Posted: 03/24/08

Liberals' Wall Street Pirouette
By Thomas E. Brewton


Liberals blaming the takeover of Bear Stearns on capitalism is akin 
to blaming the homeowner if someone sets fire to his house.

Washington Post columnist E. J. Dionne, Jr. blames capitalism  
for the Wall Street meltdown that led to the collapse of Bear Stearns and its acquisition by J. P. Morgan Chase with financial support by the Federal Reserve.  Needless to say, Mr. Dionne uses his analysis to praise collectivist government 
intervention in the style of Franklin Roosevelt's New Deal alphabet 
agencies.

He writes:

"I don't fault Ben Bernanke, the Fed chairman, for being so 
interventionist in trying to save the economy. On the contrary, 
Bernanke deserves credit for ignoring all the extreme free-market 
bloviation."

Undeniably, there was gross imprudence in the fantastic degree of 
leveraging by investment banks to underwrite structured investment 
vehicles and, in Bear Stearns's case, to carry the riskiest tranches 
thereof for a seasoning period before dumping them into the secondary 
market.

In the same fashion, there was gross imprudence among the baseball 
players who used steroids, but that is no reason to condemn the game 
of baseball.

The real villain in this set of events in the Federal Reserve 
itself. 

Human beings, from the wage-earning homeowner to the Wall Street 
tycoon, will always find ways to use huge amounts of money when the 
economy is awash in liquidity created by the Fed's deliberate 
policies (what Fed chairman Bernanke laughably called, a few months 
ago, "a worldwide glut of savings").

The Fed's rampant expansion of the money supply gave false signals to 
the entire economy, leading individuals to go on a spending binge, 
buying automobiles, gizmos, and homes on credit.  The New York Times 
reported:

"...personal debt in the United States is $13.8 trillion, including 
mortgage debt, slightly less than the country's $14 trillion G.D.P."

In other words, a huge part of everything produced in the United 
States has been bought, not out of real saving, but on credit.

Equally damaging has been the misallocation of the economy's scarce 
resources induced by inflationary expansion of the money supply.  In 
the traditional capitalist economy based on savings rather than on 
credit, without lenders thrusting home mortgages and credit cards 
into the hands of non-creditworthy borrowers, the huge overproduction 
of housing would not have occurred.

That credit would not have existed had the Fed not flooded the market 
with excess money.  The Fed played the role of the man who gives 
matches to small children and tells them to set the woods afire so 
that shiny red fire trucks, with sirens and bells, will appear.

Capitalism is the precise opposite of this mindless splurging.

Capitalism is a system in which individuals are free to save or to 
spend what they get in return for their labors.  Only when they save 
(i.e., abstain from consumption) and invest their savings in more 
productive or innovative enterprises can the economy add jobs, pay 
higher wages out of the increased productivity, and increase the 
supply of desirable goods and services available to producers and 
consumers.

Capital is savings invested in productive activity.  It is the 
opposite of spending phony money created on the books of account at 
the Federal Reserve.


Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. 
The New Media Alliance is a non-profit (501c3) national coalition of 
writers, journalists and grass-roots media outlets.

His weblog is THE VIEW FROM 1776
http://www.thomasbrewton.com/

Email comments to viewfrom1776@thomasbrewton.com

By Thomas E. Brewton Email: tbrewton@thenma.org Click here for bio and archived articles