Meet Mr. US Capitalism. He’s going away as we know him. Maybe we can just imagine that he’s going on the “Biggest Loser” TV show to never to be the same again. Yes, Mr. US Capitalism had been all the rage for the past thirty years. Mr. popular, indeed, promising great reward to all those who listened to his principles of free-market economics.
During his time, he did some incredible things. The US had a great and innovative economy driven by the relatively free flow of available capital. Amazingly, he continued to come up with newer and more complex investment instruments that put more and more capital into the market place. Viola, the housing market grew, new ideas were funded. Money seemed to be everywhere. Mr. US Capitalism, you were da’ man!
In fact, the rest of the world needed to benefit from such ingenuity. China, Russia, even some EU countries needed to put all their trust in Mr. US Capitalism’s message. We needed to convert all the unbelievers. After all, the Berlin Wall came down thirty years ago (well, it was November 9, 1989) declaring that the centralist economic system of the communist as nil and void. Mr. US Capitalism seemed to have made it through the Cold War as THE viable economic system.
Yes, those were the good old days. Now, Mr. US Capitalism is under attack. He wasn’t as strong and vibrant as it appeared. The credit market, and now the whole economy, have started to crumble. Ever hear of a Ponzi scheme?
So, now Mr. US government will have to bail out Mr. US Capitalism. Whether he wants to or not, Mr. US government is getting deeper and deeper into the banking business. That can only mean one thing: more and more regulations. The US will move closer to the economic systems of the EU. And right now, China is looking snug at having resisted all of the pressure from the US to take on exotic investments and to open up their financial market. South Koreans are irate at having followed the rhetoric of Mr. US Capitalism so literally. The Europeans? Well, they’re choking to stop from saying “I told you so”.
This is not an obituary column for Mr. US Capitalism. The US economy will move forward and continue to lead the world economy. The US economy will remain capitalistic in principle. However, the concepts of free-markets, deregulations, global economy are being re-evaluated. Even the Republican presidential candidate is advocating stricter Wall Street oversight. For certain, the US government will not be getting out of the banking business any time soon.
America will move forward looking a lot different. Mr. US Capitalism is on a serious diet.
I think that God, in creating man, somewhat overestimated his ability.OscarWildeOscar Wilde
You said, “newer and more complex investment instruments that put more and more capital into the market place. Viola, the housing market grew”. I beg to differ.
The Community Reinvestment Act of 1977 loosened regulations on who could give a mortgage, lowering the credit standards. In 1992, Freddie and Fannie were required to buy more loans under the CRA. The CRA became more relaxed in 1995 and again in 1999, in terms of who could get a mortgage.
In the meantime, the credit agencies and mortgage brokerage industry grew significantly. No longer did people have to produce proof of income, down payment funds, and their overall debt load. This made it easier for people to get credit.
Greedy individuals drove up the price of housing, and everybody wanted in because it seemed so easy to make money in the market.
The housing market grew because of CRA, relaxed credit standards, individual speculation and credit ratings. As people defaulted, there aren’t enough buyers to buy those assets. Real estate is a very illiquid investment and banks now have to sell foreclosed homes at a deep discount. That causes all banks to mark their assets to market, causing them to write-off potential losses. And so it continues in a spiral.
I’m very concerned about the $700 billion government bail-out. Legislators say they want to keep people in their homes. The only way to do that is to give the banks cash, and owners a lower price, perhaps interest free. How fair is that to people who bought their homes with appropriate down payments or even paid cash for it. The bail-out MUST buy preferred shares in the banks, common shareholders and bond-holders should not be allowed to reduce their risk, and homeowners who simply can’t afford it shouldn’t be allowed a government hand-out.
Back to the topic, Mr. Capitalism. Indeed we will see more regulation but regulation won’t fix the problem, the free market will fix it. Regulation and government cash infusion may keep it afloat long enough to sort out. Then we need tighter standards on lending that fundamentally changes the CRA, provides stronger valuation methods of exotic instruments, and classifies certain investments properly (such as credit default swaps as insurance policies) regardless of their branding.