Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.
Writing for the New York Times, Paul Krugman has a new column promoting more government spending and additional government regulation. That’s a dog-bites-man revelation and hardly noteworthy, of course, but in this case he takes a swipe at the Cato Institute.
The financial crisis of 2008 and its painful aftermath…were a huge slap in the face for free-market fundamentalists. …analysts at right-wing think tanks like…the Cato Institute…insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining. Then the nonexistent bubble burst, and the financial system proved dangerously fragile; only huge government bailouts prevented a total collapse.
Upon reading this, my first reaction was a perverse form of admiration. After all, Krugman explicitly advocated for a housing bubble back in 2002, so it takes a lot of chutzpah to attack other people for the consequences of that bubble.
But let’s set that aside and examine the accusation that folks at Cato had a Pollyanna view of monetary and regulatory policy. In other words, did Cato think that “deregulated markets were doing just fine”?
Eleven years ago, America was attacked by bloodthirsty Muslim terrorists who hijacked commercial jetliners and flew them into the World Trade Center towers, the Pentagon, and failed in a fourth attack on the Capitol Building or the White House. Three thousand Americans died that day in the most horrific and hateful attack on American soil in history, an attack injuring not only the American economy, but the American psyche. We felt vulnerable and afraid. However, if we are to be honest with ourselves, we will acknowledge the attacks of 9/11 as only the second most destructive event during that span and, in terms of long term damage to the stability of the United States, paling in comparison to the damage inflicted upon us by the Obama administration.
Now, I am well aware this will be considered a hyper-partisan attack on our president, but I believe the facts will justify the claim. The terrorist attacks were brutal to watch, and we could witness the devastation and destruction wrought with our own eyes. The terrorists desired to crush our economy and undermine our faith in our government, to weaken us. You might even say that they wanted to “fundamentally transform” America. Yet within two years America was well on her way to recovering from those events.
It was understandable that the economy was severely damaged that day. As noted in Kiplinger Financial, on the day of the attacks, the unemployment rate was just below 5%, and in the aftermath, with hundreds of thousands of jobs lost in the travel, tourism, and financial industries alone, it would rise to just over 6% in 2003. However, by 2007, the unemployment rate was back down to just over 4%, and America had come roaring back.
Apparently those who don’t learn from history really are destined to repeat it. Two different issues about the housing market caught my eye recently.
First, the Senate adopted a measure that would increase the maximum amount of a home that could be backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration to more than $700,000.
Then there was a proposal, also in the Senate, to offer residence visas to foreigners who buy $500,000 homes and agree to live in them at least six months per year.
These ideas have bipartisan support. Robert Menendez (D-NJ) submitted the amendment for the first issue. Senators Chuck Schumer (D-NY) and Mike Lee (R-UT) make up the brainpower for the second. (Side note: I was extremely disappointed to see Mike Lee’s name on that proposal. He’s supposed to be one of the good guys.)
Both of these moves are attempts to get the real estate market moving, but they’re both bad ideas. The problem is that they involve the government taking action in the housing market to incentivize home purchases.
Quotes from the senators have been posted around the internet, and they all say something about how housing got us into this mess and housing will get us out. That’s not true. Artificially inflating home values created the last bubble. Creating another bubble is not the solution to our problems.
This is a perfect opportunity for free market supporters to call for the federal government to stay out of the market. In the long run, propping up home values will do more damage than good.
One of the most common refrains from the political left and the media is that, regarding the economy, conservatives advocate for unchecked freedom for big business to do whatever it wants to do, and for no government interference with business at all. These assertions stem from a fundamental misunderstanding of the nature of conservatism.
For the conservative, the issue comes down to the proper role of government. To have no government at all is anarchy, and certainly no conservative would argue that. So the question is not whether or not there should be government involvement (there should), but what level of government involvement is appropriate.
When we look at the biggest financial scandals of the last decade (Enron, WorldCom, Fannie Mae and Freddie Mac, etc.), they all have one thing in common. At some point, whether through active complicity or negligence, government played a huge role in allowing the scandals to occur. And with every scandal, it becomes an excuse, or rather an imperative, to increase the level of government involvement to keep it from occurring again.
Some of the major scandals have occurred because the regulatory oversight assigned to one government agency or another was either inadequately enforced, or government employees were co-opted into the fraudulent scheme. Others occur because our statutory and regulatory law has become so complex that it is inevitable that a crafty thief will be able to find technical loopholes that fulfill the letter of the law while being contradictory to the clear intent of the law. Either way, we continue to add layer after layer of government bureaucracy, regulation and complexity, and yet the scandals keep getting more and more expensive. That is because the more complex the law, the easier it is to find a technical Get-Out-of-Jail-Free Card.
I can’t claim to be the origin of the Fed Credit Bubble idea, because it occurred to me as I read a fantastic piece by one of my favorite analysts, Doug Noland of Prudent Bear.
We’ve just come out of a huge bubble that consisted of inflated real estate investment and speculative finance credit. The bubble burst and the market began to correct itself, menacing to take a lot of nations’ economies with it.
Since the 2008 financial crisis, many analysts and policy wonks have been trying to come up with their best guesses as to what led to what we now call the “Great Recession.” Most lay blame on Wall Street, the beneficiary of taxpayer-funded bailouts, and never think of discussing the affects of policies pursued by the government in the years leading up to the recession.
Wall Street is, of course, an easy target, especially at a time when populism and class warfare are so common. But in his new book, The Financial Crisis and the Free Market Cure: How Destructive Banking Reform is Killing the Economy (McGraw-Hill, 320 pages), John Allison, retired Chairman and CEO of BB&T, explains that government policies, cronyism, and politics led to the worst economic troubles in decades and presents a compelling case for the free market.
Allison, who at the beginning of this month became CEO and President of the Cato Institute, has long been an advocate of free market economic policies. Allison explains that his principles helped guide BB&T to weather the economic storm before the financial crisis.
In his book, Allison outlines what he sees as the six factors that led the recession and this very tumultuous economic “recovery” in which we currently find ourselves:
Written by Mark A. Calabria, Director of Financial Regulation Studies at the Cato Institute. Posted with permission from Cato @ Liberty.
You have to give Treasury Secretary Tim Geithner some credit for spin: today the Treasury announced “Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac.” The only problem is that the steps announced largely put the taxpayer at greater risk in order to protect holders of Fannie and Freddie debt.
Essentially, the Treasury has amended its agreements with Fannie and Freddie so that the companies no longer have to pay a fixed dividend to the U.S. taxpayer, but instead “every dollar of profit” from the companies to the taxpayer. The problem is that the Government Sponsored Enterprises (GSE) have never had a year where their profits would have covered the dividend payments, so while we can debate if the taxpayer will recover anything from the GSEs, shifting to just collecting profits definitely means the taxpayer’s potential recoupment is lower.
The GSE’s regulator, the Federal Housing Finance Agency (FHFA) was at least a little more honest in its announcement of the changes, stating that, “as Fannie Mae and Freddie Mac shrink, the continued payment of a fixed dividend could have called into question the adequacy of the financial commitment contained in the PSPAs.” Read “financial commitment” to mean protecting debtholders from loss.
What should you do if you’re running for office against a politician that won’t show up for a debate? If you’re Dan Liljenquist, who is running to unseat Sen. Orrin Hatch (R-UT), you debate a cardboard cut out:
Senate hopeful Dan Liljenquist intends to debate a cardboard cutout of Sen. Orrin Hatch, R-Utah, on Thursday night.
Liljenquist’s campaign manager, Holly Richardson, confirmed to the Daily Herald on Monday that Liljenquist plans on holding a debate at the Sons of Utah Pioneers Museum in Salt Lake City on Thursday evening where he will debate the cardboard representation of Utah’s senior senator.
“We are going to have a large TV screen there and play Sen. Hatch’s answers,” said Richardson, noting that Hatch’s voice will still be heard at the debate.
Richardson claimed the move is not new to Utah politics as she said Hatch also held debates against cardboard cutouts of his primary opponent when he ran for the Senate in 1976. Richardson stated that Hatch said at his cardboard debate that his opponent seemed like he had decided he doesn’t have to run a race. She called Hatch’s past statement ironic.
Hatch’s campaign manager Dave Hansen called the Thursday night debate a gimmick by the Liljenquist team to try to drum up press coverage for their candidate.
“They are trying to do everything with bells and whistles to get some attention,” Hansen said. “The senator is trying to get out and listen to the voters and talk with them.”
Sen. Orrin Hatch (R-UT) is definitely feeling the heat. He’s tried to pass off his record as “conservative,” but it’s hard to hide many of the votes he’s cast in favor of bigger government, including his support for TARP, Medicare Part D, bailouts for Fannie Mae and Freddie Mac, and many bloated budgets.
Hatch is working feverishly to not wind up like his former colleague, Bob Bennett, who was sent packing during the Utah GOP convention in 2010. Mike Lee eventually went on to replace Bennett in the United States Senate. He’s picked up endorsements from influential conservatives like Sean Hannity and Mark Levin, and even got Mitt Romney to cut an ad for him. But grassroots groups, including FreedomWorks and the Club for Growth, and Tea Party activists haven’t been deterred.
And yesterday over at RedState, Erick Erickson joined the calls to put an end to Hatch’s political career in Washington:
On many of those votes over the years, Orrin Hatch was no different from any of the other Senate Republican leaders. We’re now past $15 trillion in debt and Orrin Hatch voted for a good bit of spending contributing to that debt. Some of it was necessary, but much of it was not.
We hear a lot from our friends on the Left about the cause of the 2008 financial crisis. The often claim that capitalism and “predatory lending” deserve a large share of the blame. But in a new video from Reason, Peter Wallison, a scholar at the American Enterprise Institute and a member of the Financial Crisis Inquiry Commission (FCIC), explains how federal housing policy was the main cause of the turmoil that led to the Great Recession.
While the official report from the FCIC blamed deregulation of the financial sector, Wallison wrote a lengthy dissent noting, according to Reason, that “there were about 28 million high-risk mortgages in the U.S. in 2008; roughly 70 percent of those mortgages were owned by government-sponosored enterprises such as Fannie Mae and Freddie Mac.”
Watch the video with Wallison below. It’s well worth your time: