Dang, Now I Have to Get Serious

Because I'm so hopping mad about the gub'ment "bailout" of Freddie and Fannie. It screws all of us. So if you do nothing else today, read this:

http://www.lewrockwell.com/rockwell/imperative-sound-money.html

If you don’t have time to read the whole thing, here are some of the most important points:

What I also find striking is the way in which this move was announced. Let me read to you from the New York Times: "The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday…. It could become one of the most expensive financial bailouts in American history."

Even the most sophisticated observers of our present scene had to blink their eyes in reading such words. Without debate, without votes, without anything other than an executive fiat, the White House just decided, on its own, to seize the mortgage market. Actually, this is an action to excuse dictators the world over, past, present, and future.

This sort of thing makes a mockery of the Constitution and the very idea of freedom and the free market, to say nothing of the idea that we have a limited government. What's more, if we can believe press reports, President Bush had very little to do with the decision. It was the work of Henry Paulson, the secretary of the Treasury and former head of Goldman Sachs, working on behalf of the nation's most well-connected financial elites. Nobody elected this guy. Most Americans don't even know his name.

And look at how he throws around trillions of our money. The New York Times says that this is expensive. That's one way to put it. It makes the S&L bailout look like the warm-up. Freddie and Fannie carry about $5.3 trillion in mortgage commitments and another $2.4 trillion in financial exposure. The total cost of this operation is unknown; it could reach to $2 trillion, with untold amounts of future exposure. [TRILLIONS, Party People! Can you even imagine a number that big – let's pause while we all try, shall we? Whoa . . .]

These two New Deal institutions were founded to speed up the home ownership process for people that banks would otherwise consider unqualified. In time, under LBJ and Nixon, they were given legal permission to expand without limit, in the name of privatization, of all things. The motive was a classic bipartisan effort: universal home ownership. The left favored the redistribution. The right favored the supposed moral virtue associated with the nuclear family and its suburban abode.

Thus was born the greatest wealth transfer in American history outside Social Security and the warfare state. In a free market with sound money, borrowing is connected with the ability to pay. [sorry, folks, that's just the way it is – no one has a "right" to borrow money.] At first, this is only available to the rich. As prosperity spreads, so does credit worthiness. Any government intervention designed to inject steroids in this process is going to end in what Rothbard called a cluster of errors. It is completely disingenuous that so many people are today decrying the banking system's failure to discriminate between those who should and should not be carrying a mortgage. The banking system in a free market handles this just fine. Ferreting out the difference between those who can handle loans and those who cannot is a main job of the competitive system. The market precisely calibrates this. If one lender fails in its assessments of borrowers, another is there to correct the problem.

If you rush the process of prosperity, and insist that everyone who wants a loan should get one, you set up a situation in which there will be problems down the line. That is precisely what the regime has done. It created Freddie and Fannie to subsidize loans. It engaged in a phony privatization that secretly socialized losses. The legal status of these privately owned, publicly traded, and government-protected agencies was always unclear, but the markets had long assumed that they would be bailed out.

There was a moral hazard at the heart of this policy. But the real point is that the free market judgment about who should get what was being over-ridden. Surely, that is not a problem when it comes to promoting the alleged American dream! In fact, we are paying for this mistake a half century after the policy became a national priority. As the evangelical ministers like to say, the wheels of justice grind slowly, but they grind mighty fine.