The Locker Room

Leftists are supposed to be against blaming the victim

Posted by George Leef at 12:55 PM

The leftist line that our current economic woes are due to capitalism has been heard over and over ever since the implosion began in 2007. The Feb. 13 issue of Chronicle Review has an article that takes the cake for mindless glee in pronouncing that free-market theory has been discredited. Here's the letter I just sent in response.

Christopher Phelps' article "Beyond Economic Revival" (Feb. 13) cannot go without comment. Phelps asserts, apropos of the current economic turmoil, "The recent riot of capitalistic irresponsibility has shattered the fantasy that the free market, left to its own devices, will produce rationality and prosperity." He also contends that what he calls the conservative position regarding the New Deal "ought, by all rights, to be on the ropes."

More indefensible claims have never been made. Phelps, a historian, simply doesn't know what he's talking about.

Ever since the economic implosion began, the standard line from statist politicians and intellectuals has been that it was due to "laissez-faire ideology" and deregulation. That notion has been refuted over and over. The great economic bubble could never have arisen but for an array of government interventions that caused artificially low interest rates and then steered most of that money into the housing sector. The Federal Reserve is a non-market actor. Fannie Mae and Freddie Mac are government-sponsored enterprises that gave investors the impression that the securities they issued were backed by the federal government. The Community Reinvestment Act and the political mania for maximizing the number of people owning rather than renting was equally a creation of politics, not the market.

How those and other federal interventions created the conditions for the housing bubble has been frequently demonstrated, for example in Professor Steven Horwitz's "An Open Letter to my Friends on the Left" (http://myslu.stlawu.edu/~howritz/open_letter.htm).

What many economists have come to understand is that whenever the government promotes artificially cheap money and credit, the result is to distort the pattern of investment and resource allocation in the economy. We get overexpansion in those sectors of the economy most sensitive to interest rates, such as housing. Cheap credit leads to, as the Austrian economists Ludwig von Mises and Friedrich Hayek explained, malinvestments that cannot be sustained in the long run. Far from putting that argument "on the ropes," the events of the Great Depression and of our current recession strongly confirm it.

Blaming laissez-faire capitalism for the consequences of government interference with our system of money and credit, with the standards of lending institutions, and with many other aspects of the free market's allocation of resources is an egregious case of blaming the victim.

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