The Wall Street Journal recently ran an excellent editorial examining the bad business and corruption that arises “when you combine private profit with government power.” Created by an act of Congress in 1938, Fannie Mae is a government sponsored enterprise (GSE) that owns or guarantees nearly one half of the $12 trillion US mortgage market. Many of these mortgages were purchased in bulk from Countrywide Financial, the firm that made multitudinous bad loans to individuals unable to repay them, fueling the subprime mortgage meltdown. Its former CEO also reportedly secured so-called “sweetheart” loans for Fannie Mae executives and US senators. Thanks to a $10 billion accounting scandal, a decades-long lack of managerial accountability and massive exposure to the subprime mortgage market, Fannie Mae is now at the brink of failure. And thanks to a now explicit government guarantee, Fannie Mae is likely to become the next recipient of a taxpayer-funded bailout. What caused this mess?

The author blames what he calls “crony capitalism,” a term long used to criticize the shady dealings of businessmen and government officials. These types collude to manipulate laws and regulations that allow a company to make greater financial gains in exchange for rewards disreputably doled out to the officials who make such modifications possible. “Crony capitalism,” which implies a below-the-radar cooperation between government and business, is actually an oxymoron. While cronyism is a non-capitalist phenomenon that undercuts free market operations, capitalism is precisely the social system that prohibits government intervention in those markets. As Ayn Rand explained, government simply has no business doing business. (For more on the nature of capitalism, see here and here).

But, if capitalism did not create the Fannie Mae disaster, what did?

Taking a cue from Ayn Rand, it should be clear we do not live in a capitalist society but rather in a mixed economy comprising elements of both a free market and government control. As capitalism is the system of freedom and rights, it cannot be mixed with socialism and remain free any more than food can be mixed with poison and remain nutritious. Quasi-governmental entities like Fannie Mae are a manifestation of the poison of socialism in our society. In a free market, Fannie Mae would have crumpled under its own ineptitude and corruption long ago. But in a mixed economy, a few cronies in Congress is all it takes to secure the taxpayer-funded bailout that will keep Fannie afloat until its next crisis.

It is not capitalism that we should blame for today’s headlines, but rather the destructiveness caused by government interference in the economy. If these problems are ever to be resolved, the markets must be liberated from the poisonous mixed economics of phony capitalism.

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