Congress Is Not a Substitute For the Market
James Gwartney:I do not believe that political decision-making is good at directing resources toward productive activities and away from counter-productive ones. Thus, substitution of Congressional votes for the profit and loss system will almost surely reduce the income of Americans.
With regard to the recent upheval in credit markets, several factors played a key role. The regulations imposed by HUD on Fannie Mae and Freddie Mac during 1995 an 1999 mandated an expansion in credit to those with lower incomes and reduced the required down payments for that credit. Along with the short-term low interest rate policies of the Fed during 2002-2004, this led to an increase in demand for housing, the housing boom and eventually the higher mortgage default rates and the housing bust. A 2004 regulatory change permitting mortgage banks to leverage their equity by a larger amount also played a role.
It was not a good idea to bail out Wall Street bankers and it is not a good idea to bail out inefficient auto producers. If we do so, state governments (California, New York, and others) will be right behind asking for a bail out. So will other industries (e.g. airlines and construction) currently experiencing difficult times. Business executives will be spending more time in Washington seeking favors and less time focusing on the production of quality goods and making them available at economical prices. This is not the recipe for long-term growth and economic progress.
Indeed.
James Gwartney:
2 comments:
The problem is that totally unmanaged markets run wild, and eventually lead to the type of collapse that we've had.
It's a total myth of some conservatives that these measures to allow for more lending to lower income people were in any way a trigger for this problem. That has no credibility whatsoever.
This was a case where the majority of the risky loans were made by private mortgage lenders, mostly under no govt regulation. No govt rule forced lenders to lend with no money down, or without income verification.
Then there were the investment houses which securitized these loans, effectively removing any risk from the mortgage lenders. They absorbed most of the subprime loans, not Fannie or Freddie.
No govt regulation forced credit-rating agencies to give high-grade ratings on subprime debt.
It's remarkable that even the lenders and investment houses are not blaming these govt agencies or govt regulations for the problems, even though it would seem beneficial to them to try to shift the blame.
At a recent Congressional hearing, Republican Rep. John Mica of Florida gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions to Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: "de minimis."
Now this is coming from someone who someday may be indicted for his actions, and even he did not try to blame the govt on this one.
No govt law made these people lend in such careless fashion; the profit motive did.
Finally, lending money to poor people is not inherently risky. That's what we've learned from several decades of microlending programs, at home and abroad, with their very high repayment rates.
As Daniel Gross notes in Newsweek:
On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Brothers, or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity.
Lending money to poor people doesn't make you poor. Lending money poorly to rich people does.
I would add that while govt is not a substitute for the market, it can be a partner to help the markets recover when there is a major collapse.
I have yet to hear critic of govt action suggest a viable alternative. The only alternative seems to be allowing all parties to fail...let the banks fail, the investment banks, the auto companies, etc...let the markets crater and unemployment soar. Then hope for a recovery after all the suffering and loss.
Hope that somehow investor confidence then snaps back, and the markets can reconstruct themselves.
Some problems are too fatal to allow to run their course. As Keynes famously remarked, in the long term we're all dead.
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