It's Schadenfreude Man!Schadenfreude is a German word that means the enjoyment that comes from watching other people suffer some misfortune. Which is why Schadenfreude Man is standing there with a grin on his face in the Dr. Fun comic to the right (click to expand).

Which brings us to the current American financial woes. Names like Fannie Mae, Freddie Mac, Lehman, and AIG are big in the news, and socialists who hate capitalism are overcome with schadenfreude. To illustrate the point, I offer up an article published on the Spiegel website by Marc Pitzke titled, “The World As We Know It Is Going Down.” The title comes from a broker by the name of James Allroy as quoted in the article. If you have nothing interesting to do or need help sleeping, read the almost 1,300 word article in its entirety; for the rest of you, let me point out two sentences. The first leapt out at me from the twelfth paragraph:

In fact, it really does look as if the foundations of US capitalism have shattered.

The second sentence came four paragraphs later:

The only thing that is certain is that the era of the unbridled free-market economy in the US has passed — at least for now.

I can’t speak for you, but I can easily imagine Pitzke rubbing his hands with delighted schadenfreude at the idea of America’s free-market economy tanking. And if free-market capitalism doesn’t work, then what other options are there? Well, people love Karl Marx’s ideas of communism and communism lite, also known as socialism. Neither one makes me happy, but I’m neither a communist nor a socialist.

Are America’s current financial problems proof that an “unbridled free-market economy” has failed us? You could make that argument if you believed that the free market got us to this position, but it didn’t. Government intervention got us to this point.

To trace this problem, we have to go back to the days of President Carter. The Community Reinvestment Act (CRA) of 1977 (sometimes mistakenly called the “Community Redevelopment Act”) specified that financial institutions had to “meet the credit needs of the communities in which they operate.” It was designed to help minorities and the poor buy homes by keeping banks from denying them home loans. Turning down a loan request would be taken as prima facie evidence of racism, and the government would come down on the bank like a ton of regulatory bricks. In other words, the federal government required banks to give loans to Joe CreditRisk, ignoring Joe’s spotty job history, spotty credit record, and spotty credit payment history. Is it any wonder that there were more high-risk loans?

In 1995 President Clinton pushed for, and got, a stronger CRA. Thanks to this update, subprime mortgages for Joe CreditRisk were secured by CRA loans, leading to another increase in high-risk loans. Between 1993 and 1998, CRA loans grew by 39%, while other types of loans grew by 17%. Did this growth occur because the free market ordinarily rewards people who are proven bad credit risks? A truly free-market bank would be very hesitant to make lots of loans to people who would be unlikely to pay them off. But thanks to government intervention, the banking industry was no longer truly free-market. As a banker, you either danced to the government’s tune and offered risky loans to people who were unlikely to pay them back, or the feds would be knocking at your business doors to close you down, you horrible racist, you.

So what was the end result of government’s heavy-handed control over risky loans? Well — duh — lots of risky loans. But as long as housing prices continued to grow and grow, the banks and lending institutions could use the good deals to balance out the bad ones. But then the housing bubble popped, and high-risk debtors turned out to be — surprise, surprise — bad at making their loan payments. Having created the problem in the first place by messing around with the free market, the government stepped in to “fix” the problem with massive buyouts (with taxpayer money) for some, and giving a middle finger to others.

Is the banking crisis evidence of the collapse of America’s free-market capitalism, as Marc Pitzke maintains? No. It is the obvious result of government mucking around where it shouldn’t be. What we have here is the obvious result of a government-controlled market. In other words: Marxism sucks, and how!