Problems, and Government Interventions, Keep Growing

Problems, and Government Interventions, Keep Growing 
August 6, 2008
William F. Shughart II
Detroit Free Press

According to a recent Wall Street Journal/NBC News poll, most Americans want government to “do more to solve problems.” As Congress agreed last week to raise the ceiling on our national debt to $10.6 trillion—an increase of $800 billion—it became indisputably clear that Washington is eager to oblige. Peddling the idea that markets have malfunctioned and drastic action is needed to rein in the excesses, the federal government is embarking on the largest expansion in spending and regulation since the New Deal.

In truth, the seeds of the current economic crisis were sowed not by too little government intervention, but by too much.

Supposing that the practice of redlining certain low-income neighborhoods was evidence of racial discrimination by mortgage lenders, policymakers began coaxing banks and thrifts to approve home loans for borrowers who, on paper, did not qualify. Financial institutions were increasingly willing to cooperate as a market for mortgage-backed securities developed and shaky home loans could be repackaged and sold to investors who assumed the risk of default.

An even safer bet still was to write loans and either sell them to—or have them guaranteed by—Fannie Mae or Freddie Mac, institutions that, although privately owned, were widely (and correctly, it turns out) viewed as being backed by the full faith and credit of the U.S. government.

Able to keep any profits repaid by borrowers and having shifted possible losses elsewhere, mortgage lenders took flyers on a large number of risky home loans, all of which are now central to the crisis.

Government, too, suffers from moral hazard. For months after the Federal Deposit Insurance Corporation took control of Superior Bank in Hinsdale, Ill., in 2001, regulators continued the thrift’s aggressive mortgage lending policy, cutting some $550 million in checks to more than 6,700 subprime borrowers. Superior then sold many of the loans to another bank.

Washington’s solution, however, is not to clean up the mess it almost single-handedly created, but rather to reward Fannie and Freddie with unlimited lines of credit from the U.S. Treasury.

Sustaining the trend that led to the creation of the colossal Department of Homeland Security after 9/11, similar political panaceas are on the horizon.

U.S. Sen. Barack Obama, the Democratic presidential candidate, has proposed significant increases in federal spending to fix the nation’s highways, bridges, ports and railroads, and he supports oversight of the $6-billion infrastructure bank by a new five-member commission modeled on the FDIC. Not to be outdone, U.S. Sen. John McCain, the Republican candidate, has said that he favors a taxpayer bailout of General Motors.

California has rolled back its 1998 deregulation of electricity markets. A poster child for alleged market failure, the state had in fact deregulated wholesale but not retail electricity markets. Subsequently, when wholesale prices spiked, power companies could not pass higher energy costs on to their customers, who therefore had no incentive to conserve. Brownouts and blackouts were predictable consequences.

Responding to concerns about the safety and effectiveness of prescription drugs, pharmaceutical companies have been lobbying Congress to grant greater regulatory powers to the Food and Drug Administration. For their part, U.S. food manufacturers want the federal government to exercise stricter controls over imports. Reacting to the recent salmonella outbreak thought to have been caused by contaminated tomatoes—or was it jalapeño peppers?—Florida has already imposed additional inspection requirements on tomato growers.

While it is not a federal or state function to protect us from all of life’s misfortunes, there is evidently no end in sight to the era of big government. Besides exacting a greater burden on citizens in the form of more taxes and less freedom, regulatory expansion displaces personal responsibility and judgment for reliance on the very questionable guardianship of the state.

As Ben Franklin once said, a nation willing to sacrifice liberty for security will have neither.

William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.