The private sector is fighting the government for control of capital markets, and the government is winning. The most recent data from the Federal Flow of Funds reveal that Uncle Sam stands behind over 58% of the mortgage market – a hike of 13 percentage points since 2006.
But it has now been three years since the fall of Lehman Brothers, and the grip of government-backed finance is still tightening as opposed to letting up. On October 20, 2008, the Washington Post ran the headline “Is Capitalism Dead?” This question and the short-lived philosophical debate has now faded, yet a fair reading of capital market data today indicates that the two sides are still battling.
We are now at a point where it is almost impossible to imagine a functioning capital market without an oversize role for government. The longer the government maintains a dominate role, the more the private sector’s capacity to fill in or take control atrophies. This dynamic needs to shift back in the direction of the private sector. In many ways, the most important battle the U.S. faces over the next few years is wrestling back control of its own capital markets.