Gerald Warner: Capitalism didn't kill the banks – socialism did

AT LAST – the death of capitalism has occurred, as so often predicted by all those rheumy-eyed revolutionaries bumming drinks off students in pubs ("See me, son, ah'm a socialist. Did ye ever read a book called The Ragged Trousered Philanthropists? Magic!"). Zzzz…

The thesis is that the banking system, propelled by the centrifugal force of its own greed, has spun off its axis, as it was always predestined to do through the operation of Marxist historical inevitability, and a new order is arising under which the financial institutions are progressively falling into public ownership. Under the stimulus of this unlooked-for remission, even the moribund Labour Left is sitting up and taking some thin gruel.

Alas for all those ragged-trousered philanthropists holding a mirror hopefully to the nostrils of capitalism, a detailed diagnosis shows that socialism is not the cure but the cause of the malady. The notion that capitalism cannibalised itself is bunkum and the evidence is irrefutable. Amid all the myriad analyses of the financial collapse, one sole premise commands universal assent: the crisis originated in the sub-prime mortgage meltdown in America.

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If we establish what caused that, we shall have discovered the root of the banking crisis. Well, that is easy: it was Gordon Gekko and his ilk, was it not? Actually, no: it was Bill Clinton and his cronies, with their politically correct affirmative action. That is the fact of the matter – the Clinton administration compelled the banks to lend to minorities, to comply with racial and social quotas that defied all the rules of banking.

In 1994 the New York Times reported jubilantly that the Clinton administration was leaning heavily on lenders to embrace people in low-income neighbourhoods or minority groups.

From then on, the madness gathered pace. In 1999, pressured by Clinton, Fannie Mae started a programme of extensive expansion of loans to people with low to moderate credit. Clinton's housing secretary Andrew Cuomo warned Fannie Mae and Freddie Mac that such loans must amount to 50% of their portfolio by 2001. Other government agencies joined the crusade. In 1999 the Justice Department was reported as trying to establish "a system of racial quotas in lending, regardless of credit risk".

Clinton's Federal Reserve compelled banks to accept welfare cheques and unemployment benefit as income sources to qualify for a mortgage. As the PC terror grew, brokers advised clients to claim they were 1% Native American to qualify for loans. These included the lunatic "Ninja" (No income, no job, no assets) loans. The most flagrant example was a $480,000 (324,000) mortgage to an illegal alien from Mexico.

The scale of the engineered destabilisation of the housing market was astronomic. In 1994 the share of sub-prime mortgages to total origination was 5% ($35bn); by 2006 it had grown to 20% ($600bn). No market could survive subversion on that scale. When the Justice Department is intervening in the housing market, to describe the economy as either "free" or "capitalist" is a bad joke. That was Clinton's legacy. The Oval Office Onanist may have done wonders for the US dry-cleaning industry, but he destroyed the housing market and, by extension, the banking sector.

Yet, today, his party has been mandated by a brain-damaged electorate to cure the disease it caused. Nothing succeeds like failure. The beneficiaries here are Gordon Brown and his interventionist party. People are still talking about the "37bn bailout". Did they not notice a further 3bn bleeding out of Northern Rock on Friday?

So it will continue. Alistair Darling ordering banks how to conduct their business; banks hoarding taxpayers' money while charging exorbitant rates; HBOS dying noisily. All the testosterone-charged takeover frenzy of the past decade, with bankers borrowing zillions to buy institutions they could not afford, has come home to roost. This was not capitalism, but a dependency culture. For many, addictive dependency shifted from state handouts to private handouts based on phantom credit.

Those proclaiming the death of capitalism have misread the situation. The US succumbed to Frankfurt School Marxism by allowing PC enforcers to do for the American financial system what the Communist Party did to the economy of the Soviet Union for 70 years. In Britain, the dependency culture transferred much of its clientele from social security offices to bank managers' waiting rooms. Capitalism did not die by its own hand; but it may yet prove to have been murdered.