Capitalism

[Kelly K.]

Hi, this is my first post on this site though I have been reading everything here for the past couple weeks.

I'm an aspiring objectivist I guess (in that I don't completely understand all of it yet). But I do believe in a completely free capitalist economy.

I was having an interesting little argument on the current issues in the American economy, and I said that a complete capitalist economy is the best way to go about it.

The person refuted by stating that a complete communist society works too, but we'll never get to one side completely.

Then I said Communism ignores human nature, for competition and being better is what drives us.

Then they said that complete capitalism ignores human nature.

how so?

apparently we do not like to see others fail, its just a shame, and i guess we can describe it as pity or sympathy. That's why most of us give change to a bum on the street.

so my question is: is it really human nature to not want to see someone fail?

I mean I personally don't care if others fail, its the way things have to go.

Like I said, I'm new to this whole thinking thing. I just graduated high school and now I'm trying to understand...

Please say anything you'd like to.

[DavidOdden]

so my question is: is it really human nature to not want to see someone fail?

Here are some things that are really in the nature of being human. None of this is pre-wired, but the specifics are reasonably easy to learn and the required cognitive faculties are indeed part of human nature. First, you have the capacity to reason abstractly and conceptually. Second, you are able to grasp the concept "justice". Third, you can evaluate a situation as good or bad. Fourth, you can imagine an injustice befalling you, and can evaluate it as bad. Fifth, You can therefore extend the same evaluation to an injustice befalling anyone. And here I must emphasize "injustice", as contrasted with "justice".

So if a grocer's business fails because he is plagued by gangsters or government regulators, even though it does not directly affect you, you can empathize because you understand how his fate was not caused by him and thus is not his getting his just deserts. You can apply virtually the same facts to your own life and see that the same thing might happen to you, and you can know that that would be bad. Thus it is easy for a person to recognise that it is not good that another person fail. But it happens, and we continue living.

There are quite a number of depraved people who hate the good for being good, the death-worshippers who gloat at the misfortunes of others. This is a learned trait (one which has been on the rise substantially for 50 years), not a part of "human nature". But of course your opponent, who is politically on the side of the death-worshippers, would pretend that communism somehow prevents people from failing.

In truth, communism forces all men to fail. Capitalism "allows" failure by letting men act freely according to their abilities and interests, so that some people will succeed more than others. Communism makes all men equal, by destroying all good and reducing men to the lowest level -- thus eliminating the difference between success and failure.

[RationalBiker]

Then they said that complete capitalism ignores human nature.

how so?

apparently we do not like to see others fail, its just a shame, and i guess we can describe it as pity or sympathy. That's why most of us give change to a bum on the street.

David's already given a good response, but I wanted to add this; nothing about Capitalism prevents people from acting on pity or sympathy. A capitalist system would still allow for people to be charitable to those people who are less successful. His premise does not follow through to his conclusion.

[Jake_Ellison]

The person refuted by stating that a complete communist society works too...

Communism is in fact not a perfect system, even if all the players in the game were intelligent robots, making decisions for the good of the "hive" or society or whatever you want to call it. It would be an efficient system, if we take out the selfishness of human players, up to a point (like we see in ants, bees etc.), but it does not allow for progress the way a capitalist system (or, another example: evolution based on the competition between species) does.

I don't have a good enough understanding of math and game theory at this level to use my own words, so I'm just gonna use a passage from Ray Kurzweil's "Singularity is near" to explain what I mean-read it all the way, because it's not as hard to understand as it first seems-:

( he talks about technological progress as being just another form of evolution(darwinian); "the law of accelerating returns" is irrelevant for this discussion, but it basically means this progress is speeding up exponentially as we evolve-in both darwinian and technological evolution )

"It may appear that this aspect of the law of accelerating returns contradicts the second law of thermodynamics, which implies that entropy (randomness in a closed system) cannot decrease and, therefore, generally increases. However, the law of accelerating returns pertains to evolution, which is not a closed system. It takes place amid great chaos and indeed depends on the disorder in its midst, from which it draws its options for diversity. And from these options, an evolutionary process continually prunes its choices to create ever greater order(¹). Even a crisis, such as the periodic large asteroids that have crashed into the Earth, although increasing chaos temporarily, end up increasing—deepening—the order created by biological evolution.

To summarize, evolution increases order, which may or may not increase complexity (but usually does). A primary reason that evolution—of life-forms or of technology—speeds up is that it builds on its own increasing order(¹), with ever more sophisticated means of recording and manipulating information. Innovations created by evolution encourage and enable faster evolution. In the case of the evolution of life-forms, the most notable early example is DNA, which provides a recorded and protected transcription of life's design from which to launch further experiments. In the case of the evolution of technology, ever-improving human methods of recording information have fostered yet further advances in technology. The first computers were designed on paper and assembled by hand. Today, they are designed on computer workstations, with the computers themselves working out many details of the next generation's design, and are then produced in fully automated factories with only limited human intervention.......

.......Technology, like any evolutionary process, builds on itself......"

(¹)To explain "order" , here's another quote: "Simply having more information does not necessarily result in a better fit. Sometimes, a deeper order—a better fit to a purpose—is achieved through simplification rather than further increases in complexity."

(Order in our system is basically technological/economic/scientific etc. innovation)

So even if you had perfect participants(with the same intelligence of humans, but without all the "negative" traits) making perfect decisions all the time, you would not have the kind of progress we have in a capitalist system based on competiton and trial and error (the failure of bad ideas). So if someone tells you communism is a perfect system(except for human nature), they are talking out of their ass: they are ideologs, not mathematicians or economists.

We in fact do not know what level of intelligence even our AI computers would have to reach before they perform better than a capitalist system, but it would have to be extremely high, well beyond our capacity to understand them: if such a thing even exists at all-I think it does-.

Then they said that complete capitalism ignores human nature.

how so?

apparently we do not like to see others fail, its just a shame, and i guess we can describe it as pity or sympathy. That's why most of us give change to a bum on the street.

There is something called empathy, which is part of human nature. It is a feeling, and capitalism does not ignore it: it just treats it as a feeling as opposed to a rational concept, and therefore leaves it up to individual human beings (the only ones capable of having feelings) to act on it.

When someone is forced to act on a feeling, they are no longer acting on a feeling. I think that's pretty obvious( even if we don't go into the morality of acting on feelings).

Edited October 30, 2008 by Jake_Ellison

[softwareNerd]

...so my question is: is it really human nature to not want to see someone fail?

I mean I personally don't care if others fail, its the way things have to go.

As David said, there are good reasons why one would want to see people succeed. First, think of your friends -- clearly you would not like to see them fail, because you value them. What about strangers: suppose for instance you see some unknown child trying to learn how to solve 3 + 2 = 5. Why would one want to see him fail? Imagine an adult: let's say a stranger opens a chocolate shop near where you live, and seems to be doing the normal things one would expect to start a business. Let's say you have no interest in it, perhaps being allergic to chocolate. Would you want him to fail? No. Most reasonable people would like to see success in "neutral" situations like that. Even if you see someone make a mistake, you might like to see him recover. Consider someone who has a drinking problem and is trying to change. Would any reasonable person want to see them fail and go back to being an alcoholic?

Is all this rooting for the success of strangers "natural"? That can mean a whole lot of things, but it is definitely normal and reasonable.

I'm not quite sure how this relates to Capitalism? Don't believe the economic books that tell you that Capitalism is primarily about competition. Capitalism comes from the recognition that we do not live in a zero-sum world. It comes from the recognition that trading freely can make everyone more rich.

[Publius]

It's worth taking the field of social psychology into account when assessing the efficacy of capitalism vs communism and the sustainability of either at their most extreme. A recent study I read found that worldwide and through different cultures and societies, the concept of fairness was strongly linked to how individuals perceived their economic standing compared to others. Essentially people tend to judge their standing in relative terms, not absolute terms. So if there is massive income disparity, regardless of the reason, it tends to create social upheaval. Capitalism has the effect of increasing living standards and building wealth for all, but the overall effect is heavily skewed towards relatively few individuals.

This helps explain the deep social turmoil that brought communism into being in the first place. Here in the US it gets forgotten just how much acceptance communism and socialism was making in the early 20th century due to perceived feelings of unfairness and oppression by the ruling elite and the excesses of unchecked capitalism.

So if we can find a way to rewire the human brain, through education and conditioning perhaps, it could be possible to de-link perceptions of fairness from one's position in the economic hierarchy.

Another problem with capitalism is the unpredictability of human behavior. This interesting article appeared today in the NY Times about how the variability of actors in the market defies prediction. We tend to think markets will always seek out the most efficient and equitable outcomes, and in theory they should, but the human element can cause unforeseen outcomes. Ultimately, as in the case of our current economic turmoil, risky short sighted behavior by some, say those in the banking industry, can create massive problems and devastating financial losses for nearly everyone.

Edited November 7, 2008 by Publius

[y_feldblum]

All other social systems take into account the idea that we must not think on our own and that we have a moral duty to sacrifice one to another.

However, we must think on our own and we are not moral slaves. Capitalism is the only social system which takes actual human nature into account.

[Jake_Ellison]

We tend to think markets will always seek out the most efficient and equitable outcomes, and in theory they should, but the human element can cause unforeseen outcomes. Ultimately, as in the case of our current economic turmoil, risky short sighted behavior by some, say those in the banking industry, can create massive problems and devastating financial losses for nearly everyone.

I take issue with most of what you wrote (I doubt social psychology even counts as a field of science outside liberal colleges, for instance), I think your ideas are unfounded, but the easiest thing to contradict is your last point:

1. We do not have a free economy, it's a mixed one. As far as the financial industry goes, it's barely a mixed one, since it is one of the areas the government has the most control over. I don't see how any conclusions can be drawn from the behavior of that sector, to describe the behavior of markets, in any way. You might as well say the law of gravity no longer applies because of the financial crisis, the link between the two would be just as strong.

2. If we agree to put the "market behavior" issue completely to the side, and discuss what caused the American, heavily regulated financial sector to collapse, I would still argue that the businessmen involved are far less at fault than the politicians: the government has set up mechanisms and incentives that made it very difficult, sometimes impossible, for businessmen to make rational decisions.

Do some of the people in the marketplace encourage and sponsor this type of behavior on behalf of the bureaucrats? Absolutely, they did so cynically, and they are guilty. However, most people, even on Wall Street, are victims. You have to remember that there still are plenty of companies that don't need rescuing, and would've happily grown to take the place of those who failed. The gov.'s intervention is in fact hurting these good guys, while stepping in to rescue many of the bad guys( sure, some of these bad guys might simply be guilty of "risky, short sighted behavior" -I'd call it stupid or lazy, rather than short sighted, though-, but many others are in fact accomplices to the evil done by the politicians over the decades- Fannie May and Freddie Mac execs are perfect examples)

Edited November 9, 2008 by Jake_Ellison

[gags]

Another problem with capitalism is the unpredictability of human behavior. This interesting article appeared today in the NY Times about how the variability of actors in the market defies prediction. We tend to think markets will always seek out the most efficient and equitable outcomes, and in theory they should, but the human element can cause unforeseen outcomes. Ultimately, as in the case of our current economic turmoil, risky short sighted behavior by some, say those in the banking industry, can create massive problems and devastating financial losses for nearly everyone.

The unpredictability of human behavior is one of the things that makes Capitalism so superior to other systems where the government and bureaucrats engage in economic planning and attempt to pick winners and losers. As Jake said, government involvement in markets creates distortions and misinformation that cause honest businessmen to make bad investments. By the way, in recent weeks the New York Times business writers seem to have decided they are going to make the case that deregulation caused this current financial crisis and that it could have been prevented with a few more rules. Of course, nothing could be farther from the truth.

[Publius]

(I doubt social psychology even counts as a field of science outside liberal colleges, for instance)

You are free to doubt the existence of whole fields of science if you choose, but you should at least search for justification for doing so, other than you simply disagree with the conclusions reached.

As far as the financial industry goes, it's barely a mixed one, since it is one of the areas the government has the most control over. I don't see how any conclusions can be drawn from the behavior of that sector, to describe the behavior of markets, in any way. You might as well say the law of gravity no longer applies because of the financial crisis, the link between the two would be just as strong.

You would have to find causation for government action forcing specific actions taken by individuals in the market to bolster your case.

2. If we agree to put the "market behavior" issue completely to the side, and discuss what caused the American, heavily regulated financial sector to collapse, I would still argue that the businessmen involved are far less at fault than the politicians:

Your statements here are just a general slam on government action, without specifying how a specific government action caused so much widespread misjudgment in the financial sector. You paint the government as some kind of puppet master pulling the strings of helpless investment bankers. The truth is the subprime mortgages were willfully made to feed the growing demand on Wall Street for new mortgage backed securities. Commercial banks had no interest in the ability of people to pay back the loan, because they were selling them off to Wall Street to be bundled as mortgage backed securities. They made their fees and shipped them off to a market that was hungry for more.

And no one forced AIG and other insurers of the mortgage backed securities to not keep enough capital on hand to pay out in case the securities went belly up.

Say what you want about government and its proper role, but this financial crisis is grounded in bad decision making in the banking industry. You can't tell me these guys were all so dumb as to not understand the risks they were taking with these subprime mortgage backed securities. The profits were phenomenal and no one wanted to be left out of the feeding frenzy, and this trumped measured responsible risk taking in all too many cases.

[Jake_Ellison]

You would have to find causation for government action forcing specific actions taken by individuals in the market to bolster your case.

I agree with your last point ( the one after this quote ): if I wanted to make a strong case, once again, that I am right, I would have to be far more specific. However, I've made that case myself before, and I've seen others make it on this forum, so I'm not going to do it again: if you want to discuss it, look up those post, I guess, I'm sure there are others who are willing to go through this issue again (I'm a bit bored with it myself).

But in this case(the quote), I think I've been more than thorough: the American economy is clearly a mixed one, and what happens in a mixed economy is irrelevant to what would happen in a free one. End of story.

A far as social psychology, you brought it up, I opined. Personally, I am not even interested in the subject enough to discuss it any further( I happen to know about it because I dated a girl who's a sociology major), I just wanted to give an idea to what else I disagreed with in your post.

Since you brought it up, I assume you're more interested, so feel free to open up a specific topic about it, describe it in detail, and I promise you, you'll get plenty of convincing arguments against it from people around here.

I don't know if you would agree with me on this, but isn't social psichology just a fancy name for sociology?

[gags]

You would have to find causation for government action forcing specific actions taken by individuals in the market to bolster your case.

There is plenty of evidence of this causation and there are several threads here that detail the evidence.

Your statements here are just a general slam on government action, without specifying how a specific government action caused so much widespread misjudgment in the financial sector. You paint the government as some kind of puppet master pulling the strings of helpless investment bankers. The truth is the subprime mortgages were willfully made to feed the growing demand on Wall Street for new mortgage backed securities. Commercial banks had no interest in the ability of people to pay back the loan, because they were selling them off to Wall Street to be bundled as mortgage backed securities. They made their fees and shipped them off to a market that was hungry for more.

You're ignoring the fact that the government created the secondary market for mortgages through Fannie and Freddie, two GSEs. The implicit government guarantee extended to Fannie and Freddie allowed those GSEs to have lower costs of funds while funneling the returns to private investors. This mismatch between risk (accepted by the taxpayers) and return (taken by private investors) was a recipe for disaster that had to inevitably blow up in our faces. Of course it did. The government also used the mortgage industry as a welfare program, pushing policies that gave everyone the promise of owning a house, whether they could afford it or not. Finally, the government created the oligopoly in rating agencies that caused much of the mispricing of risk in the CDO markets.

On top of all of these factors, perhaps the most important was the government's control of the money supply and interest rates. By keeping rates too low, the Fed financed the housing boom. If you can look at all of these distortions introduced into the market by government and still say that greedy businessmen were the cause, I'd say you need to re-examine your premises.

[4reason]

This helps explain the deep social turmoil that brought communism into being in the first place. Here in the US it gets forgotten just how much acceptance communism and socialism was making in the early 20th century due to perceived feelings of unfairness and oppression by the ruling elite and the excesses of unchecked capitalism.

Or... to put it in comtemporary political jargon: "Main Street v Wall Street." I wince whenever I hear that phrase. Perhaps Main Street would like to see Wall Street fail, and say they got their just desserts, but very few inhabitants of "main street" understand the implication. Sure, it might be "unfair" that Atlas has the strength to hold up the world ("What makes him so special?, many would wine, "I want to be strong too"), but wait and see what happens if you start to starve him or cut off his limbs...

The fact of the matter is, in capitalism it is not to your advantage for others to fail, so the assertion made by the other part in the referenced conversation is absurd. Maybe if they're in direct competition with you you may want them to fail, but ultimately, you want them to find something to succeed in: something that might benefit you. Maybe instead of manufacturing the exact engine that you do, they go out of business as such and instead go into the more specialized field of manufacturing a component to the engine that you still build. Better yet, by specializing in that component, your former competitor discovers a new way to make that component more efficient, which makes your product great, etc. etc.

That is the beauty of capitalism: itrecognizes that humans are unique in their abilities and allows us to work to our mutual benefit. Capitalists get tagged as "heartless" and "selfish" everyday, but the truth is they want success. They demand it. The whole system depends upon it. Consumers have to succeed in their own specialities in order to consume, just as manufacturers have to succeed in their endeavors in order to sell and keep selling. Capitalism inspires and requires success, on all levels. Are some more successful than others? Of course, but Capitalism is what lets you succeed according to your own efforts. No other system does that. And, yes, you can still be charitable - on your terms. There is nothing about capitalism that says you have to love watching others fail and suffer. With capitalism you can toss that dollar to a bum, because you were allowed to succeed and had enough excess of wealth to enable you to make that gesture vs Communism where you were told you earned that dollar but watch as it's given to someone else, but no one else seems to be benefitting either (except, perhaps, that soldier on the street corner with the big gun).

I would contend then, that it is impossible to measure success in Communism: how can you? What unit besides gunpower can you use to measure it? I prefer to use the dollar, not bullets. Let the dollar be what men trade in order to help each other mutally succeed in their own way, according to their own specialities, and according to their own efforts.

[Steve D'Ippolito]

One of the nice aspects of Galt's Gulch in AS was that those who had been out-competed were happy about it; they recognized that their lives were better *anyway*.

Ayn Rand actually passed up a perfect example of this. What, exactly, would Ellis Wyatt's oil be used for with Galt's motor in existence? That puppy could power automobiles, trucks and locomotives directly *and* provide electricty for homes. Someone in AS could have pointed this out to Wyatt, and he could have pointed out that quite a lot of petroleum is used for lubricants, plastics and asphalt--and these could now go *down* in price because they are no longer competing with uses of oil that simply burn it.

[Publius]

You're ignoring the fact that the government created the secondary market for mortgages through Fannie and Freddie, two GSEs. The implicit government guarantee extended to Fannie and Freddie allowed those GSEs to have lower costs of funds while funneling the returns to private investors.

Fannie Mae has been independently operated since 1968. This GSE managed to operate for 40 years without sabotaging the economy. What changed? The subprime mortgage market became a lucrative business. And it wasn't the GSE's that supercharged the market for subprime mortgages Here is a summary of how it all evolved:

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

the government created the oligopoly in rating agencies that caused much of the mispricing of risk in the CDO markets.

Not sure how the government directly manipulates the rating agencies. However, these are some good reasons to be critical of the rating agencies and their role in this mess.

On top of all of these factors, perhaps the most important was the government's control of the money supply and interest rates. By keeping rates too low, the Fed financed the housing boom. If you can look at all of these distortions introduced into the market by government and still say that greedy businessmen were the cause, I'd say you need to re-examine your premises.

I'll agree the interest rates were a contributing factor. But I find it difficult to imagine, despite all the government involvement in the economy, that smart people couldn't see that there were incredible risks involved in continuing to buy mortgage backed securities, and selling insurance on them. Wall Street continued on despite the risks, and its not hard to see why. Everyone was getting a cut of the action, and the the payouts were so lucrative no one wanted to be sitting on the sidelines. There were plenty of people warning of impending disaster. Few chose to listen.

[gags]

Fannie Mae has been independently operated since 1968. This GSE managed to operate for 40 years without sabotaging the economy. What changed? The subprime mortgage market became a lucrative business. And it wasn't the GSE's that supercharged the market for subprime mortgages Here is a summary of how it all evolved:

That article is an incredibly weak analysis of the mortgage crisis. The authors take a few stats about mortgage originations and make the claim that because most mortgages were originated by private companies, the government is somehow blameless. The authors ignore the fact that the GSEs made the secondary market what it is. Without that secondary market, the hundreds of billions of dollars that poured into the mortgage market could have never been deployed as capital by private lenders. The authors also ignore the government’s promotion of lending to low income people. An article that appeared in the LA Times in 1999 explains it pretty well:

“All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

http://articles.latimes.com/1999/may/31/news/mn-42807

Fannie and Freddie benefited from massive government subsidies while being owned by private investors:

"The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs). This means that, although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight."

That mismatch between risk and return eventually had to end in a disaster, and it ultimately did.

Not sure how the government directly manipulates the rating agencies. However, these are some good reasons to be critical of the rating agencies and their role in this mess.

There are essentially only 3 major rating agencies and that is the result of government actions. With their oligopoly, these agencies have done a poor job of assessing risk. That’s pretty obvious to most observers.

I'll agree the interest rates were a contributing factor. But I find it difficult to imagine, despite all the government involvement in the economy, that smart people couldn't see that there were incredible risks involved in continuing to buy mortgage backed securities, and selling insurance on them. Wall Street continued on despite the risks, and its not hard to see why. Everyone was getting a cut of the action, and the the payouts were so lucrative no one wanted to be sitting on the sidelines. There were plenty of people warning of impending disaster. Few chose to listen.

Again, when the government manipulates interest rates, anoints rating agencies, pushes lending to people who can’t afford to own homes and creates market distorting GSEs, the end result is a very expensive financial mess. This could have been avoided if the government had stayed out of the market.

[YYZ]

I have always believed that human nature supports capitalism. Many members have already made good points about this.

My argument for capitalism vs. communism has always involved fairness.

If you provide a good for someone, you expect to be compensated for it. If you don't get some sort of benefit from the action, you won't carry it out. That's human nature.

Under communism, you have to rely on the government to compensate you. If you get especially good at providing some random good, you still get the same amount of benefit as someone that sucks at providing the good. Because of human nature, you wouldn't be inclined to work hard. You can just produce like the other schmuck that isn't as good as you and get the same benefit.

Under capitalism, you have incentive to work hard. You can benefit more from beating your competitors. Because of this constant competition, everyone has to constantly innovate, and progress is made quickly. You are compensated fairly for what you produce. Fewer people fail. Unemployment is driven down. You get back what you put in. The system is at its fairest point.

Central planning cannot possibly help provide for the somewhat random undertakings of the individual. It also cannot, as someone else has already stated, rewire the brain in order to make us work for the "greater good."

Capitalism all the way.

[Haemp]

It's worth taking the field of social psychology into account when assessing the efficacy of capitalism vs communism and the sustainability of either at their most extreme. A recent study I read found that worldwide and through different cultures and societies, the concept of fairness was strongly linked to how individuals perceived their economic standing compared to others. Essentially people tend to judge their standing in relative terms, not absolute terms. So if there is massive income disparity, regardless of the reason, it tends to create social upheaval. Capitalism has the effect of increasing living standards and building wealth for all, but the overall effect is heavily skewed towards relatively few individuals.

This helps explain the deep social turmoil that brought communism into being in the first place. Here in the US it gets forgotten just how much acceptance communism and socialism was making in the early 20th century due to perceived feelings of unfairness and oppression by the ruling elite and the excesses of unchecked capitalism.

So if we can find a way to rewire the human brain, through education and conditioning perhaps, it could be possible to de-link perceptions of fairness from one's position in the economic hierarchy.

Another problem with capitalism is the...

How is it Capitalism's problem that people view it as unfair? Is soccer by its nature unfair, just because it rewards the best players? If my team preforms bad in a soccer league is this "a problem of soccer"? I don't get your point there.

This argument eventually ends where the initial problem is that man are not created equal.

[Tenure]

Gags: You're saying that Fannie and Freddie Mae removed the risk in getting involved in mortgages - that is, because there was this government safety net there, more people were encouraged to get involved in making loans. That still doesn't fully explain why investors were short-sighted enough that they didn't think that this would very easily bite them in the ass if they took advantage of it. Although I guess you could argue the point is moot - the regulation existed, and it meant they could make stupid decisions. The matter of why they did isn't important.

Regarding the CRA - although I understand it had a lot of impact in the 70s and 80s, and again in the 90s when one could no longer make mergers without having a good rating, I keep hearing again and again that it was a minority of these sub-prime loans that were made based on the CRA. Many companies made many loans they didn't need to. I can't provide a source for this, but if you've heard the same thing, I'd like to hear your response.

There are essentially only 3 major rating agencies and that is the result of government actions. With their oligopoly, these agencies have done a poor job of assessing risk. That’s pretty obvious to most observers.

Why were there only 3 rating agencies? Are they gov. controlled agencies? What is their role.

I don't have a full grasp on the whole mess, so I'm still trying to get my head round things.

[softwareNerd]

... That still doesn't fully explain why investors were short-sighted enough that they didn't think that this would very easily bite them in the ass if they took advantage of it.

I think the fundamental problem here is not short-sightedness alone, but also poor intellectual support. If one looks at the average intellectual opinion among economists and finance-professional -- for the last 10 years -- much of the actions taken were not risky, as judged by that conventional wisdom. Even though history suggests that credit booms have often ended badly, there are always enough reasons why "it's different this time". Each time, it appears stupid only in retrospect.

Here is a quote from a politician. We might disagree with some of the reasons he offers, but consider his predictions, while speaking in the US senate, many decades ago:

With the exhaustless reservoir of the Government ...furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.

Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. Regional bankers will not be free of it. They are human. All the world moves along upon a growing tide of optimism. Everyone is making money. Everyone is growing rich. It goes up and up, ... until finally someone whose judgment was bad,... breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.

That, sir, is no dream. That is the history of every movement of inflation since the world's business began, ... That is what happened to a greater or lesser degree before the panic of 1837, of 1857, of 1873, of 1893, and of 1907. ...

This speech was given by Senator root in 1913, explaining why he thought creating a Federal reserve was a bad idea.

[LovesLife]

I was having an interesting little argument on the current issues in the American economy, and I said that a complete capitalist economy is the best way to go about it.

The person refuted by stating that a complete communist society works too, but we'll never get to one side completely.

Then I said Communism ignores human nature, for competition and being better is what drives us.

Then they said that complete capitalism ignores human nature.

how so?

apparently we do not like to see others fail, its just a shame, and i guess we can describe it as pity or sympathy. That's why most of us give change to a bum on the street.

so my question is: is it really human nature to not want to see someone fail?

I mean I personally don't care if others fail, its the way things have to go.

I think you're asking the wrong question. In Capitalism, if one company competes with another, there aren't "failures" in the usual sense. Both companies will improve; they will strive to make their products better in order to please their customers and to attract new customers. All consumers of the products of both companies benefit. The companies themselves benefit through increased market size. It's win-win. If one company eventually goes out of business, they might be acquired by the other company or the employees might get jobs with the other company -- at higher prices or wages than if the competition didn't exist.

Competition is also the best way to allocate resources. Successful ventures can attract better people and afford better materials: success fuels growth and expansion and more success. In socialist or communist economies, failure is rewarded -- so failure grows and steals resources from successful ventures. The result is that everyone suffers: less growth, lower wages, poorer products, fewer jobs, etc.

[Tenure]

I think the fundamental problem here is not short-sightedness alone, but also poor intellectual support. If one looks at the average intellectual opinion among economists and finance-professional -- for the last 10 years -- much of the actions taken were not risky, as judged by that conventional wisdom. Even though history suggests that credit booms have often ended badly, there are always enough reasons why "it's different this time". Each time, it appears stupid only in retrospect.

So, the investments were made because they didn't think about what they were doing? That's what I mean by shortsightedness - whether your perspective is 'conventional wisdom' or night. I mean, how did they make such bad decisions, how was conventional wisdom so wrong? Do the conditions in the regulated market somehow cause that, or is it something else?

This speech was given by Senator root in 1913, explaining why he thought creating a Federal reserve was a bad idea.

I understand that people can make bad decisions, not because their judgement is wrong, but because you can't be universally infallible, and there is always risk. But you wouldn't describe this situation as one merely of a little "Oops, I made a bad prediction". Of course the economy grows as 'optimism' grows, but that optimism has to grow in accordance with an actual creation of wealth, not the kind of false-wealth of the last 30 years. If it's all optimism without growing then it does come crashing down, 'One brick after another', but if it has a basis, then that basis won't be too far behind the optimism. Each investment carries a certain amount of risk, but the whole economy does not at once throw all its weight behind a big gamble, unless it knows someone will pick up the tab - in which case there is no 'risk'.

[gags]

Gags: You're saying that Fannie and Freddie Mae removed the risk in getting involved in mortgages - that is, because there was this government safety net there, more people were encouraged to get involved in making loans. That still doesn't fully explain why investors were short-sighted enough that they didn't think that this would very easily bite them in the ass if they took advantage of it. Although I guess you could argue the point is moot - the regulation existed, and it meant they could make stupid decisions. The matter of why they did isn't important.

Tenure, since you’re interested in getting your arms around this crisis and what lead up to it, you should read this on Fannie and Freddie: http://gbr.pepperdine.edu/084/ff.html

It gives a brief background on Fan and Fred and it shows how government involvement with those two entities created the secondary market for mortgages and caused unprecedented amounts of capital to flow into those markets. By creating the process of mortgage securitization and backing these securities with either implicit or outright government guarantees, the impression was given that they carried less risk than turned out to actually be the case. Also, the massive flow of funds into mortgages by both foreign and domestic investors had the effect of bidding up real estate prices, thereby creating a bubble in the US residential market. The Fed also contributed to this bubble by keeping interest rates artificially low in an attempt to stave off recession.

To answer your question as to why investor were short sighted, I think it’s clear that most (not all) investors were fooled by the false signals given by low interest rates (cheap money) and government guarantees, whether they were implied or they were explicit. The other thing to remember is that risk taking is an important factor in driving economic growth. As risk increases, so does an investor’s required rate of return. When government actions send bad information to market participants and cause them to misjudge risk, the end result is poor investment decision making. In this case, the magnitude of the bad decisions is far larger than anything we’ve seen in many decades.

Regarding the CRA - although I understand it had a lot of impact in the 70s and 80s, and again in the 90s when one could no longer make mergers without having a good rating, I keep hearing again and again that it was a minority of these sub-prime loans that were made based on the CRA. Many companies made many loans they didn't need to. I can't provide a source for this, but if you've heard the same thing, I'd like to hear your response.

The fact is that the CRA was just one of many government programs and actions that encouraged home ownership among people who could not afford the associated financial burdens. Both the Republicans (Bush and his “ownership society”) and the Democrats (most recently Clinton, Dodd and Barney Frank) look at home ownership as some sort of welfare program where it’s the government’s duty to make sure that anyone who wants to own a home has the right to buy one, regardless of their financial situation. To focus only on the CRA is a mistake. This was a widely held attitude that government has had toward housing in America for at least that last 20 years. The CRA, Fannie, Freddie, FHA, etc.... are all just symptoms of this attitude.

Why were there only 3 rating agencies? Are they gov. controlled agencies? What is their role.

The rating agencies (S&P, Moody’s and Fitch) are private entities, but they benefit from SEC rules that certify them and that require their ratings for most security offerings. These 3 agencies have a great deal of power over financial and other firms that issue public debt and equity. In fact, it is nearly impossible for any business to access the public markets without ratings from one or more of these firms.

There is relatively little price competition between them and when they get a rating wrong, there isn’t much in the way of negative implications. Due to SEC rules that restrict competition, the 3 agencies are basically fat and happy no matter what happens. You might find this interesting: http://www.aei.org/publications/pubID.21743/pub_detail.asp

[Thomas M. Miovas Jr.]

I think one of the premises that led to the financial crises was the idea that the housing market would always go up -- that is, any given home would increase in value over time due to the increase in demand provided by Freddie and Fannie and the Community Reinvestment Act (especially after Clinton gave it teeth and basically forced banks to deal with high-risk home buyers). It took about fifteen years for this all to reach a new supply and demand that meant that home prices would come down because builders built so many homes in response to the artificial demand, leading to the bubble being popped. Now, fifteen years is a long time for a particular market to go up and up, so, for many investors, the housing market continued to boom for their whole career and it just became accepted that housing would always go up. But all markets reach a new equilibrium due to supply and demand, in the sense that demand creates its own supply until that market no longer goes up. In essence, the government manipulation created an artificial demand, which prompted home builders to continue to create the new supply -- until they caught up with the new demand, and then surpassed it, until one could no longer say that demand would always be greater than supply.

These premises are what led investors to package mortgages together into a new investment package that was presumed to always be increasing in value, which premises would not have born out for so long without governmental intervention. Maybe in a sense they became complacent, but this always happens when a market is booming. In picture framing, for example, G. Harvey's prints were always in very high demand, until he produced so many that he flooded the market, and so the time period between first run prints and going up in price became extended from, say, six months to several years, creating a new dynamic in that market. However, a lot of people bought many Harvey prints as investments, and when the new dynamic kicked in, they were dumped on the market. This sort of thing happened in housing until now there are many more houses out there than can be bought in short order. Now, if someone had guaranteed that Harvey prints would always go up in value, instead of letting market take its course, it would have created a crises similar to the financial crises in these prints. But since the market was permitted to take its course, shop owners and investors could adjust their sales and purchases accordingly before a crises occurred.

I highly recommend a video put out by The Ayn Rand Institute's Ayn Rand Center for Individual Rights where some of this mechanism is gone into and the free market solutions provided. It's called Capitalism without Guilt.

[Tenure]

Thanks, both of you, for the info. I'm starting to get this general idea, that it was a conglomerate of government policies that led us to the present state of today, founding on trying to chase away the hangover with more booze, and doing it all for the sake of the poor or the American Dream Of Home Ownership (well the metaphor breaks down there). The investors that got involved did so because they were fed bad information about how good the economy was doing, thanks to the cocking around with the the Interest Rates and supply of money.

Now, my only objection is the example of BB&T - they didn't get involved. Was that because, although being a big bank, they weren't big enough to need to get involved in that silliness? Or is it something else?