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Source link: http://archive.mises.org/8492/dont-do-it/

Don’t do it

September 10, 2008 by

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.)


Ohhh Henry September 10, 2008 at 10:33 am

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.”

This is an excellent point and I think that it cannot be emphasized enough. People don’t look at the world the way it is, at least when it comes to politics, but live in a kind of intellectual coma in which politicians and parties are consigned to pre-molded slots called “Lib” , “Con” and so on.

Not only do the facts have no impact on people’s thinking – people don’t even listen to rhetoric beyond the first few seconds of any speech or soundbite. In his acceptance speech for his 2nd nomination Doubleya spent about 1 minute describing himself as fiscally sound and being for smaller govt, etc. Then he yammered for a solid 45 min. listing new and increased expenditures he planned to make. Who listened to him, and how many of them understood? How could anyone who really listened to that speech refer to him as a conservative with a straight face? The same holds true when examining the record of the other party’s politicians w.r.t. war.

Anyone who gives these people money, time or votes and who thinks they are getting a “true lib” or a “true con”, or even a reasonable facsimile of the same, is a fool.

David Spellman September 10, 2008 at 1:21 pm

Second the motion!

Walt D. September 10, 2008 at 1:37 pm

I heard that they are going to bail out Starbucks! Why not ? – they’ve not being doing very well lately!
BTW watch out for under the table bailouts of the auto makers in the form of huge subsidies and loans for electric cars etc.

Intelitary Milligence September 10, 2008 at 10:25 pm

Easy explanation. The abject catatonic stupor that has descended upon this country (world?) was created by these people ranchers through their easy come money followed by boom and bust. Those were supposed to go away in 1913 weren’t they?

If you’re an inventor get a RepRap.

If you’re a blogger get a ham license so you can share data.

If you’re gardening save your seeds.

Dan September 11, 2008 at 9:42 am

It seems to me that Americans are paying either way. Either their house value plummets, reducing their net worth, or the dollar is devalued and their net worth stays the same in dollars but decreases in value. If the government takes over the loans, we avoid a panic. If they don’t, we can gauge how much value we’ve lost. It would be interesting to see an analysis of which is better.

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