The Political Inquirer

The United States is not a capitalist nation. The government refuses to let the two biggest lenders to new homeowners fail because the government is just “too big to fail” at any given point. Fannie and Freddie are getting a bailout and it is a bad policy decision on the side of the White House (who pushed for the bailout). This accomplishes several things, among them the bailout of the speculators involved in the housing market, allowing them to slowly take thier money out and put it somewhere else; a public image of “saving” the economy; and lastly the government is ensuring a bigger, harder financial crash in the future.

Ludwig von Mises wrote that government intervention never works. It will only create more problems. Once these problems are identified, there are only two courses of action–get the government out of the economy, or let the government intervene more. Once the government intervenes more, it will create more problems, etc. and etc., until the government controls the entire economy. This is why middle-ground does not work and why a choice between pure laissez faire capitalism and complete totalitarian socialism must be made at some point.

The perfect example of government intervention (and of Mises’ theory)  right now is the Fannie Mae and Freddie Mac debacle. For years the fascist New Deal program (Fannie Mae) has been surviving on government inflation and low interest loans spurred on by the Federal Reserve. In a market without a central bank artificially devaluing the money supply, Fannie Mae nor Freddie Mac could have ever lasted this long. It was the strength of the American economy that kept these two institutions afloat, but only as the government intervened to force lenders to lend to horribly unqualified borrowers. The affects are coming back to bite us and we see the government trying to stave off this inevitable crash.

The two institutions will fail, as all large government endeavors fail. Everything the government does results in failure because it cannot be as efficient as the free market can. Analysts are surprised at this, for government is supposed to be “too big to fail”. Karen DeCoster writes:

Bloomberg analysts appeared to be perplexed that both companies are ranked Aaa by the credit-rating oligopoly, yet derivatives traders were trading both at levels that implied a credit rating at least five levels lower.

Credit ratings by the government-granted oligopolists are not the market; trading actions based on actual knowledge and/or informed interpretations of known events are the market. The act of trading credit-default swaps (tied to debt sold by Fannie and Freddie) does not hinge on implied promises on the part of the government. Sure, implied government backing has caused the security prices to be skewed for Fannie and Freddie. But what’s happening here is that the market participants, in spite of an implicit government guarantee, are coming to their senses and realizing the insolvency and of both Fannie and Freddie.

I suppose these same individuals are convinced that the Federal Reserve and the banking industry can’t fail either because of the FDIC. That is incorrect, too. FDIC is on the verge of failure if enough banks were to collapse at once. It is the natural course of the market to have bank runs when there is suspicion of insolvent, bankrupt banks, as we saw with Northern Rock in the UK.

The government must let the banking industry fail if that is the course of things. In America, every small business is allowed to fail. Even Enron and MCI-WorldCom can fail. But the dirty secret is that the banking industry “must not fail”. That is a pack of lies that must be beaten down. The truth is, our government has a choice: it can let the banks fail and make this recession quick, or it can prevent the downfall and guarantee a harder, more lasting crash in the future. If Hoover and FDR had not intervened in the economy in 1929-1934, the recession could have lasted only a year or two, as Murray Rothbard pointed out in his book “America’s Great Depression“. I suspect the government will choose the interventionist rout and we will be made to suffer the effects of massive inflation and a prolonged depression. That is the way of governments.