Wednesday, December 10, 2008

Government Interference and Encouragement

Speaking about governmental encouragement of the arts, novelist/philosopher Ayn Rand (link below) identified the principle that: "Governmental encouragement does not order men to believe that the false is true, it merely make them indifferent to the issue of truth or falsehood." This principle is equally true regarding other forms of governmental encouragement. But the truth of the above principle has never been so glaringly obvious as in the current mortgage crises which involves both government interference and encouragement. Government encouragement is usually in the form of government financing of various initiatives.

Governmental interference and encouragement in this fiasco is plentiful and widespread. It starts with the Federal Reserve bank which is a political animal created by the government in 1913. It would not exist in a free market. The Fed under former chairman Alan Greenspan held interest rates ridiculously low earlier this decade. That policy was continued by current chair Ben Bernanke. At his website economist George Reisman (link below) writes: "For the three years 2001-2004, the Federal Reserve drove the Federal Funds Rate below 2 percent and from July of 2003 to June of 2004, drove it even further down, to approximately 1 percent." This created an atmosphere of easy money and credit in the market place. Easy money here means money can be had at less than market rates would provide. It encourages a certain amount of recklessness in financing.

Add to that the government's implicit policy--ever since the bailout of the S&Ls--of bailing out companies that are deemed 'to big to fail' and you have even more encouragement to recklessness in financing. The Fed was seen as the lender of last resort and the congressional policy was seen as a corporate safety net.

But these encouragements weren't the only ones. There is Fannie Mae and Freddie Mac created by government to buy up risky mortgages and pool them with good ones and resell them for even more money that would be used to make more risky loans. The justification was to provide "affordable housing" to those who couldn't afford it. There is the Community Reinvestment Act which provided a rating agency by which mortgage companies would have to get a good rating in order to expand or merge. To get a good rating they had to have a certain number of risky mortgages. Again, these lesser encouragements contributed to and magnified the meltdown.

The pushers of 'affordable housing' were clever about their interference in the marketplace. They cited documents showing that a small percentage of people just under the economic threshold below which private banks would not lend are in fact able to pay off loans therefore the government must help this under served part of society with cheap loans. Of course none of this was needed. As Thomas Sowell pointed out, there are always some people in the poverty or working poor category who are there only temporarily through job loss or injury or just entering the job market at a low wage. These people don't stay there for long and don't need the government trying to saddle them with debt just because Congressmen and Senators want to feel good about themselves.

If no financial recklessness or greed existed in the market place, these governmental encouragements would--and did--create it.

When Fannie Mae and Freddie Mac are cleaned up they need to be shut down. The Community Reinvestment Act should be repealed and the Fed can be eventually shut down as we return to a gold standard We do not need a central bank. A great deal of the encouragement is on the state and local level. I did a google search for 'affordable housing initiative' and got 339,000 results.

The solution is not more governmental encouragement but an end to it: a discovery of laissez-faire capitalism.

Sources:
1. Rand quote from essay "Establishing of an Establishment" in her book "Philosophy: Who Needs It."

2. George Reisman's Blog on Economics, Politics, Society, and Culture. "Essay on The Myth that Laissez Faire Is Responsible for Our Financial Crisis"
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