Reviewing the economic carnage of the last few months, where socialism has again been summoned to the rescue of what passes for capitalism, a committed free marketeer would have to say that we ought not have allowed government to entice and force people to alter their behavior in a way likely to promote this kind of calamity.

For instance, we ought to have demanded a monetary unit of value impervious to political meddling: say, a unit measured by a market basket of real commodities (trade-weighted quantities of plywood, zinc, pork bellies, petroleum, gallium arsenide, gold, etc.). Then a politically created central bank could not manipulate interest rates to a level that made credit so cheap that irresponsible mortgage lending took off like a rocket.

We ought never to have required private banks, in return for regulatory approvals, to make high-risk loans to borrowers with very small likelihood of repaying them (cf. Community Reinvestment Act.)

We ought never to have put an implied but well-publicized government guaranty behind such “private” money making institutions as Fannie Mae and Freddy Mac.

Having created such institutions, our political leadership (Clinton) ought not to have directed them to make high-risk loans to appease clamoring voter blocs.

Our fiduciary code ought to have prohibited depository institutions from investing in other institutions whose “value” is almost entirely pieces of paper representing still more pieces of paper representing, hopefully, some ultimate thing of value.

Our common law ought to have required guarantors (credit agencies) to have and publicize their holdings of assets sufficient to cover losses guarantied against.

That’s just a quick summary for openers. What we should have not have done is allow our government to erect a politician- and lobbyist-promoted array of opportunities for sharp operators to pocket gains, leaving losses to the ultimate suckers, the bewildered and angry taxpayers.

Presidents Jefferson, Jackson and Van Buren would have understood.

John McClaughry is president of the Ethan Allen Institute in Concord, Vermont.

October 8, 2008