News & Analysis
Mortgage Crisis Has Washington Putting Aside Free-Market Ideology
Despite decades of free-market rhetoric from Republican and Democratic lawmakers, Washington has a long history of providing financial help to the private sector when the economic or political risk of a corporate collapse appeared too high. The effort to save Fannie Mae and Freddie Mac is only the latest in a series of financial maneuvers by the government that stretch back to the rescue of the military contractor Lockheed Aircraft and the Penn Central Railroad under President Richard Nixon, the shoring up of Chrysler in the waning days of the Carter administration and the salvage of the U.S. savings and loan system in the late 1980s. More recently, after airplanes were grounded because of the terrorist attacks of Sept. 11, 2001, Congress approved $15 billion in subsidies and loan guarantees to the faltering airlines. Now, with the U.S. government preparing to save Fannie and Freddie only six months after the Federal Reserve Board orchestrated the rescue of Bear Stearns, it appears that the mortgage crisis has forced the government to once again shove ideology aside and get into the bailout business. "If anybody thought we had a pure free-market financial system, they should think again," said Robert Bruner, dean of the Darden School of Business at the University of Virginia. – International Herald Tribune
Dominant Social Theme: Free markets are not an ineluctable good. Sometimes they must perish.
Free-Market Analysis: What free market ideology? The United States has a $3 trillion federal budget, a national debt the size of a black hole and a graduated income tax that drains wealth from the middle class (mostly) for the benefit of the wealthy. That Fannie and Freddie are to be nationalized is not exactly a surprise. What is something of a surprise, perhaps, is that educated individuals can continue to maintain the fiction that there is something resembling a free-market in the United States, when it is at the very least on life support. The article above actually goes on to provide a pretty good history of the creeping socialism that long ago affected the United States.
The closest historical analogy to the Fannie-Freddie crisis is the rescue of the Farm Credit and savings and loan systems in the late 1980s, said Bert Ely, a banking consultant who has been a longtime critic of the mortgage finance companies. The savings and loan bailout followed years of high interest rates and risky lending practices and ultimately cost taxpayers roughly $124 billion, with the banking industry kicking in another $30 billion, Ely said. Even if the rescue of Fannie and Freddie ends up costing tens of billions of dollars, the savings and loan collapse is still likely to remain the costliest government bailout to date, said Lawrence White, a professor of economics at the Stern School of Business at New York University. "The S.& L. debacle cost upwards of $100 billion, and the economy is more than twice the size today than it was in the late 1980s," he said. "I don't think this will turn out to be as serious as that, when over 2,000 banks and thrifts failed between the mid-1980s and mid-1990s." Most of those losses were caused by the shortfall between what the government paid depositors and what it received by selling the troubled real estate portfolios it acquired after taking over the failed thrifts. In the Chrysler case, Carter and lawmakers in states with auto plants helped push through a package of $1.5 billion in loan guarantees for the troubled carmaker, while also demanding concessions from labor unions and lenders. While Chrysler is remembered as a major bailout, White says it was minor compared with the savings and loan crisis or the current effort to shore up Fannie and Freddie.
One can see from the above history that federal government interference has increased in size and aggressiveness in the past 30 or so years. In fact, the Treasury Secretary Henry Paulson is said to have come to Washington in part because he believed that he would be in a situation to pursue a very activist role given the age of the bull market and size.
It is not of course a good sign for the world's number one economy that its most powerful financiers are coming to Washington based on the idea of gaining a higher profile from practicing government activism. Yet some would say that the leaders of the United States are not even bothering to pay lip service to the idea of free markets these days. What is even more troubling is that these leaders are involved with the sociopolitical spectrum that has traditionally represented market-oriented solutions.
Conclusion: The unwinding of the American republic continues, but it should not be surprising. The combination of central banking and the graduated income tax has sent business abroad and generated ever increasing government involvement in the economy on both a macro and increasingly on a micro level. But what we have seen over time is that such trends are not unalloyed and that in this case there are plenty of factors that ultimately militate against an endless ratcheting up of governmental activism. Such trends as are being displayed currently in America and throughout Europe as well are neither unalloyed, nor endless.