Part of the failure lies with the government-sponsored enterprises Fannie Mae and Freddie Mac, by attempting to increase home ownership by encouraging subprime loans, as discussed in the Wall Street Journal today. In fact, even the New York Times – hardly the defenders of the free market – cautioned against Fannie and Freddie’s actions, given their taxpayer backing, back in 1999 (HT to Carpe Diem), writing:
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.
Government regulation and urban planning is largely to blame for the “housing bubble”, which many attribute as the start of the current “crisis.” The Community Reinvestment Act (and its strengthening in the mid-90s), which essentially required lenders to loosen their standards to increase home ownership also fueled the rise in mortgage defaults.
There is plenty of blame to be laid at the Federal Reserve for holding interest rates too low, government-create credit rating oligopolies, and SEC (the failure occurred among the most heavily regulated firms, not those facing less). Federal mark-to-market accounting rules also intensified the crisis.
What makes support of the bailout so absurd is that it calls for the cause of the problem – government agencies, regulation, and such – to offer more regulation and more management of the financial sector. Why the media is blaming capitalism is obvious: they maintain the perception that the Bush administration exudes a free-market, limited government ideology (false and false) and that “big business” supports less government intervention in the economy (also false).
The current bailout demonstrates the big business-big government marriage to a T. The bailout gives Secretary Paulson almost unlimited power to help his former Wall Street colleagues. The Heritage Foundation notes that Chris Dodd – who gets more money from Fannie Mae and Freddie Mac than anyone – will write the legislation (which they compare to Ken Lay writing post-Enron regulations), and help out his friends.
Thankfully, there are many coming to the realization that the bailout is bad economic policy, now including conservative members of Congress and a growing majority of voters. In contrast, Reason, the Club for Growth, and NTU have all compiled lists of recommendations that would not expand the role of failing government agencies, move us towards a free-market system, and actually help our economy.