The government takeover of mortgage finance giants Fannie Mae and Freddie Mac should be a lesson for us all. Clearly, we need more oversight, transparency and better accounting. We need to tighten regulation, get control of the market and prevent greedy lenders from “preying” on consumers.
As John McCain and Sarah Palin explain, “Along with the commitment of taxpayers’ dollars, we should make market reforms to help ensure that we do not face this problem again. We will make sure the marketplace understands its obligations.”
Yes, conventional wisdom tells us this is another case of free-markets gone awry –another case of having to reign-in and reform them.
But the facts tell us otherwise.
The irrational lending practices which led to the collapse of Fannie Mae and Freddie Mac were orchestrated by government intervention in these financial markets.
The Community Reinvestment Act of 1977 forced banks to make loans to poor communities regardless of financial viability. The CRA required banks to prove “non-discrimination” when issuing loans and rated their willingness to “serve” risky borrowers. The arbitrary charge of “discrimination” could include credit history, income, job history and any number of factors that might threaten the CRA’s mandate to provide loans to low-income applicants. Failure to comply with CRA mandates could result in a poor community investment rating and be used to deny mergers and other expansions.
The quest to put homes in the hands of people who realistically couldn’t afford them didn’t stop with regulatory prodding from the CRA. The Federal Reserve’s inflationary manipulation of the money supply played a major role. By keeping interest-rates artificially low and devaluing the dollar, bad loans were made to appear lucrative to both borrowers and lenders. Borrowers could count on falling interest rates and the depreciating dollar to “prop up” their ability to make payments on expensive homes. Lenders could continue to make profits even as they offered rates below actual market conditions. Such “easy money” policies allowed borrowers to refinance or sell at will regardless of their actual buying power.
And that’s not all.
The quasi-governmental entities Freddie and Fannie operated under an implicit guarantee that taxpayers would bail them out if needed. This allowed banks to package their loans and sell them to the government-backed entities, knowing that taxpayers would bear the final risk. This is precisely what policymakers wanted. If it were made clear that lenders would not be bailed out, the free market would not have offered the type of irresponsible “promote ownership” lending practices politicians were seeking.
In the name of promoting homeownership, government agencies strong-armed lenders into making risky loans. The CRA penalized lenders who refused to make financially unsound loans; the Federal Reserve manipulated the money supply to favor subprime lending and create the illusion of affordability; and the “too big to fail” policies of lawmakers ensured the burden would fall on responsible home owners should anything go wrong. This is not a free market.
In a free market, lenders could not have amassed the kind of debt they did under government regulation. Left free to act in their self-interest, investors would not have risked their money on unsound investments. What would have been irrational and suicidal lending practices in a free market became official government policy under carrot-and-stick regulations and manipulations of the money supply.
The current mortgage crisis is just one example in a long history of free markets taking the blame for problems caused by government intervention. The electricity blackouts in
In these examples, and a myriad others, government intervention causes a problem, and free markets take the blame. Despite massive government intervention in health care, banking and utilities, we still hear claims that these “free markets” need yet more regulation. If regulation is the problem, why do we keep embracing it as the solution?
Part of the reason is moral.
As the mortgage debacle demonstrates, the goal of government regulation was not to protect the freedom of banks, lenders or taxpayers. The goal was to provide loans to people who could not acquire them in a free market. It was to fulfill the needs and wants of those who could not voluntarily achieve their goals. It was to grant the unearned by coercing lenders and taxpayers into providing the goods.
Providing the unearned at the expense of the productive is almost always the justification for more regulation. This — the morality of altruism — is the reason free markets are under attack. According to altruism, “need” is a moral claim on the lives of others: “From each according to ability, to each according to need.”
Indeed, McCain and Palin promise that they “will look at every agency and department and expenditure of the federal government and ask this simple question: Is it serving the needs of the taxpayer?”
What about protecting the freedom of taxpayers? Shouldn’t this be the standard for governmental action? Not according to altruists. If someone needs a mortgage, a costly drug or cheap electricity, the producers are fair targets of the next regulatory scheme.
The government’s goal, McCain and Palin explain, is “ensuring that hardworking Americans have access to affordable mortgages during this difficult economic period.” And what if these Americans can’t, in fact, afford a mortgage? Will they force lenders to provide them and taxpayers to finance them? You can count on it.
If we hope to enjoy a future of freedom and prosperity we must reject the moral code of altruism. We must uphold each individual’s right to live for his or her own sake. We must defend the American principle of an individual’s right to his or her own life, liberty and pursuit of happiness.
Jim Allard ([email protected]) is a graduate student in biological sciences.
