Learning hard lessons in capitalism

And, as Warren Buffett, the great American investor, once said of frothy markets, “Only when the tide goes out do you discover who’s been swimming naked.”

In the last few years, with home equity lenders proliferating, many like to choose their home lender based solely on which one has the best dancing Internet ad. A prudent decision on the biggest investment of most Americans’ lives is best not done that way.

Our economic fate is tied together, and we Americans often have to pay for the mistakes of the badly informed. As the Democratic Congress will make it abundantly clear, no stupid individual who plans poorly for himself should be ever held accountable, if he or she is of the demographic that votes for them. So the rhetoric of bailing out individuals who have been caught in an ill-conceived mortgage has already begun.

As a free-market capitalist, I believe that nothing could be worse for us long term. The only thing that Congress should do is ensure that lenders are honest when they push a loan on a borrower. Of late, the market in sub-prime mortgages had become a Wild West of unregulated trickery, in which unscrupulous lenders preyed on those who do not do well in math and reading — especially when it comes in fine print — and who were basically blinded by greed. The credit markets are re-pricing debt values now.

Bankruptcies are a natural and needed result of any excess. Pain is an excellent teacher. And since few borrow from their local banker anymore, they have no place to go to plead their case on working out modified terms. Loans are sold now to faceless pools of mortgages that simply come get your house when you do not pay.

In a more noble view, I will remind you of the great economist Adam Smith, who expressed his views on this subject over 200 years ago in his book “The Theory of Moral Sentiment” (the precursor to his seminal work “The Wealth of Nations”). He began his book with a question of sorts, posed in a manner to make us think just how intertwined our economic fates are. He said: “How selfish soever man may be supposed, there are evidently some principles in his nature, which inherent him in the fortune of others, and render their happiness necessary to his, though he derives nothing from it.”

In short, many have more house than they need financed at values well above reality. Trees do not grow to the sky, and there are going to be times of ups and downs in every market. Capital markets allocate money remarkably well over time, and have amazing self-correcting mechanisms built in. When left unfettered by populist politicians, capitalism does a great job of bringing equilibrium to investments and allows the most prudent to do well.

There is an odd and perverse human inclination to make easy things difficult. Just remember this: Do not borrow all that any company wants to lend you, be it credit cards, car title pawn, student loans or mortgages.

Some would finance a tattoo if they could. Just because someone is willing to lend it to you, it does not mean you need to take it. Even more simply put: Do not borrow what you cannot repay. Life is much easier in the comfort of knowing that you are living within your means, saving for the future, and forgoing immediate wants for long-term goals.

Capitalism has a great way of weeding out the stupid and excesses. Let’s stand by and let it work its magic.

Ron Hart is a Southern libertarian columnist who writes a weekly column about politics and life. He worked for Goldman Sachs and was appointed to The Tennessee Board of Regents by Lamar Alexander. Hart is an investor in a real estate venture in Wilson County. His email: RevRon10@aol.com.