The bailout bill that passed through Congress today seeks to solve the financial mess by massively increasing government involvement in private finance. But more Government cannot be the answer to a government-created problem. The fact is that short-sighted government policies distorted the market in the first place. Bankers were certainly to blame for responding to these signals from government in the hope of a quick buck, but at its base, much of the problem was caused by government.
These are the top twelve articles, stories and papers that we think demonstrate this fact.
1. Fannie Mae and Freddie Mac are at the heart of the crisis, having helped to create an artificial mortgage boom. Fred Smith warned Congress about this in 2000, and was ridiculed for it. Read what happened here.
2. Steven Malanga outlines the “long road to slack lending standards” and just how government encouraged this, at RealClearMarkets.
3. Thomas Sowell explains how economic-populist politicians used their power to help create the problem.
4. The Securities and Exchange Commission requires firms to value their assets in a way that has vastly accelerated the liquidity problem. John Berlau explains why here.
5. A detailed examination of why mark-to-market accounting distorts the market from Peter Wallison of the American Enterprise Institute.
6. Back in 2000, City Journal warned that the Community Reinvestment Act (CRA), which encourages unrealistic aspirations to home ownership, was doomed to failure.
7. Earlier this year, Michelle Minton looked at how the CRA had indeed helped contribute to the subprime crisis.
8. Dan Mitchell argues that government created the problem, and more government will make things worse.
9. Even the International Monetary Fund recognizes that government “bailouts” don’t just merely postpone the inevitable in a banking crisis, they make things worse. This is a long paper, but see p. 4 in particular.
10. One of the oldest forms of government intervention in the financial markets has been deposit insurance. Yet globally it destabilizes capitalism, impedes innovation and makes a bad regulatory regime worse. British economist Andrew Lilico explains how.
11. Harvard economist Jeffrey Miron puts it bluntly: “The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place.”
12. Government has been becoming more intrusive when it comes to lending over the years. John Berlau looks at how they want to fingerprint anyone originating a home loan.
The bailout bill is now law, but it does little or nothing to solve the problems government created. As long as they persist, the financial markets will be at serious risk. In the end, we may need to bailout the bailout. Fixing these government-imposed problems must be a priority now if we want to have a strong, free economy.