ALL
POV: Have Gun, Will Nudge
by Ayn Rand | March 1962
It's Not the Unions — It's the Labor Laws
by Doug Altner | March 19, 2014
Regulatory Strangulation
by Steve Simpson | March 13, 2014
Obamacare creates a new class of free riders
by Rituparna Basu | January 23, 2014
Obamacare Is Suffocating An Already Sick Health Insurance Patient
by Rituparna Basu | January 22, 2014
The Broken State of American Health Insurance Prior to the Affordable Care Act: A Market Rife with Government Distortion
by Rituparna Basu | January 21, 2014
Obamacare is Really, Really Bad for You, Especially If You're Young
by Rituparna Basu | August 21, 2013
Justice Department should let US Airways & American Airlines merger proceed
by Tom Bowden | August 16, 2013
Why Is Apple Inc. On Trial? For Good Behavior, It Turns Out
by Tom Bowden | June 20, 2013
The Forgotten Man of the Minimum-Wage Debate
by Doug Altner | June 19, 2013
Why Delivering Beer Isn’t Easy
by Doug Altner | June 11, 2013
What Explains GM’s Problems With The UAW?
by Doug Altner | May 20, 2013
What Are The Search Results When You Google ‘Antitrust’?
by Tom Bowden | April 18, 2013
To Protect the Defenseless, We Must Abolish the Minimum Wage
by Don Watkins | March 27, 2013
I’ll Buy My Own Contraception, Thanks
by Rituparna Basu | November 13, 2012
Why The Glass-Steagall Myth Persists
by Yaron Brook | November 12, 2012
Why Ayn Rand’s Absence From Last Thursday’s Debate Benefits Big Government
by Yaron Brook | October 15, 2012
Changing the Debate: How to Move from an Entitlement State to a Free Market
by Don Watkins | July 02, 2012
3 Things Everyone Needs to Know About the Apple Antitrust Case
by Don Watkins | April 10, 2012
What's Really Wrong with Entitlements
by Don Watkins | February 21, 2012
The Entitlement State Is Morally Bankrupt
by Don Watkins | September 13, 2011
How Important Is the Obamacare Litigation?
by Tom Bowden | August 12, 2011
Atlas Shrugged: With America on the Brink, Should You “Go Galt” and Strike?
by Onkar Ghate | April 29, 2011
The Road to Socialized Medicine Is Paved With Pre-existing Conditions (Part 3)
by Yaron Brook | April 06, 2011
The Road to Socialized Medicine Is Paved with Pre-existing Conditions (Part 2)
by Yaron Brook | March 10, 2011
In Defense of Finance
by Yaron Brook | February 15, 2011
The Road to Socialized Medicine Is Paved with Pre-existing Conditions
by Yaron Brook | February 10, 2011
The Avastin Travesty
by Tom Bowden | December 12, 2010
Apple Now Targeted for Success Like Microsoft Was in the 1990s
by Tom Bowden | October 04, 2010
The Un-American Dream
by Don Watkins | August 27, 2010
What About Private Health Emergencies?
by Tom Bowden | April 08, 2010
What’s Really Driving the Toyota Controversy?
by Don Watkins | March 26, 2010
Anti-Smoking Paternalism: A Cancer on American Liberty
by Don Watkins | March 06, 2010
Apple vs. GM: Ayn Rand Knew the Difference. Do You?
by Don Watkins | March 02, 2010
Smash the Labor Monopolies!
by Tom Bowden | September 15, 2009
America’s Unfree Market
by Yaron Brook | May 2009
Atlas Shrugged and the Housing Crisis that Government Built
by Yaron Brook | March 2009
The Green Energy Fantasy
by Keith Lockitch | February 25, 2009
Stop Blaming Capitalism for Government Failures
by Yaron Brook | November 13, 2008
The Resurgence of Big Government
by Yaron Brook | Fall 2008
The Government Did It
by Yaron Brook | July 18, 2008
From Flat World To Free World
by Yaron Brook | June 26, 2008
How Government Makes Disasters More Disastrous
by Tom Bowden | April 29, 2008
Life And Taxes
by Yaron Brook | April 17, 2008
War On Free Political Speech
by Yaron Brook | March 21, 2008
To Stimulate The Economy, Liberate It
by Yaron Brook | February 14, 2008
Exploiters vs. Victims in the Grocery Strike
by Elan Journo | January 30, 2004
Prescription Drug Benefits Violate the Rights of Drug Companies
by Onkar Ghate | July 24, 2002
Drop the Antitrust Case Against Microsoft
by Onkar Ghate | March 17, 2002

MORE FROM THE BLOG:

Government And Business in Voice for Reason
Government & BusinessRegulations

The Government Did It

by Yaron Brook | July 18, 2008 | Forbes.com

The financial peril of Fannie Mae and Freddie Mac — the government-sponsored, government-regulated mortgage giants regarded as instrumental in solving the nation’s mortgage market problems — has one benefit. It should help expose the lie that today’s financial problems are the result of an insufficiently regulated market.

For too long, the refrain has gone, Congress and the administration have been asleep at the wheel when they should have been steering the economy by expanding government control over the housing and financial markets. Economist Paul Krugman slams the administration’s “free-market ideology”; he urges Bush to “reverse course now” and “seek expanded regulation.”

All this overlooks a crucial fact: There has been no free market in housing or finance. Government has long exercised massive control over the housing and financial markets — including its creation of Fannie Mae and Freddie Mac (which have now amassed $5 trillion in liabilities) — leading to many of the problems being blamed on the free market today.

Consider the low lending standards that were a significant component of the mortgage crisis. Lenders made millions of loans to borrowers who, under normal market conditions, weren’t able to pay them off. These decisions have cost lenders, especially leading financial institutions, tens of billions of dollars.

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers’ expense) by multiple government bodies.

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

According to one enforcement agency, “discrimination exists when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” Note that these “arbitrary or outdated criteria” include most of the essentials of responsible lending: income level, income verification, credit history and savings history — the very factors lenders are now being criticized for ignoring.

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to “promote homeownership,” not to apply sound lending standards.

Of course, lenders not only sold billions of dollars in suspect loans to Fannie Mae and Freddie Mac, contributing to their present debacle, they also retained some subprime loans themselves and sold others to Wall Street — leading to the huge banking losses we have been witnessing for months. Is this, then, a free market failure? Again, no.

In a free market, lending large amounts of money to low-income, low-credit borrowers with no down payment would quickly prove disastrous. But the Federal Reserve Board’s inflationary policy of artificially low interest rates made investing in subprime loans extraordinarily profitable. Subprime borrowers who would normally not be able to pay off their expensive houses could do so, thanks to payments that plummeted along with Fed rates. And the inflationary housing boom meant homeowners rarely defaulted; so long as housing prices went up, even the worst-credit borrowers could always sell or refinance.

Thus, Fed policy turned dubious investments into fabulous successes. Bankers who made the deals lured investors and were showered with bonuses. Concerns about the possibility of mass defaults and foreclosures were assuaged by an administration whose president declared: “We want everybody in America to own their own home.”

Further promoting a sense of security, every major financial institution in America — both commercial banks and investment banks — was implicitly protected by the quasi-official policy of “too big to fail.” The “too big to fail” doctrine holds that, when they risk insolvency, large financial institutions (like Countrywide or Bear Stearns) must be bailed out through a network of government bodies including the Federal Deposit Insurance Corporation, the Federal Home Loan Banks and the Federal Reserve.

All of these government factors contributed to creating a situation in which millions of people were buying homes they could not afford, in which the participants experienced the illusion of prosperity, in which billions upon billions of dollars were going into bad investments. Eventually the bubble burst; the rest is history.

Given that our government was behind the wheel, influencing every aspect of the mortgage crisis, it is absurd to call today’s situation the result of insufficient regulation.

We do not need more regulation or economic “steering” — laws or bureaucrats dictating to financiers and investors the kind of innovation they may or may not engage in. If that were the solution to economic problems, then Hugo Chavez would preside over the world’s healthiest economy in Venezuela. What we need to do is remove the government’s power to coerce, bribe, reward and bail out irrational decisions. The unfree market has failed. It’s time for a truly free market.

About The Author

Yaron Brook

Chairman of the Board, Ayn Rand Institute