The Financial Crisis: Government Rescues Capitalism Again
The extensive efforts by federal officials to limit the growing impact of the current economic crisis have reminded us all of something we tend to forget: just how dependent we are on government to minimize the considerable risks and dangers of a free market economy.
Conservatives like to celebrate the free market and complain about any government “interference.” But in fact we should be thankful that we can rely on government to rein in the many problems that naturally afflict this kind of economic system.
Without government coming to the rescue over and over again, life in a free market system would be unpalatable for most people.
To appreciate the kinds of failures that can trouble an unregulated market system, we need only return to the early twentieth century. In Europe and in this country, millions of people were living in the horrendous conditions created by an untamed market economy – grinding poverty, enormous economic inequality, lack of adequate health care, absence of old-age pensions, and widespread unemployment.
Add to this the unchecked and abusive power of monopolies, the environmental squalor and rampant diseases in the cities, the dangerous and often lethal working conditions, and the inevitable and hugely destructive economic depressions.
It was these unaddressed problems of capitalism that led many people to embrace radical political movements like communism and anarchism. People were driven to these political extremes by the extreme failures of the market system.
Today, fortunately, a myriad of liberal government programs have greatly reduced the problems and risks of a market economy. We have unemployment insurance, Medicare and Medicaid, food and drug regulation, the 40-hour work week, Social Security, banking deposit guarantees, the minimum wage, environmental regulations, and workplace safety rules. And perhaps most importantly, when we are facing an economic meltdown, government can step in with monetary and fiscal policies to ensure that we don’t have a major depression like the 1930s.
Ironically, modern active government’s achievements in reining in the most serious problems of capitalism have helped to foster the illusion that a market economy is relatively harmless. Few people remain alive who actually experienced the severe problems of the “bad old days” of capitalism before the New Deal. Today, many think we are living in a natural “free market” system and forget that it has been extensively tamed by a whole raft of government policies.
It is as if we lived in a world where all we knew about wild animals is what we learned by going to the circus, and thus came to believe that bears and elephants were naturally gentle creatures. The rapidly spreading and potentially disastrous financial system crisis should remind us that unfettered capitalism remains a wild economic beast that can all too easily turn on the populace.
The current crisis was created in large part because in recent years mortgage lending moved from an area of the financial system that was highly regulated to one that was relatively unregulated. Before, home loans were the province of traditional savings banks that were tightly supervised by federal regulators. But then mortgages became transformed into “mortgaged-backed securities” and “collateralized debt obligations” with little governmental supervision. This new system allowed lenders to obscure the risks of sub-prime mortgages – until the system finally collapsed.
Many free-marketeers like to fume about government regulations and large social programs, and insist that they should be drastically reduced. These government bashers should be careful what they wish for. It is these successful public sector efforts to reduce economic risks and “humanize” capitalism that has made it tolerable to the public. These liberal policies have actually created the social and political peace on which profitable business activity ultimately depends. Capitalism has succeeded in this country and retains wide spread public support not in spite of government, but largely because of government.
Even Ben Bernanke, chairman of the Federal Reserve, understands how essential government regulations and safety net programs are to maintaining public support for our market system. He has warned of the "painful dislocations" associated with capitalism and has stated that if "we did not place some limits on the downside risks to individuals affected by economic change, the public at large might become less willing to accept the dynamism that is so essential to economic progress."
Clearly, the American economy that so many people admire is not the mythical free market that operates without government interference. Our version of a market economy is highly managed and humanized by government laws and policies. And we are all better off for it. Even if it were possible to create a world of free markets that were left entirely alone by government, none of us would want to live there.
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For more on the relationship between capitalism and goverment, see Capitalism Requires Government and How Government is Good for Business.