Government intervention to blame for economic woes

By Elizabeth Fudge     10/23/08 7:00pm

Unless you live under a rock, you may have noticed the United States is currently deep in the throes of an economic crisis. What caused this crisis? Well, it depends who you ask. Republican candidate for president John McCain blames corporate greed on Wall Street, while his Democratic rival Barack Obama denounces deregulation of the markets. For a race in which the two candidates are trying to differentiate themselves as much as possible, their solutions to this mess are surprisingly similar - more government intervention. Unfortunately, government intrusion in the economy is exactly what caused the financial crisis in the first place.In the economic heyday of the 1950s, the government created Fannie Mae and Freddie Mac to help young war veterans get home loans. These "government-sponsored enterprises" operated in an unusual gray zone between private businesses and government organizations: They were essentially mortgage monopolies established by the federal government. For years, Fannie and Freddie existed outside of government regulations on banks while enjoying privileged status as borrowers from the federal government.

The current crisis started brewing some seven years ago when the Federal Reserve lowered the target for the Federal Funds rate, the interest rate banks charge each other for loans, to stimulate the economy out of a post-9/11 recession. With historically low interest rates on the money market, banks offered low interest rates to borrowers, which encouraged people to take on more debt than they could afford. More and more people with subprime credit ratings purchased houses on mortgages offered by financial giants, including Fannie and Freddie. Consumers' debt, especially on credit cards and mortgages, escalated and for the first time since the Great Depression, the average American experienced negative savings.

The amount of money being borrowed caused interest rates to rise again, and eventually homeowners could no longer make payments on their mortgages. By then, Wall Street had invested so heavily in debt-based assets that many companies faced financial collapse when those assets became unstable. The demise of these financial giants would drastically impact the economy and could potentially plunge the country into a depression.

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And that's how we got to where we are today: a wildly fluctuating stock market, an uncertain economic outlook and a $700 billion bailout of Wall Street's most reckless companies. Both McCain and Obama were strong proponents of the bailout bill in Congress, arguing that it is absolutely necessary to prevent the total collapse of the American economy. The problem with the bailout bill is that it sets up the United States to experience the same disaster again 20 or 30 or 50 years from now. The Federal Reserve will once again lower interest rates trying to stave off a recession, encouraging reckless spending by consumers and corporations alike - after all, if you make enough bad investments, the government will pay billions of dollars to bail you out. The Federal Reserve's monetary policy is akin to California's policy of putting out every single forest fire - eventually, the debris builds up and the next fire turns into a blazing inferno that can't be put out no matter how much water you dump on it. California sensibly abandoned this policy decades ago, but the Federal Reserve's attempts to prevent every little recession continue to put us at risk for a depression of epic proportions.

Meanwhile, the federal government will keep passing the bailout bills. The current bailout bill is going to increase the national debt dramatically; however, the government plans to resell these assets several years from now and could potentially profit off this investment. A more serious issue is the increase in the reach of the federal government. The bill grants unprecedented, unsupervised, and absolutely unconstitutional powers to the Treasury Secretary, while allowing Congress to stipulate the details of how companies can run themselves. Andrew Sorkin of The New York Times calls the bailout bill "the financial equivalent of the Patriot Act" ["A Bailout Above the Law," 23 Sept. 2008].

The cause of the current economic crisis is the government's interference in the economy, especially through the Federal Reserve, Fannie Mae and Freddie Mac. Sadly, both the Democrats and the Republicans are preaching more of the same as the presidential election approaches. Natural fluctuations in the economy, alternating periods of recession and growth are inevitable, and until the government realizes this and takes its hands off the economy, the pattern of large-scale government bailouts will continue, inflating the government at the cost of citizens' liberties and billions of dollars.

Elizabeth Fudge is a Will RiceCollege sophomore.

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