financial crisis — VOICES for REASON

In case anyone believed that the reckless lending and borrowing of the housing boom would never happen again, read this story: “The Return of the $1,000 down mortgage.” Once again, borrowers are putting essentially zero money into the house they buy, encouraging them to buy houses they can’t afford and to walk away if the value of their houses decline.

If you are wondering how the government is letting this happen, you’ve got it backwards; as was the case leading up to the financial crisis, the government is making it happen through its many manipulating tentacles:

This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.

The pilot program is called “Affordable Advantage,” and it has now been adopted by three states — Massachusetts, Wisconsin and Idaho. (Other states, such as Pennsylvania, California and Colorado, have similar state programs.)…Fannie Mae helped to create Affordable Advantage after the state government agencies tasked with expanding homeownership found they were having trouble doing their job.

The idea that it is the government’s job to “promote homeownership” or create “stimulus” is the root cause of the financial crisis. This idea was carried out by the Federal Reserve, Fannie Mae, and Freddie Mac. Until that idea dies and these entities lose their power to manipulate the economy, the financial carnage will just continue.

Image Source: Wikimedia Commons

Given that our country is mired in a severe recession, the history of the Great Depression—especially the history of how we got out of it—is rightly regarded as relevant to fixing today’s problems.

Some popular accounts would have us believe that the Great Depression ended via a) FDR’s New Deal and/or b) World War II. Translation: it was ended via a) a veritable government takeover of the economy, including massive wealth transfers to pay for make-work projects and/or b) an extremely costly war, both in money and in lives. Keynesian economists (and the politicians they influence) have used this supposed history to justify claims that more government spending, no matter what form, is the key to economic recovery.

But economic historian Burton Folsom and his wife, Anita Folsom, have written a forceful Wall Street Journal piece debunking the popular mythology of the Great Depression.

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Throughout Washington, the most powerful politicians (including Barack Obama) and bureaucrats (including Ben Bernanke) are sparring over the apportionment of new government powers–in particular, how much additional power should the Fed have–to prevent future financial crises. (See stories here, here, and here for more background.)

But notice that this “debate” essentially features only one position on the financial crisis: that it was caused by insufficient government control of the economy, especially by the Fed–and therefore that the solution is more controls. But what about the position that the government, in particular the Fed, was the essential cause of the crisis? Without the Fed lending out money at below the rate of inflation, without government-guaranteed mortgages, without government bailout guarantees, the housing bubble never would have gotten off the ground.

Barack Obama, Ben Bernanke, et al. want to pretend that such a position doesn’t exist. Read the rest of this entry »

Ben Bernanke won a second four-year term at the head of the Federal Reserve yesterday with a 70-30 vote in the Senate. Alex Epstein pointed out the absurdity of reconfirming Bernanke on foxnews.com. Bernanke is among the individuals most responsible for the financial crisis, and he hasn’t changed his financial philosophy in the least. Yet nearly three-quarters of the Senate—and President Obama—think he saved us from disaster. To use one of Alex’s metaphors, we just elected the arsonist to put out the fire.

Image: Gage Skidmore on Flickr

For years, Barney Frank has been the most prominent cheerleader of Fannie Mae and Freddie Mac–the colossal failures that have cost taxpayers $110 billion to date. Frank has long denied any problems with the government sponsored entities designed to “promote home ownership” by making or guaranteeing loans the free-market wouldn’t.

“These two entities—Fannie Mae and Freddie Mac,” he famously said, “are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Frank also explicitly endorsed the reckless lending that proved Fannie and Freddie’s downfall: “I want to roll the dice a little bit more in this situation towards subsidized housing. . . .”

Last week, Barney Frank changed his mind: “The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac…”

But don’t celebrate just yet. Frank didn’t call for a meaningful abolition–he called for “abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance” (emphasis mine). Read the rest of this entry »

The scene: an ostensibly civilized White House gathering between President Barack Obama and executives from the nation’s largest financial institutions. The subject? According to President Obama:

My main message in today’s meeting was very simple: that America’s banks received extraordinary assistance from American taxpayers to rebuild their industry, and now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy . . .[this] starts with finding ways to help creditworthy small and medium-sized businesses get the loans that they need to open their doors, grow their operations and create new jobs . . . we expect them to explore every responsible way to help get our economy moving again.

A hallmark of dictatorship is the view that individuals, including market institutions, are incapable of making rational decisions for themselves, and thus must be compelled to act rationally by some higher authority. Obama’s latest meeting illustrates that he holds this view of banks, and that he is more than happy to be the higher authority that tells them when to lend and whom to lend to.

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Since the start of the financial crisis, ARC has been pointing out that the cause was not the free market, but the unfree market. Another way of putting the point is that what failed was central planning.

Central planning puts economic decisions in the hands of a few government “experts,” rather than private individuals on an unhampered market. Interest rates in the U.S., for example, are not determined by supply and demand–they are determined by rates set by central planners at the Federal Reserve. And banks don’t set their own lending standards–those standards are dictated by central planners via the Community Reinvestment Act.

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I was reminded today that this year marks the 60^th anniversary of the publication of Ludwig von Mises’ “Human Action.” 

Why read a 60-year old economics textbook today? Because insights from economists such as von Mises are relevant for evaluating the claim that capitalism is at fault for today’s economic crisis, and for understanding its real cause. Ayn Rand put it best in a letter she wrote in 1960: Read the rest of this entry »

The upcoming Spring issue of The Objective Standard includes an article by ARC’s Yaron Brook and Don Watkins challenging the notion that America had a free market economy before the recent crisis. In  “America’s Unfree Market,” they argue that since World War I the U.S. economy has been increasingly saddled with–and damaged by–the anti-free market elements of taxes and government controls.

As noted in the article, with the latest federal budget surpassing $3 trillion and tens of thousands of regulations already on the books, people’s belief that America has a free market is only possible because of a gross misconception of what a free market actually is. That’s why I think one of the most important passages in the article is the following:

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This past January, ARC hosted a talk by BB&T chairman of the board John Allison at the National Press Club in Washington, D.C. About three hundred were in attendance on a cold Thursday evening to hear the talk titled, “The Financial Crisis: Causes and Possible Cures.” The lecture portion of that event is now available on the ARC website.

Mr. Allison began his service at BB&T (a large financial services company) in 1971 and served as chairman and CEO from 1989 through the close of 2008, and during his tenure BB&T has grown from $4.5 billion to $137 billion in assets. The government’s recent massive intervention into the financial industry began some months before Mr. Allison retired from his post as CEO. In this talk, he shares his views of what contributed to the current financial crisis and some of his proposed solutions for moving us towards a stronger economy. He peppers the talk with anecdotes and first-hand observations. There’s an amusing moment about a personal conversation with Barney Frank, and loads of particulars showing how government agencies and regulations disrupt good business practice. It’s worth a listen.

On our web site you can also find ARC commentary on the financial crisis.