The Discerning Texan
-- Edmund Burke
Thursday, February 19, 2009
Stating the Obvious, Brilliantly
Read the whole thing.
A lot of Americans have been confused about the mortgage crisis. Conservatives tend to blame government interference in the housing market while Democrats tend to blame the free market. Can you give a basic explanation of why we had this housing crisis?
Well, first of all, it's surely not the free market. That is, there was the Community Reinvestment Act in 1977, which was written during the Carter Administration and was given teeth during the Bill Clinton and Bush Administrations.
The Community Reinvestment Act required banks to make high risk loans that they otherwise would not have made and if they did not, the bank examiners would examine their portfolios when they came around to open another branch or a merger and if they were not making these high risk loans -- some people call them "No Doc loans," or "Liar Loans," -- they would not get permission.
In the free market, these bankers would not have given these Subprime mortgages. But, with the coercion by government and also the implicit guarantees of these loans by Fannie Mae and Freddie Mac, government sponsored enterprises, they would not have done so.
So, the Subprime crisis lies at the feet of Congress and what I find remarkable about my fellow Americans is that Congress caused the problem and they're looking for Congress to get us out of the problem. That's very much like seeing a building on fire and asking the arsonist who set it on fire to come help you put it out.
Is it a good idea for the government to bail out failing companies? Why or why not?
No, in a market economy, failure is just as important to the smooth operating of the market as is success. That is, success is a message to business in a free market that you are doing the right thing, you are pleasing your customers, and you are doing it in the most efficient manner. Failure is a message that you are not pleasing your customers and/or you are not doing it in the most efficient manner.
What a bailout does is it tells a company: continue not pleasing your customers and continue not using resources effectively and we will make up the difference. It's very much like raising a child. If the kid messes up, makes mistakes, and you bail him out every single time, what's he going to do? He's going to continue to mess up.