Steve Forbes gave a very good talk today, on the topic of his new book (co-authored with Elizabeth Ames), How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy. Just as importantly, though, he also explained how it was the undermining of capitalism by persistent government intervention that brought us to the current financial crisis. He singled out a few specific reasons.
First, the Federal Reserve kept interest rates too low for too long. This created what Forbes termed, the “fuel” for the housing bubble, which would not have occurred — or at least not grown into the enormous problem it did — had the Fed not flooded the economy with “liquidity.” I have long believed this, and several pundits have argued in favor of this view, but it was good seeing someone couch the problem of excess in the money supply in the context of a larger pattern of government intervention. I especially liked his analogy of currency to time: If the number of minutes in an hour were to constantly change, we’d soon see derivatives and hedging strategies for time, just to keep track of how many hours we’ve worked.
Second, the bubble was further exacerbated by the moral hazard created by the guarantee of unnecessarily risky loans afforded by Fannie Mae and Freddie Mac.
Third, mark-to-market accounting forced companies to value their assets as if they were day-traders. This inflated asset values at the top of the market, and depressed them when the market went down. This effect was so extreme that it created paper losses for firms that had a positive cash flow.
So how to move away from these problems toward a more prosperous future? Quite simply, government should get out of the way of the productive sector. Specifically, he said, government should focus on securing the rule of law and sound money, as well as facilitating the ease of doing business by removing barriers to entrepreneurs starting new business. (Thanks to Myron Ebell for his input in this post.)
For more on mark-to-market accounting, see here.
For more on Fannie and Freddie, see here (page 4).
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Just started to read this new book by Steve Forbes and I love it. Unfortunately it also really scares me about what our future economic situation is going to look like 5 and 10 years from now based on the path our government is trying to take us.
It all starts with a libertarian individual freedom, single pebble droppers. “Don’t make waves,” and “Don’t rock the boat,” yet, no one has ever seen a boat going anywhere that was not making waves and rocking from side to side, making the placid water choppy. For new start-ups and jobs we need to continue welcoming the wave-making pebble-droppers or secure the peace of the pond. Governing elite tell us the interests of the pond, the community, are more important than are the interests of the individual, the pebble-dropping wave makers. Pebble-droppers made America what it is today, giving form and shape to our American Evolution. Pebble droppers made us prosperous and only they can keep us prosperous. Without pebble droppers, America will have no prosperity, no growth, no entrepreneurs, no small business and no new jobs. Government managers cannot control pebble droppers, only prevent their disturbing behavior. See Save Pebble Droppers & Prosperity on Amazon.com and claysamerica.com
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