It is part of the genius of the American political system that it can withstand mediocrity or worse in high places. As Alexander Hamilton [oops. Imeant James Madison!] noted in Federalist X, "enlightened statesmen will not always be at the helm," and any democratic system worth its salt must provide for the ascendency of obtuse, petty, grandstanding partisan hacks. The 110th Congress of the United States, its approval rating hovering somewhere south of 10 percent, shows that Hamilton [that is, Madiosn, see above] did not plan in vain. Did we really elect these people to represent our interests? What were we thinking? Of course, it is not only feckless members of Congress who have been provoking such bemused questions. The steely-salt taste of contagious panic has elicited all manner of silliness. Probably the stupidest trope to emerge is that the present financial panic somehow "discredits" capitalism, at least American capitalism, and that the economic fantasies of Karl Marx are set to make a comeback. You hear the former from such exalted personages as the German foreign minister and Nicolas Sarkozy, the President of France. Capitalism should be "regulated," insists President Sarkozy, neglecting the detail that Capitalism is already very highly regulated. It needs to be "refounded" on a "moral basis," he and the German foreign minister say, forgetting that a mechanism for the production of wealth is a mechanism for the production of wealth, not a family, church, court, or legislature. Step back for a moment from the question of whether the trillion-dollar "bailout" is a good idea. I admit to having grave doubts about it, especially when we saw a three-page document mushroom into a 451-page pork sandwich (honey glazed with sweeteners) at the hands of the Senate yesterday. But leave that to one side. Perhaps this expensive effort at first aid–or is it life-saving CPR?–was justified, though if it is time, if it is a little breathing space for companies with "distressed" balances sheets, that was needed, why not begin be relaxing the "mark to market" accounting rules that have just enacted one of the most spectacular financial disappearing tricks in the the history of money? An asset that was worth a $1 billion yesterday is not worth $0 today, and to pretend that it is just because there is not a buyer right now, today, is an example of financial pedantry if not financial terrorism. In 1982, the Dow Jones Industrial Average stood at 700. That's seven hundred. Over the next 25 years, the engine of democratic capitalism went into overdrive. There were hiccups and recessionary spells–in 1987, remember, the market lost some 25 percent of its value in one day–but from 1987 to the day before yesterday we saw the greatest, and longest, period of sustained economic growth in history. The current pandemonium on the Wall Streets of the world is not due to a failure of the free market. It is due to a failure to observe the rules of the free market. In The Wealth of Nations, Adam Smith noted the paradox, or seeming paradox, of capitalism: that the more individuals were left free to follow their own ends, the more their activities were "led by an invisible hand to promote" ends that aided the common good. Private pursuits conduced to public goods: that is the beneficent alchemy of capitalism. Friedrich Hayek's fundamental insight, enlarging Smith's thought, is that the spontaneous order created and maintained by competitive market forces leads to greater prosperity than a planned economy. But in recent years the "invisible hand" that adjudicates among competing interests to produce the most efficient channels of economic growth has increasingly been replaced by the heavy hand of government-sponsored social engineering. One especially onerous one is in the form of the Community Reinvestment Act, which, in its fully-developed, post-1995 form, was a gigantic wrench tossed into the engine of capitalism that stymied the orderly evaluation and pricing of risk. It's one thing to give Chris Dodd or Barack Obama a sweetheart mortgage for favors rendered. It's quite another to force banks to issue more than $1 trillion of risky mortgages to people with bad, or no, credit history and then prop them up with taxpayer guarantees through the agency of entities like Fannie Mae and Freddy Mac.Full article here, and more here. And in case you missed it yesterday, be sure to check out this must-read overview of the causes of the crisis by my colleague Mike Flynn. (via Instapundit)
Does the Financial Turmoil Discredit Capitalism?
Hardly, according to Roger Kimball: