Capitalism is not the problem, it's the Market Meddlers

Our government leaders have intervened so much in our pocketbooks that investor-consumers have come to look upon both the stock market and the real-estate market as pet kittens that spit out hundred-thousand-dollar bills

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By Rocky Boschert

Capitalism, free enterprise and free markets have all been given a bad name recently. Not because they are inherently bad – but because of the people who have meddled with them. When market meddlers, or at least the ones who have power through government authorization, interfere with common sense capitalism, the law of painful unintended consequences will be quick to rear its head. And market meddlers exist at the national, state, and local level.

On the national front, interfering with the markets was clearly a function of the Federal Reserve Board during Alan Greenspan's reign (and to a lesser degree Ben Bernanke). That meddling was a major contributor to the tremendous edifice of debt and speculation that had built up over the past 20 years. Moreover, the abolition of the Glass-Steagle Act in 1999, which kept banks, insurance companies and brokerage firms separate, is also a major cause of the over-speculation, debt mania, and lack of risk management that has been endemic in financial markets since the late 1990s and during the current decade.

Now, like Humpty Dumpty, it has come toppling down, most recently on the heads of more than 500,000 American workers – casualties of the banking sector’s appetite for risky investments they had no understanding of. And these newly and soon-to-be jobless Americans have the right to ask just what their corporate master bosses were doing to receive their huge compensation packages, since generous pay obviously didn't stop management from acting like fools.

Economic muscle cars

Yet there are some happy endings. Gov. Mark Sanford of South Carolina recently noted one successful example of capitalism unimpeded by outside interference: the vibrant auto industry in his state. In fact, a number of other southern states have the same auto industry happy ending. Not surprisingly, the auto industry in these states is part of the in-sourcing efforts of Toyota, Honda, and Hyundai.

But now, like some 21st century version of Civil War politics, a few southern US Senators with Honda, Hyundai, and Toyota plants in their backyards are balking at giving the Michigan automakers money to retool and produce market competitive cars. They seem to be willing to wreck havoc on national employment stats so their states can prosper at the expense of the rest of America. So much for good 'ol American "all for one and one for all" economic analysis.

Still, as Congress debates the bailout of General Motors et al., without a radical restructuring a bailout could very well be a waste of money. Equally flawed may be the call for more regulation. What helped get us into this mess was not just a lack of regulation but also the failure to enforce the laws already in place.

Had the Federal Reserve Board, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Office of Thrift Supervision under both the Clinton and Bush Administrations’ done their jobs, there's no way all the financial institutions could have become so badly impaired, and consumers would never have been allowed to irresponsibly borrow so much money.

Support intelligent solutions

It could be that Treasury Secretary Henry Paulson (despite his admirable efforts) and the past and current governments do not understand the root cause of so much of the financial turmoil – the size and scope of the housing bubble. They seem to be operating under the misguided notion that they need to prop up house prices in order to solve the underlying problem.

In fact, the problem may be that house prices are simply still too high relative to consumer incomes. Since the beginning of the decade, consumer incomes have not kept pace with housing prices (or real inflation for that matter). As a result, a housing bubble was inevitable. And unfortunately recently tightened lending standards will put additional upward pressure on home prices. In reality, the price of housing will need to eventually decline to a level that can be supported by real incomes and financial prudent home buyers. Until that adjustment happens, we will most likely remain in a bear market.

A more productive approach toward ameliorating the housing and credit mess would be for the financial institutions and the government to try to figure out just where that level of house prices relative to incomes should be and what the size of those losses would be. Then it could be decided how the losses might be shared among the government, the public and the financial institutions.

Salute the unsung savers

In addition, something should be done for the morale of American consumers who have behaved prudently. They should get some sort of reward, just as those who behaved imprudently are undeservingly going to receive government aid at taxpayer expense. Citizen consumers who have lived within their means deserve some amount of tax-free saving reward, which, by example, would help instill the right kind of financial management skills in consumers.

With a “financial prudence” reward system, no one will feel taken advantage of and smart consumption decisions will be encouraged in others. As it now stands, the government expects the prudent to bail out the reckless, which is inherently unjust.

The future of American capitalism

We have just come through a decade-plus in which the Federal Reserve Board and our government leaders have intervened so much in our pocketbooks that investor-consumers have come to look upon both the stock market and the real-estate market as pet kittens that spit out hundred-thousand-dollar bills. But real markets are not like that at all. They are more like animals looking for weaker prey due to economic inefficiencies. The latter is what we are seeing now.

The era of "pet markets" that almost effortlessly made people richer is probably behind us. That is not to say that Americans can't still get rich through innovation, smartly building businesses, and investing in the markets. But becoming rich will be a lot harder than it has been over the past couple of decades. The withdrawal of unfettered debt access will ensure that limitation.

The upside is maybe Americans will begin again to act financially responsibly rather than blindly believing they have the right to achieve the American dream without earning it. If Americans can make that commitment to themselves, the problem of our economic success will be mostly solved.

On that note, have a Merry Christmas and a Happy New Year.

Rocky Boschert has resided in Wimberley since 1993. He currently serves as board president of the Katherine Anne Porter School (KAPS) in Wimberley. Mr. Boschert owns and manages Arrowhead Asset Management.