I have officially lost faith in the United States government.
When you combine all the factors — a bloated federal bureaucracy, presidents who ignore the Constitution, a corrupt Congress supported by an undemocratic two-party system — it’s a wonder I held out for so long.
However, the recent decision by the government to bail out mortgage giants Fannie Mae and Freddie Mac from enormous debts is the proverbial straw that broke the camel’s back.
By bailing out Fannie and Freddie, the government is actually making the problem worse. It is responsible for the weak dollar and higher inflation, and they are systematically encouraging the destruction of the entire American economic system.
In 1938, President Franklin Roosevelt created the Federal National Mortgage Association (commonly, Fannie Mae) as part of his economic New Deal in an attempt to promote home ownership in light of the Great Depression. Until the “privatization” of Fannie Mae in 1968, it existed as a virtual monopoly in guaranteeing home mortgages.
In 1968, Fannie Mae was restructured into a government-sponsored enterprise (GSE), meaning it would operate more like a private firm responsible for offering stock and competing in the market, while at the same time maintaining privileges not available to other market competitors — namely, more favorable interest rates.
The Federal Home Loan Mortgage Corporation (Freddie Mac) was created as a GSE in 1970 to complement the already bloated Fannie Mae.
For the last 40 years or so, Fannie and Freddie have been buying mortgages that banks and other lenders gave people who could not afford them with the implicit understanding that the federal government would bail them out when things went sour.
When the subprime mortgage crisis hit, the companies that collectively held or guaranteed more than $6 trillion in mortgage debt suddenly became the greatest liability to the country — or, as some politicians say, too large to fail.
Sen. John McCain said it perfectly at a campaign stop in Michigan when he guaranteed a federal bailout: “They must not fail,” he said. “Fannie and Freddie are vital to Americans’ ability to own their homes.”
Sen. Barack Obama isn’t going to do anything to fix the problem either. MSNBC reported that Franklin Raines, the former chairman of Fannie Mae who is responsible for politicizing the mortgage industry, is the housing advisor for the Obama campaign.
Too many people in America agree the entities are too large to fail – but I’m one of the few who thinks this is a good idea.
I think if they are not allowed to fail, we will have committed ourselves to unsound fiscal and monetary policies that are not easily reversed.
Austrian economist and philosopher Ludwig von Mises promoted the idea that, when given the choice between the free market and intervention in the economy, the government always chooses the latter.
In this case, increased government intervention in the economy is going to make the current economic crisis seem insignificant and will eventually lead to national bankruptcy.
Mises knew 50 years ago what government bureaucrats continue to ignore today: Unfair monopolies like Fannie Mae are not subject to market forces because they operate outside the realm of the free market. The government implicitly guarantees the debt held by Fannie and Freddie, and thus is implicitly responsible when the two begin to falter.
The theory that the government favors intervention holds up today. President Bush and Congress have recently authorized the shoveling of money into two very unsound financial institutions.
Bailing out Fannie and Freddie is simply the beginning.
Because so many homeowners made horrible decisions to buy mortgages they could not afford and because politicians are always looking towards re-election, crises such as this tend to support Mises’ theory of intervention.
The government continues to intervene in the economy, with drastic results. Inflation chiefly rises due to high rates of growth of the money supply. How do you think the government gets the money to pay for the budget?
I don’t recall anyone raising taxes. Instead, they print fiat money not even worth the paper it is printed on to pay for services.
The Consumer Price Index for June 2008 surged 1 percent — one of the best indicators of inflation in the market. The government is destroying the economy, and millions of ignorant Americans are along for the ride.
So, how do we fix the crisis?
The problem with that question is it presupposes we can actively fix the problem.
My theory is that the best thing we can do is let Fannie and Freddie fail. They will have their assets auctioned off to the highest bidder, housing prices will adjust downward as millions more Americans go into foreclosure, the federal reserve would have to clean up its internal corruption, and the economy will be given a chance to fix itself.
This isn’t going to happen.
The federal government is going to bail out Fannie and Freddie, millions of Americans who made poor financial decisions are going to keep homes they cannot afford, the dollar is going to become worthless, goods and services are going to become more expensive, and the government is going to grow ever larger.
Mises was right: “The worst evils which mankind has ever had to endure were inflicted by bad governments. The state can be and has often been in the course of history the main source of mischief and disaster.”
I’d be laughing if it wasn’t true.
Joe Hunt is an economics and history senior. His column appears every other Thursday.
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hendou10 3 years, 9 months ago
AMEN! competition is the only way.