Financial crisis is not a matter of greed
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Wednesday, October 8, 2008
All we read of these days is the financial crisis: about how if the government doesn’t “do something” – something costing taxpayers and our children hundreds of billions of dollars – we’ll have another Great Depression. Newspapers trumpet that once again, “free markets” and “deregulation” have failed.
But this latest crisis, like nearly every other “crisis” to befall us, has been caused by corrupt and inept government policies, not by markets or greed. And new regulatory rules vastly exacerbated this crisis.
This episode demonstrates the modus operandi of government: it causes a “crisis” and then demands more money and our civil liberties in order to “fix” the problems it created, be it immigration, drugs or terrorism. Always government grows.
This time, government officials, in yet another unwise attempt at social engineering, decided that home ownership should be encouraged. They passed laws discouraging banks from asking “discriminatory” questions about low-income loan applicants’ ability to repay. “Government Sponsored Enterprises” such as Fannie Mae and Freddie Mac own or guarantee half our mortgages, further encouraging banks to make risky loans. One can hardly blame banks for responding to these incentives to lend indiscriminately.
The federal government also encourages larger mortgages by making mortgage interest tax-deductable. And the Federal Reserve lowered the cost of borrowing by dictating artificially-low interest rates.
The government-induced demand led to higher prices (the “housing bubble”) in what would otherwise have been a much safer (if somewhat smaller) housing market.
Then, when the risks of such imprudent lending were recognized and the bubble finally popped, the financial problems experienced by banks were greatly exacerbated by new financial regulations. So-called “mark-to-market” accounting standards imposed by government last year forced companies to record artificially-large “paper” losses, compelling them to come up with larger cash reserves to offset those “losses”, and simultaneously leading to lower credit ratings, which made it harder for them to obtain that cash. These accounting rules led to the total collapse of several companies, and have made banks afraid to lend.
So now that government has caused this crisis, it insists it can fix it with more intervention. It will only cost taxpayers an estimated $700 billion (government being well-known for its ability to provide realistic estimates). And if the bailout plan is filled with $100 billion of pork – including a $100 million for auto racetrack owners and $192 million for the offshore rum industry, well, that’s just the price we must pay for “the greater good” of society.
But based on our government’s track record, why would we think it is able to fix anything? After all, it was brilliant government plans that caused and worsened the Great Depression, the early 1980s Midwest Farm Crisis and the late 1980s Savings and Loan Crisis. It is simply unrealistic to expect that members of Congress will understand financial problems well enough to implement effective policies.
How will this bailout give large businesses incentives to make sound financial decisions? After all, they now know that government will bail out their mistakes – no risk, all rewards.
Taxpayers take note: this is not how “free markets” work. Real free markets allow businesses the freedom both to prosper and to fail. No onerous taxes, no handouts. Consumers are free to purchase what they think best fits their needs – not what government has decided would be best for us (or for businesses).
So now that government has gotten us in this incredible mess, how do we get out of it? Frankly, probably nobody really knows – not economists or Wall Street executives, and certainly not the government “experts” who produced our plight.
But it is clear that we do not need more of what got us here. More government intervention is not the answer. Instead, we need to start slowly unwinding the convoluted strings of government meddling. Social-engineering programs should be repealed, government should cease aiding businesses, tax burdens and government debt should be reduced, not increased.
Will these necessary reforms happen? Of course not. Instead, government
will slap another expensive bacteria-laden band-aid on the wound it inflicted.
In another decade, another “crisis” will visit us and Congress
will again do something. And our once-free Republic will continue to slowly
asphyxiate under the crushing burden of over-reaching government.