• Jim Kelly

Socialism caused the financial crash

Updated: Apr 19



12 years after the global financial meltdown, people are still furious about both the event and the issues it underlined. Bank bailouts. Unaffordable housing. A class system, in which the rich get richer and everyone else gets left behind in stagnating wages and mounting debt.


It's easy to understand why Bernie Sanders's pitch resonates with so many people. "We've seen the dismal results of capitalism, so join the socialist revolution. Everyone will have college degrees and homes and jobs and healthcare!"


Easy to understand, not so easy to forgive.


Bernie's premise is wrong. Not just wrong--wantonly delusional. Criminally negligent. The financial crash was not capitalism run amuck, but socialism running into the same ditch it always runs into, and leaving society-wide misery in its wake.


I know they didn't explain this in school. I know you're not hearing it from your friends. But you live and vote in a democracy, and it's not okay to accept falsehoods of this magnitude. Moreover if you're hoping for a better life in the future, you need an accurate diagnosis of what created the circumstances of today.


Recognizing Socialism


People define socialism in various ways: public ownership of the means of production, or radical democracy controlled by the workers. The socialist envisions a society where "the people" get to make the rules governing the economy.


In practice, people have to specialize. Most voters can scarcely be relied on to show up for elections once a year. They simply don't have the time, interest, or knowledge base to research and weigh every issue carefully. "The people" inevitably ends up meaning "a few people," or in other words a government. An elite few make economic decisions on in the name of "the people," and then imposes them on millions of strangers they've never met and never will.


The central planner, then, is the defining feature of socialism. A person, or a handful of people, control part of society's supply chain and impose their own whims. They decide what millions of other people should be forbidden to do, or allowed to do, or required to do. And because they're the government, they impose their rules at gunpoint, threatening anyone who doesn't comply with overwhelming violence.


The Global Financial Crash


Your leftist friends will be quick to tell you what caused the GFC: Wall Street greed. Banks preyed on innocent home buyers who just wanted a piece of the American dream, so they could make more money trading derivatives.


Greed causes market crashes in the same sense gravity causes airplane crashes. It's a thing, just a a ubiquitous, eternal one. People weren't suddenly afflicted with more of it 15 years ago.


Your friends will also tell you deregulation caused the crash. They'll point to the Graham-Leach-Bliley Act, which repealed parts of Glass-Steagal Depression-era bank regulations separating investment and commercial banks. The trouble is, the firms at the epicenter of the crash were neither one, they were mortgage companies like Countrywide and insurance companies like AIG. People seem to have seized on Glass-Steagal because it's the only financial regulation they can find that was ever repealed. It just has nothing to do with the crash.


Individual companies come and go, even industries go through cycles, but whenever the entire economy crashes in sync, you can bet central planners have been at work.


In the case of the financial crash, central planners are easy to spot. The government decided back in the 1930s that not enough Americans owned their own homes, so they set up Fannie Mae and Freddie Mac to orchestrate a secondary market for mortgages--that is, derivatives. Then in the 1970s while the federal government was still pushing for more home ownership, state and local governments decided too many homes were being built. They started passing land use restrictions, creating an increasingly severe "affordability crisis."


The Ministry of Money

But the primary blame belongs with the Federal Reserve, Washington's Soviet commissar of the money, imposing centrally planned interest rates on the rest of us.


Markets run on price signals to coordinate decisions about the best use of resources. The interest rate, the price of money, is the most important price in the economy. But the government doesn't allow markets to work out what it ought to be. It sets it according to the whims of a few PhDs and imposes it on the rest of us. Because the government is in so much debt, and because politicians prefer a soaring stock market, the Fed has been forcing interest rates to historical lows for decades.


People don't buy homes as much as they buy mortgages. Low interest rates make it cheap to sign up for mortgages. Even cheaper if you get an adjustable rate.


Having laid the trap for millions of home buyers with low introductory rates, the Fed sprung it by raising rates starting in 2004. Credit became more expensive. People could no longer afford their mortgage payments. Foreclosures started and home prices fell. Underwater homeowners stopped making payments. Mortgage and mortgage-backed security holders stopped receiving income they expected. Banks started facing up to bad loans, stopped lending as freely, and the whole global economy slumped.


The Wages of Greed


The Fed's malpractice could not be any plainer. Price caps always create shortages, and loose money policies by central banks always create crashes by luring people into debt. It happened in 2008 much the same way it happened in 1929.


It gets worse. Despite the turmoil of 2008, the world had just as much physical stuff after the crash as it did before it. Banks and other companies simply lost their beer googles and had to reassess whom they were in bed with. The market had to reassess how much homes were worth, how much securities were worth, and who owned what. It would take some months to work that out.


But the central planners never let that happen. The Fed refused to let bankrupt banks go out of business. Instead it redlined the printing presses to bail out hard-on-their-luck bankers and other giant corporations. Those trillions, though free to the Fed, are not free to you and me. They come at the expense of anyone holding dollars in a savings account or receiving them in a paycheck.


In a capitalist system, government doesn't impose barriers to entry for people wanting to start businesses. Nor does it create barriers to exit for businesses that have gone broke. Whether a bank was too greedy isn't a debate we need to have. If its bad bets caught up with it, that should be the end of the bank. Perhaps its employees will be able to find jobs in more prudent banks. Or maybe the market was sending a sign that we had too many bankers, and those people should find something more useful to do.

It's 2008 again


I wish this were just ancient history. But the Fed is still around, still run by those PhDs and still imposing the same preposterous interest rate policies in the name of "stability."


And the wheels are coming off once again. In September a key interest rate (the repo rate) the Fed wanted at 2% spiked up to 10%. To keep it subdued, the Fed started printing tens--and now hundreds--of billions of dollars. More bank bailouts are happening under our noses, without even the the excuse of a financial crisis. Constant bailouts are the new normal.


If you have a problem with bailing out bankers, I don't blame you. You should be screaming for the central planners' heads, not for a Bernie Sanders to take over the central planning. We're living in the dystopia of late stage socialism. The cure is not less capitalism, less free enterprise, and less economic freedom, but more of all three.

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©2019-20 by Jim Kelly

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