Obligatory Bailout Post

It is widely acknowledged that part of the problem that caused the housing crisis and its troubling consequences is that lenders were pressured by politicians to loan money to people that in normal circumstances would be turned away. The ideological principle behind this pressure was the idea that homeownership was an entitlement, not a privilege; a human right, not something to be earned. While visions of utopia include shelter for everyone (Micah 4:4), they also include a world of peace and no war. The sad reality is that guns are needed to protect the butter if the supply of butter is to ever enlarge. Investment in the means of butter production require borrowing, and borrowers need to pay back their lenders. If you can’t pay back the lender you will have to learn how to be content with plain toast.

Thomas Sowell is critical of congress along these same rational lines. With the facts showing that Fannie Mae and Freddie Mac were encouraged to do more to help the subprime loan market, our political leaders were pushing for loans to be given to those normally deemed unworthy of them. Altruism goes over better with the voter than siding with banks, obviously, though common sense does not always rule. Sowell writes, “The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.” He could not be more painfully correct.

But the idea of “affordable housing” could not be taken off the table so easily. And if the largest lenders in the game are backed by the American tax payer whose to stop the bankroll of such risky business? Sowell acknowledges that the government doesn’t guarantee Fannie Mae or Freddie Mac, but it is widely assumed that bedfellows bail out bedfellows. The free market would never allow it, and it would never allow such foolishness with loans to transpire. But Fannie and Freddie are neither of the free market nor the product of economic wisdom. Their abominable practices are the consequence of government policy that rests on the nebulous ideals of political ideology. The free market would not supply something that could not be returned, but that is precisely how government economics seem to work.

Nevertheless, something must be done. My opinion is that nothing should be bailed out via blank government check. Take the $700 billion and issue bonds with a low fixed rate of interest. The rate of inflation will most likely make them cheap, but the money isn’t simply given away for free. Make Wall Street pay for its mistakes, but don’t put it out of business. Give the American tax payer something back rather than false ideologies or dubious demands for entitlement. Give us a market that has some freedom to work itself back into real output and economic growth.

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5 thoughts on “Obligatory Bailout Post

  1. Amanda says:

    I could not agree more. If we cannot reasonably (morally, empathetically, etc.) let the free market be truly free in these circumstances, putting that $700 billion to actual use is almost as good.

  2. What has become nauseating to listen to is how “deregulation” has become a catch-all blame word. The solution: more regulation! But that entirely misses the mark and will only serve to slow things down in the long run. Hopefully, whatever regulation gets put in place will be to guard against loaning to people who can’t pay back.

  3. The “deregulation caused everything” canard is absurd. There were regulations in place, and they were disregarded by a variety of parties. It reminds me of gun-control activists who want more laws on the books. We don’t enforce the ones we have. The only people who pay in regulatory schemes are the honest people.

    The scoundrels will find the next Fannie Mae or Tri-Minnesota from which to exploit people.

  4. Elton says:

    “There were regulations in place, and they were disregarded by a variety of parties. ”

    This is a great statement. What we have here is a total failure of government. The state and local governments are supposed to monitor the local lenders’ activities and didn’t. They went along as long as there were an increasing pool of property tax payers. The feds allowed the investment bankers and regular banks to decrease the collateral requirements. Then there’s the credit swap market that nobody understands and policies were sold to non-insurers who don’t have the collaterals to pay up when these CDOs tanked.

    I think they should allow certain entities to die if they hold too much bad debts. It’s a lot more painful in the short term but it sure clears out the dead wood and there may be a quicker and more robust recovery. Zombie companies actually clog up the credit market and make it tough for everyone else.

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