The Nanny State Did it
by Paul Hibbert

    The Nanny State Did It

The editorial of Aug. 12, "Bush 'fesses up: It's Wall Street's fault" is as good an example of superficial, biased opinion as one can find anywhere. Attributing the current financial crisis to "... the administration whose laissez-faire approach to financial regulation led us into this mess" must be either a gross misunderstanding of laissez-faire or a blatant smear. Upon further dissection and analysis the blame can be placed squarely on the excesses of regulation, control and the "Nanny State." In its formal definition the Nanny State is the derogatory term that refers to state protectionism, economic interventionism, or regulatory policies, and the perception that these policies are becoming institutionalized as common practice. In its everyday usage it is deemed to be paternalistic in nature. It is designed to protect individuals from the consequences of their actions and is based on the assumption that the government knows what is best for all citizens and on that basis passes laws which, in its judgment, prevent citizens from harming themselves or help them do things that they are entirely capable of doing themselves.

In the economic sphere the Nanny State has enacted laws to prevent runs on banks when they are about to become insolvent. The Federal Deposit Insurance Corp. (FDIC) was initiated to insure depositors against loss of up to the (now) limit of $100,000. This was supposed to foster confidence but what it really does is to take the responsibility of doing due diligence away from depositors. Voters are seduced by it because it relieves them from having to make choices. Potential depositors need only look at the promised interest rate, independent of the risk that a particular bank undertakes— and, after all, they are insured. Banks compete and those that don't offer an adequately high interest rate will go out of business. This is direct encouragement by the government for the banks to undertake risky, subprime loans, i.e. mortgages with little or no down payment and little chance that the mortgagees can actually make payments. In spite of the efforts of the best minds on the planet (Alan Greenspan was once described as the smartest man alive) and all the resources available to the Federal Reserve Board they weren't able to identify and rectify the problem early enough.

The mortgage income tax deductibility is also a major culprit and it is an example of social engineering in full flower. The government in its wisdom thinks that "society" can be more stable and conducive to family values if many people own their own homes, so it offers home buyers an incentive in the form of a tax deduction. It is undoubtedly true that society is better off with many homeowners but it's a mistake for the government to foster it because of the secondary effects. The deductibility causes a shortfall in government revenues and to maintain its services it must raise taxes, which are levied on all taxpayers. Thus, the homeowners, to some degree, subsidize their own tax relief and, ironically, renters are forced to subsidize them also. It results in a subtle form of wealth transfer from the renters, who are generally less affluent, to the homeowners and as a result it motivates do-gooders to plump for even more wealth equalization programs. Also, it distorts the market signals that a capitalist system requires. In my opinion, most of the current turmoil can be attributed to government encouragement for subprime mortagees to buy houses they couldn't afford. Over and above those negative influences, the mortgage deductibility encourages home owners to not pay off their mortgages and to take out home equity loans to put them further in debt. I wonder why the social engineers don't promote a program that recognizes that society is more stable when there is less consumer debt?

A further negative influence of the Nanny State is that of tax deferred retirement plans. Again, in its wisdom, government thinks that it should encourage citizens to save for their retirement by deferring income taxes on investments set aside for their old age. As with mortgage tax deductibility, it requires government to increase taxes, which are spread over all taxpayers. Saving for one's retirement is something that any individual should and can do but it doesn't require the overhead of a bureaucracy and the hundreds of thousands of accountants to ensure that the rules are followed.

Once any of these plans are in place it is silly for an individual not to participate to the fullest extent and it then becomes a beggar-thy-neighbor contest. Those most affluent will be able to contribute the maximum and get the most benefit while those less affluent or those not able to participate at all carry part of the taxation burden.

It would be well to heed the cries of Ron Paul and the late Milton Friedman to abolish the Federal Reserve Board (and all other Nanny programs) altogether. Any observer of stock market activity must be aware of the heightened action just prior to and just after a setting of interest rates by the Fed. What is at work is that investors are forced to give their prime consideration to second-guessing what the Fed will do rather than to the fundamental value of their investments. This causes huge distortions in the market and leads to mis-direction of capital.

One can only suppose that the writer of the editorial, in criticizing laissez-faire, is an advocate of total state planning of the economy. The Fed was established in 1913, the FDIC in 1933, and mortgage deductibility in 1954, so to claim that the current crisis is the sole responsibility of the current administration is clearly bogus.
 

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