Capitalism is dead, and we’ve allowed it to be replaced by something much worse; a system that systematically robs the poor to give to the rich. Not only that, statistics suggest we seem to do so voluntarily.
The 2008 Subprime Mortgage Crisis was in hindsight, a major turning point in the implementation of a capitalist economic system long promoted by the West as foundational to an individual’s civil liberty. At the core of a genuine capitalist ideology is the belief that businesses must be allowed to fail where services are either unproductive or in low demand; this allows unproductive capital to be reallocated to more productive ventures of higher value to the community at large. During the height of financial contagion in 2008, the US Congress agreed to a $700 billion bailout of large banks and financial institutions deemed ‘too big to fail’. The failure of these institutions was due mainly to large bets placed on toxic ‘subprime’ mortgage products.
Subprime mortgages were similar to regular residential mortgages, the main difference being that they were issued to higher risk borrowers; often individuals with no deposit or unsteady employment history. The loans usually involved a higher rate of interest. When the American economy started to hit a rough patch, unemployment rose, house prices fell and a large proportion of these borrowers started to default on their loans. The banks seized properties to resell on the open market but this ballooned supply and caused a spiralling feedback loop of falling house prices and further foreclosures. The losses accumulated and the most exposed banks went bankrupt.
That’s where the story should have stopped; however, by offering up $700 billion of public funds, the US Congress laid the groundwork for an economic experiment not seen before in history. An economic experiment still being implemented to this day. It truly is Robin Hood in Reverse.
Socialist capitalism is based on the assumption that the economy should never be allowed to fall into recession. By giving to the top end of town when times are tough, the economy will stay stable and the working class will remain in steady employment and continue to live enriching and fulfilling lives, so the theory goes. Central banks do this by lowering interest rates during rough patches and raising rates during hot periods. Lower rates in theory means greater borrowing capacity and more money/debt injected into the economy. The system is grounded in the best of intentions; recessions can ruin lives in the short term. However, the long term result of continually propping up failing businesses is the quickly compounding productivity losses of new capital. We’ve now reached a point where it takes $4 of new debt in the US to stimulate $1 of GDP growth. Debt balloons and interest rates must go ever lower over time to maintain this ‘recession free lifestyle’. Over the past 40 years, interest rates in Australia have fallen from 16% to the current low of 1.5%; meanwhile, household debt to GDP has risen exponentially. Asset prices have risen across the board at materially higher rates than inflation; in layman’s terms this means that cash has lost a lot of value comparatively. Good news if you are a landlord or a bank, bad news if you are a renter, an employee, a pensioner, or anyone else with cash as their only investment.
In 2008, lowering interest rates no longer proved effective as debt reached stratospheric levels; quantitative easing (buying even further government debt to increase the money supply) injected money directly into credit markets and asset prices boomed across the world. Real estate, stocks, bonds, classic cars, art, everything was in demand. Everything was going according to plan, the trickle-down effect would soon take hold and Western economies would soon return to their pre-bust levels of growth. Except obviously this never happened.
To this day, wage increases and inflation remain at record lows, whilst company profits, asset prices and stock markets remain at record highs. The inequality this economic experiment has caused creates even further reason to maintain the status quo in the eyes of the social capitalist. Asset prices are so elevated that any significant fall would lead to a mammoth recession and the masses would be left without employment.
So what’s the solution now that Australian house prices have started to fall and we’ve hit our first quarter of ‘per capita recession’? The Australian Prudential Regulation Authority, the Reserve Bank of Australia and the newly elected Liberal Government say it’s time to lower the lending criteria required to obtain a residential mortgage loan, lower interest rates to even further historic lows, and create our own version of the ‘subprime loan’ by offering first home buyers access to a government guaranteed loan with only 5% deposit.
Not only did Australia recently vote overwhelmingly in support of an expansion of these ingrained economic policies, election data from the ABC showed that the largest swing against the Labor Party came from electorates where economic inequality is having the largest impacts on day to day cost of living and quality of life; predominately lower socio-economic, working class electorates. The largest swings to Labor occurred mainly in the more affluent Eastern Sydney Suburbs. Go figure.
Where does this decade long social and economic experiment end? One thing is for sure, it’s a global phenomenon and the longer we delay the inevitable, the bigger the consequences will be when we must finally pay back our debts.