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| The Bureaucratic Bait-N-Switch As basically everyone with political pull, whom I call the Pull Peddling Power Brokers, are getting in line to blame Wall Street (corporate "greed") and the "free market" for the housing crisis, you have to ask yourself what they might be getting out of that. Rand said not to bother examining an obvious error, but to ask yourself what the deluded error is intended to accomplish. Who is to benefit? It turns out that the proposed solution to the housing crisis is more government control of the otherwise-free market (so that those Pull Peddlers will have more "pull"). But was the market too free (as would have had to be true here)? Regulation of what? Regulation is the buzz-word, nowadays. Headlines read things like "Regulation is back" and such. Deregulation is blamed for our current crisis. If only we hadn't deregulated, we wouldn't be here now -- so the argument goes. But that argument assumes that the problem was the lack of government control of the market rather than a lack of control of the government's control of the market. If you want to blame a free market, then you have to start with one (and see if it fails). Such a straightforward point that seems lost on virtually all of the popular talking heads. The Zookeeper analogy If an animal were free but I wanted to cage it -- in order to make money off of it at the zoo -- then I would try to mess with the animal behind the scenes in order to try to get others to believe that it was too dangerous to be left out of a cage. I would poke and prod at the animal when others weren't looking, trying to incite a response. I would do whatever it is that I could to evoke or "incentivize" bad behavior, just so I could blame the animal and get what I want. That's what politicians did here. The Problem (and solution) Fannie and Freddie were created by politicians in order to try to bypass market mechanics, in order to get home loans to folks with bad credit by backing up mortgages with taxpayer money in a redistribution of wealth scheme. Laws like the Community Reinvestment Act (CRA) were created by politicians in order to try to bypass market mechanics, in order to force banks to make high-risk home loans. The politicians told the banks to risk more, and to fall back on Fannie and Freddie indirectly (by selling bad loans to mortgage brokers like Bear Stearns, who were backed by Fannie and Freddie). It's a shell game, but an easy one to figure out (if you open your eyes). The banks weren't backed by Fannie and Freddie, as pundits shout into well-placed microphones, but the brokers were -- and so they got the brunt of the blame. But you have to keep the dynamics in context: banks are forced to give bad loans, and brokers are there to buy them with government-backed credit (from Fannie and Freddie). It all ensues from the interaction of Fannie and Freddie with laws like the CRA. The final straw was for the Fed to initiate and propagate "negative" interest rates (interest rates below the rate of inflation). This was a de facto payment to the banks for taking out federal loans, created by politicians in order to try to bypass market mechanics. Do we really need more government control of the market -- or do we need more government control of the government? This crisis was a failure of internal regulation of the government (i.e., the government doing too much in the market), not a deficiency of external regulation of the market. Yet so many folks fall for the bait-n-switch, blaming the market for the government's savage invasiveness! Arguing that we should have MORE invasiveness! Offering poison as food, and then more poison as a remedy! What a farce! We need to reign in the government, NOT the market. Ed | ||||
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