No doubt, as you are reading this article, the economy is continuing to crash. Everyone is pointing fingers at the free market. Consequently, lawmakers and voters alike are calling for more regulation. Whether they are right or wrong, it is utterly ridiculous that their blame game is not even being seriously contested.
Who or what is to blame for the economic crisis? The most popular answer today is the government’s lack of regulation of the free market. But is it really to blame? Why is it not even being considered that too much regulation has been the problem? Let’s take a look at just a few government regulations and interventions that could have caused the problem.
Fannie Mae and Freddie Mac, in bed with the federal government, helped expand and burst the housing bubble. Fannie and Freddie, who own more than half of the U.S. mortgage market, were pressured by lawmakers to buy and guarantee mortgages to low-income and risky consumers.
Furthermore, as government-sponsored enterprises, they received numerous benefits, privileges and exemptions from local and state taxes that are denied to everyone else, thereby unnaturally redirecting credit flow in the market. Their exception to the capital-asset ratio limit, for example, has exaggerated the current subprime mortgage crisis. It also certainly does not help that consumers believe the Federal Reserve implicitly backs up their loans.
After the dot-com bubble burst and the recession hit in the early 2000s, the actions of the Federal Reserve helped form the housing bubble. The lowering of the interest rate to 1 percent, along with other government incentives, helped facilitated the transfer of the market to the mortgage industry.
At the same time, their injection of capital made out of thin air into the system helps increase inflation. The numerous times they have lowered interest rates the past few years and created fiat money has lowered the value of homeowners’ money and made it harder to pay their mortgages. Houses declined in value and forced many people “under water,” meaning their home was worth less than they owed on their mortgages. The Fed has acted contrary to the market. As less people can afford homes and more people are foreclosing, the Fed has continued to make loans into the system and encourage more risky lending.
The economic crisis is so complex, anyone could write a book about it. Although I try, I still feel like I have no idea what is going on. That is why people refer to history as an example, in particular the Great Depression. Politicians and consumers are yearning for another Franklin Roosevelt-type hero to come save the day against the corrupt robber barons. However, they are looking in the wrong direction. The Great Depression was exaggerated and then prolonged by exuberant government intervention in the markets.
I don’t mean to demean those who are calling for more regulation, but it is ridiculous that less regulation isn’t even being portrayed as a valid argument. The recent bailouts are not best for our country. We need to let the economic crisis work itself out. If we continue to fix it like Japan did to its own crisis in the ’90s, we will only exacerbate the problem. We should not be encouraging lenders to make loans when borrowers should not be accepting them. Americans today only save 1 percent of their income, as opposed to 10 percent in the ’60s.
We should return to saving our own money rather than borrowing, and the government should do the same with its — sorry, I mean our — money.
Lazarus Austin is a senior majoring in history. He can be contacted at [email protected].