When I taught at Hillsdale College, I heard one of my colleagues (whose office was right next to mine, and our doors were open) listening to a student ask if he could take the class final early, because he wanted to go participate in a rally for newly-reelected President Bush. My colleague wearily asked, “Why do you support him? He’s not a conservative. Look at how much he increased spending during his first term, even non-defense spending.” Exacta-mundo, to quote the Head & Shoulders commercial. Just as Republican Richard Nixon took the U.S. off the gold standard and instituted explicit wage and price controls, so too it has happened under a Republican administration that the Federal Reserve has engaged in unprecedented actions to interfere in financial markets, and the Treasury has now “seized control” of Fannie and Freddie.
One of Tyler Cowen’s readers had the temerity to ask why taxpayers should be put on the line to bail out fraudulent financial players, and Tyler’s answer was that if the government allowed Fannie and Freddie to fail, basically the world would end. (Go read his post to see how little I am exaggerating.) After warning of a collapsing dollar and stock market, as well as boils and frogs, he at least links to a Jeffrey Rogers Hummel article on why libertarians should welcome a default by the U.S. government.
I will post more on this topic in the coming days, but for now I want to make the simple point that the government per se cannot create wealth or financial stability. It is not as if the people running Freddie and Fannie were stumped, and then Paulson sprang up in his bed Sunday at 3 a.m. with a brilliant new way to securitize mortgages. All the government can do is inject money into sinking operations by (a) stealing it from taxpayers and/or (b) creating more dollar bills through the printing press. Either way, “America” is paying for the bailout. Any increased “confidence” in the rescued sector is counterbalanced by an increase in uncertainty in other areas, like, “How much are my taxes going to go up over the next ten years to pay for this?!” or “What in the world will a gallon of milk cost next year?!”
I want to stress that these interventions have been getting progressively bolder. If, back in August 2007 when the credit crunch first hit, Paulson had announced all of the measures that have been unveiled in the last 13 months, most “right-wing” analysts would have cried foul. They would have labeled him a socialist and compared him to FDR. But instead of throwing the private sector into the boiling pot, instead Paulson and Bernanke have just been turning up the dial incrementally.
The reason we are in the current fix, where “libertarian” Tyler Cowen and others are saying it is necessary for the government to take over Freddie and Fannie, is that Paulson and Bernanke chickened out and didn’t simply let a bunch of banks fail back in September 2007. It would have been painful–there would have been billions in losses, house prices would have plummeted, the dollar may have fallen, etc. But guess what? All those things happened anyway, and the fundamental problems in the economy merely festered.
The same will happen with this “rescue.” The housing market is not suddenly fixed with the promise of hundreds of billions in Treasury injections. On the contrary, it relieves pressure on the systemic problems that led to these massive malinvestments in the first place.
What happens as the recession deepens, and other institutions that are “too big to fail” line up for their injections of hundreds of billions? Will the federal government take over the Big Three automakers, the pension funds of homebuilders, etc.?
The government can only rearrange–and in the process, dissipate–wealth. The federal takeover of Fannie and Freddie is just one more example that there is no difference between Republicans and Democrats. It doesn’t matter whether McCain or Obama wins; your taxes are going up. How else is the government going to pay for all of the “compassionate conservatism”–not to mention the “humble foreign policy”–that has been ladled out the last eight years? (cross posted from my blog.)