Here’s hop­ing cure won’t be worse than dis­ease

The Washington Times Weekly - - Commentary - Thomas Sow­ell

Who was it who said, “crack-brained med­dling by the au­thor­i­ties” can “ag­gra­vate an ex­ist­ing cri­sis”? Ron­ald Rea­gan? Milton Fried­man? Adam Smith? Not even close. It was Karl Marx. Un­like most left­ists to­day, Marx stud­ied eco­nomics.

Will the cur­rent fi­nan­cial cri­sis lead to crack-brained med­dling or to some ra­tio­nal ac­tions? Pre­dict­ing what politi­cians will do is risky busi­ness. We will have to wait and see.

Saints are no more com­mon on Capi­tol Hill than on Wall Street. We can only hope the po­lit­i­cal “so­lu­tion” does not turn out to be worse than the prob­lem.

There are times when gov­ern­ment in­ter­ven­tion can make things bet­ter. But that is no guar­an­tee it won’t make things worse. As they say, “the devil is in the de­tails” — and we don’t know the de­tails yet. Prob­a­bly most mem­bers of Congress don’t know the de­tails yet — and many may still not know the de­tails when the time comes for them to vote on this bailout.

Tak­ing an op­ti­mistic view, this big­gest bailout of all time may stop the prob­lems in fi­nan­cial mar­kets from spread­ing into the gen­eral econ­omy — which is cur­rently noth­ing like the dis­as­ter area that the me­dia por­tray it to be.

Ninety per­cent of the peo­ple on this planet would ex­change their eco­nomic sit­u­a­tion for ours in a minute. The me­dia love hype, and have been dy­ing to use the word “re­ces­sion” all year but noth­ing has hap­pened that meets the def­i­ni­tion of a re­ces­sion.

The Amer­i­can econ­omy is grow­ing, not de­clin­ing. Our un­em­ploy­ment rate is up to 6 per­cent but there are coun­tries that would be de­lighted to get their un­em­ploy­ment rate down to 6 per­cent. Our inflation rate is up a lit­tle but many coun­tries would love to get their inflation rate down to where ours is.

Why then is there such a mess in the fi­nan­cial mar­kets? Much of that mess is due to the very peo­ple we are now turn­ing to for so­lu­tions — mem­bers of Congress.

Past Con­gresses cre­ated the hy­brid fi­nan­cial in­sti­tu­tions known as Fan­nie Mae and Fred­die Mac, pri­vate in­sti­tu­tions with gov­ern­ment back­ing and po­lit­i­cal in­flu­ence. About half of this coun­try’s mortgages are backed by th­ese two in­sti­tu­tions.

Such in­sti­tu­tions — ex­empt from laws that ap­ply to other fi­nan­cial in­sti­tu­tions and backed by the im­plicit prom­ise of gov­ern­ment sup­port with the tax­pay­ers’ money — are an open in­vi­ta­tion to risky be­hav­ior. When th­ese risks blew up in their faces, Fan­nie Mae and Fred­die Mac were taken over by the gov­ern­ment, cost­ing the tax­pay­ers bil­lions of dol­lars.

For years the Wall Street Jour­nal has been warn­ing that Fan­nie Mae and Fred­die Mac were tak­ing reck­less chances but lib­eral Democrats es­pe­cially have pooh­poohed the dan­gers.

Back in 2002, the Wall Street Jour­nal said: “The time for the po­lit­i­cal sys­tem to fo­cus on Fan­nie and Fred isn’t when we have a hous­ing cri­sis; by then it will be too late.” The hy­brid pub­li­cand-pri­vate na­ture of th­ese fi­nan­cial giants amounts to “pri­va­tiz­ing profit and so­cial­iz­ing risk,” since tax­pay­ers get stuck with the tab when high-risk fi­nances don’t work out.

Sim­i­lar con­cerns were ex­pressed in 2003 by N. Gre­gory Mankiw, then chair­man of the Coun­cil of Eco­nomic Ad­vis­ers to Pres­i­dent Bush. But Mas­sachusetts’ lib­eral Demo­cratic Rep. Bar­ney Frank crit­i­cized Mr. Mankiw, cit­ing “con­cern for hous­ing” as his rea­son for sup­port­ing Fan­nie Mae. Bar­ney Frank said fears about the risk­i­ness of Fan­nie Mae were “overblown.”

Cal­i­for­nia’s Demo­cratic Rep. Max­ine Wa­ters and other mem­bers of the Con­gres­sional Black Cau­cus have also been among the lib­eral Democrats de­fend­ing Fan­nie Mae. Just last year, Sen. Charles Schumer, New York Demo­crat, ad­vo­cated leg­is­la­tion to al­low Fan­nie Mae and Fred­die Mac to in­crease their al­ready huge role in the mort­gage mar­ket. Ohio Repub­li­can Rep. Mike Ox­ley has also de­fended th­ese hy­brid fi­nan­cial giants.

Both Fan­nie Mae and Fred­die Mac have been gen­er­ous in their con­tri­bu­tions to politi­cians’ po­lit­i­cal cam­paigns, so it is per­haps not sur­pris­ing that politi­cians have been gen­er­ous to them.

This is cer­tainly part of “the mess in Wash­ing­ton” that Barack Obama talks about. But don’t ex­pect him to clean it up. Franklin Raines, who made mega-mil­lions for him­self while mis­man­ag­ing Fan­nie Mae into a fi­nan­cial dis­as­ter, is one of Mr. Obama’s ad­vis­ers.

Thomas Sow­ell is a na­tion­ally syndicated colum­nist.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.