Capitalism on Trial

More than 50 years ago, in the midst of the cold war, Soviet Premier Nikita Khrushchev said, in speaking of capitalism, “We will bury you.” What he meant was that time was on the side of Communism and that the socialist system of government control of the economy would outlast the capitalist, free market approach. While Communism has faded as a military threat, it appears that Khrushchev’s vision of the inevitability of Socialism may have been accurate. Certainly, the world-wide political response of near hysteria about the credit “crisis” shows how insecure is freedom’s hold on men’s minds.

When faced with the fact that a number of privately owned banks and other financial institutions had made imprudent investments and were about to fail, our government decided that the ramifications of such failure would be intolerable. The Secretary of the Treasury and the Chairman of the Federal Reserve proclaimed a crisis and called for immediate legislative action to allow them to stave off that failure.

Even those most ardent supporters of government control of economic decisions recognize that action taken to deal with a “crisis” is likely to be misguided and surely that has been the result. First came an attempt to inject liquidity into the system so that banks would lend to each other. That failed to build confidence among those with deposits in shaky banks, so deposit “insurance” was increased and expanded to cover previously uncovered deposits. That favored banks at the expense of other institutions so money market funds had to be guaranteed. Then, insurers who had invested unwisely in risky securities came in for a handout. Now, mortgage borrowers at risk of default are hoping for a bailout along with automobile manufacturers and any other group that can squeeze in line for a government handout.

Now, essentially all financial institutions in the U.S. are being supported and are under the control of the Treasury and the Federal Reserve; public officials have to decide on a case-by-case basis who is worthy of government support and who is not. Khrushchev’s prediction is on its way to being fully borne out.

The freedoms we tout so avidly as the hallmark of our country are often thought of as relating to those guaranteed by the Bill of Rights enumerated in the Constitution. Although not enumerated, perhaps because it was never considered necessary, another important freedom is the freedom to fail – to bear the consequences of one’s own mistakes. In a system in which government controls the economy – Khrushchev’s model – economic failure is traceable to the controlling politicians and it is not allowed.

People can argue forever about what might have happened had the government not stepped in, but what has been done has been done. The issue now is what can be done to undo the damage. It is not enough to let the politicians fail by throwing them out of office because the damage they have done will live on after them, like rent control in New York City. What should be occupying the minds of economists and political scientists everywhere is how to bring to an end the disastrous policies we are adopting in the name of preventing failure.