enough gasoline in its — in their cars.
It’s also curious how Bush trots out those red herrings, like “authorities in every nation should take a fresh look at the rules governing market manipulation and fraud.” Sure, I’m against market manipulation and fraud, too, but saying they were a significant part of the global crisis is misdirection akin to calling the corporate scandals of the beginning of the decade (Enron, WorldCom, etc.) the fault of “a few bad apples.” The vast majority of the behavior of people who were selling mortgages, securitizing mortgages, rating securities, and trading credit default swaps was completely, 100%, tell-it-to-Santa-Claus legal.
Then there’s the disingenuous argument par excellence:
History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market. (Applause.) We saw this in the case of Fannie Mae and Freddie Mac. Because these firms were chartered by the United States Congress, many believed they were backed by the full faith and credit of the United States government. Investors put huge amounts of money into Fannie and Freddie, which they used to build up irresponsibly large portfolios of mortgage-backed securities. And when the housing market declined, these securities, of course, plummeted in value. It took a taxpayer-funded rescue to keep Fannie and Freddie from collapsing in a way that would have devastated the global financial system.
The idea that Fannie and Freddie were the cause of the crisis is simply false, at least in the form it usually takes, and one I’d hoped I’d heard the last of once the Presidential campaign was over. During the peak of the subprime boom, Fannie and Freddie were buying a smaller and smaller share of subprime loans in comparison to private sector institutions. Fannie and Freddie got into trouble because they were private companies using their implicit government guarantee to fund risky investments in search of higher profits; the problem was not too much government, but management and shareholders making a quick buck off the government.
For the record, I’m for free markets, not socialism. But I’m not for a lame-duck president making campaign speeches when what we need are real solutions.
Update: Hey, Felix Salmon agrees with me on this. He even uses the word “disingenuous” in roughly the same place that I do.
The Baseline Scenario 
Who you callin’ a “lame duck,” Mr. Kwak?
The president did not say, at least in what you have quoted, that Fannie and Freddie were the cause of the crisis. And in your paragraph following that quotation, you make the exact point the president was making, that the implicit government guarantee led management and shareholders to take excessive risks.
The “implicit guarantee” was indeed “too much government.”
The “implicit” government guarantee turned out to be real… so it wasn’t “implicit” at all, was it?
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.
Daniel: You’re right that Bush didn’t make the claim that I accused him of making. He has made it so often in the past, and I wasn’t reading carefully enough, so I made that mistake.
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.
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James, I wish your last comment was part of the original article. Reasoning trumps epithets.
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
Amen!