Capitalism is Dead

by Russ Roberts on July 11, 2008

in Regulation

Capitalism is dead. Markets are passe. So says E.J. Dionne (HT: Vasu Murthy). According to Dionne, even fans of capitalism have come to realize that the system is broken:

What’s striking is that conservatives who revere capitalism are
offering their own criticisms of the way the system is working. Irwin
Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute,
says the subprime crisis arose in part because lenders quickly sold
their mortgages to others and bore no risk if the loans went bad.

"You have to have the person who’s writing the risk bearing the
risk," he says. "That means a whole host of regulations. There’s no way
around that."

Stelzer is definitely on to something. You do want people who take risks and impose risks on others to bear the costs when things go badly. Did risk-takers avoid the costs in the case of subprime mortgages? People say they did. But did they? Bear Stearns didn’t do so well. They went out of business. They bore the risk, didn’t they? Executives there lost a lot of money. I wish they’d lost more, but Ben Bernanke decided to soften the blow. (Dionne cites Bernanke as another market-lover who thinks more regulation is needed, but of course Bernanke has a horse in the race–his organization will accrue power if it has more regulatory authority over investment banks.)

And don’t we have a lot of regulations already? Before I spoke about the inevitablity of "a whole host of regulations" I’d want to make sure that existing regulations didn’t cause the current problem. I’d also want to make sure that existing regulations were enforced.

I hear it said all the time that the subprime mortgage was caused by people who lent money to people knowing there was a good chance that it wouldn’t get paid back but lent the money anyway because they knew someone else would buy the loan. But why did that next person buy it? Didn’t they check to see if the risk was high? Yes, goes the explanation, but they bundled it up with other stuff and sold it to someone else. But why did that person buy it? Eventually someone got left holding the bad loan. Bear Stearns is one example. No doubt there are others. I suspect that a lot of people have gotten more wary of bundled mortgages. Do we need to make it even harder to make bad loans in the future?

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