In 2008, the United States saw the largest bank collapse in history when mortgage-backed securities, a seemingly safe way to buy risky debt, began to fall apart. Many homeowners couldn’t make payments on their sub-prime loans. Each mortgage default made the securities, of which it was part, worth less until the entire package became toxic. Portfolios containing these securities lost value for the people and businesses invested in them which crippled the job market. As jobs were shed, the newly unemployed were unable to afford their own mortgages, and the cycle began again.
Initially, these deals were wrought with uncomfortable details. The home buyer suspected he couldn’t afford the home. The bank knew balloon mortgages were back loaded to be less affordable over time. Securities traders expected pieces of each larger security to fall through. In subsequent rounds, however, detriment spread far beyond those unsavory decisions. Deals made with great faith and intentions were also crumbling.
“The banking crisis has shown yet again that the present system relied on motives of greed and acquisitiveness, which are morally repugnant,” write Robert Skidelsky and Edward Skidelsky. “It also divides societies into rich and poor, latterly very rich and very poor.”
Skidelsky isn’t necessarily condemning “greed and acquisitiveness” as much as he is arguing, that these motives can’t be trusted to voluntarily yield to fairness and social justice.
With little exception, economists agree that selfishness can benefit society. In The Wealth of Nations, Adam Smith makes the point well. “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
In any deal, each party can consider whether he stands to benefit from the trade. If he doesn’t, he has the option to back away. Ayn Rand would suggest more adamantly, he has the responsibility to do so.
If the burst housing bubble of 2008 kicked off the largest bank collapse in history, it owes a great deal to the fact that there was further to fall. There was more money than ever before in the banking system.
Each party in the sub-prime mortgage transactions that contributed to the housing bubble expected to benefit. With more complete and clear information, each could have more carefully entered into those agreements. However, whether that information was intentionally concealed can be considered without a repeal of capitalism. To the contrary, Ayn Rand, Milton Friedman and others acknowledge information is essential to capitalism.
Dr. Yaron Brook president of Ayn Rand institute recalls a quote from Rand that describes why capitalism and banks are taking the blame.
“One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.”
The free-moving markets have inarguably led to the prosperity of this nation. While wealth has become increasingly concentrated among the rich, even the lower end of the spectrum has benefited from the gains of self-interested industrialization.
“The share of people living on less than $1 a day (adjusted for inflation) fell from 42 percent in 1950 to 17 percent in 1992,” Barry and Rosenthal argue. “Historically almost everybody was poor, but that is no longer true.” (Barry, Rosenthal, 318)
Of course, while wealth is increasingly concentrated at the top, there is a related and growing concentration of lower middle class households.
In our relatively free market, investment is essential to building business. Employing money is an efficient way to earn money. Those most fit to rise through the middle class and above are fit to continue to outpace the average American.
In parable, assume Olympic gold medal sprinter, Usain