Martin Wolf on the advancement of capitalism . . .

. . . or more exactly, The Credit Economy

Looking especially at the figure on the left, I have a question on my mind.

Can a credit economy maintain itself as a classically liberal capitalist economy?

I'll put it more specfically:

In a domestic and global economy like the present one, wherein an individual's wealth is what he is 'credited' as having, and wherein a nation's wealth is dependent upon the creditworthiness of its claims to wealth, does there still exist at the core of the system a true theoretical distinction between government institutions and economic institutions (between public and private)?

Not that he is speaking directly to it, but Martin Wolf writes a characteristically thought-provoking column in the FT that reminded me of this question. The column starts with a fascinating assertion.

Creditworthy governments always come to the rescue of large financial institutions, particularly when many are in trouble at the same time.

He goes on:

Since institutions do not come bigger than Fannie Mae and Freddie Mac, the rescue announced by the US government over the weekend was a foregone conclusion. That these were “government-sponsored enterprises” made it a certainty. Since these institutions have been financing some three-quarters of US mortgages, the socialisation of the risks of housing finance is also close to complete.

If a government, like say Chavez's in Venezuela, "rescues" an economy's workers by financially subsidizing their activities, it is rightly deemed socialist.

So: Is the US government's "rescue" of Fannie and Freddie, done because it had to ensure the creditworthiness of the American economy, similarly socialist? Wolf and others seem to think so. Remember, Wolf's argument is that the US government had to intervene not because it was the best choice but because the system gave it no choice.

For now we can be pleased to pinpoint the key question. Which is: Can an economy dependent upon credit and creditworthiness for its functionality and growth, as in the case of the US since the unfettering of the dollar from gold in 1971, be a truly private market system?

If the answer is no, America does not have a capitalist economy. And if America right now does not have a capitalist economy . . . is there a single history textbook in the country that doesn't need to be re-written? An economics model that is not gibberish? A sociology study that is not outdated? An individual's awareness of what is around him that does not need to be reflected upon?