Hayek was Right

By Jake Haulk

In yet another verification of the Hayekian warning that government involvement in the marketplace begets more government involvement, we now face the mother of all financial market bailouts, putatively to prevent a credit market collapse of economy-endangering proportion.  The bailout is needed to counter the consequences of the granddaddy of government interventions in the economy.  Beginning with the Community Reinvestment Act, it moved on to the congressionally forced conversion of Fannie Mae and Freddie Mac into buyers and sellers of junk mortgage paper.  And now the toxicity of the colossal volume of subprime loans and the securities they back has spread like flesh eating bacteria through the financial world.

So far this year the Federal government and the Federal Reserve arranged for and assisted in a buyer takeover and bail-out of Bear Stearns; arranged a $300 billion program to help banks and homeowners in foreclosure or danger of foreclosure; created an open-ended credit line for Freddie Mac and Fannie Mae; made a loan of $85 billion to AIG; and now has recently placed Fannie Mae and Freddie Mac in conservatorship.

Despite these heroic efforts to shore up the nation’s confidence in financial markets, it has now become necessary to launch a staggering $700 billion program to buy up the ever-growing stack of bad mortgage paper and the securities they back.  As of this writing, the final details are not in place and we do not know if $700 billion will be enough.  And little wonder.  Together Freddie and Fannie have $5.4 trillion in guaranteed mortgage backed securities and debt – about the same figure as the publicly held national debt.  What’s worse they are still in business, still acquiring more loans and mortgage-backed securities. 

Free marketeers have long since warned against the intrusion of government into the economy, especially the intrusions that create market distortions and moral hazards.  These intrusions cause people and businesses to make misguided decisions and engage in hyper-risky behavior they would not contemplate absent the government’s promise to prevent their suffering any serious consequences for bad decisions.

Unfortunately, these warnings have not only gone unheeded, they have been totally ignored.  So, all things considered, there is not much free marketeers can learn from another episode that merely confirms what they have confidently predicted would happen.

There is one new and frightening twist in this latest calamity.  It has become obvious that most of the major media are completely in the tank for Obama and will report nothing that might harm his chances to be elected, including his ties to Jim Johnson and Franklin Raines, both of whom played major roles at Fannie Mae.  Nor is there any mention of his being the biggest recipient of Fannie Mae contributions over the last three years.  Neither will the liberal media begin to point out, as Fox News has done, the perfidy and complicity of Democratic senators and congressmen in creating the mess that Freddie Mac and Fannie Mae have become, refusing even to allow corrective legislation on a number of occasions when it was clear that the two behemoths were about to go careening off the tracks.  The media have to protect those miscreants as part of the protect Obama effort.  And besides, they’re in bed politically with the liberal Democrat agenda anyway.

So what we have learned to our great horror and dismay is that liberal media and some legislators have no real concern about the underlying institutional infrastructure of the United States and are willing to undermine it, even at enormous risk to the nation, if it is necessary in order to promote their selfish political goals.  They will get away with it because the Bush administration failed to draw a line in the sand five years ago and say this will not be allowed to happen on our watch.  And they will get away with it because as long as the American people cannot get the truth from the major media, a large number of them will continue blindly believing that it was all Wall Street greed that created the mess and Wall Street, as they all know, is a bunch of Bush-loving Republicans.  Yet another media created untruth.

That’s what one free marketeer thinks.

Jake Haulk is president of the Allegheny Institute in Pittsburgh.

September 26, 2008