General25 Mar 2009 05:50 pm

Early on in US economic history its form of “free market capitalism” had numerous growing pains. The economic cycle was often punctuated with harsh and severe recessions. There were a few economic crisis and a depression or two before the Great Depression of the 30’s following the 1929 stock market crash.

The answer as to why our economic system has been relatively stable and successful since the 30’s has more to do with empire building than sound economic principles. In a previous post I outlined how a combination of natural resources, political and geographical security along with the use of other nation’s resources, labor and monetary wealth created our era of prosperity.

Coming out of WWII Germany and England were major debtor nations badly wounded by two world wars and the US was a creditor nation that capitalized on Europe’s misfortunes and chaos. Now, the US is the major debtor nation and China looks to be in position to be the next creditor nation ready to step to the forefront of economic power.

Yet, what we are doing today to try to deal with are current recession/depression is very similar to the 30’s. In both situations domestic consumer debt and easy cedit were choking the economy. In both times a financial crisis evolved from these practices which were responsible for the previous decade’s incredible boom times.

In both time periods you had/have the industrial/financial complex claiming credit for the boom while extolling the virtues of free enterprise while warning of the hazards of government intervention. In both situations you have a crisis in which the tax payer via the government took actions to stabilize the system.

In both situations you have the Federal Reserve saying that these interventions were necessary to avert a financial meltdown and restore stability to the marketplace.

Yet, economic pundits are already begining to complain about the interventions even while they are being asked for. Economic historians have a tendency to downplay the fact that the governmental interventions of the last depression were done to save the system, and that without such acts, capitalism itself might have failed. Instead they criticize the “socialistic” tendencies of many of the interventions such as job programs, social security and many of the other safety net programs which helped the little guy weather the storm.

Many economic historians go so far as to state that these programs did nothing to solve the depression and in fact they prolonged the depression. One thing is for certain those so called socialistic programs bailed out the big boys, as they are today, and supposedly saved capitalism, as they are today. So, I guess it is fair to say that these interventions are “prolonging” the economic malaise because they are prolonging the existence of capitalism.

It is ironic that the financial/industrial world takes “credit” for the boom times while it was literally credit which fostered the illusion of wealth of both the 20’s and our recent affluence. We’ve borrowed massive fortunes from future generations while we’ve exploited the riches of the entire globe.

It is also interesting to note that those countries that have surpassed the US in terms of wealth, education, health care and standard of living have many socialistic programs and tendencies which the US decries as being obstacles to capitalism and its ability to generate wealth for all citizens.

Now, in the first inning of an economic decline which will last several years, we already have economic pundits complaining of the socialistic job programs being suggested by the Obama administration. Likewise, the very entities that are relying on socialistic bailouts to stay in business and prevent the demise of capitalism are arguing that any social safety net intervention will only intensify and lengthen our current recession.

Repeating once again for emphasis. The Federal Reserve claims that the financial system was headed towards a systemic meltdown, and only their intervention in situations like AIG prevented a system failure. In other words, if it wasn’t for the un-free market government intervention the game would be over. If it wasn’t for a government sponsored tax payer funded socialistic intervention the crisis would have resulted in a financial collapse of the US and probably the globe.

Now, first it would be nice if the financial/business world admitted this and thanked the government and tax payers for their assistance, and it would be nice if they supported the government using social safety net programs to save the little guy.

The corporate world and the wealthy who benefit from it, are grousing over the prospect of having to pay more taxes. They claim, as always, that raising taxes will deplete their profit base preventing them from investing in new .and business ventures. Without this investment base no jobs would be created and the economy will stall.  While there is some truth in these statements there are many truths missed in them

First, most business expansion and research money comes from borrowing and not from profit pools. Profits in general go in executives and investors pockets while banks subsidize expansion and research.

Second, and more importantly, the average man needs government assistance just to survive and maintain a healthy standard of living. Without jobs the average “consumer” will not have any money to purchase the goods and services necessary for economic expansion. Without getting money to the consumer there can be no economic turnaround.

We are in crisis mode, and we do not have time for trickle down economics.

Even though the stock and housing markets have fallen and the credit bubble still has a long way to go, the economic pundits are still in denial. They are saying the worst is over and the stock market is already up over 20% since its low last month and will likely go up another 20% or so before the next severe leg down.

The problem is our current economic bailouts are being viewed not as a necessary intervention to temporally save the system, but as a solution to the problem. Creating more debt to pay off ridiculous levels of debt is not a solution it is a stop gap measue to prevent a collapse. Those who think that the crisis is past and our economy is about to rebound are like those who on the third floor of a skyscraper who have fled to the tenth floor of the skyscraper to avoid a fire on the first two floors. It may look good for awhile. but soon they’ll smell smoke and now there ten floors from safety instead of three.

We continue to try to solve our problem with credit and debt by creating more debt. I would say we’re way above the tenth floor right now, and it would be nice if we thought of another solution than running up more floors. I would say some safety nets are in order so we can safely jump from this burning building we’ve created.

Jim Guido

2 Responses to “Capitalism: Credit and Blame”


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  2. […] Rum Bunter | A Pittsburgh Pirates Blog added an interesting post on Capitalism: Credit and BlameHere’s a small excerptEarly on in US economic history its form of “free … today to try to deal with are current recession … debt and easy cedit were choking the… […]

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