Luis Alberto López Rafaschieri and José Alberto López Rafaschieri
www.morochos.net
Due to the bankruptcy of four banks in the United States, the international radical left, and some people who don't know what they are talking about, say free market doesn't work and democracy should be replaced by socialism.
Over there we have seen people like Teodoro Petkoff in Venezuela, stating that "Milton Friedman must be rolling in his grave, because the State had to lend the market a hand." As if the free market theories suggest the government extinction.
After, we listened to Cristina Kirchner asserting "the financial crisis in United States shows that the Washington Consensus failed." As if the radical left ideas have had better results than the political models based on freedom.
And then we saw Hugo Chavez saying that "capitalism is the responsible for the United States financial crisis" and "the next U.S. president will receive a sinking ship." What shall we say then about socialism's achievements? the worst political model that humanity has known in the past one hundred years!
But we will go beyond words, look briefly what happened and realize the reality.
Origin of the crisis
During the years 2001 and 2002, the United States was on the brink of deflation. This forced the Federal Reserve's decision to put interest rates at 1%, trying to stimulate the economy.
At that time, financial institutions in the United States borrowed billions of dollars from the Federal Reserve, taking advantage of the low interest rate, and spread the funds in the American credit system, primarily in the mortgage markets.
Everything was going perfectly and banks made easy money, because the business was simple: borrow at 1% and lend at 5%.
After, we listened to Cristina Kirchner asserting "the financial crisis in United States shows that the Washington Consensus failed." As if the radical left ideas have had better results than the political models based on freedom.
And then we saw Hugo Chavez saying that "capitalism is the responsible for the United States financial crisis" and "the next U.S. president will receive a sinking ship." What shall we say then about socialism's achievements? the worst political model that humanity has known in the past one hundred years!
But we will go beyond words, look briefly what happened and realize the reality.
Origin of the crisis
During the years 2001 and 2002, the United States was on the brink of deflation. This forced the Federal Reserve's decision to put interest rates at 1%, trying to stimulate the economy.
At that time, financial institutions in the United States borrowed billions of dollars from the Federal Reserve, taking advantage of the low interest rate, and spread the funds in the American credit system, primarily in the mortgage markets.
Everything was going perfectly and banks made easy money, because the business was simple: borrow at 1% and lend at 5%.
But not only banks tried to take advantage of low interest rates. Like financial institutions, many middle-class buyers sought for loans to buy houses and enjoy cheap money.
Unfortunately, the happiness did not last long. Then came the years of great economic prosperity, from 2003 to 2006, and the Federal Reserve normalized its interest rate, placing it above 5%.
This meant that those who were over-indebted, now had to pay 400% more interest than before. As a result, many debtors could not pay their credits, delinquencies rose to historic levels, hundreds of people lost their properties, banks no longer had any way to get cheap money from the FED and losses reached the financial institutions.
A bearish market makes things worse
Complicating the matters, the U.S. housing market was full of foreclosed properties, which were being liquidated below their natural price.
This means that those who sell receive less money than they paid for. Furthermore, it takes a long time to close deals, due to the amount of offers generated by a lot of people with the same problem.
And as the number of debtors and banks affected is so great, the problem became a crisis.
The government intervenes because democracy is not anarchy
Unfortunately, the happiness did not last long. Then came the years of great economic prosperity, from 2003 to 2006, and the Federal Reserve normalized its interest rate, placing it above 5%.
This meant that those who were over-indebted, now had to pay 400% more interest than before. As a result, many debtors could not pay their credits, delinquencies rose to historic levels, hundreds of people lost their properties, banks no longer had any way to get cheap money from the FED and losses reached the financial institutions.
A bearish market makes things worse
Complicating the matters, the U.S. housing market was full of foreclosed properties, which were being liquidated below their natural price.
This means that those who sell receive less money than they paid for. Furthermore, it takes a long time to close deals, due to the amount of offers generated by a lot of people with the same problem.
And as the number of debtors and banks affected is so great, the problem became a crisis.
The government intervenes because democracy is not anarchy
Faced with this situation the government intervenes, because it is the responsible of ensuring economic stability in a democratic nation like the United States. However, those who have a misconception about the free market theories -like Teodoro Petkoff- think that the "invisible hand" of Adam Smith seeks a country where actors perform without regulations.
But simply observing democratic societies where free market has flourished, we can realize that these are the world’s countries with more regulations on the private sector. Clarifying that in democracy, these regulations maintain the private sector linked to the legal system. Quite the opposite of what happens in socialist nations, where governmental action seek to exterminate the private sphere.
It was in democracy and in the countries with free market, where the Rule of Law born and the legal theories reached their maximum progress.
Those who believe that liberalism is proposing a free society without law and government are wrong. That would not be liberalism but anarchism.
Free market cannot exist without the government's supervision. Therefore, the intervention of the U.S. authorities to assist borrowers and banks in trouble is a measure that fits perfectly within the free market paradigms, because democracy implies the existence of a sovereign government, pledged to make everything necessary to help their citizens.
Democratic transparency
Indeed, during this crisis we have seen one of the biggest differences between democracy and dictatorial models.
We see the problem recognition by the U.S. government and the freedom with which the media disseminates news, including criticisms that inform the public.
On the other hand, if this crisis occurred in countries such as Cuba or Venezuela, the government would deny the existence of a financial problem. The journalists with unofficial information would be jailed and the independent media would be accused of conspiracy.
Furthermore, no government official in Cuba or Venezuela would try to resolve anything, because no one could pretend to solve what for them does not exist. This would make things worse, as always happens in dictatorial regimes, enemies of transparency.
Nothing new in this crisis
But back to the United States, the current financial crisis doesn’t represent anything new to democratic societies. As an example remember the risk of deflation in the United States during the years 2001 and 2002. A similar crisis that caused huge losses in the stock market and annihilated giant companies like Enron and Adelphia.
At that time, the enemies of freedom said the same arguments they use now: Free market collapsed and democracy should be replaced by socialism.
Then 2003 came in, economies recovered and democracy once again showed better results than the leftist thought.
Is this the end of the U.S.?
So far, there has been no human power capable of challenging the time. Therefore, we must assume that the United States reign will someday be surpassed. But unfortunately for those who expect the Yankees’ collapse, for now we have to recognize that the United States remains the world's leading power, with no opponent close enough.
Economically, we must consider that 70% of the world's savings are denominated in U.S. dollars, with the American founding fathers images on them. Furthermore, to have an idea of its magnitude, the U.S. economy is equivalent to that of the entire European Union. And it’s the world’s most competitive and innovative economy.
However, for those who still believe that the U.S. economy went bankrupt, or that democracy has come to an end, we present a quite eloquent chart.
Here are the historical records of the Dow Jones industrial index from 1900 to the present. Look at the fall today, it's just a scratch in the meteoric rise that the U.S. economy has experienced over the past hundred years.
Forget leftist fantasies! Democracy and free market continue irrefutably being superior to socialism and leftist ideas.
But simply observing democratic societies where free market has flourished, we can realize that these are the world’s countries with more regulations on the private sector. Clarifying that in democracy, these regulations maintain the private sector linked to the legal system. Quite the opposite of what happens in socialist nations, where governmental action seek to exterminate the private sphere.
It was in democracy and in the countries with free market, where the Rule of Law born and the legal theories reached their maximum progress.
Those who believe that liberalism is proposing a free society without law and government are wrong. That would not be liberalism but anarchism.
Free market cannot exist without the government's supervision. Therefore, the intervention of the U.S. authorities to assist borrowers and banks in trouble is a measure that fits perfectly within the free market paradigms, because democracy implies the existence of a sovereign government, pledged to make everything necessary to help their citizens.
Democratic transparency
Indeed, during this crisis we have seen one of the biggest differences between democracy and dictatorial models.
We see the problem recognition by the U.S. government and the freedom with which the media disseminates news, including criticisms that inform the public.
On the other hand, if this crisis occurred in countries such as Cuba or Venezuela, the government would deny the existence of a financial problem. The journalists with unofficial information would be jailed and the independent media would be accused of conspiracy.
Furthermore, no government official in Cuba or Venezuela would try to resolve anything, because no one could pretend to solve what for them does not exist. This would make things worse, as always happens in dictatorial regimes, enemies of transparency.
Nothing new in this crisis
But back to the United States, the current financial crisis doesn’t represent anything new to democratic societies. As an example remember the risk of deflation in the United States during the years 2001 and 2002. A similar crisis that caused huge losses in the stock market and annihilated giant companies like Enron and Adelphia.
At that time, the enemies of freedom said the same arguments they use now: Free market collapsed and democracy should be replaced by socialism.
Then 2003 came in, economies recovered and democracy once again showed better results than the leftist thought.
Is this the end of the U.S.?
So far, there has been no human power capable of challenging the time. Therefore, we must assume that the United States reign will someday be surpassed. But unfortunately for those who expect the Yankees’ collapse, for now we have to recognize that the United States remains the world's leading power, with no opponent close enough.
Economically, we must consider that 70% of the world's savings are denominated in U.S. dollars, with the American founding fathers images on them. Furthermore, to have an idea of its magnitude, the U.S. economy is equivalent to that of the entire European Union. And it’s the world’s most competitive and innovative economy.
However, for those who still believe that the U.S. economy went bankrupt, or that democracy has come to an end, we present a quite eloquent chart.
Here are the historical records of the Dow Jones industrial index from 1900 to the present. Look at the fall today, it's just a scratch in the meteoric rise that the U.S. economy has experienced over the past hundred years.
Forget leftist fantasies! Democracy and free market continue irrefutably being superior to socialism and leftist ideas.
Click on the image to enlarge it
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I'm glad your defending democracy... however you are wrong about the regulation helping or being necessary in a democratic economy. Rather we needless regulation and to end the federal reserve. Your on track but you need study economics further.
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