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Blame for the Bailout

Letter from Carol Hill

Economy – November 2008 – Colorado Central Magazine


Regarding our current financial crisis, I would like to share a couple of excerpts from one of my favorite books:

“Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, INEVITABLY [emphasis added] mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses [bailout]. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily over-stimulate building, raise the cost of building for everybody (including the buyers of the homes with guaranteed mortgages), and may mislead the building industry into an eventually costly over-expansion [bubble]. In brief, in the long run they do not increase overall production but encourage malinvestment.”

“The proposal is frequently made that the government ought to assume the risks that are ‘too great for private industry’ [‘TBTF’/Too Big To Fail]. This means that bureaucrats should be permitted to take risks with the taxpayers’ money that no one is willing to take with his own. Such a policy would lead to evils of many different kinds. It would lead to favoritism: to the making of loans to friends, or in return for bribes. It would INEVITABLY [emphasis added] lead to scandals. It would lead to recriminations whenever the taxpayers’ money was thrown away on enterprises that failed. It would increase the demand for socialism: for, it would properly be asked, if the government is going to bear the risks, why should it not also get the profits?”

DOES ALL THIS SOUND like a pretty accurate description of our current situation? It was written by Henry Hazlitt, a free-market economist, in the book Economics in One Lesson — in 1946. It’s not only accurate, it’s prophetic. Clearly the fundamental principles of economics have not changed.

The people primarily responsible for the current crisis are in Washington D.C., not on Wall Street. As the above example shows, the principles of sound economic policy are not new, Congress has simply ignored them, creating instead the ‘legal’ mechanisms that distorted and corrupted the market, ultimately creating the environment for greed to run rampant.

Economic ignorance is also responsible. One glaring example of this ignorance is the insistence that this meltdown is the result of “free-market” economics (capitalism), when in fact it is exactly the opposite. A free market doesn’t mean a market that’s “free” to commit fraud, or to deceive … or to be “free” from the consequences of their actions … anymore than a “free” press means to be free from libel. A free market means free from government interference, and we haven’t had such an economy for quite some time. It doesn’t matter that such interference is well-intended, because any interference inevitably distorts the market by shielding people from the natural consequences of various economic activities.

Government intervention to keep a business from failing is one such distortion. Business failure is a normal market occurrence. Yes, for those involved, it does hurt; but it used to be that that was localized, and a relatively small number, not the entire population. One of the most pernicious concepts of “modern” business is TBTF — Too Big To Fail — which not only scares people into acting against their own best interest (bailout), but also guarantees corruption. After all, who has the ability to “buy” themselves a congressman/woman, a small “Mom & Pop” business, or a national corporation? And, it’s not because the people involved are somehow predisposed to be corrupt, but because actions that were inconceivable to a company with a dozen employees may appear unavoidable to a company with hundreds of thousands of employees and shareholders dependent on that company’s solvency.

Free market capitalism holds individuals accountable for their decisions: if they’ve made good decisions the capital they risked is rewarded with more capital, sometimes lots of it, and that’s fine because it means they’ve created lots of it; and if they’ve made poor decisions, they’re punished by losing their money … but only THEIR money, not everybody’s.

As for regulation, when a business fails, that’s the market regulating itself. It’s government interference that creates the need for government regulation. Regulation also grows government, as new bureaucracies are created to “enforce” the regulations–and we’ve seen how well that works.

Again, the problem today is that WE DON’T HAVE A FREE MARKET, and desperately need one.

WHAT WE ARE WITNESSING TODAY is the inevitable outcome of Keynesian “have your cake and eat it too” economic theory. We have been becoming an increasingly socialist nation for generations. If we allow Treasury Secretary Paulson to assume what amounts to dictatorial powers over the economy, that process will be complete; we will be a socialist country, with our government becoming increasingly authoritarian — you cannot turn this country’s financial system over to the government and have any other outcome.

Oh, we can still call ourselves the United States, we can still proclaim our ‘patriotism’ and declare we are the ‘greatest country on earth,’ we can pretend that as long as we’re ‘allowed’ to watch porn or argue over gay marriage, we’re ‘free,’ and we can continue to have elections where we pretend we have a choice — the Soviet Union got away with it for about 75 years. But the United States that was created to “secure” “unalienable rights”, with a government that got “their just powers from the consent of the governed,” and that embraced limited government to guarantee individual freedom … in other words, the United States that began as the “great experiment” in self-government, will be over.

What’s going on in Washington is simply an attempt to deflect responsibility to Wall Street and to delay the inevitable long enough for Congress to get re-elected. At election time, no one wants to the bearer of bad news — just as no one wants to face up to the fact our children and grandchildren have been used as the collateral for our spending spree.

Now the same politicians responsible for this mess, and who for years have accepted large campaign contributions (check out, a very informative website) from the same financial services sector that will benefit from the taxpayers “largess,” are word-smithing a solution. This “solution” includes things like “punishing” executives that likely should be fired with a 20% tax on their severance (parachute) — boy, that’ll teach’em.

Are we nuts? They say the definition of insanity is doing the same thing over and over and expecting a different result. We keep getting bullied into these bailouts only to have them come back with hat in hand again and again, and with increasing frequency. Is there any reason to expect a different result this time? With or without this bailout we’re probably in for a tough time, the only questions being how soon, how tough and for how long. If we fail to hold Congress accountable, and continue to reward the people responsible for this mess by re-electing them … if we really expect we can arrive at a different destination by continuing on the same path … then we are nuts.

Carol Hill