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Understanding Capitalism and Fading College Affordability

Published at Detroit News

Just a generation after capitalism triumphed with the collapse of the Soviet socialist system, a recent Pew poll reports that 49 percent of Americans 18-29 years old have a positive view of socialism while only 46 percent have positive views of capitalism.

The ambivalence toward capitalism is due in part to the influence of the information and entertainment class — the mainstream media, Hollywood and the universities — whose biases are entrenched and well-known. Their portrayal of the 2008 financial collapse and the shambles of its aftermath — as being caused by greedy Wall Street bankers who got rich by foisting deceptive loan underwriting practices on ordinary people — reinforces this narrative.

Now, another side of the story on the financial crisis is crystallizing in the public mind as a result of serious investigative reporting — with the latest new insights coming from Jay Richards in his just-released book, Infiltrated. What’s now increasingly clear is that it wasn’t free market capitalism, but rather Washington’s socialized housing policies and crony capitalism that failed, precipitating the worst recession since the Great Depression.

The other side of the story focuses on opportunistic financiers who began exploiting government policies to promote home ownership to the poor. Dumbing down mortgage lending standards started in the 1980s with no documentation “liar loans” pioneered at Golden West Financial, founded by progressives Herb and Marion Sandler. Millions of the Sandlers’ lavish profits were later reinvested in ACORN, presumably to keep the gravy train going.

Two years before the meltdown of 2008 government intervention went so far as to push Fannie Mae and Freddie Mac to raise their subprime loan holdings to 50 percent of their portfolios.

In the aftermath of the 2008 collapse there was a rush “to do something,” but the fact that no one went to jail was quite revealing. Legislative fixes were instead focused on the “transformation” that Barack Obama had promised two days before he was elected president in 2008.

With the White House and both chambers of Congress under Democratic control in 2009 and 2010 the stars were lined up. Rather than fixing what went wrong with actual reform bills that would reduce cronyism and harness the benefits of competition, Washington power brokers proceeded to give us the Affordable Care Act (Obamacare) and the Wall Street Reform and Consumer Protection Act (Dodd-Frank).

These new laws have moved the nation in a direction quite opposite to our heritage, saddling us with new pervasive and granular regulations, creating heightened uncertainty, diminished lending and capital formation and, increasingly, part-time over full-time employment. The public sector, on the other hand, received a windfall from the new laws with legions of new unaccountable bureaucrats, lobbyists, carve-outs and side deals.

Meanwhile, a new financial bubble is already upon us, with President Barack Obama recently calling the high cost of college tuition and student loan debt “a crisis.” What most probably don’t see is that Washington’s efforts to socialize education have done to tuition costs what they did to housing prices. By subsidizing and enlarging government-guaranteed student loans, colleges ignored costs and raised tuition prices well above the inflation rate.

The problem now is that students can’t find jobs to allow paying back their loans after graduating. Forbes recently reported that “more than half of student loans are in deferral or delinquent.” No one knows when increasing defaults in the $1 trillion of student loans outstanding will trigger the next financial crisis and the next bailout.

The other side of the story is vital because it explains how government intervention to promote and socialize access to housing created the systemic risk that ended in disaster — resulting in massive bailouts, trillion dollar deficits, and regulatory overreach.

Now it’s time to connect the dots and recognize similar government culpability in contributing to the unaffordability of higher education and the unfolding student loan crisis.

The silver lining to this new crisis is that it can help make the 2014 midterm elections a referendum on the imperative for smaller government.

Scott S. Powell

Senior Fellow, Center on Wealth and Poverty
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.