The financial crisis the U.S. and the world are currently going through is the result of years of government intervention and monetary mismanagement. The problem has not been caused by "deregulation" or a hands-off laissez-faire approach to the banking industry or the housing market.
The banking and housing industries are and have been for decades among the most highly regulated sectors of the American economy. Fannie Mae and Freddie Mac -- with mortgage portfolios of over $5 trillion -- were creations of the government meant to artificially stimulate home buying at non-market rates of interest and sub-market credit worthiness.
The Federal Reserve is not only legally responsible for overseeing the banking industry; it is also the monetary central planner of the nation. The Fed controls the quantity and influences the value of our money. Between 2003 and 2007, the Federal Reserve massively increased the money supply, sometimes at double-digit annual rates of increase. Interest rates were at times pushed so low by this flood of money in the banking system that they were near zero when adjusted for inflation.
Awash with Federal Reserve-created money and credit, the banks shoveled the money out the door, lowering down payment and other requirements to be eligible for a home loan. In addition, consumer debt has gone up by 25 percent over the last five years, as low interest rates undermined the incentive for people to save and made it cheaper for consumers to go on buying binges.
Now having created the miss that we are in, President Bush, Treasury Secretary Paulson, and Fed Chairman Bernanke, tell us and the world that they are ready, willing and able to stop the panic, stabilize markets, and put the world economy back on an even keel.
Give me a break!
The money flood gates are to be opened wide, once again. The Treasury is going to invest at least $250 billion of the $700 billion bailout money approved by Congress in buying equity shares in all the remaining big banks in America. And the FDIC is going to guarantee virtually every banking deposit known to man.
After creating this disaster, on what conceivable basis can they claim to know how to bring it to an end and restore balance to the market?
Oh, yes, that's right, with "experts" from Goldman Sachs! The same Goldman Sachs that is earmarked to receive $10 billion of funds from the government as part of its equity purchases into the financial sector.
All of what has been and is going on should warn us against the hubris of all those in political power.
This was all understood long ago. Adam Smith in his famous work, The Wealth of Nations (1776), said it most clearly:
"The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it."
That George W. Bush is not familar with Adam Smith should come as no surprise. But is a shame that a university economics professor like Ben Bernanke seems to have forgotten, now that he is the head of America's central bank, what the "father" of modern economics warned against over 230 years ago. |
In general, what I think needs to be done is to allow the market to "face" the music and adjust and correct for all the misjudgments, and malinvestments that occurred during the boom.
I know this sounds harsh -- a "do-nothing" policy. But I actually view it as an active do something policy -- face up the errors and mistakes of the past. Sort out the asset values; write some done, write off others. Allow markets to find the right prices for financial and "real" assets. And the economy will then set itself right and start moving forward again.
In the long run, there is no way to avoid this. And government's "activist" hand will only make it worse.
Richard Ebeling