Jul 23 2008

When there’s a financial crisis, look to the government as the cause, part 2

Category: Congress,corruption,diversity,economy,election 2008,housing,politicsharmonicminer @ 12:11 pm

Thomas Sowell continues his previous discussion of how the government is the primary cause of our current financial issues.

We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.

How did the government help create the current financial mess? Let me count the ways.

In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to “creative financing” in order to buy these artificially more expensive homes.

Meanwhile, the Federal Reserve System brought interest rates down to such low levels that “creative financing” with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.

But there is no free lunch.
………….
…government laws and policies at federal, state and local levels have
had the net effect of putting both borrowers and lenders way out on a
limb.

Yet, when that limb began to crack, the first reaction in politics
and in the media has been to look to government to solve this problem
because– as always– it was called the market’s fault, the lenders’
fault and everybody’s fault except those politicians who created this
dicey situation in the first place.

Markets often get blamed for conveying a reality that was not created by the market.

…………..

Markets were also blamed for the Great Depression of the 1930s and New
Deal politicians were credited with getting us out of it. But
increasing numbers of economists and historians have concluded that it
was government intervention which prolonged the Great Depression beyond
that of other depressions where the government did nothing.

You can say that again. Our government is constantly trying to repeal the laws of economic thermodynamics, to their shame, and our chagrin. And now, those of us who acted responsibly are going to pay for those who did not, both the borrowers and the lenders.

Sowell is simply one of our most brilliant economists and observers of the interactions between government and the economy. Read the whole article at the link. He explains quite clearly why government intervention in markets, to attempt to redress imbalances that were created by government policy, is like having the obese guard the refrigerator and the pantry.  Politicians respond to voters and immediate pressures, while economies and markets require a sort of benign neglect, for the most part.

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One Response to “When there’s a financial crisis, look to the government as the cause, part 2”

  1. harmonicminer » Privatized Profit, Socialized Risk: the problem of public/private companies says:

    [...] even with all of this, it might have worked out far less disastrously without social/political pressure to loan to people who were poor credit risks. Similar problems have been observed in public/private partnerships like [...]

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