The Blog @ Spolitics

Was It Really Capitalism That Failed?

One annoying aspect of the current economic turmoil is the repeated claims that capitalism has failed. But when the Federal government subsidizes home buying through tax breaks and cheap interest rates, is that capitalism? When it pressures banks to make risky loans and then uses GSE’s to create a market for those loans, is that capitalism? Was it capitalism at work when the government bailed out Bear Sterns? Of course, not — one of the cornerstones of capitalism is to let bad companies fail.

In fact, the Bear Sterns bailout sent a message to Wall Street that Uncle Sam would be there to help save the day if needed. This dissuaded companies from cleaning up their act and encouraged continued risk-taking in a horrible economic environment. If one thing should be abundantly clear, all the various bailouts have done is encourage more bailouts. That’s not capitalism. Perhaps if we were more ruthlessly capitalistic, things might not have gotten as bad as they have.

Sure, the crisis has exposed flaws in our financial system. But many of these flaws have nothing to do with free markets and instead are the result of government interaction in the markets. You can’t pin it all on capitalism and we should question the motives of anyone who’s trying to.