By Michelle Seitz

I’m sure I’m not the only taxpayer frustrated by Washington’s generosity to irresponsible, politically connected corporations. We hear that the credit markets are frozen. Without federal dollars, America would see a domino effect of banks failing one after the other. If you believe this, I have some land I’d like to sell you. Look through your “junk mail,” both snail and online, and see how many invites you receive for credit. Take a stroll to your local car dealership this weekend and see how quickly they’ll get you financed. While it may be true that people who have less than appealing credit or are overextended may not be getting offers, but is that a bad thing? Aren’t reckless loans what got us here in the first place? Isn’t it natural for banks to hold back on lending in harsh economic times? What is the demand for borrowing when people are afraid of losing their jobs?

President Bush’s $168 billion economic stimulus plan in February of this year was supposed to give the economy the boost it needed. Then, along came Bear Stearns. The federal government extended a discounted loan to JP Morgan Chase to entice them to buy Bear’s troubled liabilities. Case closed – economy saved…hardly. In October, the market began to hemorrhage. State governments are now asking for federal dollars along with the troubled auto industry. President Bush addressed the nation assuring us that the federal government would rescue the falling economy. The government being the rescuer is the equivalent of a small raft being thrown to someone drowning in the ocean in the middle of a hurricane, when the one throwing the raft was the cause of the storm!

The federal government now has plans to take stakes in nine of America’s top financial institutions and equity investments in potentially thousands of other banks. One month later, the DOW continues to plunge, consumer confidence is in the tank and the threat of more foreclosures still exists. The threat of a global recession is eminent. What does our President-elect say? More economic stimulus is needed! Why not, as it has worked so well thus far. Don’t forget; he was hired to fix the economy!

One only needs to take a look at history to see how well government intervention works. Did President Hoover’s Reconstruction Finance Corporation of 1931 and 1932 end the Great Depression? Hoover gave federal loans to politically connected companies much like the Paulson/Bush plan. When President Roosevelt took over, he invested heavily in the country’s infrastructure and took the Keynesian approach. Both of these approaches turned a bad recession into the Great Depression and further prolonged misery.

Critics of capitalism and a laissez-faire approach fail to realize that economic downturns are part of the overall economic cycle. Recessions do not mean that capitalism has failed. That also doesn't mean that government oversight is not needed; but there is a difference between proper oversight and intervention. The problem with government intervention is that it prolongs the downturn and creates new problems in the future. Fannie Mae and Freddie Mac were the outgrowth of “The New Deal” along with the waves of entitlement programs that the government is currently having a difficult time funding.

The Bush administration wasn’t interested in bailing out the “dot com” companies at the beginning of this decade. Is the tech sector dead as a result? America had an 8-month recession with a decent recovery. While the credit crisis is far more severe, over-reaction can make a bad situation worse. The federal government has already spent over $1 trillion to try and stop the bleeding. The new administration plans on spending more and possibly a move to bail out the ailing auto industry. As it stands, the federal deficit will exceed $1 trillion next year. The potential effects these actions will have on the value of our dollar and impending inflation, one has to ask if we are pouring water into a leaky bucket and what the opportunity cost will be from allocating an incredible amount of resources to banks, individual states and companies that are poorly run.

In September our great nation was faced with a financial crisis not seen since the 1930’s. In response to this financial crisis, President George W. Bush called for a bill to save our financial markets. On September 28, 2008 America passed the “Emergency Economic Stabilization Act of 2008”. This bill provides over 750 billion dollars of tax payer dollars to attempt to restore credit and regain confidence in a downward economy that has grown to epic and global proportions. In essence the bill will allow the federal government to buy into the financial system through the ownership of preferred stock. I firmly stand against this action and have concerns about the federal government buying ownership into the financial district.

First lets go over how all this happened. In a nutshell this all leads back to the "Community Reinvestment Act" which forced banks to comply with Fannie Mae and Freddie Mac by giving out loans to people regardless of whether or not they could pay for them. Fannie and Freddie, partly owned by the federal government, offered to back these bad loans if any of them were to foreclose. With the government backing these loans, banks felt they had nothing to lose since they had to comply with the federal mandates or face costly lawsuits. So banks got creative with how they issued loans (Arm, interest only, no money down, etc.). Fannie and Freddie continued to make money as long as home values increased and as long as more loans were issued. The more loans the more money Fannie and Freddie made. Fannie and Freddie then bundled these mortgage loans into "mortgage backed securities" and sold them as investments to other banks who bought them. Next came high oil prices and inflation started to rise. Interest rates went up and more people started to foreclose. With too many foreclosures at one time, Fannie and Freddie couldn't back these loans and the downward spiral continues to this day.

What happened was not the result of the free market or deregulation, as the left would have you believe. What happened had everything to do with the fact that a bad government policy failed. Fannie and Freddie removed an important element of capitalism…..the element of risk. When risk is removed there is no fear and therefore there can be no failure. Risk is an essential part of capitalism. The old saying “the higher the risk, the higher potential for return” still holds true today as it did hundreds of years ago. In this case there was no danger in giving out risky loans because banks were assured they would be backed by the government. For example, let’s say you and I go to a casino, and I force you to play the slot machines. Then I tell you not to worry because if you lose any money I will cover your losses. Are you going to behave differently in that casino if I tell you I am going to back your gambling that day? Of course you will, and our financial markets are no exception.

So what does our government do? They buyout Fannie and Freddie so they are completely owned by the federal government, and bailout our banks by buying shares of preferred stock as collateral. Our federal government failed us by trying to make everything fair instead of letting the market determine who can pay back a loan. In a normal market banks all take a reasonable amount of risky loans, but too many can jeopardize their business. The federal government failed to regulate Fannie and Freddie and failed to enforce the existing laws we already have in place. As a result the federal government now has complete ownership of Fannie and Freddie, as well as a substantial stake in our largest banks.

So what should our government have done? For starters our government had no business mandating companies to take bad loans in the first place. I would love to see everyone own a home, but as we have seen too many people owning houses they cannot afford can lead to a disaster. I would like to see the government dramatically change the “Community Reinvestment Act” and reduce the power Fannie and Freddie have in the marketplace. Next, I would like to see the government stay out and not offer any tax payer money to financial institutions. However, as I stated above our government broke capitalism so now our government believes they have to come in and fix it. I am against the government owning any shares in our financial sector. If it is decided that federal help is mandatory then I would rather they issued bonds or loans coupled with legislature that completely changed the way Fannie and Freddie operate.

As a free market capitalist I am weary whenever the government buys into the private sector to “help out”. Usually when the government gets involved with anything they cause more problems than they solve. When this is all over is our government going to sell those shares back and get out of the private sector? That remains to be seen, but I have my doubts. What voice is our government going to have now that the government has a direct steak in the financial world? What kind of new regulations are going to be put in place while they are partial owners? Is the government going to mandate how these companies invest their money? I don’t recall hearing GW Bush say a bad government policy had a hand in causing the financial crisis. As other industries fall on hard times as a result, is the government going to bail them all out? The fact is we do not have the money to subsidize the private sector, and our federal government shouldn’t be in the business of running it in the first place.

Sources:
http://online.wsj.com/article/SB122398468353632299.html
http://money.cnn.com/2008/09/28/news/economy/Sunday_talks_bailout/index.htm?cnn=yes
http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/09/28/franks_fingerprints_are_all_over_the_financial_fiasco/