ECONOMIC CRISIS: OBJECTIVE EPILOGUE
“Objectivists are not ‘conservatives’. We are radicals for capitalism; we are fighting for that philosophical base which capitalism did not have and without which it was doomed to perish.”
Greed is not new to mankind, but the world was so overwhelmed by the economic crisis that ‘greed’ has suddenly been given importance and traced as being the root cause of the crisis. In a capitalist economy the government intervention is the least. Market forces shape the economy. The great political thinker, Thomas Hobbes believed that society needed to be controlled or else selfishness would take over and it would be an uncontrollable situation. He believed that man is a selfish animal.
The uncontrolled, unscrupulous risky investments of the banks and the sub prime lenders lending to the borrowers with no creditworthiness has been the reason for the crisis as we all have seen it. Government intervention and regulatory steps at the right time would have reversed the crisis but the capitalist society believes in the market forces so strongly that the financial global crisis ultimately shook the very edifice of this ideology of free economy.
The ex-chairman of the Federal Reserve Mr. Alan Greenspan, influenced tremendously by Ayn Rand’s ideology has humbled today and accepted that he had put too much faith in the self correcting power of the free economy. He had strongly proposed deregulation. Ayn Rand vehemently opposed government control over the economy.
Let us take a journey into Ayn Rand’s philosophy that has so inspired and influenced Mr. Alan Greenspan. I quote Nathaniel Branden from the book “Capitalism: The Unknown Ideal” by Ayn Rand.
“As to depression and mass unemployment, they are not caused by the free market, but by government interferences into the economy”.
What one often ignores about the advocates of the philosophy of free economy is that it is based on objectivism. Objectivism rejects altruism and believes that the moral pursuit of every human being is one’s own happiness and rational self interest. Every individual is capable of taking a rational decision. Objectivism rejects any form of collectivism namely socialism and fascism. It also rejects ‘mixed economy’ the notion that government should regulate the economy and redistribute wealth. The sole responsibility of the government is protection of individual rights. The quote below explains this statement and is again taken from the book “Capitalism: The Unknown Ideal”.
“In a free economy, the supply of money and credit needed to finance business ventures is determined by objective economic factors. It is the banking system that acts as the guardian of economic stability. The principles governing money supply operate to forbid large scale unjustified investment.”
“Most businesses finance their undertakings, at least in part, by means of bank loans. Banks function as an investment clearing house, investing the savings of their customers in those enterprises which promise to be most successful. Banks do not have unlimited funds to loan they are limited in the credit they can extend by the amount of their gold reserves. In order to remain successful, to make profit and thus attract the savings of investors, banks must make their loans judiciously: they must seek out those ventures which they judge to be most sound and potentially profitable.
If, in a period of increasing speculation, banks are confronted with an inordinate number of requests for loans, then, in response to the shrinking availability of money, they (a) raise their interest rates and (b) scrutinize more severely the ventures for which the loans are requested, setting more exacting standards of what constitutes a justifiable investment. As a consequence funds are more difficult to obtain, and there is a temporary curtailment and contraction of business investment. Businessmen are often unable to borrow the funds they desire and have to reduce plans for expansion. The purchase of common stocks, which reflects the investors’ estimates of the future earnings of companies, is similarly curtailed: overvalued stocks fall in price. Businesses engaged in uneconomic ventures, now unable to obtain additional credit, are obliged to close their doors, a further waste of productive factors is stopped and economic errors are liquidated.”
Nathaniel Branden has strongly opposed the formation of The Federal Reserve that allows the government officials to decide the amount of credit availability in the economy. Money and credit is not determined by objective economic factors. The government believed that it could guarantee a state of virtual prosperity and the economy would experience unending boom. Throughout the 1920’s, the government directed the banks to keep the interest rates low. This perpetuated investment in speculative ventures. Stocks were overvalued. But in a situation of free banking system credit and investment would have been curtailed. What has happened now is the result of the low interest rates encouraged by Mr. Alan Greenspan which resulted in high housing prices. Government ignored the calls for regulating sub prime mortgages, and other high risk mortgages that encouraged people to borrow more than they could afford without testing their creditworthiness. Nathaniel Branden had opposed this kind of lending and “people making fortunes on paper”.
The disbelief in the free economy should not be the reaction to the crisis but a better understanding of objectivism would help and this would guide the decisions of mankind and thus the economy and this also would help to prevent crisis in the future. No one can deny the role of the government in guiding the economy but perpetuating a crisis by artificially regulating the interest rates coupled with encouraging risky investments, thus giving the wrong signals to the bankers is nothing but quiet opposite to what proponents of free economy talked about. Left to themselves the bankers would have acted objectively but the government by lowering the interest rates artificially for a considerable period of time signalled the lenders and bankers to make risky investments.
Yes, greed has been the root cause of the crisis but man capable of thinking objectively has been conspired by the government regulators to think otherwise and resulted in greed blurring the vision of the bankers and stopped them from thinking objectively. The laissez faire economy discourages the government from interfering because it believes that man makes objective and rational decisions. But this might not be true in all cases. Freedom from regulation is important. Regulation in the form of misguiding objective decisions leading to artificial boom in the economy should be discouraged and regulating the economy at the right time and junctures leading and guiding the citizens of the country to take objective decisions is extremely vital.
The article does not wish to debate on different ideologies but wishes to point out the reasons behind the crisis. One should not blame capitalism or free economy as the root cause of the crisis. As Nathaniel Branden said about the 1929 depression that, “Had men chosen to understand the cause of the crash, the country would have been spared much of the agony that followed.”
Note: It would help the reader to refer to the following:
2) “Capitalism: The unknown ideal” by Ayn Rand