Democrats in Washington are offering a solution to the economic crisis that consists of spending trillions of dollars and increasing regulation and oversight of the private sector. The Republican opposition (if such a thing still exists) does not seem to be offering much by way of a solution beyond criticizing the Left's massive government spending as a path towards socialism.
But before any solution - socialist or non-socialist - is proposed, we must understand what got us into this mess. Answering this question should be step one in any plan of action. But that's easier said than done. The mainstream consensus is that the principal cause of this economic crisis is the bursting of the housing bubble and the subprime mortgage crisis. But was this really just a market failure within the private sector, in which case a similar failure could very well happen in the future, or did certain political policies cause these toxic assets to exist?
In deciding which of these explanations is correct, America will take a giant step on the political spectrum either towards the socialist left or to the capitalist right.
Those who say that the subprime mortgage crisis is due to under-regulation of the private sector recommend greater and more aggressive regulation as the answer. They want the government to set stricter rules for those to whom the banks lend money and at what rates. This is probably the scenario you heard - it is the one that Obama endorses with all his talk of "unregulated capitalism." It implies that America would do well to slide a few spaces to the left.
But the other side, which exhorts the free market, says that government intervention in private markets created a system of crony capitalism that got us in this mess in the first place. That is to say that the government socialized the risks and privatized the profits in the lending markets. For instance, first the government required banks to give mortgages to high-risk individuals through the Community Reinvestment Act in 1977. And then, through entities such as Fannie Mae and Freddy Mac, which are funded by the taxpayer, the government underwrote the risks by buying these high-risk loans from the banks. That effectively meant that banks kept the profits and taxpayers bore the losses. This caused businessmen to take unnecessary risks.
In order for capitalism to function, there must be a possibility for both entrepreneurial success and failure. Under capitalism, the entrepreneur acts out of self-interest and because his own livelihood is at stake, he avoids unnecessary risks. He, and not the government, is the best judge of these risks because he is the most closely connected with the business's success and failure.
Under this explanation, the solution to the economic crisis would not be a move to the socialist left, but a move to the capitalist right - a move from crony capitalism to capitalism in Adam Smith's understanding of the word (where businesses actually face the consequences of their failures).
As of a few weeks ago, this was my understanding of today's political-economic debate. I believed we were at a crossroads and this was it: two separate problems and two separate solutions. If we could just come to a conclusion on this matter we could solve the crisis. And then I went to a Foreign Affairs Symposium of four or five leading economists and posed them the question: "Is America's economic crisis due to problems of under-regulated capitalism or crony capitalism?"
And I received an answer that was not among the choices listed. True or not, their unified response is perhaps the scariest possible explanation for the economic crisis because it offers no solution! They said that the economic crisis was not instigated by a failure of policy as much as a failure of the human mind.
That is to say that people genuinely thought that the housing market could function the way it was. It was not simply a certain political environment that led to the crisis; it was a general short-sightedness - a failure to perceive dangerous problems with the housing market. If this is the case, what is to prevent a similar scenario from occurring?
Whether their estimation of the crisis is correct or not, I don't know. All I know is this economic mess is so incredibly complicated that right when you feel you are starting to get a grasp on the issues, you realize that you are lost in a whole new world of ideas. I'm just glad I'm not the president.
