Originally published in Flourishing November 2008.
In a brazen display of ignorance and/or cynicism, members of the media and virtually every nationally recognized politician have characterized the current credit crisis as a failure of laissez-faire capitalism. Excuse me? This crisis was created by the Federal Reserve, aided and abetted by the explicit demands made of the private capital markets by an irresponsible and unrepentant Congress. An unregulated market would never have tolerated debt-to-equity ratios of 20:1, 30:1, 40:1 or in the case of those government sponsored entities, Fannie and Freddie, 70:1. It’s plain as the nose on my face: Take a look at the balance sheets of the best-managed companies in unregulated industries. You’ll find debt-to-equity ratios in the range of 1:2 or 1:3. In an unregulated, un-coerced mortgage banking industry, similar ratios would undoubtedly be demanded by shareholders and lenders.
The fact is that job-creation and economic progress depend on private savings, massive private investment in capital goods (plants, tools, and equipment), and innovation; and that these in turn depend on an economically sound banking system and the freedom of businessmen, entrepreneurs, and capitalists to earn high profits and to accumulate great wealth. None of these depend on “easy money” doled out by the Federal Reserve Banking System or Congress. Our leaders do not see—or will not admit—that production must precede consumption. In an attempt to overturn this causal order, they still throw more cheap money at the problem they created with cheap money. Good luck, boys and girls; for as history and the great economists—from Adam Smith to Ludwig von Mises—have long ago shown, cheap money ultimately begets hyperinflation or deflation or both.
The menacing truth—ignored by the pundits and posers—is that government-mandated credit expansion was never more than the attempt by politicians to gain favor with their contemporary electorate at the expense of tomorrow’s taxpayers. My economics professor, Dr. George Reisman, calls this “the loot and plunder theory” of economics. It is the loot and plunder theory—being practiced against every productive and conscientious American—that is responsible for the credit crisis. mh