Bailouts Aggravate Economic Crisis

In the Washington Post, Peter Schiff describes how politicians spawned the current financial crisis.  “Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.”  “Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow — until it could grow no more.”

“After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.”

“Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.”

“And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury’s $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That’s what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.”

“Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.”

Why do we have such a logjam in the credit markets?  One big reason is that banks are afraid they won’t be paid back if they make loans.  For good reason, they fear that the government will pass laws that will protect defaulting borrowers from foreclosure.  The State of Maryland has already passed a law that bars foreclosure until the borrower has missed at least four payments.

Senator Obama has now gone beyond that, demanding a three-month freeze on all foreclosures nationally, an unfunded mandate to be imposed on banks all across the country.  That will make it harder for banks to collect mortgage payments, and even more worried about making loans in general — contributing to the credit freeze that was cited as the reason for the $700 billion financial system bailout.  Taxpayers will suffer as a result.  And the government’s enormous bailout of foolish borrowers and lenders will promote future bubbles and inflation.