Those Who Forget History

You’ve heard the mantra “Those who forget history are doomed to repeat it.” I think it’s a federal requirement that this quote be repeated at the beginning of every history class everywhere. It’s like the thesis statement of history. This is held up as the reason to study history. I happen to disagree though. I think there’s a far more important and practical reason to study history and that is that you cannot understand where you are today, unless you understand how you got here and where you came from. History informs the present. Unless we know history accurately, we do not know the present accurately. This is why Orwell said, “He who controls the past controls the present. He who controls the present controls the past.”

There is so much out there today that either blatantly ignores history or is trying to rewrite it. I found another example today. This is just one of a million different entries in the file of “Capitalism caused our current crises and has been proven false.”

Goldman Sachs: Off the Hook?

This article is mostly discussing the fact that Goldman Sachs is not going to be prosecuted for their misdeeds because apparently they didn’t break any laws. That’s not quite what I want to focus on. Rather, toward the end of the article, the author includes a quote from President Obama’s 2012 State of the Union address:

In 2008, the house of cards collapsed. We learned that mortgages had been sold to people who couldn’t afford or understand them. Banks had made huge bets and bonuses with other people’s money. Regulators had looked the other way, or didn’t have the authority to stop the bad behavior. It was wrong. It was irresponsible. And it plunged our economy into a crisis that put millions out of work, saddled us with more debt, and left innocent, hard-working Americans holding the bag … We’ve put in place new rules to hold Wall Street accountable, so a crisis like that never happens again.

Now, I know… The State of the Union address was 8 months ago, but the sentiment that President Obama expresses here is still very current. It was an undercurrent in Occupy Wall Street. It’s part of the defining platform for the Democrats. It seems to be the consensus analysis of the financial crisis.

In this statement, President Obama described the climax of the crises right before everything collapsed. “[M]ortgages had been sold to people who couldn’t afford or understand them.” This was true. “Banks had made huge bets and bonuses with other people’s money.” This was also true. “Regulators had looked the other way.” Was this true? Maybe maybe not. In order to answer this question, we must understand why the first two realities were true. Why had mortgages been sold to people who couldn’t afford or understand them? Why were banks making huge bets and bonuses with other people’s money? The liberals want us to just accept their conclusion that it’s just because people are greedy and therefore they were willing to screw others over in order to get what they wanted. Now, I’m not going to say that that’s impossible. People are sinful and there’s no limit on the breadth and depth of human depravity. Greed drives people to commit fraud all the time. But nevertheless, we must deal in the world of actual fact. Rather than knowing that greedy people exist and therefore just concluding that this must be greed, we should be concerned with what actually happened, and when an entire industry seems to behave in the exact same way, then that’s an indicator that something else might just be going on.

In fact, when we look at history we discover that the reason for both of these realities is not the inherent greed and corruption in capitalism, it’s because of the misguided policies of liberal government regulation designed to correct a perceived inequality. For years the Free Market had kept this system in check by not selling mortgages to people who could not afford or understand them because when one such person would come to apply for a mortgage the banker would say “This is a bad risk,” and the person would be turned away.

In 1977, President Jimmy Carter looked at this and found out that, surprise surprise, the vast majority of such individuals were from low income neighborhoods. Imagine that! Someone with low income can’t afford to buy a house! This is inequality! So the Community Reinvestment Act was passed which required banks to meet a quota of issuing loans to people who couldn’t afford them as a way to try to help them out of their situation. Only a democrat could imagine that taking on more debt and spending beyond your means is the path to wealth, but I digress.

At any rate, it didn’t work. Banks were still reluctant to make these loans because they felt stuck. Either they give out these loans that they know are going to default or they break the law. Bankers erred on the side of breaking the law. So in 1995, under the direction of President Bill Clinton, major changes to the legislation were made which gave rise to Fannie Mae and Freddy Mac coming in and buying those loans off of the banks. So essentially the government was saying “Make these loans and if there is a default, we’ll buy the loan off of you.” This gave rise to the entire system that allowed Goldman Sachs to even do what it was doing.

So did Regulators look the other way? Yes and no. In any economic environment that is even remotely capitalist, businesses will find a way to make money. The government can try to set the terms of the environment, but these truths will always remain: businesses will find a way to make money and they will do it by taking some sort of risk. It’s the nature of the beast. In the case of the most recent collapse, the government had set up the environment such that the risks they were taking involved other peoples’ money. This, as William A. Niskanen of the Cato Institute predicted back in the 90’s has been very costly to the economy and the banking system in general. Don’t get me wrong. I’m not letting Bush off the hook. In fact, the degree to which regulators looked the other way is mostly due to the fact that he rolled back regulations twice in 2005 and in 2007 which exacerbated the problem. But the statement that regulators looked the other way is intended to convey this idea that capitalists went out and did these naughty things all on their own without any moral compass whatsoever and if the Whitecloaks in government had been doing their jobs they would have put a stop to this whole thing. But this is completely inconsistent with the history of the issue. In fact, it was regulation and the regulators that were pushing the capitalists to do the very things that they were doing! The statists have deceived people into believing that capitalism has failed because of its inherent flaws and the government is the white knight standing ready to rescue us.

Anytime we allow politicians to convince us that the federal government can actively and positively create wealth, we are being duped. They are only telling us this because they want our votes. In fact, the government cannot create wealth. All they can do is set the playing field on which the players in capitalism will create wealth. Government can set some reasonable boundaries to keep businesses from going too far in certain directions, like defining more clearly what constitutes fraud, but they cannot create wealth. The best they can do is steal the wealth from others through taxation to provide incentives for businesses to create wealth in a certain way. But whether or not they do this, the only engine that has ever positively created wealth in the history of mankind is the Free Market.

So, can we please stop blaming Capitalism for the failures of government? I’m not an anarchist. I think government is necessary to a degree, but people have allowed the wool to be pulled over their eyes in believing that the government can do no wrong and anything bad that happens is the fault of capitalism. President Obama says “We tried that top down approach. It’s what caused the mess in the first place.” With all do respect, Mr. President, we haven’t, and it didn’t. It was liberal political policies designed to force equal outcomes despite unequal inputs that caused us to fall into this problem. This is not a failure of capitalism, it is a failure of liberalism.

Can we please finally see this for what it is?