Government Meddling Leads to Risky Business
The National Center for Policy Analysis has put together a good summary of how government meddling in the free market led to the recent financial meltdown. The summary plays off a more detailed analysis by Randall G. Holcombe in The Journal of the James Madison Institute
- Fannie Mae and Freddie Mac were created to help provide mortgages for people who didn’t qualify for conventional mortgages; as government-sponsored enterprises (GSE), they rapidly grew to where their debt was nearly half the size of the federal government’s debt.
- A related problem began with the Community Reinvestment Act (CRA) of 1977; if lenders wanted to expand their lending, they had to balance their loans to financially secure buyers with loans to buyers who did not meet the conventional mortgage criteria.
- A third factor was easy-money policy adopted by the Federal Reserve Bank early in the decade to mitigate the effects of an incipient recession exacerbated by the after-effects of the September 11, 2001 terrorist attacks; low rates meant lower-cost mortgages, further enabling people to buy houses, however, the increased demand pushed prices up, and many buyers wouldn’t have qualified for mortgages except for the relaxed standards.
To be sure, businesses frequently take risks, including the financial industry, in order to get ahead of their competitors.
However, in a free market, they have to live with the consequences when they take too many risks, foolish risks. Understanding this helps curtain excessive risk-taking.
But when the government encourages or even mandates risky business practices, businesses tend to feel more justified in taking foolish risks.
When you throw in the guarantee or well-founded hope of a government bailout, businesses are further encouraged to ditch wisdom and get careless; they know the taxpayers will rescue them if their foolishness catches up with them.
This is yet another reason why government meddling in the free market is itself risky business. It distorts and blocks the mechanisms the free market naturally uses to keep itself remarkably well regulated. The Founders were wise to recognize that government involvement should be kept to a minimum.
Read the entire piece at The Journal of the James Madison Institute.
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